A Different Approach to Taxing Digital Services in Malaysia

Countries around the world have been trying different approaches to changing their taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. laws to address some of the difficulties associated with taxing digital commerce. While many countries are looking at digital services taxes to tax gross revenues associated with online advertisements and marketplaces or sales of user data, other countries are taking a different approach.

Malaysia is one such country that recently adopted a digital services tax, but this policy is quite different from, say, the new French digital services tax.

Malaysia currently administers a consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. named the Sales and Services Tax (SST). The SST has three separate rate bands at 10 percent, 6 percent, and 5 percent. The 10 percent rate generally applies to sales of goods while the 6 percent rate applies to services transactions. The reduced rate of 5 percent applies to many basic foods and some IT equipment.

In July, the government adopted an amendment to the SST that expands the scope of services included in the 6 percent band. The expanded tax will be effective January 1, 2020 and will include many digital services.

The new law defines digital services as those delivered over the internet and identifies foreign service providers as responsible for filing quarterly tax returns for services provided to Malaysian consumers.

This tax will likely capture many transactions over digital platforms that are delivered to consumers in Malaysia, including streaming services and app store purchases. As a consumption tax, there is a direct link between consumption of a service in Malaysia and the tax.

Other policies, like the new one in France, do not make such a direct link between commercial transactions and the tax. Instead they rely on a theory of user-created value to design policies that are narrowly targeted at taxing the revenues of online marketplaces, social networks, and search engines.

Malaysia is not alone in its approach to taxing digital commerce as part of its consumption tax. South Korea expanded its consumption tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to include digital services in 2014. India also has a tax on digital services as part of its Goods and Services Tax.

While countries are currently negotiating ways to change how multinationals are taxed on their income, it is important to notice the differences between expanding consumption taxes to include digital services versus redefining how income should be taxed.

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