Tourists to pay tax on accommodations booked online

From 1 July 2021, tourism tax will be levied on a tourist staying at any accommodation premises booked online through a digital platform service provider. The order has been gazetted on 16th March 2021. 

Note: For further information about our Tax subscriptions, contact us at my-sales@wolterskluwer.com (Malaysia).

Build firm resilience with predictive intelligence

 

If 2020 has taught us anything, it’s that the future is full of unexpected surprises. But what if you could predict the future? Although there are still many unknowns, predictive intelligence can help you build resilience by proactively identifying how tax legislation or regulatory changes could affect your clients. Advanced technologies, like CCH iQ Client Match can help firms provide enhanced client service and deliver business insights that help streamline tax season and discover additional revenue streams.

Provide year-round superior client service

If you want clients to view you as advisors rather than just accountants, you need to anticipate their needs before they even ask you for help. Because if you don’t, you could lose their business. Up to 72% of small businesses have changed accounting firms because the firm wasn’t proactive about addressing tax law changes. With predictive intelligence, your firm can offer updates all year long on how regulatory changes might affect them, so clients can take action today.

Create an efficient tax season

With growing financial advisory services, your firm is keeping in touch with clients all year long, delivering important business insights proactively. But did you know that predictive intelligence also can save critical time during your busy season? With CCH iQ Client Match your firm can streamline the tax prep and review process by identifying which legislative changes could affect each client. This gives you a heads up for areas of the tax return that may require a bit of extra attention.

Discover new revenue sources

You can use the power of predictive intelligence to flip your firm’s mix of business from primarily commoditised compliance services to a higher percentage of lucrative advisory services. Position your firm as a trusted partner and open up additional revenue streams.

 

Budget 2020

Since we will be entering 2020 soon, lets take a recap of some of the exciting Tax highlights of our Budget 2020. It was presented by our Finance Minister YB Lim Guan Eng on 11 October 2019.

Budget 2020 Higlights:-

* Corporate income tax rate for SME's will now be taxable at 17% for the first 600,000 of the company's chargeable income. 

* Also if SMEs are focusing on adopting digitization or if they are undertaking pilot projects on digital applications, then they might be entitled to grants and loans in 2020. 

* To encourage companies to participate in export fairs, the government will provide a tax relief up to RM 25,000 compared to RM 10,000 previously. Please note, this relief is upon approval and submission of certain documents required by Inland Revenue Board Of Malaysia (IRB). 

* Companies are allowed to claim or deduct 10% of approved donations made for the year. Cash Wakaf is now entitled to be deducted as well. 

* The Government has increased the relief for childhood care (Taska) to RM 2,000. It was RM 1,000 previously. 

* Individuals are now eligible to a tax relief of up to RM 6,000 for medical expenses which includes fertility for YA 2020. 

* Individuals with taxable income of RM 2 million and more will now be taxed at 30% instead of 28%. 

Lochana Nanthacumar
Content Management Analyst
Wolters Kluwer Malaysia 

More Sales Tax Hikes Needed from Japan, IMF Says

The International Monetary Fund has proposed further changes to Japan's tax regime following the increase to its sales tax rate.

Japan's headline consumption tax rate was increased from eight percent to 10 percent on October 1, 2019. A reduced eight percent applies to the supply of foods and drinks – with the exception of liquors and restaurant services – and to subscription newspapers issued twice or more a week.

The consumption tax rate was last increased in 2014, when it rose from five percent to eight percent.

The IMF said that, relative to 2014, consumption has been less affected by October's rate hike, owing partly to countermeasures introduced by the Government. These measures include a tax allowance for automobile and house purchases, a point-reward program for cashless payments in SMEs, infrastructure investment, and additional spending for childcare and tertiary education.

Tax Deductibility of Valuation Fee

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

In the case of  CP Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, the high court  allowed a taxpayer to deduct the valuation fee incurred by them to value their properties, including their investment property in the form of a shopping mall. The taxpayer was successfully represented by our Tax, SST & Customs partner, S Saravana Kumar. 

Transfer Pricing Dispute Successfully Resolved

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

 In FSB vs Ketua Pengarah Hasil Dalam Negeri, a transfer pricing appeal before  the DGIR made transfer pricing adjustments on the ground that services provided by the holding company were duplicative of the activities carried out by the taxpayer. The DGIR invoked Section 140(1) of the Income Tax Act 1967 and applied the general tax avoidance provision to perform transfer pricing adjustments. Tax assessments were raised and the taxpayer appealed against the assessments to the SCIT.

Case Spotlight: Tariff Classification for Sales Tax

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

 The reintroduction of sales tax highlights the need to be precise in the tariff classification of goods manufactured in or imported into Malaysia. Under the goods and services tax (GST) regime, a standard rate of 6% duty was imposed on all taxable goods (except for exempt and zero-rated supplies). However, under the sales tax regime, goods can be either exempted (0%) from sales tax or be subject to sales tax of 5%, 10% or 15%. This sales tax rate differentiation is entirely based on tariff classification. Tariff classification thus becomes a key aspect in determining the sales tax rate payable. 

The Australian High Court recently granted special leave to the appeal sought by Comptroller General of Customs (Australian Customs) against the Federal Court’s decision in ComptrollerGeneral of Customs v Pharm-A-Care Laboratories [2018] FCAFC 237. This case concerns the tariff classification of vitamin gummies (Vitamin Gummies) and weight loss gummies (Weight Loss Gummies) imported by the taxpayer.

Case Spotlight: Arbitrary Transfer Pricing Assessments Successfully Set Aside

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

OSB v Ketua Pengarah Hasil Dalam Negeri

In a landmark ruling, the Special Commissioners of Income Tax (SCIT) unanimously allowed a tax appeal against transfer pricing tax assessments raised by the Director General of Inland Revenue (DGIR). The assessments were raised consequent to a transfer pricing audit. Our Tax, SST & Customs lawyers, led by senior partner Datuk D P Naban together with partner S Saravana Kumar, and senior associate Jason Tan Jia Xin, successfully represented OSB.

Case Spotlight: Transfer Pricing - DGIR’s Power To Vary Transactions

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

 In the recent Indian case of Pr Commissioner of Income Tax vs M/S Aegis Ltd (Case No 1248 of 2016), one of the issues was whether the Indian Revenue Service (IRS) can re-characterise a share subscription transaction as an advance of unsecured loans. The High Court held that the IRS is not entitled to do so and dismissed its appeal against the decision of the Income Tax Appellate Tribunal (Tribunal).

Brief Facts

The taxpayer, a company based in India, was subjected to a transfer pricing audit for the years of assessment 2009 and 2010. It was dissatisfied with the decision of the IRS to deem interest income and raise tax assessments.

During the said years of assessment, the taxpayer had subscribed to redeemable preferential shares of its associated enterprise and redeemed some of the shares at par on a later date. The IRS took the position that the preference shares were equivalent to an interest-free loan advanced by the taxpayer and accordingly, imputed deemed interest.

Two key issues that arose were whether:

India needs to rethink attitude towards corporate tax avoidance

by Shilpa Goel (Editor) (Tax Lawyer)

This article was first published on the Kluwer International Tax Blog on 8 April 2019.

According to an oft-cited research by the UN University World Institute for Development Economics Research, India loses over 40 billion US dollars in revenue, annually, to corporate tax avoidance. Obviously, for a country like India, the money could have been used to reduce poverty-related deaths and to provide basic social care to the poor and underprivileged. Despite its impact, corporate tax avoidance is one of the lesser debated issues in India.

Multinational tax avoidance has almost never made it to the front pages of popular Indian newspapers and has never been discussed on primetime TV news debates. That corporate tax avoidance is not ‘popular’ with the Indian voters today is also indicated by the fact that not a single question relating to “tax avoidance” or “corporate tax avoidance” was raised in the Sixteenth Lower House of Parliament (2014-2019).

This is not to suggest that nothing has been done so far. I have blogged about some of the changes recently carried out to the Income Tax Act to mirror the OECD’s BEPS recommendations. Also, in 2017, the government introduced a legislative general anti-avoidance rule (GAAR) to disregard aggressive tax planning arrangements and deny tax treaty benefits. Of course, the GAAR came too late in the day and came only after the Supreme Court, in the case of Vodafone, rather bluntly noted that tax benefits cannot be denied in the absence of any explicit anti-abuse rule in the tax law.

These changes, though necessary, are not sufficient to win India’s fight against corporate tax avoidance. A lot needs to change, both at domestic and international levels.

Reforms relating to tax compliance and tax incentives

There are two aspects to consider in improving the Malaysian tax system – tax compliance and tax incentives.

Tax compliance

Tax compliance needs to be made a way of life. However, media advertisements can only do so much to educate. There should be a focus on the educational role so as to be able to disseminate tax information. The website could be used more effectively, for example, listing all tax case law decisions, etc. as the public needs to know it all in the self-assessment world. The need for information also extends to officers of tax authorities, where they should be trained via contributions from the private sector to develop staff with a broader mind-set and enhanced business knowledge.

Tax compliance is a multi-faceted issue, hence there are many facets to consider. Examples include improvement of the tax consultation process, utilisation of technology in holistic manner, improvement of the tax authorities’ technical capabilities.

Tax incentives

The roll-back of certain tax incentives that commenced in 2012 has stalled. It is important to carry out a review and decide which tax incentives are important and cease pandering to vested interests. The tax incentives legislation needs to be revamped to remove certain incentives while simplifying others.

The development of tax incentives in Malaysia has not really gone through a focused review. Instead, an approach of “add-ons and tinkering” was adopted rather than taking a step back and reviewing the rationale for the need for tax incentives and having a clear measurement tool to evaluate the effectiveness of tax incentives.

The Tax Reform Committee set up in September 2018 aims to address some of the issues mentioned above. It is not undertaking a public review of the tax system which will require a significant amount of time and resources. Rather, it acts as an advisory committee to the MoF by engaging with various stakeholders for suggestions on improvements, and provide recommendations to the MoF.

Dr Veerinderjeet Singh, Chairman of Axcelasia Taxand Sdn Bhd discusses examples of tax reforms to better the Malaysian tax system.

Click here to read more.

Sugar tax in Malaysia: Sweet idea or bitter pill?

by Dave Ananth

Dave Ananth, Senior Tax Counsel with Stace Hammond Lawyers, is based in Auckland, New Zealand. He 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 is an expert in taxation and tax policy. He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand. He is a consultant for Wolters Kluwer Malaysia. He can be reached at davea@shg.co.nz.

The usage of tax to change “unhealthy behaviour” is not uncommon. Examples include “sin taxes” on cigarettes and alcohol, tax on high fat food (Denmark) and a “metabo” law (Japan) which was introduced to overcome obesity through annual measurement of waist circumference, provision of weight loss classes and the imposition of fines[1].

Malaysia’s sweet tooth

In August 2018, Damanasara MP Tony Pua floated the idea of a “soda tax” to kill two birds with one stone – to increase government revenue and encourage healthy living. A few weeks later, Prime Minister Dr Mahathir Mohamad says the government is considering implementing a soda tax to encourage healthy living and reduce sugar consumption as the diabetes rate in Malaysia is very high.

It cannot be denied that Malaysians are eating and drinking too much sugar. Not just from soft drinks, but from other sweetened drinks (teh tarik), local kuih (cakes) and biscuits. Per the chart below, the estimated daily consumption of sugar is the highest among Malaysians[2] in Southeast Asia (SEA).

It was reported that in 2017, about 16.74% of adults in Malaysia have diabetes. While it is not the highest in the world (Malaysia ranks 12), Malaysia still has the highest number of diabetes sufferers in SEA[3]. It is also worth noting that Malaysia has the highest levels of obesity sufferers in SEA, at 15.6%. Again, while Malaysia is not the highest in the world[4], it is still a cause for concern. Total (direct and indirect) costs of obesity are highest in Malaysia, amid SEA, where it is estimated to be between 10% and 19% of national healthcare spending[5].

Evolution of Tax and Investment Incentives in Malaysia

The granting of tax incentives is one of the methods used to develop a particular economic activity. If designed and implemented properly, it attracts businesses (local or foreign) to invest in a country. Apart from that, it should also lead to increased employment, knowledge transfer, technology development and development to rural areas. Thus, this should lead to increased economic growth and tax revenue (after the expiration of the tax incentive period).

In Malaysia, tax incentives are granted in several ways:

• Exemption of statutory income
• Additional relief for qualifying capital expenditure
• Double deduction

The three major tax incentives in Malaysia are as follows:

Tax incentive	Description
Pioneer Status	Companies in the manufacturing, agricultural, hotel, and tourism sectors, or any other industrial or commercial sector that participate in a promoted activity or produce a promoted product may be eligible for the pioneer status incentive. It involves the granting of a partial exemption (of up to 70% of a company’s statutory income), or in limited cases, full exemption from income tax for a period of five years or 10 years.
Investment Tax Allowance	Companies in the manufacturing, agricultural, hotel, and tourism sectors, or any other industrial or commercial sector that participate in a promoted activity or produce a promoted product may be eligible for investment tax allowance. It involves the granting of an allowance of 60% or 100% of qualifying capital expenditure incurred which can be deducted against 70% or 100% of statutory income.
Reinvestment Allowance	A resident company in operation for not less than 36 months that incurs capital expenditure to expand, modernise, automate, or diversify its existing manufacturing business or approved agricultural project may be eligible for reinvestment allowance. It involves the granting of an allowance of 60% of qualifying capital expenditure incurred which can be deducted against 70% of statutory income.

The abovementioned investments serves to strengthen Malaysia’s key economic activities and encourage inflow of foreign capital. However, there were no targeted incentives provided for labour-based companies, especially, the manufacturing sector) to embrace digital transformation. Only the reinvestment allowance provides some incentive for companies to be more technologically-inclined. With digitalisation transforming the business landscapes, creating both new opportunities and challenges, it was important for the manufacturing sector to transform, considering that it contributed 23% to Malaysia’s GDP (Q3 2018).

Technically….

Withholding tax: Special classes of income

Section 4A(ii) has been subject to much debate as to whether a service that is subject to withholding tax under s 109B of the Income Tax Act (ITA) 1967 needs to be in technical in nature or not. What made a service “technical” was also the subject of much dispute.

Section 4A(ii) of the ITA 1967 provides the following:

“… the income of a person not resident in Malaysia for the basis year for a year of assessment in respect of …

(ii) amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme …

which is derived from Malaysia is chargeable to tax under this Act.”

The Finance Bill 2018 proposed that s 4A(ii) be amended to state as follows:

“… the income of a person not resident in Malaysia for the basis year for a year of assessment in respect of …

(ii) amounts paid in consideration of any advice given, or assistance or services rendered in connection with any scientific, industrial or commercial undertaking, venture, project or scheme…

which is derived from Malaysia is chargeable to tax under this Act.”

This widens the scope of withholding tax under s 109B by:

• including non-technical services, and
• not limiting the scope to technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

The proposed change aims to reflect case law decisions that have widened the definition of services under s 4A to include both technical and non-technical services.

Tis’ the season of giving

IRB's Special Voluntary Disclosure Programme

In a bid to improve its revenue collection and also bring non-compliant taxpayers into the system, it was announced that a Special Voluntary Disclosure Programme (SVDP) will run from 3 November 2018 to 30 June 2019.

Voluntary disclosure under this programme can be made at any Inland Revenue Board (IRB) office, from 3 November 2018 to 30 June 2019 in respect of the following categories of taxpayers:

• Unregistered taxpayers who have not submitted the Income Tax Return Forms (ITRF)/ Petroleum Tax Returns (PTR)/ Real Property Gains Tax Returns (RPGTR) for any YA
• Registered taxpayers who have not submitted ITRF/PTR/RPGTR for any YA
• Taxpayers who have submitted ITRF/PTR/RPGTR but with incorrect declarations
• Stamp duty payers who failed to present stamp-able instruments within a stipulated period of time.

Under this programme, taxpayers will be subjected to penalty rates of 10% to 15% of tax payable. Once the voluntary disclosure period expires, taxpayers could be subjected to penalty rates of 80% to 300%.

This is not IRB’s first rodeo. In 2016, the Budget 2016 Recalibration proposed for a special consideration on relaxation for penalty on taxpayers who come forward and declare their past years’ income and settled their arrears before 31 December 2016. Following this, the IRB announced the following offers to taxpayers in support of the proposal:

• Reduction of penalty to specified rates for taxpayers who opt for voluntary disclosure of non-compliance, subject to certain requirements.
• Waiver of tax increase for taxpayers who wish to settle in full their income tax, petroleum income tax, real property gains tax or withholding tax areas on or before 15 December 2016.

While the gist and the end goals of the two audit programmes remain somewhat similar, there are some differences.

Employers’ Tax Awareness: Settlement of PTPTN loan on behalf of employees

It was proposed in the Finance Bill 2019 that a tax deduction be given to employers who help settle PTPTN loans of their full-time employees, on the condition that employees are not required to reimburse the amount paid on their behalf. This proposal is aimed at improving the loan repayment performance and ensuring the sustainability of the PTPTN programme.

Section 13(1)(a) of the Income Tax Act 1967 provides that gross income of an employee in respect of gains or profits from an employment include any wages, salary, remuneration, leave pay, fee, commission, bonus, gratuity, perquisite or allowance (whether in money or otherwise) in respect of having or exercising the employment.

The characteristics of perquisites are as follows:

• Perquisites can be received regularly or casually.
• Perquisites can be received in cash or in kind.
• Perquisites received by the employee can be in respect of an employment contract or be given by the employer or third party voluntarily.
• A perquisite is subject to tax only if it arises in respect of having or exercising an employment.

The payment of an employee’s pecuniary liabilities by the employer is considered as a perquisite. As the PTPTN loan is a pecuniary liability of an employee, the PTPTN loan settlement amount would be deemed as a perquisite to the employee and would be subject to income tax.

Budget 2019 Highlights (Tax)

The new government’s first budget was announced on 2 November 2018. The theme of the Budget speech was “A Resurgent Malaysia, A Dynamic Economy, A Prosperous Society” and focused on three areas:

• To implement institutional reforms
• To ensure the socio-economic well-being of Malaysians, and
• To foster and entrepreneurial economy.

Below are the tax proposals which are based on the content of the Budget speech and its appendices.

Corporate income tax

Tax rate for SMEs

The preferential tax rate for SMEs in respect of the first RM500,000 of chargeable income is to be reduced from 18% to 17%.

(Effective YA 2019)

Review of group relief

The rules for group relief claims are to be amended as follows:

• Companies surrendering losses must be in operation for at least 12 months
• Surrendering of losses is restricted to three consecutive YAs, and
• A company with unutilised investment tax allowance or unabsorbed pioneer losses will not be eligible to claim group relief.

(Effective YA 2019)

Time limit for carry forward of unabsorbed losses and allowances

A time limit of seven consecutive YAs is placed on the carrying forward of unabsorbed losses, unutilised capital allowances, unutilised reinvestment allowance and investment allowance, and unabsorbed pioneer losses and investment tax allowance.

(Effective YA 2019)

Personal income tax

EPF and life insurance premium relief

• The combined relief of RM6,000 for EPF and takaful/life insurance premiums has been split - RM4,000 for EPF and RM3,000 for takaful/life insurance premiums.
• For public servants under the pension scheme, the income tax relief on takaful/ life insurance premiums is given up to RM7,000.

(Effective YA 2019)

National Education Savings Scheme (SSPN) relief

The relief on the net annual savings in SSPN is to be increased from RM6,000 to RM8,000. 

(Effective YA 2019)

Investigation of unexplained extraordinary wealth

The Inland Revenue Board (IRB) will scrutinise and investigate unexplained extraordinary wealth, and use necessary measures to recover such monies, in the form of additional taxes, penalties or fines.

(Unknown effective date)

Indirect tax

Sales tax and service tax

• Service tax exemption on specific B2B transactions between service tax registrants.
  (Effective 1 January 2019)
• Imposition of service tax on imported services as follows:
• Services imported by businesses
  (Effective 1 January 2019)
• Services imported (e.g. downloaded software, music, video and digital advertising) by consumers)
  (Effective 1 January 2020)
• Introduction of a credit system against sales tax payable for small manufacturers who do not purchase from registered manufacturers.
  (Effective 1 January 2019)

Import duty on bicycles

Reduction of import duty on bicycles under the tariff code of 8712.00.30.00, i.e. bicycles other than racing bicycles and children bicycles) from 25% to 15%.

(Effective 1 January 2019)

Sugar tax

Imposition of excise duty of RM0.40 per litre on sugary drinks as follows:

• Fruit juices and vegetable juices under tariff heading of 20.09, which contains sugar exceeding 12 grams per 100 millilitres, and
• Beverages under tariff heading of 22.02, which contains sugar exceeding 5 grams per 100 millilitres)

(Effective 1 April 2019)

Malaysian Tax Budget Conference 2019

The new government’s maiden budget announced last Friday indicates that they are trying to balance between being a socialist government and being pro-business to boost economic growth. They announced a creative host of subsidies, grants  and allocation of funds, and utilised tax measures to promote economic growth and well-being. 

The government proposed measures to increase tax revenue such as introducing new taxes (levy on international departures, soda tax) or increasing existing ones (taxes on gaming industry, RPGT for sixth year and beyond disposals, stamp duty on property transactions over RM1 million). They modified existing tax rules to curb income set-off – imposition of a 7-year time limit for businesses to utilise losses and allowances from tax reliefs. They also proposed to impose service tax on foreign services providers that provide online services (downloaded software or music) as well as on imported services acquired by Malaysian businesses, which should level the playing fields between local and foreign players. Apart from that, the government proposed a special voluntary disclosure programme where taxpayers who voluntarily disclosed unreported income are entitled to reduced penalty rates.

The government also proposed tax measures to improve social welfare. They widened the scope of donations – Donations to social enterprises are now qualified for deduction. They focused on employee welfare – a 100% deduction for PTPTN payments made by an employer on behalf of its employees and a 200% deduction on remuneration of full-time employees who are either senior citizens or ex-convicts. These deductions, however, are subject to conditions. They government also proposed a stamp duty exemption for first time home-buyers in respect of property valued between RM300,000 and RM1 million, subject to conditions, consistent with their promise of affordable housing.

The government also proposed tax measures to encourage green businesses. Companies producing environmentally-friendly plastics will be granted Pioneer Status (70% exemption of statutory income) or Investment Allowance (60% of qualifying capital expenditure) for five years. It also proposed to expand the list of green assets that qualify for green technology investment allowance from 9 to 40.

While many agree that the measures implemented are targeted at selective business industries, it is still important for the government to continue with the tax reform reviews with the aim of making the tax system more efficient, neutral and progressive while promoting the long-term productivity of the economy.

Find out more about these taxes, key trends, challenges and opportunities that may impact your business and influence your strategy in 2019, at our Malaysian Tax Budget Conference 2019.

Managing transfer pricing risks

Transfer pricing is a common topic for audits, given its inherent subjectivity. The Inland Revenue Authority of Singapore (IRAS) transfer pricing audit is termed “Transfer Pricing Consultation” where the IRAS generally reviews for:

• The adequacy and timeliness of the taxpayers' transfer pricing documentation;
• The appropriateness of the taxpayers' transfer pricing methods; and
• The arm's length outcome of the taxpayers' transfer pricing studies.

Based on the IRAS Transfer Pricing Guidelines (TP Guidelines), the risk indicator upon which IRAS selects taxpayers for a transfer pricing audit are as follows:

• The value of related party transactions;
• The performance of the business over time; and
• The likelihood that taxable profits may have been understated by inappropriate transfer pricing.

Tax in the digital age

by Laurence Todd & Connor Vance

This paper was first published (September 2018) on the IDEAS website.

Introduction

Advances in technology have led to radical changes in existing business models and the creation of radically new ones. With the advent of the internet, many corporations no longer need physical establishments or proximity to customers to do business. This new digital age has encouraged the emergence of an enormous variety of new products and services, easily accessed online.

However, there has been a growing sentiment within some governments that the reach and accessibility of new digital channels poses a challenge to the long-standing principles of taxation. In response to these concerns, the OECD has established a Task Force on the Digital Economy to seek to develop a global consensus and is due to report in 2020. But some countries want to move faster, and several jurisdictions are now considering new unilateral taxes targeting digital activity.

The emergence of digitalisation is of course not unique to any one country, and there are many different perspectives on how digitalisation changes the way we think about taxes – or even whether it should at all. In Malaysia, the previous government was actively looking into ways to raise revenue from digital activity; Second Finance Minister Datuk Seri Johari Abdul Ghani stated in January 2018 that the government had sought out “feedback from the OECD” on potential methods for imposing a new digital tax in Malaysia (The Malaysian Reserve, 2018). As the new Pakatan Harapan government develops its first budget, they too may consider targeting the revenue of digital companies. With this in mind, this Brief Ideas considers the main issues, domestically and globally, in the debate over digital tax.

The case for digital tax

Those countries arguing for new tax measures targeting digital activity often advocate two arguments in favour of this course of action:

• First, that digital companies pay less tax than non-digital companies;
• Second, that digitalisation has fundamentally altered the way value is generated.

Before we consider these two arguments, we should note the challenge in specifying a company as “digital” for the purpose of taxing it. Many, if not most businesses, will seek to use digital channels to some extent, including for sales and advertising. This includes many traditional “brick and mortar” companies that have adapted to the innovations provided by the internet and digital technology, but these cannot be classified as “digital companies”. Of course, many new predominantly digital business models have also emerged over the past few years, such as social media platforms, but even among these, there remains an enormous variety in size and function. In recognition of this, the OECD concluded that “because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.” This difficulty in defining exactly what it is that is going to be taxed makes policy development significantly more challenging and risks new taxes being unfairly targeted, which can in turn create market distortions. Any new digital tax would almost certainly have an inadvertent impact on traditional companies.