In this world, nothing is certain except death and taxes – Benjamin Franklin (1706-90), one of the Founding Fathers of the United States.
In October 2014, the Hungarian government submitted its proposed Internet tax law for 2015.
One of the features under that tax law is the introduction of “Internet tax” that will be imposed on Internet users at a rate of HUF 150 (approximately USD 0.60) for every gigabyte of data or part thereof. For example, downloading a movie in HD quality (8.5 GB) would attract a tax charge of approximately USD 5.
This proposal caused a huge uproar and received negative criticisms from the public and the industry players. It was even condemned by the European Union. Some people perceived this as a way for the Hungarian government to control the Internet and stifle free expression and access to information.
The Hungarian government was later pressured into changing its stance slightly. They did so by stating that the new tax will be capped at HUF 700 (approximately USD 2.8) for home users and HUF 5,000 (USD 20) for business users, with Internet Service Providers (“ISPs”) expected to pick up the rest of the tab. That did not help much as the public still believed that the ISPs will pass on the costs of complying with this law onto the consumers eventually.
The Hungarian government has finally backed down and decided to shelve this law after large-scale protests from its people.
From the inception of the Internet until the late 1990s, the Internet was free of regulation by governments all over the world.
However, things began to change when the government realized that Internet services are a potential source of tax revenue, especially in the e-commerce sphere where the world is becoming one big marketplace. As a result, many governments have amended their Internet tax law to accommodate to this new way of doing business.
In the United States, President Bill Clinton signed the Internet Tax Freedom Act into law in 1998, in an effort to promote and preserve the commercial, educational and informational potential of the Internet.
This law bans federal, state and local governments from imposing a tax on internet access and other discriminatory Internet-only taxes such as bit tax, bandwidth tax and email tax. The law also prohibits multiple taxes on e-commerce, although it does not exempt sales tax made through online transactions.
A tax on internet access is not the same thing as a tax on internet sales. The former is what the Hungarian government was trying to introduce, whereas the latter is becoming a norm in many parts of the world.
Internet Tax in Malaysia
Likewise, the Malaysian government is not left out when it comes to taxing internet sales.
In March 2013, the Inland Revenue Board of Malaysia (“IRB Malaysia”) published a “Guidelines on Taxation of Electronic Commerce” (“E-Commerce Guidelines”) which as the name suggests, aims to provide guidance on the tax treatment of e-commerce transactions.
E-commerce is defined to mean any commercial transaction conducted through electronic networks including the provision of information, promotion, marketing, supply order or delivery of goods or services although payment and delivery of such goods and services may be conducted off-line.
The IRB Malaysia acknowledged that as there are no specific provisions under the Income Tax Act 1967 (“ITA”) that address e-commerce transactions, hence it is hoped that the E-Commerce Guidelines will provide the much-needed guidance to clear the confusion as to whether online businesses need to pay income tax or not.
The E-Commerce Guidelines adopts the principle of neutrality where both conventional and online businesses are subject to the same tax treatment under the ITA. What this means is that there is no difference between a seller who sells goods in a physical shop and a seller who sells goods on a website (online shop) – both of them need to pay income tax.
With the coming into force of the E-Commerce Guidelines, it signals an end of the tax-free ride era enjoyed by e-commerce players since the beginning of the e-commerce industry in 1997.
In general, the income of a person accruing in or derived from Malaysia is subject to income tax in Malaysia.
Where business operations are carried out in Malaysia, the income attributable to those business operations is deemed to be derived from Malaysia. Whether an income is considered to be derived from Malaysia or not is subject to the business operations test i.e. whether there are substantial business activities being carried out in Malaysia.
- Para 5.1 of the E-Commerce Guidelines states that a server/website by itself does not carry any meaning in determining derivation of income.
- Para 5.2 provides 3 examples of situations where income from e-commerce is deemed to be derived from Malaysia even though the company conducts business through a website which is hosted on a server located outside Malaysia.
- Para 6 examines the various permutations of e-commerce business models with varying assumptions, in each case, stating the IRB Malaysia’s position on whether or not business income is deemed to be derived from Malaysia.
The Sales and Services Tax (“SST”) took effect from 1 September 2018, replacing the Goods and Services Tax (“GST”).
SST comprises two legislative acts:
The Sales Tax Act 2018 governing the manufacturing and oil and gas industries; and the Service Tax Act 2018 on selected service providers. The current version of SST is an enhanced version of the Sales Tax Act 1972 and Service Tax Act 1975. The tax rate for Sales Tax is 10% while the Service Tax is 6%.
Unlike GST which is a multi-stage indirect tax, SST operates on a single-stage basis, which means that the sales tax or service tax is imposed only once at the manufacturing stage (sales tax), importer stage (sales tax) or service provider stage (service tax).
The threshold for businesses to imposed SST is RM500,000 and above on taxable income. (For Foods and Beverages Business – threshold is RM1,500,000)
For example, manufacturing will add in sales tax of 10% on manufactured goods in the invoice to the wholesaler. For the wholesaler, the sales tax is part of the inventory cost. Any subsequent sale from wholesaler to distributor or distributor to customers will have no sales tax imposed on the invoice issued.
The Royal Malaysian Customs Department (“RMCD”) is the authority tasked with administering, assessing, collecting and enforcing payment of GST. So far, they have yet to issue any SST related guide on e-commerce.
However, we can assess the implication of SST based on the broader interpretation of the current SST legislations.
Example 1: selling items through 3rd party platform
When a seller is selling an item he bought from a supplier, this is deemed as trading in nature hence no sales tax implication.
Example 2: providing platform to users for commercial purposes
When a company is providing an online platform for users and collecting any form of remuneration, it will be considered as providing a service hence service tax will be imposed.
One important area worth highlighting is when an individual or business engages overseas service providers for services. These services will be subjected to imported service tax effective from 1 Jan 2019.
In essence, when a local company engaged overseas service providers, he/she will need to account and file for the service tax on behalf of the overseas service providers. This amount should be remitted to RMCD One month from the end of the month in which the trigger point falls (payment made or invoice received).
This week, the Parliament has passed the bill to impose Digital Service Tax effective from 1 Jan 2020.
This will have an impact on digital service providers (e.g. Spotify, Netflix etc.). These service providers are required to register with RMCD if the revenue from Malaysia exceeds RM500,000. However, it remains a big question on how the Malaysian Government could get these foreign entities to sign up and start charging their customer the Digital Service Tax.