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Digital tax not likely to affect foreign online businesses

Digital tax not likely to affect foreign online businesses

The digital tax, which is expected to be enforced from Jan 1 next year, is not expected to affect foreign online services’ bottom line as the customers are anticipated to remain loyal, while absorbing the minute additional cost.

Several users and subscribers told The Malaysian Reserve (TMR) that they would not discontinue the services and packages even if the full portion of the tax is passed to them.

Dubbed as a necessary evil, the 6% tax will be charged to foreign digital service providers with sales of more than RM500,000 a year beginning Jan 1, 2020, after Service Tax (Amendment) Act 2019 was passed in the Dewan Rakyat last Monday.

Various popular online service providers such as Spotify, Netflix Inc, Amazon.com Inc and Steam are likely to fall under the measure, and the tax is expected to contribute billions of ringgit to the government’s fund.

Netflix and Spotify regular user Aizul Manan said the digital tax is similar to what has been imposed by other utilities and Internet services firms like private satellite television broadcaster Astro Malaysia Holdings Bhd.

“I think I will still continue to subscribe to both Spotify and Netflix despite the 6% increase in the subscription fee,” the 33-year-old information technology engineer told TMR recently.

Currently, Aizul subscribes to premium packages on both Netflix and Spotify at RM14 and RM50 respectively.

Medical practitioner Dr Khairunnisa Kosnin, an avid Netflix subscriber, echoed Aizul’s sentiment and said she would continue to enjoy the platforms, which are still deemed the cheapest in the country so far.

“I don’t see any better option. So, most likely, I will continue to subscribe to Netflix,” she said.

The digital tax is expected to provide a level playing field among local and foreign companies, as well as between online and offline service providers. Currently, only local providers are required to pay taxes.

While end users for certain services might not feel the pinch of the digital tax, it could be a different ball game for small and medium-scale entrepreneurs.

Gritz Aromatherapy Holdings Sdn Bhd MD and CEO Nur Fateha Basran said the digital tax could be translated into higher digital business infrastructure costs like the use of e-commerce platforms, including cloud services.

She added that the 6% charge would contribute a significant impact towards her material cost.

For her herbal-based aromatherapy business, Nur Fateha imports 30% of her raw materials, including essential oils and packaging items, via Chinese e-commerce giant Alibaba Group Holding Ltd.

“We have to be ready with the impact and expect the worst to absorb the extra charge. It is definitely more than a 5% increase.

“To sustain (the business), we will also have to cut down our operational cost and start to explore local services and materials, instead of importing,” she said.

Yesterday, Deputy Finance Minister Amiruddin Hamzah called for the foreign digital service providers to register with the Royal Malaysian Customs Department, from Oct 1 to Dec 31 this year.

Meanwhile, Malaysian Associations of Tax Accountants president Datuk Abdul Aziz Abu Bakar said collecting the tax might be a little bit challenging for the government.

“It may be hard to identify companies that have an excess of RM500,000 in revenue in the country. The collection of data would be challenging.

“How would the authorities collect tax from these foreign firms? What if they do not comply? The enforcement mechanism needs to be addressed,” he told TMR.

Abdul Aziz added that while the 6% charge is reasonable, as it is at the same level charged to local businesses, prices in the services sector will generally be increased upon the implementation of the digital tax.

The National ICT Association of Malaysia advisor Woon Tai Hai said most countries that implement a digital tax are facing collection mechanism issues.

“Getting foreign sellers to register may be easier said than done. The bigger issue, as experienced in other countries, is the collection mechanism of the platform. Automatic deduction from the credit is one of the proposed ideas,” he said.

Woon added that the final cost of the products can be potentially higher, especially if an efficient mechanism for the registration and tax collection is not in place.

However, Woon said digital taxes are necessary — especially in developing countries.

“Other countries like Singapore, New Zealand, Australia, Taiwan, Norway, South Africa and Japan have already imposed such tax, or rulings on imported digital-related transactions,” he said.

Singapore is also expected to impose the Goods and Services Tax (GST) in imported digital services by 2020.

In Malaysia, taxing the digital economy could bridge the shortfall of the scrapped GST, which contributed RM44 billion to the government’s funds in 2017.

The Sales and Services Tax, which replaced the GST, is only forecast to add some RM22 billion into the government’s coffers this year.

According to a Statistics Department survey, the country’s e-commerce generated about RM398 billion of income in 2015.

Meanwhile, BMI Research stated that South-East Asia’s online shopping market is set to generate an estimated RM257.94 billion in 2021, projecting a continuous uptrend in the upcoming years.

A Bloomberg report recently revealed that Malaysia’s share of total online retail sales was at 2.7%, indicating a huge potential for development for business and consumers, as well as the government’s revenue.