The Malaysian Parliament has recently passed a draft proposal to extend its service tax to foreign supplies of B2C (business-to-consumer) online services as of 1st January 2020. Online services include the provision of software, streaming of music and film, gaming and digital advertising.
The Sales and Service Tax (SST) replaced the Malaysian GST regime in 2018. Unlike the GST, it is a single-stage tax which is charged just once in the lifecycle of the good or service. It isn’t possible to recover any input tax credits under this regime.
Under the current rules, the service tax is levied at a 6% rate on domestic and foreign B2B (business-to-business) supplies of taxable services. It does not yet apply to imported B2C services. The draft law expands the reach of the service tax to cover supplies of digital services which are imported by consumers in Malaysia. The proposal refers to a “foreign service provider” as any person outside Malaysia providing any digital service to a consumer which includes online marketplace operators.
What this means is that from 1st January 2020, if you are a foreign business supplying such services, you will have to register with the Malaysian tax authority through a specially launched system for foreign service providers. You will have to charge the 6% rate of service tax on your supplies at the time of sale and be responsible for paying it over to the tax authority.
The registration requirement will be triggered if the value of the supplies of digital services made to consumers in Malaysia breaches the compulsory annual registration threshold of 500,000 ringgit (that is, around US$125,000).
In launching this new B2C service regime, the Malaysian government is playing catch-up with a global trend. Japan, Australia and Russia have already implemented similar measures. Foreign suppliers are reminded that since input VAT is irrecoverable under the service tax, they will likely have to increase their price points on impacted supplies.
Contact our VAT experts now and find out how this change could affect your business.