Malaysia mulls digital tax to regain ‘Asian tiger’ status. Here’s what it means

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The Malaysian government is exploring a digital tax to give its dwindling coffers a boost and pay off debts that have turned the country from an “Asian tiger” into a “small kitten.”

Tax specialist Choong Kwai Fatt, a member of the Association of Chartered Certified Accountants (FCCA), told Tech in Asia that business transactions via the cloud often escape income tax. “This not only results in loss of revenue for the country, but it also gives e-transactions an unfair advantage over physical transactions.”

In the hopes of capturing this missed economic opportunity, Malaysia’s deputy finance minister Amiruddin Hamzah alluded that the government was looking to tax digital transactions in the country, among a string of new taxes.

Some e-transactions are already being taxed, beginning last year, when a 10 percent withholding tax (WHT) was implemented by the government. The WHT applies to Malaysian companies that use foreign services, including digital ones.

A digital tax will have unintended consequences, according to experts. “While the government’s objective may be to target big [tech] organizations, the digital tax imposed would undeniably end up affecting small, local startup companies, especially ones that wish to establish themselves locally first before growing globally,” said Alvin Gan, head of IT-enabled transformation practice at KPMG Malaysia.

He further added that the government’s vision of growing the country into a global tech startup ecosystem may also be affected. “Those considering Malaysia to be their operation home base may turn to neighboring countries that have yet to implement such laws.”

Global trends

The growth of ecommerce has led to a worldwide discussion on how nations can bank on it to fill state coffers.

However, digital economy transactions are often borderless. “It has become even more challenging to figure out who should pay taxes, where, how much, as well as how those taxes should be collected,” observed Ernst & Young.

The European Union was among the first to propose that tech giants like Facebook and Google should pay their fair share of income tax. Even the UK government is looking to introduce a digital services tax by April 2020, which could potentially generate US$512 million for the government annually.

Closer to home, Singapore also announced that its government will impose a goods and services tax (GST) on imported digital services by 2020. This tax, however, will not affect ecommerce on physical goods below S$400 (US$290.90).

In Australia, a “Netflix tax” was introduced last July: a 10 percent GST was placed on all digital products and services supplied into the country.

Mixed sentiments

The news of a possible digital tax in Malaysia was met with mixed reactions from industry players and consumer groups.

Among the many concerns is the risk of double taxation. Telematics and fleet management startup Katsana is already experiencing this because of WHT.

Moving forward