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 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 has caused an 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, by stating that this 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 government realized that Internet services is 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 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 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.
Likewise, the Malaysian government is not left out when it comes to taxing the 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, 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.
With the impending coming into force of the Goods and Services Tax (“GST”) Act 2014, the Royal Malaysian Customs Department, the authority tasked with administering, assessing, collecting and enforcing payment of GST, has also published a “Guide on E-Commerce” and a “Guide on Web Hosting Services” in August 2014 to assist e-commerce players and web hosting service providers in understanding the GST and its implications on their businesses.
GST is a form of consumption tax i.e. it is charged on all taxable supplies of goods and services in Malaysia except those specifically exempted. GST is also charged on importation of goods and services into Malaysia. All provisions of services whether it originates in the country or imported from other countries also fall under the scope of GST. These include services provided via the internet. In Malaysia, a person who is registered under the GST Act 2014 is known as a “registered person”. A registered person is required to charge GST (“output tax”) on his taxable supply of goods and services made to his customers. He is allowed to claim back any GST incurred on his purchases (“input tax”) which are inputs to his business.
For e-commerce business, the Guide says that if you are supplying goods or services in Malaysia via the Internet, you are responsible for the collection of GST just like any other conventional business. It does not matter that the transactions are carried out through a third party e-commerce service provider.
If a GST-registered person sells goods via the Internet and the goods are physically supplied to a customer in Malaysia, the supply is subject to standard rate (6%) GST. If goods are sold via the Internet and the goods are physically supplied to customers overseas, the sales can be zero-rated (0%) for GST purposes. As for supply of services via the Internet, the Guide says that if you are a GST-registered person, you must standard rate (6%) the supply unless the services are zero-rated under the GST Zero Rate Supply Order.
For web hosting business, the principal rule with regard to place of supply for services provided by web host is where the supplier belongs to. In this context, if the supplier of web host services belongs to Malaysia, such services have to be standard rate (0%). On the other hand if the supplier belongs to another country, the supply of service is out of scope. However, if the recipient of the services provided by overseas supplier belongs to Malaysia, the imported service will be subjected to standard rate (6%) GST.
As Albert Einstein (1879 – 1955) once said, “the hardest thing to understand in the world is the income tax.” While the guidelines provide some very helpful guidance and FAQs, please note that tax system is a very complex subject, and you are strongly encouraged to seek professional tax advice before relying on the guidelines issued by the authorities.
About the author:
This article was written by Edwin Lee Yong Cieh, Partner of LPP Law – law firm in Kuala Lumpur, Malaysia (+6016 928 6130, [email protected]). Feel free to contact him if you have any queries.
This article was first published in CHIP Magazine Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal and tax advice. You are advised to seek proper legal and tax advice for your specific situation.