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Malaysia’s new digital service tax to impact foreign service providers

Starting 1 January 2020, the government began imposing a digital services tax (DST) of six per cent on foreign digital service providers (FSPs) in Malaysia. Other than Malaysia, Singapore also recently imposed a DST in January of this year.

The government hopes the introduction of the DST will level the playing field for local companies – in addition to gaining more tax revenue from its US$36 billion digital economy.

What constitutes digital services?

The RMCD guide defines digital services as any service that is subscribed or delivered over the internet or other electronic networks with minimal human intervention from the service provider.

The guide provides a few examples of digital services which include:

  • Online licensing of software;
  • Firewalls;
  • Mobile applications and video games;
  • Provision of e-books, films, music, streaming services, subscription-based media;
  • Search engines and social networks;
  • Website hosting services, cloud storage services;
  • Online advertising platforms;
  • Internet-based communications; and
  • Online learning services.

The guide also defines FSPs as:

  • A person who sells digital products to consumers in Malaysia;
  • A person who sells digital products through intermediaries; or
  • An online platform that sells digital products on behalf of an overseas provider.

Revenue threshold

Foreign digital service providers who have reached RM500,000 in annual turnover must register to collect and remit the six per cent service tax. Applications for submission began 1 October 2019.

Registered FSPs must issue invoices and file tax returns on a quarterly basis, ending on the last day of any month of any calendar year.

Defining consumers

The RMCD guide defines a consumer as any business or individual that fulfils any two of the following criteria:

  • Makes payment an FSP through a credit card or debit facility provided by a financial institution under the country’s Ministry of Finance;
  • Resides in Malaysia; or
  • Acquires the digital service through an internet protocol (IP) address registered in Malaysia.

To determine whether the consumer resides in Malaysia, the guide advises FRPs to consider:

  • The consumer’s billing address in Malaysia; and
  • The consumer’s home address in Malaysia.

Investors should seek the help of registered local advisors to ensure they stay compliant with this latest tax regime.

According to an earlier report by OpenGov Asia, the digital tax made Malaysian start-ups nervous when it was first announced.

The executive director and co-founder of a leading online payment gateway came out strongly against the introduction.

His key concern is that Malaysian start-ups are not ready for such a tax, not when most are not profitable yet; introducing such a tax now could have dire consequences.

He noted that taxing star-ups now may push some to collapse or seek other countries as their base, which will be a loss to the country.

It may also hinder innovation and the growth of the industry at a time when international players are entering the market.

In addition to the tax, other measures that would impact Malaysia’s digital economy include were reportedly announced.

These include:

  • Introduction of a new Capital Market and Services Act to approve and monitor digital currency and token market trading activities, which will be gazetted early next year.
  • An RM50 million (US$12 million) co-investment fund, where the government will jointly invest with the private sector using alternative funding platforms, such as equity crowdfunding and peer-to-peer lending (P2P).
  • Introduction of a property crowdfunding/P2P platform for first-time homeowners, regulated by the Securities Commission of Malaysia. The platform is slated for launch in the first quarter of 2019.
  • Introduction of a RM 3 billion (US$721 million) industry digitalization transformation fund with a subsidized two per cent interest rate. This fund is intended for accelerating industries embracing smart technologies, such as robotics and artificial intelligence.
  • Government-managed venture capital will be streamlined. Government matching grants will only be awarded to companies that can attract investments from the private sector.
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