Digital Tax Service
Rising Global Consultants
Starting from January 1, 2020, Malaysia began imposing a Digital Service Tax on digital services. Foreign registered persons providing digital services to Malaysian consumers are required to pay the Digital Service Tax.
The concept of the Digital Service Tax
“Digital services” broadly refer to any services delivered or subscribed to via the internet or other electronic networks that cannot be obtained without the use of information technology. The delivery of these services is essentially automated, with little or no human intervention in the process. Such digital services include software or applications, video games, music, e-books, movies, online advertising or e-commerce platforms, search engines and social networks, databases and hosting, internet telecommunications, online training courses, and more.
A “foreign digital service provider” refers to any foreign entity that provides any digital services to Malaysian consumers, including those operating e-commerce platforms outside Malaysia for the sale of goods or services (whether or not they provide any digital services), as well as those who conduct digital service transactions on behalf of others.
“Consumers” refer to any entity (including businesses and individuals) that meets the following two conditions:
- Users who make payments using any credit or transfer tools from financial institutions or companies established in Malaysia
- Users who use an Internet Protocol (IP) address registered in Malaysia or use Malaysia’s international mobile phone country code
- Users residing in Malaysia
Common Challenges and Issues with Digital Services Tax
Any digital services provided to consumers in Malaysia include digital content, music, software, digital advertising, etc.
Foreign digital service providers (FSPs) whose total value of digital services provided to Malaysian consumers exceeds RM5 million within 12 months.
Foreign digital service providers can register with the Royal Malaysian Customs Department (JKDM) from October 1, 2019, and start levying service tax on digital services provided to Malaysian consumers from January 1, 2020.
Any registered service tax person must pay tax on taxable services imported by the due date of the DST-02 form.
According to Malaysia’s Service Tax Act, after the implementation of digital services tax, foreign digital service providers with an annual turnover exceeding RM500,000 (approximately USD 120,000) must register as a foreign registrant immediately. However, some foreign companies may not be aware that their turnover in Malaysia has already exceeded the registration threshold. Additionally, due to the broad nature of Malaysia’s digital services tax system, many digital services are covered under the tax scope. Some foreign companies might misunderstand the service tax law, mistakenly believing that their digital services are not within the scope of the digital services tax. This results in delayed or failure to register on time. The Customs Department will require late-registered foreign digital service providers to submit all historical tax returns and pay all due service tax along with any related penalties.
Foreign registrants who fail to submit tax returns to the Customs Department on time will be considered in violation of the Service Tax Act and may face fines and imprisonment. Malaysia has also updated the Service Tax Act, granting the Director-General of Customs the authority to waive late tax payment penalties in certain situations.
Some foreign registrants neglect the requirement under Malaysia’s Service Tax Act to include necessary information on invoices, debit notes, and credit notes, thereby violating the Service Tax Act.
Under Malaysia’s Service Tax Act, the calculation method for digital services tax is on a cash basis. If a foreign registrant wishes to adopt the accrual basis for calculating the tax amount due, they must submit a separate application to and obtain approval from the Director-General of Customs. However, many foreign registrants overlook this regulation and directly adopt the accrual basis for calculating the amount due without obtaining approval from the Director-General of Customs.
On May 14, 2020, Malaysia updated the Service Tax Act, introducing the “Group Relief for Service Tax Exemption Mechanism.” Under specific conditions, this allows foreign registrants to provide digital services to Malaysian affiliate companies exempt from the 6% digital services tax.
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