Make digital service tax transparent

By SHAZNI ONG / Pic By BLOOMBERG

The government should be transparent before implementing the service tax on foreign digital services as it could hurt the country in the long run.

AlphaBeta Engagement manager Konstantin Matthies said transparency is one of the things that needed to be adhered to when it comes to taxing the digital economy.

“You need to explain how services would be taxed, and why is that the case…You also need to show that you are not discriminating. Is it discriminatory to one sector or just to one aspect? Does it distraught the market forces?

“So, if it does, then it would be a poorly designed tax. These principles should be adhered to when it comes to taxation. Transparency is more important than the tax rate,” he said after presenting a report titled “Asia-On-Demand: The Growth of Video-On-Demand (VOD) Investment in Local Entertainment Industries” via a video call organised by AlphaBeta and Netflix Inc yesterday.

When tabling Budget 2019 last month, Finance Minister Lim Guan Eng announced that foreign digital service providers will be required to register with the Royal Malaysian Customs Department, and apply and remit the relevant service taxes effective Jan 1, 2020. Examples of these services will include, but are not limited to downloaded software, music, video or digital advertising.

“The above measures will neutralise the cost disadvantage faced by physical retailers against their virtual storefront counterparts, especially those operated by foreign entities,” Lim said.

According to Matthies, based on past research, the tax rate is not that important compared to the emphasis on transparency which many parties are really concerned about.

“For the previous research, we surveyed a number of multinational companies, start-ups, investors, as well tax structures.

“All of them told us that tax rate is not that important, but it has to be transparent,” he said.

Matthies added that while the report did not look into details on the taxation aspect, the key point is that the service tax would obviously affect both international and local players.

He also said the measure taken by the government on the matter could be seen as “protectionist measures”.

According to Matthies, such taxation would “make the overall market that you are operating in less attractive”.

“While you might be raising tax revenue in the short run, you may be actually cutting off that line of future investment. So, there’s a real trade off there.

“And the risk is that if you haven’t moduled this properly, then you might be actually doing more harm to your revenues in the long run than you’re doing them any good,” he explained.

Matthies added that if the government is putting out regulations that make the market less attractive compared to the market in other countries, the investment would follow suit.

“There’s a real danger unless these things are very much well designed, so that it won’t hurt your economy and local entertainment industry in the long run,” he said.

According to the report released by AlphaBeta, VOD services are expected to invest up to US$10.1 billion (RM42.29 billion) in Asia by 2022, an increase of 3.7 times from the amount spent last year.

“About US$4 billion of the expected investment will be in the form of foreign direct investment by global players. Additionally, the economic impact VOD players will have is expected to be more than three times the amount spent on investment.

“Up to 736,000 jobs could also be created by this spending in 2022, and there may be spillover benefits to other industries such as tourism, music or merchandised products,” the report said.

The study also found that the number of subscribers in Asia is expected to double in five years, and that viewers in Asian countries have a strong appetite for high quality local content — prompting industry players to focus on becoming more locally relevant.

Meanwhile, the report also outlined several recommendations for Asian policymakers to take full advantage of the VOD industry as a runaway for innovation and investment.

These include adopting a collaborative approach with VOD players, creating flexible regulation and investing in the local ecosystem.