Malaysia GST system may extend to foreign-supplied digital services

Wed Oct 18, 2017

Malaysia looks set to become the latest tax jurisdiction to seek a levelling of the playing field between traditional and digital businesses by amending their GST system to tax foreign-supplied digital services.

Malaysia digital tax plan

In mid-September 2017 Royal Malaysian Customs Department director-general Datuk Seri Subromaniam Tholasy told reporters after a GST conference in Malaysia that:

“We are amending a few of the tax laws, especially with regard to the GST to collect taxes from foreign companies that offer digital services in Malaysia. Taxes from the digital economy… we can easily collect a couple of billions of ringgit. It runs into several billions. Nobody knows how big the monster is out there. Once we amend the law and look into the details we would know for sure.”

Director-general Subromaniam added that the biggest loss in the digital economy is in business-to-consumer (B2C) sales:

“When the business provides services directly to consumers and the business which is providing the service is overseas, it gets direct payment and the services are not taxed. This also creates discrimination – the local players get taxed but the foreign players are not. This is what we’re trying to correct and once the law is amended, it will create a level playing field. Once the amendment is done, we will have a legal basis to register them and tax the services.”

The primary aim of the potential extension of Malaysia’s GST system to foreign-supplied digital services is to level the playing field but it has a secondary target of raising revenue.

The process of amending several tax laws so as to bring foreign digital service suppliers is set to begin during the next sitting of the Malaysian House of Representatives (Dewan Rakyat) in October.

Malaysia: a beacon of economic growth in the ASEAN area

Today, Malaysia is home to 31 million people, but in 1985 it was half that at 15.5 million. The country has blossomed as a beacon of economic growth in the ASEAN area. This growth is continuing with Q2 2017 seeing GDP growth of 5.8%. This was Malaysia’s fastest growth rate in more than two years.

This was in large part due to a surge in consumer spending. These consumers are also becoming increasingly connected due to a rise in mobile phone ownership and usage.

According to Statista Malaysia was home to 18 million mobile phone internet users in 2016 with that number expected to exceed 21.5 million by 2022, an increase of almost 20%.

The Malaysian digital economy is ever-growing as more and more consumers take to the internet for commerce reasons. According to Director-general Subromaniam the digital economy currently accounts for 18% of the Malaysian economy and, as is the case elsewhere, is expected to grow rapidly.

Successful introduction of GST system

Malaysia introduced a Goods and Services Tax (GST) system in April 2015. It was introduced at a rate of 6% and replaced a Sales and Services Tax.

Malaysia’s GST introduction has been deemed a resounding success with revenue from GST collection estimated to boost the Malaysian government tax base by RM42 billion (circa USD$10 billion) in 2017. This an increase of RM1 billion from 2016 (circa USD$9.8 billion).

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