Malaysia angling for tax revenue from foreign digital-services firms

Kuala Lumpur

MALAYSIA is looking to amend tax laws to ensure unregistered foreign digital-services companies operating in the country also contribute some revenue to Treasury.

Even so, tax specialists think this will be quite a herculean task given the borderless nature of the Internet, and it will require a global effort to get digital-services providers to pay additional taxes.

After a conference on GST (Goods and Services Tax) on Monday, director-general of Customs Subromaniam Tholasy told media of plans to tweak the laws.

"We are amending a few of the tax laws, especially with regard to the GST, to collect taxes from foreign companies that offer digital services in Malaysia. It's not provided for under the GST Act, so we are amending the law to tax the digital economy. That's from the point of service."

The Star newspaper reported Mr Subromaniam as stating such a move could easily boost revenue collection by "a couple of billions of ringgit" and that the department aimed to table the amendments when Parliament convenes next month.

But he conceded such a move would not be easy and that governments all over the world were grappling with how to implement it. Moreover, services are intangible.

"One of the requirements for GST is that the companies need a place of supply in Malaysia. But if the place is outside Malaysia, then it's difficult to tax," he remarked, noting the current situation discriminates against local players as they have to pay tax.

"Once the amendment is done, we will have a legal basis to register them (foreign firms) and tax the services," he said.

A tax specialist said consumers pay GST on domestic services but Putrajaya also wants to subject digital-services companies operating overseas but not registered locally to pay GST, especially if they are making profit from local operations.

How it plans to levy GST on firms such as Airbnb or overseas dating sites used by locals is less clear.

For some firms also, identifying the supplying company could be dicey as their call centres could be located in a different country while their platforms could be sited in another country.

If enforced, the tax specialist suspects the consumer could end up paying more rather than the services provider. As in the case of withholding taxes for professional services, for instance, he pointed out overseas suppliers still insist on getting paid a certain amount for their services regardless of the 10-15 per cent the customer withholds to pay to the tax authorities on the supplier's behalf.

"I think it will be difficult to catch the international party. The only way is to make the local party pay on the international party's behalf - sort of a withholding tax - but even that would be hard to enforce, especially on individuals," the tax specialist said.

Saying details are still too scant, a tax consultant opined the borderless nature of transactions makes it very difficult to levy such a tax.

As such, a concerted effort is needed, she added. "All the tax authorities are trying to increase tax collections. They want to tax these companies but they have to find a way to do it together. At the moment they have to wait for the OECD (Organisation for Economic Co-operation and Development) countries, which have the most to lose as that's where these companies are headquartered, to show the way."

Malaysia is targeting to collect RM42 billion (S$13.48 billion) from GST this year after raking in RM41 billion in 2016.