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 concerns involved whether or not this could lead to double taxation, creating a heavier strain on an already higher cost of living. For example, as a taxpayer in Malaysia, you will now need to pay for the digital tax imposed on using Google G Suite services like Youtube Premium, Youtube Music and Google Play.
Types of digital taxes in Malaysia
The digital tax was finally implemented in January 2020, in tandem with the other implementations announced during the tabling of Budget 2020 in October 2019.
Malaysia’s digital tax rate is currently set at 6% and in the first year of implementation had brought in more than RM400 million in revenue for the government. The introduction of this new indirect tax has the potential to deliver a sizeable revenue stream for the government in coming years as online transactions increase.
The Tourism Tax (Amendment) Act 2021 set up in February 2021 included imposing the digital tax on accommodation premises reserved through digital platform service providers (DPSPs). This new tax had originally been scheduled to take effect on July 1, 2021 but has now been postponed to January 1, 2022. This exemption was further postponed in Budget 2022 until the end 31 December, 2022. The government had extended the exemption of the tourism tax as well as the services tax for hotel booking under the PEMERKASA stimulus package in 2021.
Malaysians buying imported goods online will also have to pay tax on them starting 1 January 2023. In August 2022, the Dewan Rakyat passed the Sales Tax (Amendment) Bill 2022 to charge a 10% sales tax on goods purchased online and delivered to Malaysia by registered vendors. This flat rate will apply to imported online goods that are priced below RM500.
In its pre-budget 2023 statement, the Finance Ministry had stated that discussions are being held with the Organisation for Economic Co-operation and Development (OECD) on a global minimum tax rate of 15% on the digital economy.
Digital tax across the globe
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 implementation of the digital tax makes Malaysia the second Southeast Asian country to make this move after Singapore.
Malaysia’s digital tax rate at 6% is among the lowest worldwide.
| Country | Digital Tax Rate |
|---|---|
| Albania | 20% |
| Angola | 14% |
| Australia | 10% |
| Bahrain | 5% |
| Bangladesh | 15% |
| Belarus | 20% |
| Cambodia | 10% |
| Chile | 19% |
| Egypt | 14% |
| European Union | 2-7.5% |
| Iceland | 22.5% |
| Indonesia | 10% |
| Japan | 10% |
| Kenya | 16% |
| India | 18% |
| Mexico | 16% |
| New Zealand | 15% |
| Nigeria | 7.5% |
| Norway | 25% |
| Quebec | 9.975% |
| Russia | 20% |
| Saudi Arabia | 15% |
| Serbia | 20% |
| Singapore | 7% |
| South Africa | 14% |
| South Korea | 10% |
| Switzerland | 7.7% |
| Taiwan | 5% |
| Thailand | 7% |
| Turkey | 18% |
| Uganda | 18% |
| United Arab Emirates | 5% |
| United States | 1-7% |
| Uzbekistan | 10% |
How does the 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.
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.
That’s not the only challenge, they will then need to figure out how to collect and file these taxes. 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.
How does the digital tax affect you?
At the moment, the digital tax seems to only affect sellers and service providers overseas.
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.
Digital services included under the 6% digital tax regime are:
- Software
- Application
- Videogames
- Music and film streaming services
- Subscription-based media
- Database and cloud storage services
- Advertising and online platform
- Search engines
- Social networks
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.
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This article was first published on October 2017 and has been updated for freshness, accuracy and comprehensiveness.
