Government Proposes Amendments to Impose Service Tax on Digital Services Provided by Foreign Service Providers
08 April 2019
The Service Tax (Amendment) Bill 2019 (‘Bill’) was passed by the Dewan Rakyat (House of Representatives) of the Malaysian Parliament today. It will become law after it has been passed by the Dewan Negara (Senate) and has received Royal Assent and been published in the Gazette. It will come into operation on a date to be appointed by the Minister of Finance (‘Minister’) by notification in the Gazette.
Among other amendments, the Bill introduces amendments to the Service Tax Act 2018 (‘Act’) to facilitate the imposition of service tax on services provided by foreign service providers. These amendments implement the proposal announced by the Minister during the 2019 Budget Speech that online services imported by consumers will be subject to service tax with effect from 1 January 2020.
Four definitions are introduced into section 2 of the Act -
- ‘digital service’ means ‘any service that is delivered or subscribed over the internet or other electronic network which cannot be obtained without the use of information technology and where the delivery of the service is essentially automated’;
- ‘foreign service provider’ 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 the 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’;
- ‘consumer’ means ‘a person who fulfils any two of the following –
- 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’; and
- ‘foreign registered person’ means ‘any foreign service provider who is registered under section 56C’.
The main provisions relating to service tax on digital services provided by foreign service providers are set out in the proposed new Part IXA (sections 56A to 56K) which is to be introduced into the Act under the Bill.
The proposed section 56A, amongst other, provides that –
- service tax shall be charged and levied on any digital service provided by a foreign registered person to a consumer;
- the value of the digital services on which the service tax is payable shall be the value charged by the foreign registered person;
- the rate of service tax is to be determined in accordance with section 10(2) of the Act; and
- the service tax is due at the time when the payment for the digital service is received by the foreign registered person.
The proposed section 56B states that the Minister may prescribe the total value of digital services for the purposes of registration of a foreign service provider. Such total value will be based on a 12-month historical or prospective basis. The proposed section 56C requires a foreign service provider who meets either of the aforesaid thresholds to apply to be registered as a foreign registered person within one month after the month in which he becomes liable to be registered.
A foreign registered person who provides any digital service is required under the proposed section 56G to issue to the consumer, an invoice or document, in electronic or paper form, containing prescribed particulars in respect of the transaction.
The proposed section 56H specifies the taxable period for a foreign registered person to be three months, which is to end on the last day of a calendar month. A foreign registered person is required under the proposed sections 56H and 56I to account and pay to the Director General of Customs and Excise (‘DG’) the service tax due no later than the last day of the month following the end of each taxable period.
The DG is permitted under the proposed section 56H to vary the length of a table period upon the application by a foreign registered person. In such event, the foreign registered person shall account and pay to the DG the service tax due no later than the last day of the month following the end of the varied taxable period.
A foreign registered person is required under the proposed section 56J to keep complete and true records of all transactions which affect or may affect his liability to service tax, and to retain such records for a period of seven years.
The Bill also extends the application of certain provisions of the Act (such as section 27 (power of assessment), section 28 (recovery of tax) and section 29 (collection of tax from debtor of taxable person)) to a foreign registered person.
The rate of service tax that is generally applicable under the Service Tax (Rate of Tax) Order 2018 is six per cent (6%) and, subject to exceptions, the threshold of taxable services for registration under the Act, as specified in regulation 3 read with the First Schedule of the Service Tax Regulations 2018, is RM500,000 in twelve months. It remains to be seen whether the same rate and threshold will be applied in respect of digital services provided by a foreign service provider.
Although it is likely that the services provided by a foreign registered person will be charged in a foreign currency, the Bill does not provide a mechanism for conversion of the foreign currency into Ringgit Malaysia for the purposes of reporting and payment of service tax. The Service Tax General Guide published by the Royal Malaysian Customs Department on 30 August 2018 provides that any amount stated in a foreign currency in an invoice is also required to be expressed in Ringgit Malaysia based on the selling rate of exchange prevailing in Malaysia at the time the taxable service is provided. It remains to be seen as to whether this requirement will be adopted in relation to services which are charged in foreign currency by a foreign registered person.