Malaysian Digital Service Tax – Did you miss the boat on 1 January 2020?

In the Q3 2019 WTS Global VAT newsletter, we highlighted the key requirements of the Malaysian Digital Service Tax (“DST”), which took effect on 1 January 2020.

We have now come to realise that a number of sizeable foreign entities missed the boat on 1 January 2020 and are now in the process of taking the corrective steps.

The threshold to register in Malaysia is RM 500,000 (approximately EUR 100,500) of Malaysian sales [including business-to-business (“B2B”) sales] and this has been expressively outlined in the Q3 2019 publication.

For a Foreign Service Provider (“FSP”) who registers now, here are the penalty exposures:

• Penalty for late application for registration (fine up to RM 30,000 (approximately EUR 6,000) or imprisonment up to 2 years, or both);
• Penalty for late submission of DST-02 returns (fine up to RM 50,000 (approximately EUR 10,000) or imprisonment up to 3 years, or both);
• Penalty for late payment of service tax on digital services due (rate of 10% to 40%); and
• Penalty for failure to issue invoice or document as required by the Act (fine up to RM 30,000 (approximately EUR 6,000) or imprisonment up to 2 years, or both).

Based on experience thus far, the penalty for late payment of service tax on digital services is commonly imposed almost immediately upon submission of DST-02 returns. While we have not seen much enforcement of the other penalties, we urge FSPs to comply with the requirements for invoicing religiously, for both commercial and regulatory reasons.

Ironically, the law does not expressly empower the Royal Malaysian Customs Department (“RMCD”) to waive these penalties for FSPs who come forward voluntarily. Nevertheless, we have made administrative appeals to the RMCD and are in the midst of discussions.

Another important and favorable development is that effective 14 May 2020, intra-group provision of digital services by FSPs shall not be subject to service tax. This exemption is not applicable to FSPs who also provide digital services outside the group of companies. Hence, registered FSPs who are solely providing intra-group digital services may now seek cancellation of registration as an FSP.