Tax on digital services is set to come into force on Jan 1, 2020, and is to be applied to all services provided to Malaysian residents by foreign digital service providers. However, there is some ambiguity on whether this applies to those providing online financial services, says Deloitte Malaysia.
The company’s indirect tax partner, Senthuran Elalingam, says there is uncertainty about financial services provided by international firms.
“The uncertainty of application on the provision of financial services to Malaysians by international companies is an area of concern for us. Based on our discussions with the authorities, they are not going to put any boundaries on what these digital services are,” he says.
“For example, I could be a Malaysian consumer with an online international bank account. All the banking services would be delivered to me electronically, and all the fees and transactions are automated. These transactions could potentially be taxable under the digital service tax regime.”
The likes of fund management are exempt from the current Sales and Service Tax (SST) regime while online banking services (provided digitally, and by locally based players) do not fall within the scope of the tax. However, there is a risk that similar services could attract a 6% digital service tax if it happens to be provided by an international financial service company to customers in Malaysia.
Since the announcement of the digital service tax in the Budget 2019 announcement last November, it is understood that more mainstream digital services such as Spotify and Netflix as well as personal computer game distribution platform Steam would be required to collect the tax from their Malaysian users. These examples were referenced in Finance Minister Lim Guan Eng’s Budget 2019 presentation.
According to a statement by the Ministry of Finance back then, it noted that for online services imported by users, foreign service providers would be required to register with the Customs Department. They would then have to collect and remit the tax effective Jan 1, 2020. However, the tax status of international financial service providers remains uncertain.
According to an August 2019 guidance document by the Customs Department, the service tax shall be charged and levied on any digital service provided by a foreign-registered person (FRP) to any consumer in Malaysia. The rate has been set at 6%.
For clarity, “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 the delivery of the service is essentially automated”. The guidance document states there is no exemption under the provision of service tax on digital services.
A “foreign service provider” (FSP) is defined as “any person who is outside Malaysia providing any digital service to a consumer and includes any person who is outside Malaysia operating an online platform for buying and selling goods or providing services (whether or not such person provides any digital services), and who makes transactions for the provision of digital services on behalf of any person”. The guidance document adds that an FSP would be obliged to register to become an FRP with the Malaysian authorities and collect digital service tax “when the total value of digital services provided to a consumer in Malaysia exceeds RM500,000 per year”.
According to Senthuran, the reference to “a consumer” denotes a collective, rather than individual users. “What this provision is saying is that if the sales revenue from digital services collected from all Malaysian customers, whether business or private resident, exceeds RM500,000 on a historical (previous 12 months) or prospective (future 12 months) basis, then the FSP is obliged to register.”
The digital service tax is not just limited to business-to-consumer transactions. It is possible that it could be imposed on digital services provided between financial service players, which, in turn, could possibly affect end users in the form of a cost pass-through.
“Consider the scenarios in a multinational bank. These institutions would have a lot of electronic systems in their back end that facilitate complex and automated trading. These trades could technically be caught under the digital service tax,” says Senthuran.
“In fact, we’ve had international financial institution clients asking us whether these electronic networks that facilitate such transactions could be caught under that tax. For a lot of other countries, financial services tend to be specifically exempt, but in Malaysia, under the new digital service tax rules, it doesn’t yet seem to be the case.”
The uncertainty extends to the provision of fund management services. According to the Customs Department’s August 2018 Guide on Management Services, the “provision of management services by asset and fund managers, including pusat zakat and trustee companies, which provide will services, trust services, wakaf services and other similar services” are considered exempt and, therefore, do not attract any service tax. Personal Wealth has reached out to the department for further clarification.
However, Senthuran says the incoming digital service tax has been so broadly defined that similar financial services, provided by foreign companies, could now attract the 6% tax. “If you were to buy something from an international online mutual fund marketplace, or if you want to engage in some [online] peer-to-peer lending with a financial service company based in Singapore, it will possibly have to charge you the digital service tax, assuming its Malaysian business exceeds the RM500,000 threshold.”
Looking ahead to the eventual introduction of the digital service tax, Senthuran is not optimistic that the authorities will introduce any kind of corresponding exemption list for the digital service tax, the likes of which currently exist within the SST regime. “I don’t see this happening before we go live. For the moment, the authorities’ approach is to see who is getting registered and who will be collecting tax,” he says.
However, another firm is of the opinion that the digital service tax will impact foreign financial services providers. In a note on the tax to Personal Wealth, local professional service firm McMillan Wood believes that the tax will be imposed on foreign-based financial service providers. “They will charge this tax to their customers if their (service providers) total annual subscription fees received exceed RM500,000.”
Broadly, although the cost of digital services will increase, McMillan Woods suggests that the impact on consumers will be minimal. This is because the tax rate is one of the lowest in the world. “For example, the rate in New Zealand is 15%; in Russia, 18%; and in Norway, 25%.”