Malaysia is officially the second country in Southeast Asia (SEA) to introduce a Digital Tax which could apply to both local and international players. Slated to be implemented by 1 January 2020, the tax is aimed to level the playing field and spark better competition in its e-commerce sector.
This landmark announcement for the digital sector is highly significant as it was announced at the first federal budget tabled by a new government since the country’s independence in 1957.
More importantly, the announcement on the digital tax in Malaysia is expected to serve as a role model for neighbouring countries and beyond to introduce a tax scheme for its digital economy.
Introduction of the Digital Tax
The Budget 2019 announcement includes the introduction of a tax scheme specifically for online services imported by users are required to register with the Customs Department from 1 January 2020. This includes software, music, videos, or any digital advertising provided to Malaysians.
This would mean that online service providers who meet certain criteria will have to register with the Customs Department in order to continue providing their offerings to Malaysian consumers.
Similar to Singapore, video, and music streaming like Netflix or Spotify, apps, listing fees on electronic marketplaces such as Apple’s or Google’s app stores, software, such as online subscription fees may be taxed. In addition to this, the inclusion of software could mean that services such as Microsoft’s Office 365 productivity suite and games sold by Steam would be liable under the new tax.
However, no further details were shared on the mechanics of the tax was shared and will probably be clarified closer to the year of its implementation.
Rational of the Digital Tax
According to experts, the tax is aimed to level the playing field between international and local businesses in the digital sector.
Global digital businesses such as Amazon and Steam often avoid paying taxes due to the reason that international companies have no physical presence in the country. As such, these digital firms declare their profits in the country where their headquarters are based, causing other countries, such as Malaysia to lose potential tax revenue.
This has also created a non-level playing field as certain international players were able to provide a more competitive price point on products and services as compared to local players who are subject to local taxes such as the Sales and Service Tax (SST) and others. This tax scheme is also aimed to level the playing field between online and offline businesses as well.
This issue was acknowledged globally as well such as the European Union (EU). Currently, the EU finance ministers are aiming to obtain the approval from all EU countries to agree on a digital tax plan by the end of 2018.
The announcement of the digital tax in Malaysia is also aimed to spur the government’s revenue base and reduce the country’s 1 Trillion Ringgit (US$239 million) government debt.
After Malaysia’s newly elected government took office, Finance Minister Lim Guan Eng made a startling announcement, stating that the country’s debt was higher than previously disclosed by the previous administration. Since then, the government has been optimising all efforts to strengthen and expand the government’s revenue base.
With various reputable research companies and experts predicting a snowballing effect in the digital sector, it was inevitable that the government will sideline the digital tax as it a great opportunity for the government to improve the state of the country’s debt. Malaysia’s Director General of its Customs Department previously stated that taxes from the digital economy can easily collect a couple of billions of Ringgit.
The growth potential of e-commerce was evident as the country recently garnered US$12.2 million in gross merchandise value (GMV) in five days during its recent digital sale period (MyCyberSale 2018). The digital economy in Malaysia is expected to receive further boon for its annual 11.11 Sale (Singles Day), 12.12. Sale and Year-end digital sale.
Also not forgetting is Google and Temasek’s big prediction that e-commerce in Malaysia is expected to become a US$8.2 billion market by 2025, indicating a big potential for tax revenue for the government in the near future.
Concerns with the new tax scheme
While the primary premise of the tax is commendable, several experts and business owners are concerned with its possible negative effects. Some commented that the introduction of the tax will add an extra layer of taxation which could lead to the increase of online goods and services for all players.
Prior the announcement, YYC Tax Consultant, Yap Shin Siang, stated that the Inland Revenue Board identifies digital marketing payments to non-resident companies as royalty income and hence subjecting them to pay Withholding Tax (WHT).
A WHT is a tax charged on Malaysian businesses when certain types of payments (interest, royalty, services) are made to non-resident companies. As such, the introduction of the Digital Tax increases the probability of double or maybe triple taxation to businesses.
The founder of a Malaysian online women's footwear company commented on the Digital Tax. “This tax on e-commerce businesses is not practical. We already spend so much on SST and with the addition of a new tax, this would squeeze all the business dry. How many tax systems do we need?”
Certain players stated that the digital tax is introduced too early and may hamper the growth of the sector. The Executive Director of iPay88, Chan Kok Long states, “the marketplace is still at its infancy stage in Malaysia and many companies … are still trying their best to break-even … Taxing them now may even push them to collapse or seek other countries as their base”.
On the mechanism of the tax, the Institute for Democracy and Economic Affairs (IDEAS) predicts that there might be two types of taxes that will be introduced in the near future.
One would be a “direct tax” that target the profits of foreign digital companies doing business in Malaysia. And another probably an “indirect tax” that is a consumption tax (like the Sales and Services Tax or SST) to foreign companies selling digital goods and services into Malaysia, paid by the users.
Another potential issue with the digital tax is due to the lack of a global consensus and consistency on digital taxation has presented challenges for businesses. This was highlighted by tax experts from Ernst and Young where international businesses have to wrestle with different tax rules in different jurisdictions and figure out how these rules should be interpreted and applied. This will increase the compliance burden for businesses with global footprints and potentially result in more tax controversies and double (or even multiple) taxation risks.
Prior to the announcement of the federal budget, the government has acknowledged its concerns and is working to introduce a tax scheme that is truly fair and levels the playing ground for the digital economy.
Malaysian Deputy Finance Minister Datuk Amiruddin Hamzah commented on the digital tax stating, “This will definitely be a matter that we will look into deeply. We will come out with a new mechanism, but we are still studying it and we will impose something for them. If we put this matter (digital tax) aside, I think the nation will be losing revenue” said Datuk Amiruddin.
The Malaysian Finance Minister Lim Guan Eng mentioned that the Inland Revenue Board is expected to work closely with international bodies to address international tax issues relating to the digital and sharing economies. A more certain answer on the positive and negative effects of the digital tax to be ascertained at the finalisation of the tax mechanism by 2020.
Digital Tax in Southeast Asia
As of today, Singapore and Malaysia are the only two countries in SEA to levy a digital tax. The Philippines has implemented an e-commerce tax but is applied to local players now.
Today, Indonesia is SEA’s largest e-commerce market with a prospect of becoming a US$46 billion e-commerce industry by 2025 according to Google and Temasek.
Back in 2017, the Indonesian Finance Minister Sri Mulyani revealed a plan to level the playing field between businesses that operate online and those offline through a digital tax. The tax is expected to cover four types of platforms: online marketplaces, classified ads, daily deals, and online retail.
The country is currently engaged with e-commerce players and analysts and is slated to conduct a public trial in 2019.
In SEA, the Philippines is the only country to apply a taxation specifically for e-commerce. Currently, a 12% VAT on the total value of online transactions of more than USD$37,310 came into effect in 2016.
However, the tax is less comprehensive only applies to local players. Certain experts stated that Philippine tax laws had not caught up with recent developments in Internet commerce.
The Thai Cabinet approved a proposal to collect 7% VAT from foreign e-commerce platforms with an annual service income exceeding THB1.8 million (US$56,000). Taxable businesses are required to sign up as operators under the VAT system to report to the Revenue Department.
Plans of the tax are slated to be announced sometime early 2019 should it be approved by the National Legislative Assembly.
In Vietnam, foreign firms are required to have a local representative office registered in Vietnam and pat VAT 10% tax. Businesses without a local representative are still subject to tax but are not enforced on a strict level. The Vietnamese government is currently writing down plans to enforce this more strictly and is predicted to make further announcements by late 2019.
Outside of Southeast Asia, South Korea, Japan, New Zealand, and Australia are the other jurisdictions that have laid down laws requiring international online suppliers targeting their domestic markets to register for value-added tax (VAT) or GST.
All eyes will be on Singapore and Malaysia by 2020, as neighbouring countries will closely observe the successes and pitfalls of its implementation and will probably introduce a digital tax of its own. If successful, it won’t be long when the digital tax will become a conventional thing in the digital sector.
Jeremy Chew is senior content marketer at iPrice Group.