Service Tax on Cross-Border Services – the onus on Malaysian customer or foreign service provider?

Effective 1 September 2018, Malaysia implemented a 6% Service Tax, which is characterized as a narrow-base taxation as it applies to only 8 group of services; including management services, information technology services, accounting services, legal services, consultancy services and so on. These services are known as “taxable services”.

In an effort to widen the scope of Service Tax to include services rendered from overseas, the following amendments have been recently announced.

(1) Imported Service Tax on B2B Services effective 1 January 2019

This rule applies to business-to-business (B2B) transactions – more specifically, where a foreign service provider provides any taxable services to a Malaysian business customer.

The foreign service provider is not required to register for Service Tax in Malaysia (unless there’s fixed establishment in Malaysia). Instead, the Malaysian business customer is required to self-account for 6% Service Tax and remit the same to the Malaysian Customs. This is known as the imported service tax, and is effective 1 January 2019.

The imported service tax applies at the time when the Malaysian business customer receives the invoice (or at the payment date - if the payment is made before the invoices is received).

Given that the Service Tax is not a multi-stage tax system, there would be no input tax credit available in respect to the Service Tax. The same would be an additional cost to the Malaysian customer.

The requirement for the Malaysian business customer to self-account for the 6% Service Tax applies even if such person is not service tax registered. According to Customs guidelines, the Minister would grant a relief in respect of certain taxable services provided by a foreign service provider within the same group as the Malaysian business customer. This, however, is subject to conditions.

(2) Foreign Businesses that provide online B2C Services are required to register and charge Service Tax effective 1 January 2020

While the Malaysian business customer is expected to self-account for Service Tax on services procured from foreign service providers, it is not practical to expect the same when the service is procured by a Malaysian consumer (i.e. an individual for non-business consumption). As such, it has been announced that foreign businesses that provide services to Malaysian consumers would be required to register for service tax and charge service tax effective 1 January 2020.

The law for the B2C (business-to-consumer) services are yet to be enacted and hence full details are not known at this juncture. 

Based on the information available so far, it appears that not all B2C service providers would be required to register for Service Tax. Instead, only those who provide services that fall under the concept/category of “online services” would be subject to this requirement. Some examples given by the Government for “online services” are downloaded software, music, video and digital advertising. Of course, these examples are not exhaustive.

It is presumable that the requirement for foreign service providers to register for Service Tax would apply even if such person does not have any fixed establishment or physical presence in Malaysia.

Foreign businesses that provide services to Malaysian consumers/individuals are advised to assess their potential exposure to this new rule and, if necessary, make the necessary preparations to comply.