Digital Service Tax vs Service Tax on Imported Services?

Beginning 1 January 2019, taxable services that are imported into Malaysia would require the recipient of such services to self-account and pay a 6% Service Tax to the Royal Malaysian Customs Department (“RMCD”). In other words, any person in Malaysia (irrespective of whether he is registered for Service Tax or not) has to pay a 6% Service Tax to the RMCD when the following conditions are met:

• The services acquired are prescribed as taxable services in the Service Tax Regulations 2018;
• The services are imported into Malaysia; and
• The services are used for business purposes.

If by any chance, any of the conditions are not met (e.g. the services were not used for business purposes), the recipient of such service would not be required to account for the 6% Service Tax.

Exactly one (1) year after 1 January 2019, the authorities widened the scope of the Service Tax legislation further to include digital services that are provided in Malaysia. The Service Tax for this new category of taxable services is commonly referred to as the “Digital Service Tax” which took effect from 1 January 2020. As a result of this tax, a foreign company that has no physical presence in Malaysia may now be liable to register for Service Tax in Malaysia under this new system and would have to charge a six per cent (6%) Service Tax on any digital service provided by this foreign company to any consumer in Malaysia.

As of 20 December 2019, an RMCD spokesman said that at least 126 foreign digital service providers including companies like Netflix, Spotify, Google and Airbnb had registered for this Digital Service Tax.

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