This article first appeared in The Edge Malaysia Weekly on December 9, 2019 - December 15, 2019

Governments around the world are struggling to deal with what we call the “new colonialists” — tech giants like Facebook and Google. Not only are they too powerful socially and politically, but they have also become economic powerhouses with market capitalisations that are bigger than the GDP of some countries.

Facebook is accused of being used as a platform for fake news and information. We shall not dwell on that issue here.

Our concern is about the financial impact — and it is mainly adverse — that the likes of FB, Google, Waze and Youtube have on economies around the world because they suck out billions of dollars through the advertising revenue they earn in the countries they operate in.

Some governments are fighting back with a digital service tax and Malaysia has just announced this will start on Jan 1, 2020.

Unfortunately, the digital tax will not hurt FB and Google even though it will earn the government some revenue. This is because the tax is not paid by these tech giants. It will be paid by Malaysian consumers. FB and Google will only be tax collection agents for the Inland Revenue Board.

In the case of FB and Google, their principal revenue is advertising, so, if a Malaysian advertiser used to pay, let’s say, RM100,000 for a campaign, it now has to pay a 6% digital service tax that these social media platforms will collect. Similarly, a Malaysian who subscribes to Netflix or Spotify will now have to pay an extra 6% on top of the subscription fee.

Netflix, Spotify, Facebook and Google pay nothing,

In the case of advertising on FB and Google, the issue becomes more complicated and the costs are even higher for Malaysian businesses because on top of the 6% digital service tax on advertising, there is also a sales and service tax that advertisers have to pay to buy advertising on FB and Google through local advertising agencies. It amounts to double taxation.

The outcome could be that advertisers may bypass local advertising agencies and go straight to FB and Google to save on the 10% sales and service tax.

If this happens, the loss to the country will be far bigger and more damaging than it already is.

Why do we say that?

It is not widely known that FB and Google alone today drain out of Malaysia RM1.5 billion to RM2.0 billion of advertising spending a year by local businesses that, in the past, were spent with Malaysian media companies.

And they pay no tax on the billions that they earn in Malaysia.

This is because while advertising bookings are done through the local sales offices of Facebook and Google, payments are sent to their overseas bank accounts in countries outside Malaysia.

The Edge has documents showing that Malaysian advertisers transfer advertising payments to Facebook Ireland Limited’s bank account in Dublin. Advertisers on Google are asked to make bank transfers to Google Asia Pacific Pte Ltd’s bank account in Singapore.

All these payments bypass the Malaysian tax system, ensuring that these tech giants pay no income tax on revenue they earn here.

The damage from this massive outflow of advertising money to Facebook and Google is not limited to loss of tax revenue for the government.

It has caused thousands of jobs to be lost in Malaysian media companies as profitability sinks or disappears completely because of the sharp contraction in advertising revenue.

Data tabulated by The Edge shows that the loss of more than RM1.5 billion in advertising revenue a year has also destroyed the market value of listed media companies by close to RM4.0 billion between 2014 and 2018.

Something must be done to stop this tax debacle that allows these tech giants to profit at the expense of local industries and the local economy.

Unfortunately, we do not think the digital service tax that is to start in January will set things right because the tax will be paid by Malaysians and not these tech giants.

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