Taxation On Digital Services

This article is written by Lee Hishamuddin and Gledhill (LHAG) and was first published in their SST e-Alert in October 2019. Reproduced with permission from LHAG.

Effective from January 2020, there will be a 6% of service tax imposed on digital services in Malaysia  for both local and foreign service providers in order to comply with Malaysia's new Sales and Service tax. The Royal Malaysian Customs Department (Customs) recently issued a Guide on Digital Service Tax (Guide) to assist FSPs. This alert highlights some of the key points that FSPs should consider in assessing their liability prior to the implementation.The service tax is also applicable to online platforms that carry out transactions on behalf of overseas service providers but do issue invoice or any other document under their name.

In order to be a consumer, at least two of the following requirements must be met:

a) Makes payment for digital services using a credit or debit facility provided by any financial institution or company in Malaysia. 

b) Acquires digital services using an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia. 

c)  Resides in Malaysia.

Registration

Foreign service providers must be registered when the total value of digital services exceeds RM 500,000 per annum. This includes services provided through an information technology medium either with or without human intervention. 

The Guide, issued by Customs Department explains that the value of digital services for a period of 12 months is determined based on either the historical or future method. The former is based on the value of digital services in any month, plus the value of digital services for 11 months immediately before that month. Alternatively, the future method is based on the value of digital services in any month plus the expected value of digital services for the 11 months immediately after that month.

Invoicing

Furthermore, Foreign servive providers are required to issue an invoice or documents to consumers in respect of transactions pursuant to section 56G of the Act. Based on Regulation 6 of the Service Tax (Digital Services) Regulations 2019, the invoices/documents shall state:

a) the date of the invoice

b)the registration number of the foreign service provider

c)a description sufficient to identify the digital services provided 

d)the total amount payable, excluding service tax, the rate of service tax and the total service tax chargeable shown as a separate amount. 

Conclusion

In the event that Foreign Service providers fails to submit its return or submits incorrect returns, they are subjected to a penalty of 10% and additional penalty of 15% if the initial penalty remained unpaid for a period of 30 days. Foreign service providers are advised to register early to avoid being penalized.

Our Tax, SST & Customs senior partner Datuk D P Naban and partner S Saravana Kumar successfully represented the taxpayer in the Power Root case at the Court of Appeal.

For any questions in relation to tariff classification in respect of sales tax, please contact our Tax, SST & Customs partners at tax@lh-ag.com