Costly GST Mistakes that Businesses should Avoid - Part 4 - Services Invoiced to Foreign Customers

This is the final instalment of a 4 part series on GST written by Thenesh Kannaa, Partner of TraTax Malaysia
(Speaker for the upcoming Wolters Kluwer workshop, GST Health Check: Ensure Compliance - Avoid Costly Mistakes held in Kuala Lumpur on the 21st of July 2016)

The previous three instalments can be viewed here:

• Part one: Contractual terms
• Part two: Price displays
• Part three: Property investors

Services invoiced to foreign customers

When a GST-registered business invoices a foreign customer for a service, the structure of the GST Act 2014 suggests that the fee would be subject to GST at the standard rate of 6% unless the criteria to apply the rate of zero is met. There are 27 different provisions pursuant to which a service fee may be zero-rated. One such provision is paragraph 12, Second Schedule, GST (Zero-Rated Supply) Order 2014. Para 12 allows a service fee to be zero-rated where all of the following criteria are met:

•  the service must be supplied under a contract
•  such contract must be with a person (‘customer’) who belongs in a country other than Malaysia
•  the service must directly benefit a person (‘beneficiary’) who belongs in a country other than Malaysia; and
•  the beneficiary must be outside Malaysia when the service is performed.

There are some specific situations to which para 12 does not apply despite having met the criteria above.

For the sake of simplicity, such exclusions are not reproduced in this article. The key message is for businesses not to be trapped in the myth that any invoice to a foreign customer must be zero-rated. It is not unusual for a Malaysian business to enter into a contract and invoice a foreign company for a service which directly benefits a local company. Such invoices, despite being addressed to a foreign company, must be subjected to GST at 6%.

On the other hand, it is also untrue that a service fee must be subjected to a 6% GST charge if it relates to services rendered in or from Malaysia. For example, if a business provides consultancy services entirely from Malaysia but to a foreign customer, such services would be zero-rated provided the criteria above are met.

Each service fee must be determined based on the criteria of the 27 provisions and it is advisable to seek professional advice on each arrangement.

This concludes our series of articles on key GST mistakes. If you've found this interesting and would like to know more, why not sign up for our GST Health Check workshop this Thursday 21st of June. Be quick!

Thenesh Kannaa is a partner at Thenesh, Renga & Associates (a.k.a. TraTax Malaysia), a firm of tax advisors. He is the author of Wolters Kluwer’s Master GST Guide (2^nd Ed., 2015) and a prominent speaker on tax topics. He can be contacted at thenesh@tratax.my. Views expressed are his own.