Jumping on the ‘digital tax’ bandwagon

The tax would affect other services including the likes of Spotify, Netflix and Amazon


Malaysia is one step away from being the second country in South-East Asia to introduce the digital tax, a levy mechanism that could be imposed on various online services including software, music, video and digital advertising.

The tax would affect other services in the same bracket including the likes of Spotify, Netflix Inc and Amazon.com Inc.

Last week, the Ministry of Finance tabled an amendment to the Service Tax Act 2018 so that the government can charge service tax on any digital services provided by a foreign registered person to any consumer.

Should it be approved, the Digital Tax would take effect from Jan 1, 2020.

As explained in Subsection 2(1f) of the Service Tax (Amendment) Bill 2019, “digital service” means any service that is delivered or subscribed over the Internet and other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.

Why Digital Tax?

The digital sector is known to be worth billions of ringgit.

However, global digital businesses such as Spotify, Netflix, Amazon and Steam may be subjected to the tax of the country they’re in, but not the country they’re selling to.

Large tech firms such as Facebook Inc, Google LLC and Amazon often manage to avoid paying taxes in many countries, mainly due to the fact that they have no large physical presence in those nations.

Under the current tax regime, the biggest loss in the digital economy appears when it comes to business-to-consumer (B2C).

As such, Malaysia needs to harness the potential tax revenue while balancing the competition between international and local businesses in the digital sector.

Without the digital tax, a non-level playing field is apparent as certain international players are able to provide a more competitive price point on products and services compared to local players who are subjected to local taxes such as the Sales and Services Tax and many other forms of levies.

It has to be noted too that the new tax scheme may also drive up prices for businesses in Malaysia, particularly on small businesses and start-ups that use online platforms, such as cloud computing or social media, both for advertising and sales.

Who Will Be Charged and Who Pays?

According to the proposed amended bill, the tax is applicable to any person who is outside of Malaysia providing any digital service to a consumer.

It includes any person who is outside Malaysia operating an online platform for buying and selling goods or providing services (whether or not such person provides any digital service).

Services such as video and music streaming like Netflix or Spotify; applications; listing fees on electronic marketplaces such as Apple Inc’s or Google’s app stores; software, such as online subscription fees may be taxed.

In addition to this, the inclusion of software could mean that services such as Microsoft Corp’s Office 365 productivity suite and games sold by Steam, a digital distribution platform, would be liable under the new tax.

The digital tax will only affect sellers and service providers overseas. That means, it should affect only those who operates from other countries — and sells their products or services on websites — such as Lazada and Alibaba.com.

According to the bill that was tabled by Finance Minister Lim Guan Eng for first reading last Thursday, consumers means any person who fulfils any two criteria mentioned.

The criteria include any person who resides in Malaysia; makes payment for digital services using credit or debit facility provided by any financial institution or company in Malaysia; or any person who acquires digital services using an Internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia.

How Common is Digital Tax Globally?

Across the globe, value-added tax (VAT) rules are being amended to ensure that foreign digital suppliers become liable for the collection and remittance of these taxes.

In the first half of 2018 alone — Turkey, Saudi Arabia and the United Arab Emirates imposed a destination-based VAT on cross-border B2C digital service supplies.

Singapore, in mid-February 2018, flagged such changes to their tax rules with change due on Jan 1, 2020.

In January this year, the Canadian province of Québec introduced a digital sales tax, a year after revealing its plan to do so.

South America, in particular, has seen a series of moves in the third quarter of 2018 with Colombia, Uruguay and Chile all revealing plans to tax foreign suppliers of digital services.

Similar plans in Brazil had been put on hold after a legal challenge.

In early October 2018, Bahrain became the third Gulf Cooperation Council member state to implement a new 5% VAT system that went live on Jan 1, 2019.

The European Union (EU) is inching closer to introducing a digital tax on technology giants such as Google, Amazon and Facebook.

Following claims that large digital companies are involved in tax avoidance and pay a lesser effective tax rate compared to bricks-and-mortar businesses, the EU’s tax deal is expected to resolve such concerns.

If the digital tax is approved by the EU members, then it will likely raise about £4.4 billion (RM23.54 billion) annually across Europe.

The European Commission has proposed to impose a 3% levy on the revenue of digital businesses with a total annual revenue of over £750 million and a yearly EU taxable revenue of £50 million