This article first appeared in The Edge Financial Daily on October 29, 2018

KUALA LUMPUR: Speculation is rife that a form of consumption tax, similar to that of a service tax, would most likely be implemented on foreign digital service providers who do not have a permanent establishment in Malaysia, in the upcoming Budget 2019.

Ernst & Young Tax Consultants Sdn Bhd (EY) partner and Malaysia tax leader Amarjeet Singh said this would be easier to implement, compared with a direct tax on the income of these companies that are not based in Malaysia.

“For example, each time someone from Malaysia downloads or procures services online, there will be a service tax added to the amount that is paid to the foreign digital service provider,” he told The Edge Financial Daily in a recent interview.

EY managing partner for its Asean tax practice Yeo Eng Ping, who was also at the interview, said that the consumption tax approach is more “doable”, as taxing the income or profit of a company without a permanent establishment in Malaysia would go against existing conventions and break tax treaties that Malaysia has with other countries.

“It will go against international tax conventions. At the moment, the practice is that tax can only be imposed when there is a permanent establishment in the country in which the revenue is earned [hence this would not apply to foreign digital service providers who have no permanent establishment in Malaysia]. So in order to be able to tax foreign digital service providers, the international community will need to change its policies, and this will take time,” she explained.

Amarjeet said that imposing tax on foreign digital service providers is fair, as local players who meet the threshold for service tax are already subject to the consumption tax.

“The argument for a digital tax is about creating a level playing field. Today, you have domestic players providing digital services who are subject to tax in Malaysia and who are likely to impose service tax as it would fall under IT services. Then you have someone operating from outside Malaysia providing the same services, but that person is not taxed and consumers in Malaysia do not incur service tax on these services.

“Malaysia would not be the first country to introduce a digital tax [if the government decides to do so]. It is a global trend and a lot of countries have already carried this out — there’s the Netflix tax in Australia, the equalisation levy in India, and in the UK, they have introduced a digital service tax.

“We also think that foreign digital service providers, particularly the global ones who are serious about doing business in Malaysia, would be willing to register as taxpayers in Malaysia and comply with the tax laws here as they would want to protect their reputation,” he said.

Yeo said that another likely move concerning taxes in Budget 2019 is a hike in personal tax rates for those in the higher-income band.

“We do not think that there would be a hike in personal tax rates across the board. Instead, it would most likely hit the higher-income group which is deemed to have a higher disposable income,” she said.