Frankly Speaking: Direct digital tax will plug leakages

This article first appeared in The Edge Malaysia Weekly, on April 15, 2019 - April 21, 2019.
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Business models and consumer preferences have evolved over time, far surpassing the pace of change in tax treatments and systems. Like it or not, tax structures will have to move with the times.

That said, are governments evolving their tax structures quickly enough to plug tax leakages?

Last week, Malaysia announced a 6% digital service tax, an indirect tax that is based on transactions, not income.

What this means is that income earned from Malaysia through the digital sphere by companies that do not have a physical presence in the country is still not taxed.

In other words, the big boys who ring in millions, if not tens or even hundreds of millions of ringgit, through their digital business models are not required to pay any taxes on that income.

Malaysia has always adopted a territorial-based tax system where income is taxed when it is derived in the country by a company onshore.

But what happens if the income is derived from Malaysia by a service provider that is offshore?

This conundrum is not unique to Malaysia, of course. It is happening in all countries as the digital and non-digital worlds collide, resulting in tax leakages when it comes to the big boys. Ironically, these corporate giants boast a market capitalisation larger than the gross domestic product of most emerging countries.

At the same time, the average Joe is made to shoulder the tax burden of digital services consumption.

Does that make sense?

Facebook, Amazon, Apple, Netflix and Google (FAANG) have come under attack for not paying enough taxes. Last month, German Finance Minister Olaf Scholz raised the issue of tech giants paying tax “nowhere” and stressed the urgent need for a global solution.

Thus far, France has introduced a 3% levy on the revenues of tech companies that earn at least €750 million, with €25 million from within France. How the French implement the levy will be closely monitored by other jurisdictions eager for a successful model to leverage.

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