Malaysia: Digital Service Tax

In 2018, Malaysia abolished the multi-staged Goods and Services Tax (GST) and introduced the conventional single stage consumption taxes of Sales Tax and Service Tax. That, however, does not stop Malaysia from following the international trend on indirect taxation of electronic commerce businesses.

The parliament has passed the Bill to amend the Service Tax Act 2018 in order to incorporate Digital Service Tax (“DST”). Effective January 1, 2020, DST is to be charged and levied at the rate of 6% on any digital service provided by a foreign registered person to any consumer.

Digital service is defined as any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where delivery of the service is essentially automated.

“Consumer” is defined as any person who meets at least 2 of the following requirements:

1. makes payment for digital services using a credit or debit facility provided by any financial institution or company in Malaysia.
2. acquires digital services using an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia.
3. resides in Malaysia.

Ironically, the law does not confine the interpretation of ‘consumer’ to natural persons, and hence it is dubious at this juncture whether DST would also apply to business-to-business (B2B) transactions.

“Foreign Service Provider” is defined as:

• any person who is outside Malaysia providing any digital service to a consumer;
• operators of online platforms for buying and selling goods or providing services; and
• any person who makes transactions for provision of digital services on behalf of any person.

Foreign providers are to register with the Royal Malaysian Customs Department (“RMCD”) from October 1, 2019 if the annual value of digital service exceeds MYR 500,000 (about EUR 106,000). However, no tax is to be charged until January 1, 2020.

DST operates on a ‘cash’ or ‘receipt’ basis, i.e. registered persons are required to remit the tax only on receipt of payment from customers. While service tax in general operates on bi-monthly taxable periods, DST operates on quarterly taxable periods and hence simplifies compliance for the foreign operators. The law also permits electronic lodgment and payment of DST.