What’s the true nature of the 2020 Malaysia Digital Services Tax?

According to the Services Tax Amendment Act 2019 Digital services in scope were “…any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.”

The recently published Guide provides now a non-exhaustive list of services that could be regarded as digital services:

(a) online licensing of software, updates and add-ons website filters and firewalls;

(b) mobile applications and video games;

(c) provision of digital content, for e.g., music, e-book, film, images, text and information;

(d) advertisement platform, for e.g., provision of online advertising space on intangible media platform;

(e) online platform, for e.g., offering of a platform to trade products or services;

(f) search engines services;

(g) social networks;

(h) database and hosting, e.g., website hosting, online data warehousing, filesharing and cloud storage services;

(i) internet-based telecommunication;

(j) online training, for e.g., provision of distance teaching, e-learning, online courses and webinars;

(k) online newspapers and journals subscription; and

(l) payment processing services.

Any foreign service provider (FSP) or Platform Operator treated as such, with an annual services value above an equivalent to approximately USD$120,000 is forced to register in Malaysia for this tax purposes and collect it at a rate of 6% on their sales to Malaysia-based B2B or B2C customers.

Your customer can be considered to be Malaysian when makes payment for the  digital services using a credit or debit facility provided by any financial institution or company in Malaysia, has an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia or resides in Malaysia.

DET3 COMMENTS

This tax is not exactly a unilateral DST in the sense of some country’s passed / drafted regulations or the EU draft directive that are more targeted on purpose.  

This is in fact a Sales and Services Tax on a wide range of imported Digital Services equivalent to a GST/VAT type of indirect tax, with a reduced tax rate.

The Guide has confirmed a kind of prevalence of the new Digital Sales and Services tax formal obligation stating that there will be an exemption granted to Malaysian businesses from the obligation to reverse charge to avoid double taxation, if such company has already been charged with service tax by a FSP.

In essence this rule forces an indirect tax registration and subsequent tax collection in Malaysia if the users of the non- established digital service provider are local, with a low quantitative threshold to be in-scope.

As a difference with a unilateral DST, the 6% B2B charged amount should therefore be deductible at the level of the services importer and the invoice to the final B2B customer should not therefore be increased versus before. Unilateral DSTs force the companies to decide whether to pass-on that cost or not the final customer.  

The tax aims to level the playing field between foreign digital service providers of any type and local digital service providers.

Many US companies like Facebook, Netflix and Google confirmed their intention to comply with the law, but the impact should be the same for instance for transactions as normal as standard software licenses, or on-line courses acquired automatically through the web with low or no human intervention at all.

This is a different policy option than that of the unilateral pure DSTs, with some equivalence points; countries like Russia, New Zealand and Norway took this road before as well as several LATAM indirect tax regulations.    

Between trade wars, retaliations and the many different tax policy options including DSTs, Withholding taxes, Pillar 2, Indirect Taxation and the like, we are making it really cumbersome for any global digital 24/7entrepreneur.  

We shall reflect on the impact of it in one of our next news or blog posts.

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