August 27, 2020
Recently, the Royal Malaysian Customs Department (Customs) published a Guide on Digital Services by Foreign Service Provider (Guide). This Guide replaces the Guide on Digital Services published on 20.8.2019. It also seeks to provide guidance and assistance on the imposition of service tax on digital services provided by Foreign Service Providers (FSP). The implementation of service tax on digital services provided by local providers and FSP is different. It must be noted that the Guide has no legal effect and merely serves as the Customs’ position on the matter.
This alert summarizes the key changes introduced by the Guide on 1.8.2020.
What Is Digital Service?
The term digital service is very widely defined. Under the Service Tax Act 2018 (STA), digital service is defined as “…any service that is delivered or subscribed over theinternet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.”
In other words, digital service is a service that:
Is to be delivered through information technology medium or other electronic network
Cannot be delivered without the use of internet technology
Is to be delivered with minimal or no human intervention from the service provider
Since the term is so widely defined, most of the products or services obtained or utilised by consumers constitute digital services. Some examples are online software, mobile applications, media platform, streaming services, cloud storage and digital content.
The liability to register as FSP arises when the total value of digital services provided by a FSP to a consumer in Malaysia exceeds RM 500,000.00. FSP are then required to issue invoices and charge service tax on the digital services it supplies to Malaysian customers. Any FSP who has registered will be referred to as a Foreign Registered Person (FRP).
Who Is A FSP?FSP is a business or individual residing outside of Malaysia who provides digital services to consumer in Malaysia. Similarly, the definition of a FSP is wide and includes a person who provides digital services directly and an online platform owner who sells digital services on behalf of serviceproviders through his or her online platform.
An online platform operator will be regarded as acting on behalf of another service provider if he or she:
Authorises or function sets the term and conditions of the transaction
Has direct or indirect involvement in the payment processing
Has direct or indirect involvement in the delivery of digital services
Provides customer support service in relation to the supplies provision of digital services
Further, an online platform operator will considered as a FSP if the invoice or any other document provided by the him or her identifies the supply as being made by him or her.
Digital Services Exempted From Service Tax
Effective from 1.1.2020, the following digital services are not subject to service tax:
Online distance learning provided by FSP in relation to preschool education, primary and secondary education, or tertiary education including vocational education and professional trainings
Online newspaper, educational, technical, scientific, historical or cultural journals and periodicals including printed digital versions that are issued at regular intervals
Effective from 14.5.2020, digital services provided by a FSP to a company in Malaysia within the same group of companies are also not subject to service tax. This ispursuant to the new provision introduced by the Service Tax (Digital Service) (Amendment) Regulations 2020 that provides intra-group relief from service tax. Companieswould be treated as being within a group of companies if one company controls each of the other companies directly or indirectly through subsidiaries.
RefundThe Guide has also specified the manner in which a refund of service tax, penalty, fee or other money to anyone who is entitled for a refund (i.e. overpaid or erroneously paid the amount). The person entitled of a refund shall make an application online within one year through the MySToDS system by filling up and submitting the relevant form (DSTADM01) along with all relevant supporting documents.
ConclusionThe exemptions granted for online education platforms and publications are welcomed since these two categories of digital services are able to improve the accessibility ofeducation in Malaysia especially during this period. Further, it can be argued that these services are not services that could be delivered to consumers completely automated (i.e. without human intervention). On the other hand, the intragroup relief that has been introduced provided a much welcomed clarity on that digital services given by overseas companies to their Malaysian counterpart are exempted from tax.
As digital service tax has been implemented since 1.1.2020, it is important for FSP to stay vigilant and be aware of their obligations in providing digital services to Malaysian consumers. This is especially so when any failure to comply with the digital tax provisions under the STA and Service Tax Regulations 2018 may amount to an offence. Although it could be foreseen that further guides and amendments to the legislation regarding the taxation of digital services provided by FSP will be introduced, it is best for FSP and potential investors to be well informed and stay compliant with the Malaysian digital services tax regime.