INSIGHT: Taxation of Digital Services—A Comparison of the Malaysian and Singapore Approach

Malaysia and Singapore are the first two countries in South East Asia to impose a tax on imported digital services. This new taxation is envisaged to come into force with effect from January 1, 2020 with the objective of ensuring that local suppliers, as well as foreign suppliers, are treated equally from a tax perspective in respect of services supplied to local customers.

Taxing Digital Services in Malaysia

In Malaysia, the imposition of a tax on imported digital services in business-to-consumer (B2C) transactions was first announced by the Honorable Minister of Finance during the 2019 Budget Speech.

Aimed at ensuring an equal tax treatment in respect of services supplied by local suppliers and foreign suppliers, the new digital tax would be implemented in the form of a service tax. Following that, the Service Tax Act 2018 (STA) was amended vide the Service Tax (Amendment) Act 2019 to, among others, extend and enlarge the scope of the STA to tax B2C imported digital services (the Digital Services Amendments).

The STA is a relatively new piece of legislation in Malaysia, having only come into force as from September 1, 2018. Together with the Sales Tax Act 2018, which came into force at the same time, the STA repealed the Malaysian Goods and Services Tax Act 2014 and replaced it with an entirely different sales tax and service tax regime with effect from September 1, 2018.

When the STA first came into effect, service tax was only levied upon specified “taxable services” provided in Malaysia by specified “taxable persons.” As such, initially, services provided from outside Malaysia were not subject to service tax at all. However, subsequently, the STA was amended to levy service tax on imported taxable services acquired in business-to-business (B2B) transactions. This meant that with effect from January 1, 2019, taxable services provided by foreign service providers to businesses in Malaysia are subject to service tax.

The liability to account for service tax, however, was imposed upon the local business which had acquired such services, instead of the foreign service provider. Therefore, it was the customer, rather than the supplier, that was liable to account for and pay the applicable service tax to the Royal Malaysian Customs Department (Customs).

The Digital Services Amendments, which are expected to come into force as from January 1, 2020, have now further widened the original scope of the STA to impose service tax on the provision of digital services by foreign service providers in respect of B2C transactions.

Under the STA, “digital service” is defined to mean “any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.”

The term “foreign service provider” is also defined below and means “any person who is outside Malaysia providing any digital service to a consumer and includes any person who is outside Malaysia operating an online platform for buying and selling goods or providing services (whether or not such person provides any digital services) and who makes transactions for provision of digital services on behalf of any person.”

Meanwhile, the term “consumer” is defined under the STA to mean any person who fulfills any two of the following criteria:

• makes payment for digital services using credit or debit facility provided by any financial institution or company in Malaysia;
• acquires digital services using an internet protocol address registered in Malaysia or an international mobile phone country code assigned to Malaysia;
• resides in Malaysia.

As such, foreign service providers falling within the ambit and scope of the aforesaid definitions will be required to register under the STA within the stipulated period. The registration threshold has yet to be prescribed by the Minister of Finance but is expected to be set at 500,000 ringgit ($121,000). That is to say, a foreign service provider must register under the STA if the total value of all its digital services to consumers in a particular month and the 11 months immediately preceding that month has exceeded 500,000 ringgit or where there are reasonable grounds to believe that the total value of all its digital services in the next 12 months will exceed 500,000 ringgit, whichever is the earlier.

In light of this, it is vital that the meaning of “digital services,” the value of such services and the status or identity of customers, among others, be clearly ascertained right at the outset as this would be crucial in determining whether or not a foreign service provider would be subject to the stringent provisions of the STA.

In this regard, section 56C(4) of the STA provides that any foreign service provider who fails to register in accordance with section 56C(1) of the STA commits an offense and shall, on conviction, be liable to a fine not exceeding 30,0000 ringgit or to imprisonment for a term not exceeding two years, or to both.

In addition, section 56A(1) of the STA also requires foreign service providers to charge service tax on the provision of digital services to Malaysian customers. As liability to account for service tax is imposed upon the foreign service provider, any failure on the part of the foreign service provider to charge service tax or to issue an invoice or other document with the prescribed particulars to its customers may be visited with severe sanctions, including fines of an amount not exceeding 50,000 ringgit or imprisonment for a term not exceeding three years or both.

Taxing Digital Services in Singapore

With effect from January 1, 2020, pursuant to the amendments made vide the Goods and Services Tax (Amendment) Act 2018, goods and services tax (GST) will be imposed on B2C digital services, namely, the provision of digital services by overseas suppliers to non-GST registered customers in Singapore.

An overseas supplier who is a “taxable person who belongs in a country other than Singapore” will be required to be registered under the Overseas Vendor Registration regime if it provides digital services to a customer who belongs in Singapore. Upon registration, the overseas supplier has to charge and account for GST on the supplies of digital services to such customers.

The relevant terminologies are defined in the Singapore Goods and Services Tax Act (Cap. 117A) (GST Act) whereby a person is treated as “belonging in Singapore” if, among others, he has in Singapore a business establishment, or other fixed establishment and no such establishment elsewhere. A person will also be treated as “belonging in Singapore” if he has no such establishment in any country but his usual place of residence is in Singapore.

In this connection, “digital services” is defined to mean not only “any service supplied over the Internet or other electronic network and the nature of which renders its supply essentially automated with minimal or no human intervention, and impossible without the use of information technology,” but also includes a gamut of additional items as enumerated in paragraph 2(1)(a) of the Seventh Schedule to the GST Act.

The extended definition includes items ranging from digital products, software updates, music, films, games and search engines to the making available of any database, live streaming services and distance teaching through any pre-recorded medium or e-learning.

Overseas suppliers who provide digital services are required to be registered should their global turnover as well as the value of their B2C digital services supplied to non-GST registered customers in Singapore, as alluded to above, simultaneously exceed SG$1 million ($730,000) and SG$100,000 respectively.

Global turnover refers to all the taxable supplies made by the supplier including supplies made outside Singapore that would have been a taxable supply if such supply had been made in Singapore. Registration would also be required if the supplier reasonably believes that the two-tier threshold referred to above would be reached within the next 12 months.

Electronic marketplace operators may also be subject to the same obligations as overseas suppliers of digital services. Such obligations will arise where, for instance, the electronic marketplace operator authorizes a payment to be charged to the customer or the delivery of a supply to the customer, among others. However, any medium that is used solely for processing payments for any supply is not regarded as an electronic marketplace for the purposes of the Seventh Schedule to the GST Act.

A Broad Comparison of Two Different Tax Regimes

The imposition of the Singapore GST and the Malaysian service tax on digital services appears to be for the same objective of ensuring a level playing field between local and foreign suppliers or service providers.

In line with this objective, it is not surprising that the approach taken in both jurisdictions is the same, that is to extend the ambit of a pre-existing tax regime which was originally applicable to only local suppliers, to foreign suppliers. By placing the responsibility and liability to charge and account for tax squarely on their shoulders, the foreign suppliers or service providers are placed on an equal footing with local suppliers to the extent of the additional and onerous compliance obligations and costs to be borne by them.

Although such costs may ultimately be passed on to the consumers, this may not be inconsistent with the stated objective of ensuring that foreign suppliers do not have an unfair competitive edge over local suppliers solely on account of tax.

Nevertheless, the STA appears to impose two different sets of standards vis-à-vis local and foreign service providers. For locally provided services, only the specified taxable person who carries on a business in Malaysia of providing the specified taxable service, is subject to the STA.

In contrast, no such condition exists with respect to foreign service providers so that the latter would be subject to the STA as long as the value of imported digital services provided to Malaysian consumers exceeds the registration threshold of 500,000 ringgit regardless of whether or not it carries on a business of providing such services in its jurisdiction.

Furthermore, it is pertinent to note that the Malaysian registration threshold of 500,000 ringgit is relatively low as compared with the two-tier threshold under the GST Act of SG$1 million and SG$100,000 respectively. Accordingly, this may subject one-off high value transactions to compliance obligations under the STA and potentially widens the tax net to any supplier who happens to provide digital services above a certain value.

This leads back to the fundamental and conceptual distinction between the GST and the service tax regimes. The former is a broader charge to tax by way of an inclusionary scope of tax whilst the latter is a restrictive charge to tax by way of an exclusionary scope of tax, as was held by the High Court in Sarawak Shell Bhd & Anor v. Menteri Kewangan [2001] 1 MLJ 602 .

Unlike service tax, GST is a broad-based tax which is applicable to all taxable supplies made in the course or furtherance of any business carried on by the taxable person whereas service tax is narrower in scope and only applies to specified businesses providing specified services. The broad-based service tax on imported digital services may, therefore, be more akin to GST, than service tax.

With respect to the scope of the charging provisions under the respective statutes, there are broad similarities as the GST Act and the STA both apply to digital service providers as well as to electronic marketplace operators. However, whilst the GST Act excludes any medium used solely for processing payments from the scope of charge to GST, there is no similar exclusion under the STA.

On the face of it, the scope of digital services under both the GST Act and STA also appear to be similarly worded. However, with the incorporation of an extended definition of that term in the GST Act, the scope of digital services under the GST Act is arguably significantly wider than that under the STA.

For instance, under the GST Act, the making available of any database, live streaming services and distance teaching through any pre-recorded medium or e-learning are deemed to be digital services. However, no such extended definition exists for service tax where “digital service” is simply defined to mean “any service that is delivered or subscribed over the internet or other electronic network and which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated.”

Accordingly, it is arguable that services performed by human actors, such as distance teaching where human intervention or input is a critical prerequisite, do not fall within the scope of the STA as the delivery of these services is clearly not essentially automated although for the purposes of the GST Act, they are deemed to be digital services by operation of the extended definition in paragraph 2(1)(a) of the Seventh Schedule to the GST Act.

Lastly, the distinction between “services” and “goods” may have been blurred as the aforesaid definitions of “digital services” appear to include both digital products or e-goods, and digital services. While this distinction may largely be irrelevant or academic for GST purposes, GST being applicable to taxable supplies of goods and services, such distinction may be critical for service tax purposes. As service tax had, conceptually and traditionally, been associated with services, not goods, arguably digital products or e-goods ought not be taxed under a legislation that was specifically designed to tax services. Accordingly, it may be imperative to determine whether or not a “digital service” is indeed a service or otherwise for purposes of the STA.

More Similarities than Differences?

Despite the use of a different tax regime, Malaysia and Singapore’s approach to taxing digital services is not that dissimilar and, in fact, shares many common features, including mandatory registration for foreign suppliers and the imposition of compliance obligations on them.

Conversely, they also share similar challenges, in particular, in enforcing these compliance obligations upon entities and persons located outside their territorial jurisdiction.

Although the STA expressly provides that it shall apply both within and outside of Malaysia and to any foreign service provider of whatever nationality or citizenship beyond the geographical limits of Malaysia, some of these practical problems may be insurmountable. Therefore, any such legislative provision is likely to have a limited, if any, impact outside Malaysia.

Irene Yong is a Partner at Shearn Delamore & Co, Malaysia

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.