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Guide on Digital Services

In view of the impending imposition of Service Tax on digital services, proposed to be effective 1 January 2020, the Royal Malaysian Customs Department (“RMCD”) has issued a Guide on Digital Services (as at 20 August 2019). 

Please click on the above header link for a copy of the Guide at the MySST portal. 

Amongst others, the Guide sets out examples of digital services, responsibilities of a foreign registered person as well as transitional rules.  Set out below are some of the notable points:-

  • In explaining what is “digital services”, RMCD summarizes it as services that are delivered through information technology (“IT”) medium with minimal or no human intervention from the service provider.
  • Examples of digital services include:-

a)      Software, application and video games

b)      Music, e-book and film

c)      Advertisement and online platform

d)      Search engines and social networks

e)      Database and hosting

f)       Internet Based Telecommunication

g)      Online training

h)      Others such as subscription to online newspapers/ journals and payment processing services

  • Services which can be obtained without the use of IT or the transmission of services via email (which require human intervention) would not be considered as digital services.
  • The RMCD adopts a wider definition of “foreign service provider” which includes any person (either business or individual) outside Malaysia who:- 
  1. sells digital products directly; or
  2. sells digital products indirectly through intermediaries such as online platform*

to consumer (not limited to the provision of digital services).

*Online platform operators who make transactions on behalf of the overseas service provider and issue invoice or any other document under their name, will be regarded as foreign service providers.

  • One of the tests for the definition of “consumer” is any person who resides in Malaysia.  In determining whether the person resides in Malaysia, the RMCD proposed that the foreign registered person may consider information or a declaration from the person as below:-
  1. The billing address of the person is in Malaysia
  2. The home address of the person is in Malaysia
  3. Recipient's country selection
  • The Service Tax rate is indicated to be 6% and the registration threshold is RM500,000 for the total value of digital services provided to consumers in Malaysia for a period of 12 months.
  • Service Tax on digital services cover both business to business (“B2B”) and business to consumers (“B2C”) transactions.  Businesses who have been charged Service Tax on digital services by a foreign registered person are exempted from self-accounting for Service Tax on imported taxable services.
  • The application for Service Tax registration of a foreign service provider shall be made online via the DST-01 Form at http://dst.customs.gov.my, from 1 October 2019.
  • Unless special approval is obtained to exclude certain particulars, a foreign registered person is required to issue a document (invoice) that state:-
  1. Date of invoice;
  2. Service Tax registration number;
  3. A description sufficient to identify the digital services provided; and
  4. The total amount payable excluding Service Tax, the rate of Service Tax and the total Service Tax chargeable shown as separate amount.
  • Service Tax is due at the time when payment is received from customers, subject to the 12-month deemed paid rule.
  • The quarterly Service Tax Return shall be furnished in Malaysian Ringgit and any foreign exchange rates can be used.
  • For the provision of digital services spanning 1 January 2020, the proportion of such services which is attributed to the part of the period on or after 1 January 2020 is subject to Service Tax, regardless when the invoice is issued or payment is received.
  • Where any payment is received before 1 January 2020 in connection with digital services to be provided on or after 1 January 2020, no Service Tax shall be charged on the payment received.

Whilst it was anticipated that the Guide will provide more clarity on the imposition of Service Tax on digital services, there are numerous areas which require clarifications, for example:-

i.      On the scope of “digital services”, to what extent do the services constitute “minimal or no human intervention”?

ii.     Where a service falls within the ambit of taxable services under the First Schedule of the Service Tax Regulations 2018 as well as digital services (e.g. IT services), which provision would take precedence?

iii.    Whether the existing exclusion under the Service Tax Regulations for taxable services (e.g. in relation to goods/ land situated or matters outside Malaysia shall not be taxable) will apply for digital services too?

iv.    Will there be an equivalent intra-group exclusion if the digital services are provided by a foreign service provider who is a company within the same group of companies? 

v.     Is there any obligation to verify whether the customer meets the “consumer” test?

It is hoped that further clarifications can be provided as soon as possible and before the go-live date.  Although at the first glance it can be seen that Service Tax on digital services only impact foreign service providers, it is not the case as the tax would impact the cost of doing business and the pocket of the man on the street.

Hence, consumers should also have a proper understanding of the extent of this tax so that they can make an informed decision before purchasing any digital services.  We understand that the RMCD will conduct roadshows nearer to the implementation date to provide more clarification and guidance. 

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

For more information on our core service offerings, please contact:

Petaling Jaya Office

Tai Lai Kok
Executive Director –
Head of Tax and Head of Corporate Tax
ltai1@kpmg.com.my
+ 603 7721 7020

Long Yen Ping
Executive Director –
Head of Global Mobility Services yenpinglong@kpmg.com.my
+ 603 7721 7018

Bob Kee
Executive Director –
Head of Transfer Pricing
bkee@kpmg.com.my
+ 603 7721 7029

Ng Sue Lynn
Executive Director –
Head of Indirect Tax
suelynnng@kpmg.com.my
+ 603 7721 7271

Soh Lian Seng
Executive Director –
Head of Tax Risk Management
lsoh@kpmg.com.my
+ 603 7721 7019

Nicholas Crist
Executive Director –
Corporate Tax
nicholascrist@kpmg.com.my
+ 603 7721 7022

Dato’ Leanne Koh
Executive Director – 
Corporate Tax
leannekoh@kpmg.com.my
+ 603 7721 7026

Neoh Beng Guan
Executive Director – 
Corporate Tax
bneoh@kpmg.com.my
+ 603 7721 7025

Ong Guan Heng
Executive Director – 
Corporate Tax
guanhengong@kpmg.com.my
+ 603 7721 7027

Chang Mei Seen
Executive Director – 
Transfer Pricing
meiseenchang@kpmg.com.my
+ 603 7721 7028

Ivan Goh
Executive Director – 
Transfer Pricing
ivangoh@kpmg.com.my
+ 603 7721 7012

 

 

 

Evelyn Lee 
Executive Director –
Penang Tax
evewflee@kpmg.com.my
+604 238 2288 (ext. 312)

Regina Lau
Executive Director –
Kuching & Miri Tax
reglau@kpmg.com.my
+6082 268 308 (ext. 2188)

Titus Tseu
Executive Director –
Kota Kinabalu Tax
titustseu@kpmg.com.my
+6088 363 020 (ext. 2822)

Ng Fie Lih
Executive Director –
Johor Bahru Tax
flng@kpmg.com.my
+607 266 2213 (ext. 2514)

Crystal Chuah Yoke Chin
Tax Manager –
Ipoh Tax
ycchuah@kpmg.com.my
+605 253 1188 (ext. 320)