- In just under a month, Malaysia will receive the announcement of its Budget for the year 2019, with the introduction of a Digital Tax expected to be included as part of the announcement.
- An introduction of a Digital Tax will see Malaysia become the second country in Southeast Asia after Singapore to have a tax system for the digital sector.
The upcoming Budget 2019 slated to be announced on 2 November is exceptionally important to provide direction for the country, More importantly, it will also give direction for support and growth of the digital sector in Malaysia.
This was confirmed by economists and market observers just as the government commenced the tabling of the 2019 Budget on 15 October 2018. Additionally, this presents a great opportunity for an overhaul and reform of the economy by the newly elected government.
Malaysian’s government underwent a huge revamp on May 9, 2018 when the nation elected the opposition party into power and ended a 61-year rule by the former ruling party.
Along with the revamps were the introduction of different philosophies on how Malaysia’s finances were managed by the government. This was evident as we saw several multi-billion Ringgit projects cancelled, the abolishing of the Goods and Services Tax (GST), and many others, in a short period of time.
But before we can settle down, Malaysians are now preparing themselves for yet another big announcement by the newly elected government, which is the annual Budget allocation for 2019.
Introduction Of The Digital Tax
Experts have highlighted that the tabling of the 2019 Budget will see the introduction of the Digital Tax. Should this happen, Malaysia will be the second country in Southeast Asia after Singapore to introduce a tax scheme for the digital sector.
The rationale behind the tax is aimed at leveling the playing field between international and local businesses in the digital sector.
Currently, global digital businesses often avoid paying taxes in Malaysia due to the reason that the companies have no physical presence in the country. And as such, these digital firms declare their profits in the country where their headquarters are based, causing other countries such as Malaysia to lose potential tax revenue.
In addition to this, the Digital Tax can assist in strengthening and expanding the government’s revenue base due to its bright outlook in the years to come.
Concerns About The New Tax Scheme
While the primary premise of the tax is commendable, several experts and business owners have aired concerns over its possible negative effects on tech companies and e-commerce players. Some have commented that the introduction of the tax will add an extra layer of taxation which could lead to a price increase of online goods and services for all players.
YYC Tax Consultant, Yap Shin Siang, stated that the Inland Revenue Board already identifies digital marketing payments to non-resident companies as royalty income, hence subjecting them to pay Withholding Tax (WHT).
Dictionary Time: A WHT is a tax charged on Malaysian businesses when certain types of payments (interest, royalty, services) are made to non-resident companies.
As such, the introduction of the Digital Tax increases the probability of doubling or maybe tripling taxes on businesses.
Christy Ng, founder of online women’s footwear company ChristyNg.com commented on the Digital Tax, saying, “This tax on e-commerce businesses is not practical. We already spend so much on SST and with the addition of a new tax, this would squeeze all businesses dry. How many tax systems do we need?”
On the mechanism of the tax, the Institute for Democracy and Economic Affairs (IDEAS) predicts that there might be two types of taxes that will be introduced.
One would be a “direct tax” that target the profits of foreign digital companies doing business in Malaysia, and another—probably an “indirect tax”—that will act like a consumption tax (like the Sales and Services Tax or SST) on foreign companies selling digital goods and services into Malaysia, paid by the users.
The government has acknowledged those concerns and has stated that is working to introduce a tax scheme that is fair and that levels the playing ground.
Malaysian Deputy Finance Minister Datuk Amiruddin Hamzah commented on the Digital Tax stating, “This will definitely be a matter that we will look into deeply. We will come out with a new mechanism, but we are still studying it and we will impose something for them.”
“If we put this matter (digital tax) aside, I think the nation will be losing revenue.”
Malaysian Finance Minister Lim Guan Eng also mentioned that the Inland Revenue Board is expected to work closely with international bodies to address international tax issues relating to the digital and sharing economies.
Continued Support For The Digital Free Trade Zone?
The previous budget statement specified that the government would dedicate RM83.5 million to develop a Digital Free Trade Zone (DFTZ) in partnership with the Alibaba Group.
The funds would be allocated to construct the first phase of the DFTZ in Aeropolis, Kuala Lumpur International Airport (KLIA), to create a regional gateway for e-commerce. This was great news as the DFTZ was set to benefit thousands of SMEs and is projected to attract more than RM700 million worth of investments.
However, this project came under a cloud of doubt after the country’s recent general elections.
The new government sought to review all deals made with China as some were deemed unfavourable to Malaysia in the long term. Included in the scrutiny was Alibaba’s investment into Malaysia along with the establishment of the DFTZ with the previous government.
Among the criticisms leveled was the concern that the Chinese e-commerce giant held too much control over the DFTZ. A similar concern was noted by international players as they worried that the Belt and Road initiative was an attempt by China to construct a massive, multi-national zone of economic and political influence with Beijing at the centre.
Jack Ma, the Executive Chairman and co-founder of Alibaba Group swiftly addressed the concerns when he met Prime Minister Tun Dr. Mahathir a month after he was elected into office.
Jack reassured that the DFTZ was focused on benefiting businesses from both countries equally. Without much hesitation, the Prime Minister confirmed the continuation of the DFTZ with Alibaba Group.
Looking To The Future
According to BMI Research calculations, Southeast Asia’s online shopping market is set to generate an estimated US$64.8 billion (RM257.94 billion) in 2021, citing a continuous uptrend in the upcoming years. And recently, a Bloomberg report stated that Malaysia’s share of total online retail sales was at was at 2.7%, indicating a huge potential for development.
The digital economy presents a great growth opportunity for Malaysia especially when the government is looking to optimise their expenditure to manage its RM1 trillion debt.
AmBank group chief economist and head of research Dr. Anthony Dass stated that the government will need to optimise its expenditure during the tabling of the 2019 Budget. This can be done by focusing on priority projects or investments that trickle down positively to the market and people.
As such, it is very unlikely that the Malaysian government will side-line e-commerce and the digital industry. After all, its important not to forget that the country’s focus on developing the digital sector was initiated the Dr. Mahathir himself during his last outing as a Prime Minister back in 1996, with the Multimedia Super Corridor (MSC) one of his major initiatives.
More details on the Digital Tax and support on the digital industry in Malaysia are expected to be announced on November 2, 2018.
This article is an expert opinion contributed by the iPrice Group, a meta-search website where Malaysian consumers can easily compare prices or specs, and discover products with hundreds of local and regional merchants.