What is Digital Service Tax in Malaysia?
In an era dominated by digital transactions and global connectivity, the introduction of digital tax has become a pivotal aspect of fiscal policies worldwide. This article delves into the intricate landscape of digital taxation, with a particular focus on Malaysia’s initiatives and their implications. As of January 1, 2020, Malaysia has implemented a 6% service tax on digital services, signifying a significant move to regulate and balance the taxation landscape between local and foreign service providers.
The subsequent sections unravel the specific criteria, compliance obligations, and the impact on consumers and foreign service providers, providing a comprehensive guide to navigating the dynamic realm of digital taxation in Malaysia. With these complexities in mind, follow RS 36 Solutions to delve into the intricacies of Malaysia’s sst landscape to help you navigate this financial terrain effectively.
Understanding Digital Tax in Malaysia
As of January 1, 2020, Malaysia has implemented a 6% service tax on digital services, known as the Digital Services Tax (DST). Notably, Malaysia became the second Southeast Asian country to introduce such a tax, following Singapore.
The Service Tax (Amendment) 2019 Bill was endorsed by Dewan Rakyat to levy taxes on foreign-registered entities providing digital services to consumers within Malaysia. Foreign digital service providers (FSP) are required to register with the government and adhere to the new tax regulations. This initiative aligns with the government’s objective of creating a level playing field between local and foreign suppliers.
Failure to comply with the new tax implementation may result in penalties, including fines of up to RM50,000, imprisonment for a term of up to three years, or both, upon conviction.
DST operates on a ‘cash’ or ‘receipt’ basis, meaning registered entities must remit the tax only upon receiving payment from customers. Unlike general service tax, which follows bi-monthly taxable periods, DST operates on quarterly taxable periods, simplifying compliance for foreign operators. Additionally, the law allows for the electronic lodgment and payment of DST.
Defining the Consumer under Digital Tax Law
A consumer is officially defined as any individual meeting at least two of the following criteria:
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.
Interestingly, the law does not limit the interpretation of ‘consumer’ to natural persons. Therefore, it remains uncertain at this point whether the Digital Services Tax (DST) would also be applicable to business-to-business (B2B) transactions.
Understanding Foreign Service Providers (DFC)
The term “Foreign Service Provider (DFC)” is specifically defined as follows:
A foreign registered person refers to any Foreign Service Provider (FSP) duly registered under section 56C of the Service Tax Act 2018 (STA). This includes:
Any person located outside Malaysia providing digital services to a consumer.
Operators of online platforms facilitating the buying and selling of goods or providing services.
Individuals engaged in transactions for the provision of digital services on behalf of others.
Foreign providers are mandated to register with the Royal Malaysian Customs Department (“RMCD”) starting from October 1, 2019, if the annual value of their digital services exceeds MYR 500,000 (approximately EUR 106,000). It’s important to note that no tax is applicable until January 1, 2020.
Compliance Requirements for Foreign Service Providers
Foreign Service Providers (FSPs) offering digital services to consumers in Malaysia, with the value exceeding RM 500,000 within a 12-month period, must adhere to specific registration and compliance obligations. These responsibilities include:
Charging 6% Service Tax: FSPs are required to impose a 6% service tax on the digital service provided to consumers in Malaysia at the time payment is received.
Issuing Invoices: FSPs must issue invoices, whether in electronic or paper form, containing prescribed particulars for each digital service transaction to the consumer.
Submission of Service Tax Return: FSPs are obligated to submit a prescribed service tax return and remit any collected service tax to the Royal Malaysian Customs Department by the last day of the month following the end of the taxable period, which is on a quarterly basis.
Record-Keeping: FSPs are expected to maintain complete and accurate records of all transactions for a duration of seven years.
For more comprehensive details on compliance procedures, please refer to the Guide on Digital Services.
Understanding Service Characteristics Eligible for Digital Tax
Foreign Taxable Person Under Digital Tax
Providing Direct Digital Services: Any person outside Malaysia offering direct digital services to a consumer.
Operating an Online Platform: Individuals outside Malaysia operating online platforms for buying and selling goods fall under the category of foreign taxable persons.
Impact of Digital Tax on Buyers
Impact of Digital Tax on Various Services
Digital tax is anticipated to have an impact on a variety of digital products and services, including but not limited to:
Digital Products
- Spotify
- Apple Music
- Netflix
Digital Services
- Adobe Creative Cloud
- Microsoft Office 365
- Dropbox
Content Providers
- Google Play
- Steam
- Apple App Store
It’s important to note that certain services are not expected to be affected by the digital tax, including:
Not Affected
- Iflix
- Astro
- Grab
Conclusion:
In conclusion, the implementation of digital tax in Malaysia marks a crucial step towards fostering equity and accountability in the digital services sector. By imposing regulations on foreign service providers and defining clear criteria for consumer inclusion, the government aims to create a level playing field for local and international entities.
As digital transactions continue to evolve, the need for adaptive taxation policies becomes increasingly apparent. The outlined characteristics of services subject to taxation, compliance obligations for foreign providers, and the nuanced impact on consumers collectively illustrate the multifaceted nature of digital tax.
This article serves as a guiding compass through the intricacies of Malaysia’s digital tax landscape, shedding light on the transformative journey towards a more inclusive and regulated digital economy.
Frequently Asked Questions (FAQs)
What is digital tax?
Digital tax is a levy imposed on online services and products to regulate the digital economy.
Who is considered a foreign taxable person under digital tax?
Any person outside Malaysia providing direct digital services to consumers falls under this category.
What services qualify for digital tax?
Services delivered or subscribed over the internet, excluding physical items, with minimal human intervention are eligible.
When did Malaysia implement digital tax?
Malaysia introduced a 6% service tax on digital services from January 1, 2020.
What are the compliance obligations for foreign service providers?
Foreign providers must charge 6% service tax, issue invoices, submit service tax returns quarterly, and maintain accurate records for seven years.
How does digital tax affect consumers in Malaysia?
Digital tax impacts overseas sellers and online services, including purchases from platforms like Apple Store and Google Play.
Which digital products are affected by the tax?
Services such as Spotify, Apple Music, Netflix, Adobe Creative Cloud, and Microsoft Office 365 are among those affected.
Are there exemptions to digital tax in Malaysia?
Yes, services from providers like Iflix, Astro, and Grab are not subject to digital tax.
How is digital tax collected from consumers?
Digital tax is collected during credit card transactions, with the amount remitted to Customs.
Can businesses be considered consumers under digital tax?
The law does not limit the interpretation of ‘consumer’ to natural persons, raising uncertainty about its applicability to business-to-business transactions.