Digital Tax and It’s Impact to Business

• The proposal for the implementation of service tax on digital services (also known as digital tax) provided by foreign service providers (“FSPs”) was first announced during the 2019 Budget. The proposal was subsequently gazetted on 9 July 2019 via the Service Tax (Amendment) Act 2019 which seeks to impose service tax on digital services provided by FSPs.
• With effect from 1 January 2020, FSPs who provide digital services to consumers in Malaysia where the total value of digital services provided breaches the threshold of RM500,000 (approximately US$122,000) in a 12-month period are liable to register and charge service tax at a prescribed rate of 6%.
• “Digital service” is defined as 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. Examples of digital services are online licensing of software, provision of mobile phone applications, provision of music, live streaming services, online advertising, website hosting, etc.
• Notwithstanding that FSPs do not have a presence in Malaysia, they are required to charge service tax on the provision of digital services. The salient point to note is such that service tax on digital services would be imposed by FSPs to individuals (B2C) and businesses (B2B).
• To minimise the cascading effect, service tax exemption on digital services is provided to business-to-business (B2B) transactions whereby the exemption is applicable if the FSP and service recipient are both registered for service tax and both parties provide the same digital services. The service recipients can enjoy the exemption by claiming a refund of the service tax paid to the FSP on such digital services acquired.
• The provision of digital services has been included in the First Schedule of the Service Tax Regulations 2018 as a new taxable service to align with the implementation of service tax on digital services provided by FSPs.
• The Royal Malaysian Customs Department (“RMCD”) has indicated that approximately 127 FSPs have been registered for service tax as at December 2019 and the targeted revenue collection from digital tax is approximately RM2.4 billion annually.

Digital services exempted from service tax

The Minister of Finance has prescribed that the following digital services provided by FSPs and local service providers would not be subject to service tax with effect from 1 January 2020: –

• Online distance learning services for preschool, primary, secondary and tertiary education including vocational education and professional trainings.
• Online newspaper, online journals and periodicals.

Implications

• FSPs are liable to register for service tax and can apply for registration online via the RMCD’s web portal (https://mystods.customs.gov.my/landing-page/).
• Registered FSPs are required to comply with the regulations which include the payment of service tax and the filing of service tax returns on a quarterly basis.
• Digital service providers in Malaysia who have not been registered for service tax are required to apply for registration not later than 29 February 2020 and start charging service tax from 1 March 2020.
• For businesses that qualify for service tax refund on digital services acquired from FSPs, the refund is to be made via the service tax return (Form SST-02).

REVISED TAX AUDIT AND INVESTIGATION FRAMEWORKS

The Inland Revenue Board (“IRB”) has recently issued the following revised frameworks:

• Tax Audit Framework (Issued on 15 December 2019, replacing framework dated 1 April 2018)
• Transfer Pricing Audit Framework (Issued on 15 December 2019, replacing framework dated 1 April 2013)
• Tax Investigation Framework (Issued on 1 January 2020, replacing framework dated 15 May 2018)

We summarise the key changes to each of these frameworks below:

Tax Audit Framework

• The IRB will inform the taxpayer in advance prior to visiting taxpayer’s premises.
• The letter of audit settlement will be issued by the IRB to inform taxpayers if there are any tax adjustments and penalty. A tax findings letter will not be issued for certain desk audit cases. A revised tax computation will be issued together with the notice of assessment instead.
• The penalty for the omission or understatement of income is 45% on the tax undercharged. The Director General may abate or remit any penalty.
• Taxpayers who committed repeated offences will be subject to a penalty of 55%. Repeated offences refer to cases where the taxpayer was audited / investigated before and were issued notices of additional assessments and the first offence is to take into account only the notices of assessment issued from 1 January 2020 onwards.

Transfer Pricing Audit Framework

• Under the revised framework, the penalty rates have been increased:
  • Non-preparation of transfer pricing documentation (“TPD”): Penalty rates increased from 35% to 50%.
  • TPD prepared but not compliant with guidelines: Penalty rates increased from 25% to 30%.
  • TPD not submitted within 30 days upon request: Penalty rate of 30%.
• Previously, taxpayers are given 21 days to object to the IRB’s proposed transfer pricing adjustments. The revised transfer pricing framework reduces the period to 18 days.
• The framework clarifies that transfer pricing audit may cover up to 7 years (previously 5 years). This is in line with the power given to the IRB to issue an assessment or an additional assessment within 7 years in relation to transfer pricing adjustments.
• Detailed guidance is provided to help taxpayers to participate in a transfer pricing voluntary disclosure. In such a case, the penalties range between 0% to 20%. A prescribed form is to be submitted together with the documents listed in the framework.

Tax Investigation Framework

The contents of the revised framework are broadly similar to the 2018 framework. Some of the pertinent changes are:

• Investigation exercises can be carried out by the IRB by issuing letters requesting for documents and information from the taxpayer, tax agent and third parties.
• A taxpayer is required to provide the IRB officers with access to (including passwords) and make copies or extractions of documents belonging to the taxpayer without making any payment.
• A taxpayer who fails to furnish the tax return for a period of two (2) years of assessment or more, on conviction, is liable to a fine of not less than RM1,000 and not more than RM20,000 or to imprisonment for a term not exceeding 6 months or to both. The taxpayer is also liable to pay a special penalty of 3 times the amount of tax undercharged (previously 3 times the amount of tax charged).
• If no prosecution has been instituted in respect of failure to furnish a return or give notice of chargeability, the IRB may require the taxpayer to pay a penalty equal to 3 times the amount of tax undercharged (previously 3 times the amount of tax payable).

Implications

In view of these recent frameworks that may potentially result in higher penalties being imposed for any tax undercharged arising from tax audit and investigations, it is imperative for taxpayers to undertake periodical reviews on their tax affairs to assess the risks involved and their readiness for a tax audit. In managing tax risks, taxpayers may choose to undertake a health check to assess any risks present and consider ways to mitigate such risks.