How Much Do You Know About The Digital Tax Coming In 2020?

How Much Do You Know About The Digital Tax Coming In 2020?

Starting 1 January 2020, a 6% service tax will be implemented for digital service providers in the country.

The Service Tax (Amendment) 2019 Bill was approved by Dewan Rakyat on April 8 this year to introduce tax on foreign registered persons providing digital services to consumers in the country.

Under this new law, digital tax defaulters can be fined up to RM50,000, imprisoned for a term of up to three years, or both, upon conviction.

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Foreign digital service providers have been asked to start registering with the government and comply with the new tax requirement next year.

Malaysians have a deep love for online shopping, so initially when news hit that the government is looking into implementing a digital tax on foreign digital service providers, many were concerned.

Some of the concern involved whether or not this could lead to double taxation, creating a heavier strain on an already higher cost of living.

While the talks about digital tax have been going on for some time, the implementation will be in January 2020, in tandem with other implementations to be announced during the tabling of Budget 2020 on Oct 11, this year.

As this may affect online shopping within Malaysia, here’s what you need to know about the digital tax.

An untapped segment

The dawn of e-commerce has made it easy for any creative entrepreneur to sell their wares or service across the globe. Whether you’re in Mexico or Spain, China or Russia, you will be able to sell or buy products and services from and to anyone and anywhere, including Malaysia. When it comes to the taxing aspect though, they are mostly subjected to the tax of the country they’re in rather than the country they’re selling to.

The Malaysian government is now aware of this missed opportunity, and that this segment is actually worth “billions of ringgit“.

They are amending tax laws, especially with regard to collecting taxes from foreign companies that offer digital services in Malaysia. These not only range from games and movies that are being sold online worldwide, including Malaysia, but it also includes companies such as AirBNB, who are based overseas, and are not subjected to tax in Malaysia.

According to international tax advisory Axcelasia Taxand, the country could collect more than RM2.4bil a year from the digital tax.

“Introduction of the digital tax is an attempt by the government to widen the tax base. The collection can be a substantial amount if all digital players register in Malaysia. The success of the implementation of the digital tax will depend on how many service providers register in the country, ” Veerinderjit Singh, non-executive chairman of Axcelasia Taxand said.

Under the current tax regime, business-to-business (B2B) is not an issue as there is no loss of revenue. But the biggest loss in the digital economy appears when it is business-to-consumer (B2C).

Digital Tax Across The Globe

CountryDigital Tax Rate
Albania20%
Angola14%
Australia10%
Bahrain5%
Bangladesh15%
Belarus20%
European Union2-7.5%
Iceland22.5%
Japan8%
India18%
New Zealand15%
Norway25%
Quebec9.975%
Russia20%
Saudi Arabia5%
Serbia20%
South Africa14%
South Korea10%
Switzerland7.7%
Taiwan5%
Turkey18%
United Arab Emirates5%
United States1-7%
Source: https://quaderno.io/blog/digital-taxes-around-world-know-new-tax-rules/

How does digital tax work?

Digital tax isn’t new, as it has been adopted in many other countries as well, each with their own way of getting sellers outside of their country to pay the tax. Some countries, such as Bangladesh and South Korea, require sellers to register for an account with their online system. Other countries such as Taiwan and Japan require you to register and hire a tax agent from their country to be able to file taxes.

For the EU countries, the VAT is their form of digital tax and is paid by the consumer at the time of purchase of a product or service. This means when you sell a product in an EU country, you charge them VAT according to their country of residence, and the onus is on the seller to collect it, report on it and file VAT returns using the mini one-stop-shop (MOSS) scheme available online.

In most countries, the digital tax is often pushed on to consumers. For example, if you sell a product worth 1,000 yen in Japan, the customer will actually have to pay 1,080 yen, and that 80 yen is meant to be filed through the tax agent.

As a seller, you can always absorb the cost of the tax, but this may not be worth it if the fees you have to pay for the platform you’re using is high as well. The fee often ranges, and it really depends on the platform. Here is an example of how much it would cost when one person sells their products or service online and decides to absorb the cost.

Details
Cost
Price of one product
$50.00
Assuming platform fee of 3.5%
$1.75
Digital tax of 10%
$5.00
Net worth of one product
$43.25

That’s not the only challenge, they will then need to figure out how to collect and file these taxes. Each selling platform have their own requirements when it comes to tax, with some, like Amazon Marketplace, calculating the tax for you.

There are also platforms like Etsy where sellers will need to calculate and file taxes themselves depending on the customer. So depending on the platform, sellers may have a hard time dealing with taxes and would likely not sell their product or services to the countries with a strict or a high digital tax.

This is a factor that the Malaysian government also needs to consider as well when they’re coming up with ways to collect digital tax from overseas sellers.

How the digital tax will affect you, as a buyer?

At the moment, the digital tax seems to only affect sellers and service providers overseas.

Essentially, this tax will only apply to services offered online that require a payment made to a company that is not based in Malaysia.

This also covers mobile apps you purchase from Apple Store or Google Play store. The same goes for software, music and video which are considered digital services that you subscribe or pay for from foreign registered companies like Spotify and Netflix.

Majority of local e-commerce transactions involving items sold online will be excluded from digital tax as they are already subject to import duty and sales tax. The same goes for Malaysian-made services which are already subject to local taxation laws.

Sadly, this does not mean that sellers and service providers who are affected by this new tax regime will not push some of the tax cost to the consumers by adding it to the existing price. This is a possibility as this would be a commercial decision for sellers, and will be based on several factors that vary from business to business. Also, if the tax process is too tedious or foreign sellers do not see business in Malaysia as profitable, it’s possible that the product’s listings will be removed from Malaysia, making it unavailable to us.

As for how it will be implemented, there are discussions being done with credit card companies, which will collect the digital tax when consumers swipe their cards, which will in turn remit it to the Customs. At this time of publication, no information has been given on other modes of payment.

Despite all this, the fact remains that a country is entitled to its fair share of tax revenue when an online service entity sells a product or service to a consumer in it. As such, we will have to wait and see if the big players of the digital industry comply to Malaysia’s digital tax in 2020.

This article was first published on October 2017 and has been updated for freshness, accuracy and comprehensiveness.

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