Malaysia extended its tax system to supplies from foreign digital service providers on January 1, 2020. Malaysia was the second country in South-East Asia to introduce such a tax, along with Singapore.
In late 2020, it was revealed that this extension of the Malaysian tax system recouped RM428million (circa USD126 million) for the government. The tax collection revenue figures were revealed by the State News Agency Bernama on December 29, 2020.
Malaysia's digital service tax rules - at a rate of 6% - brought foreign suppliers of digital services into scope from the start of 2020.
Back in January 2019, Malaysia amended how business-to-business (B2B) supplies were treated, businesses had to account and pay service tax. From January 1, 2020, foreign suppliers become liable for service tax to all consumers, including B2B.
Here is what is specifically stated in the Guide on Digital Services as issued by the Royal Malaysian Customs Department (click on ‘Digital service’ on the left column in link that opens):
"Effective 1st January 2020, service tax shall be charged and levied on any digital service provided by a foreign registered person (FRP) to any consumer in Malaysia."
Foreign suppliers that expect to exceed the RM 500,000 (circa USD$120,000) threshold were able to register before the effective date of the new service tax rules back in January 1, 2020.
Malaysia digital service tax: the key details
For affected businesses, here is a selection of the key details that need to be taken into account when analysing potential compliance with the new Malaysia digital service tax rules:
- Digital service definition: “Digital service means 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.” Affected businesses will have to understand if the services they provide are within the scope of this definition.
- There is a threshold: If the value of the services rendered exceeds the threshold of RM 500,000 (circa USD$120,000) for a period of 12 months, the foreign supplier is required to register to collect and remit Malaysia service tax of 6% on their sales to Malaysia-based customers. The existence of a threshold means that sales to Malaysia-based customers will have to be understood and monitored.
- Customer location: According to the Royal Malaysian Customs Department (RMCD), a consumer in Malaysia is any person who fulfils any two of the following:
- Makes payment for digital services using a credit or debit facility provided by any financial institution or company in Malaysia;
- Acquires digital services using an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia.
- Resides in Malaysia.
In determining whether the consumer resides in Malaysia, the registered foreign supplier may consider information or a declaration from the consumer as below:
- The billing address of the consumer is in Malaysia
- The home address of the consumer is in Malaysia
- Recipient's country selection
- Filing information: once registered, affected foreign suppliers are required to submit service tax returns once every three months. The taxable period shall be a period of three months (quarterly) ending on the last day of any month of any calendar year. If a foreign supplier registers before the effective date of the new rules (January 1, 2020), then this company will need to submit its first return for the January to March 2020 taxable period by April 30, 2020.
- Returns can be filed online by affected foreign suppliers once they have registered on the MySST system.
Malaysia move mirrors global implementations
Malaysia's Deputy Finance Minister Datuk Amiruddin Hamzah was quoted as referencing other similar legislative implementations across the globe when announcing Malaysia’s plan.
He was quoted by the Malay Mail stating the 6% rate was deemed to be one of the lowest in the world compared to that imposed in several other countries.
“They (digital service providers) should have no problem to pay...because it’s only six per cent. If they can comply with Russia, Norway and New Zealand, I don’t see any reason why they should refuse to comply with the rate in Malaysia,” he said.
For context, Russia introduced a similar tax on digital supplies by foreign suppliers on January 1, 2017, at the then rate of 18% (since increased in January 2019 to 20%). Norway was one of the pioneers of such a tax with their VAT rules amended on July 1, 2011, at the rate of 25%, while New Zealand extended its Goods and Services Tax (GST) regime on October 1, 2016, at the rate of 15%.
Malaysia and Singapore make digital tax moves
Malaysia is the second Southeast Asian state, after Singapore, to reveal such an extension of its tax rules to cover digital supplies by foreign suppliers.
This extension of Malaysia's service tax is similar to Singapore's Goods and Services Tax (GST) that was also introduced on January 1, 2020. More on Singapore's plans here.
In Malaysia, the broad intention of this service tax extension is to level the playing field for local service providers in the area of digital technology to fairly compete with foreign firms. This is a common theme among such global legislative amendments and implementations.
Here at Taxamo we will, of course, keep you updated with any further developments in Malaysia and beyond.
- Background to Malaysia's digital service tax plans here.
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