Placing foreign digital firms in income tax net a challenge

By MARK RAO / Pic By TMR File

MALAYSIAN tax authorities will be challenged in bringing foreign digital companies under the income tax regime due to present clauses in the law and will instead rely on the Goods and Services Tax (GST) to widen the tax net.

The Royal Malaysian Customs Department and Inland Revenue Board (IRB) announced earlier this month that they are looking to amend the present tax laws to make digital companies operating from overseas liable to taxation in Malaysia.

The initiative could result in the country gaining billions in revenue from these foreign digital players alone.

From an IRB perspective, the tax authority will need to look at amending the law, which states that only companies with a permanent establishment (PE) in Malaysia are liable to income tax.

Axcelasia Inc executive chairman Dr Veerinderjeet Singh (picture) said the concept of PE has long been ingrained in the income tax collection scheme.

“The issue for the authorities is how to go about bringing foreign-based service providers who do not have PE under the tax system.

“It is a question of how to widen the tax net and the answer is to typically use GST,” Veerinderjeet told The Malaysian Reserve (TMR).

He said the GST Act 2014 allows for the taxation on consumption of a product or service irrespective of whether the company providing the said product or service has a PE.

While e-hailing service provider Grab operates from private limited companies set up in each of its respective country of operation, competitor Uber Technologies Inc mainly runs it business from its US headquarters.

Companies like Uber that provide a service or product in Malaysia without a PE may be liable to further taxes if changes to the GST Act are finalised, implicating digital players such as Facebook Inc, Google Inc and Airbnb.

“At the end of the day, the GST Act will only need to add a provision in the law to require foreign companies to register under the tax regime.

“The authorities will have to work out a mechanism to allow for the taxation of these companies and secure approval from Parliament,” Veerinderjeet said.

The Customs Department is aiming to push the changes through the upcoming parliamentary sitting next month, and has set a target of RM42 billion in GST collections this year.

Meanwhile, the IRB is aiming to secure a 12% year-on-year increase in tax revenue to RM127.7 billion for 2017.

TMR reported last week that the tax agency under the Ministry of Finance is pushing the Organisation for Economic Cooperation and Development (OECD) to draw up a framework, which allows for the taxation of digital- based companies by next year instead of the slated 2020 deadline.

“The OECD is trying to forge an agreement. Once all countries become signatories of the arrangement, then all governments can push ahead with their respective tax initiatives, including Malaysia,” Sunway University Business School economics Professor Dr Yeah Kim Leng was quoted as saying in the report.

Veerinderjeet said OECD is now in the stage of collecting input from various countries and will come up with a report after this process.

He added that any change to the GST Act or income tax will result in a “prospective” rather than “retrospective” tax collection system, thus avoiding any backdating practices. Malaysian consumers are also concerned about facing double taxation as products retailed on e-commerce platforms are already GST-inclusive, according to a report in Bernama.

However, the news agency reported that the prospective changes to the GST Act will only affect foreign-based service providers with no establishment or place of business in Malaysia.

“There is a mechanism under our current GST model that allows for tax to be collected for online services provided by local companies to Malaysian consumers.

“If the services were provided by foreign service providers, they do not have to pay the GST,” Deloitte Malaysia indirect tax partner Senthuran Elalingam was quoted as saying in the report.