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Dave Namasivayam Ananth is a senior lawyer, a
former Magistrate and advocate in Malaysia before taking up a position with the
Inland Revenue Department in New Zealand as a Prosecutor. He now practises as a
Tax Barrister, based in Auckland. He is an expert on Malaysian GST and a
familiar speaker on the local Malaysian circuit, spending considerable time in Malaysia with a consulting
firm working on GST. He also writes extensively on GST in Malaysia. He can be
reached at davetaxnz@gmail.com.
There has been a lot of hype
about the digital economy recently. The
Director General (DG) of the Royal Malaysian Customs Department (RMCD) clearly
stated on 18 September 2017 that the GST
Act 2014 will be amended to capture the GST impact on the digital economy.
In New Zealand, this tax, sometimes also called the “Netflix tax”, came into
force 1 October 2016. This tax is paid by the consumers of the product and not
by the company.
I note the changing nature of doing business – the
standard way will eventually give way to the digital economy. Tax collection
year-on-year is declining, and that is likely to do with this new e-commerce
way of doing business and the permanent establishment requirement. Therefore, we must recognise that GST on digital services is yet another example of digital
transformation. It is here to stay and will get more complex as the style of
doing business evolves to the next level.
GST has always been intended
as a broad-based tax on the consumer which is intended to cover the vast
majority of transactions[1]. Virtual goods are
increasingly commonplace (eg, Netflix, Uber, Alibaba, etc.) so they should not
be exempt. It should be noted that these companies providing goods did not come
up with some cunning tax plan to avoid charging it; they were just operating
within the way the rules worked until the recent law change[2]. No one would have thought the
rules of the game will change this soon. However, the GST committee, when
introducing the first draft of the GST Bill in Parliament in 2009, should have
considered the fact that e-commerce was already in place and downloading of
software was a common occurrence at that time. Even if that was too early, the
drafters could have included it in 2014 when the Bill became law. We have been
living in the digital age for some time and the government needs to catch up
with times.
Should the
government choose to tax digital services, these are some points to be
considered:
Contracts made online
Any amendments to the GST Act 2014
would also need to address contracts made online. The time and place of offer, and acceptance of such contract may be different from the conventional
treatment and this may need to be considered to determine the correct tax effect,
ie where the time and place of supply is. From the basic contract law, where
you sell a product is an "invitation to treat", followed by an
"offer to buy" from the potential purchaser, and acceptance of the
offer to buy, by the seller. The contract is finally made at the time and place
the acceptance by the seller is communicated to the potential purchaser.
Definition in GST Act
I must stress the definition of words in the legislation is paramount to
give effect to the intent and purpose of the legislation.
What will be the definition of remote services? A wide definition of
services should be in place, where it includes both digital and traditional
consultancy services. For example, the New Zealand GST Act defines “remote
services” as a service that, at the time of the performance of the service, has
no necessary connection between the place where the service is physically
performed and the location of the recipient of the services. The New Zealand
GST Act also provides rules on determining residence and status of recipients
with respect of remote services.
In any case, the definition should ensure that offshore
suppliers will be required to register and submit a GST return if their
supplies of services to Malaysian consumers exceed the RM500,000 threshold in a
12-month period.
Enforcement
Enforcement
will be challenging – RMCD and Inland
Revenue Board (IRB) will need a good IT system in place as well as money to be
spent on training and expertise to manage this new source of revenue.
Because,
say for argument’s sake, I register for cloud services internationally and I am
not paying GST on those services. However, I don’t have an issue paying GST for
those services. How does the government enforce compliance? How does RMCD know
that I have cloud and where it is? It is a nightmare, in my view.
Companies
like Netflix, Adobe and Uber would consider compliance a component of their
corporate responsibility, however, not all are like that.
Effect on businesses
Every
time new laws are implemented, there is a compliance cost to businesses which inevitably
will be passed on to the consumer. In eagerness
to maximise the collection of revenue, we tend to forget the competitiveness of
the world around us and what businesses go through. To the taxpayer, this is a significant change
from the normal way GST operates, as the GST rules will be ignoring the legal
structure of the agent / principal relationships of the parties[3].
I
think more concerted effort must be put in place to get all stakeholders and
the public to understand and give proposals (public submissions) to the issues
at hand. Perhaps the RMCD or Ministry of Finance can consider adopting the
Central Bank of Malaysia (BNM) or the Inland Revenue Authority of Singapore
(IRAS)’s method of drafting to introduce new and/or amended legislation.
BNM
obtains feedback from the relevant stakeholders and the public in respect of
any proposed frameworks, regulations, etc. vide exposure drafts, discussion
papers and concept papers. IRAS obtains feedback from the relevant stakeholders
and the public on any proposed changes and new adoptions of tax treatment
through the use of public consultations. It then releases a summary of the responses
received and the corresponding feedback.
A
key task would be to ensure that the final form of the GST legislation is able
to work in an efficient and effective manner in the real world, ie it allows
for the collection of GST, without causing unnecessary costs or delays to the
Malaysian consumers or foreign suppliers. More importantly, it should not cause
foreign businesses to withdraw from the Malaysian market if our rules become
too cumbersome. Please do be business-focused and user-friendly, what more now
the government has implemented the Digital Free Trade Zone (DFTZ).
I hope that the new amendments will ensure
that compliance costs are minimised as it will only apply to
business-to-consumers (B2C) transactions. Any increase in cost will
inevitably to passed on to the consumers. Business-to-business (B2B)
transactions are already covered under the reverse charge mechanism. The new amendments must also prevent double taxation from arising on supplies
of remote services performed in Malaysia to a non-resident consumer, by
allowing a deduction against the supplier’s liability for Malaysian GST to the
extent that the supply has already been taxed in another jurisdiction.
Netflix tax in foreign jurisdictions
The
GST rules on online services came into force on 1 October 2016 in New Zealand. GST
is collected on services and intangibles (including digital downloads) supplied
remotely by foreign suppliers to New Zealand-resident consumers. The new rules
also apply to insurance and remote gambling services provided by foreign suppliers.
The foreign businesses will need to register and collect GST while New Zealand
consumers who purchase or subscribe to such services will likely bear the
increased costs.
The
rules do not cover the collection of GST on the purchases of goods online from
overseas. This is a more complex issue that is still being considered by
New Zealand Customs and Inland Revenue separately[4]. In Malaysia, I
envisage the same.
Norway has moved ahead in this direction with
their “VAT on electronic services” (VOES) scheme since their law change in
2011. A dating service, a
foreign company, in 2017, was assessed approximately USD3.8 million including
penalties and interest, for failure to report and pay VAT on its electronic
dating services sold to Norwegian consumers. The law requires all foreign
companies supplying electronic services to Norwegian consumers regardless of
the permanent establishment requirement to report VAT at a standard rate of 25%
on all sales.
Permanent establishment
Now, there appears to be the permanent establishment issue
which needs to be addressed, established in the income tax regime. Tax laws
need to move with times, obviously due to the globalisation and digitalisation
of the businesses. E-commerce is now the in thing – governments need to address
this issue and as consultants, we cannot hide behind archaic rules. Malaysia,
like New Zealand, is a member of the
Organisation of Economic Cooperation and Development (OECD) and has been
involved in issues relevant to e-commerce.
One OECD report, "Clarification on the Application of the Permanent
Establishment Definition in e-Commerce", released in December 2000,
concluded that a website does not in itself constitute a permanent
establishment, but a server could be a permanent establishment if it is an
essential part of an online business activity. This can mean that internet
service providers or Malaysian businesses who own servers overseas and conduct
all their business online may have to file tax returns in the country where
their equipment is based, even if the business does not base staff there[5].
There are proposed rules to get around the
conservative permanent establishment requirement[6] – that is to deem a
non-resident entity to have a permanent establishment in Malaysia if a related
entity carries out sales-related activities for it here. This permanent
establishment will be deemed to exist for any applicable double tax agreement
(DTA). This deeming provision is essential to get around the permanent
establishment regime. However, the mechanism of this needs to be studied before
the law is drafted. A good place to start would be to peruse the existing papers
and studies on this subject.
What is next?
As much as Malaysia will be amending the GST Act 2014 to cover these digital transactions, Malaysian
companies operating in a similar way, supplying to overseas customers will
eventually need to also register in other jurisdictions for GST/VAT. Malaysian
digital service providers that cater to overseas customers will have to be ready for
GST/VAT whether they like it or not. Again, Malaysia is not the
first country neither will it be the last to tax on e-commerce.
Rather than making piece
meal amendments to Revenue Acts, I suggest an in-depth study by experts in the
field. Engage them and get it right. Taxpayers want to know their tax
obligations and how much they need to spend on compliance including IT infrastructure.
Taxpayers want to pay GST but only if it is the right amount according to clear
law.
[1] Jackson, Donovan. “Netflix tax: Why
digital goods belong in the IRD’s net.” istart.co.nz. iStart, 6 Oct. 2016. Web.
11 Oct. 2017.
[2] Ibid
[3] Bullot, Allan and Hornbrook, Sam. “GST:
Online purchases – What will be caught and when? Tax Alert - September 2015.” www2.deloitte.com. Deloitte, n.d. Web. 11 Oct.
2017.
[4] du Buisson, Jeanne and Pahwa, Divya.
“GST on “remote” services Tax Alert - April 2016.” www2.deloitte.com. Deloitte, n.d. Web. 11 Oct.
2017.
[5] “Trading
electronically”. http://www.ird.govt.nz/.
Inland Revenue. Web. 17 Oct. 2017. http://www.ird.govt.nz/ecommerce-tax/trading-electronically/business-australian-ecommerce-electronic-trading.html
[6] “BEPS – Transfer
Pricing and Permanent Establishment Avoidance.” http://www.ird.govt.nz/.
Inland Revenue. Web. 17 Oct. 2017.
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