Tax Matters: Digital service tax updates create even more uncertainties
The Royal Malaysian Customs Department (RMCD) recently released a series of updates on the digital service tax framework, which officially went into force on Jan 1. Released in April, the rules — which apply retroactively now — exempt local banks and financial institutions (FIs) from having to levy the 6% tax when charging fees on transactions that pass through their networks.
Deloitte Malaysia partner for indirect tax Senthuran Elalingam welcomed the move and lauded the removal of uncertainty for the local banking industry. “The exemption applies to all locally licensed banks and FIs, including those operating in Labuan. This also includes local units of foreign banks that hold such licences.”
However, there are now other areas of uncertainty, he adds.
Personal Wealth first reported on digital financial services attracting the tax, back in October last year. While these new rules clear up the ambiguity surrounding the local banking sector, the tax exemption does not appear to apply to foreign banks and FIs, card payment players, digital payment networks, third-party payment gateway providers and payment messaging networks (such as SWIFT, or Society for Worldwide Interbank Financial Telecommunication). These are all potential pass-through points in a digital transaction, with possible multiple transaction fees attached.
In fact, this latest update suggests that even local digital payment networks and third-party gateways will be required to levy the 6% tax on fees they charge on transactions that pass through their networks.
“While it is clear that there are no concessions for foreign FIs (including banks), the fact that the authorities felt the need to give a specific exemption to local banks implies that they are of the view that by default, online banking services are very much in the scope of the tax,” says Senthuran.
“Also, the tax is not just limited to transactions involving individual customers at either end, but could apply to commercial and bank-to-bank transactions as well. The cost impact of the tax is, therefore, potentially far-reaching.”
Simply put, inbound and outgoing digital financial transactions that happen to pass through a local payment network or gateway, foreign bank or FI, or any foreign payment network or gateway could now potentially attract the 6% tax.
Should the value of services from any of these international banks or networks to customers in Malaysia (whether individuals, merchants or even local banks) exceed RM500,000 a year, they would be legally obliged under local law to register with the RMCD as tax collectors. It is likely that these costs will eventually be borne by individual users.
“If anything, this outcome further solidifies an uneven playing field between local and foreign service providers. I can only speculate that this move was made to favour certain local players. There does not seem to be any other reasonable basis for this move,” says Senthuran.
Wide range of applicable services
Meanwhile on the home front, leading payment services facilitator Payment Network Sdn Bhd (PayNet) is not thought to be exempt from the tax. Therefore, the myriad online and digital transactions it facilitates would likely attract this tax.
Bank Negara Malaysia is the largest shareholder of PayNet, which it jointly owns with leading Malaysian banks and FIs. The payment services facilitator effectively administers the country’s entire digital payment and financial transaction ecosystem. It runs the MyDebit network, Interbank Giro facilities, FPX facilities (direct-to-bank internet payment gateway), DuitNow and the shared ATM and MEPS networks, among others.
“If we take the debit and credit card networks as an example, every transaction in Malaysia requires a payment network to facilitate it. The payment network usually charges the issuing and receiving banks a fee. This fee appears to fall within the scope of the tax,” says Senthuran.
“Additionally, for every single e-commerce transaction, there is a third-party payment processor that confirms a customer’s payment details between that of the merchant bank and the customer’s bank. The third-party processor charges a fee, and this fee would also attract the tax.
“Although we have not received any updates from the authorities on these issues yet, the fact that they specifically exempted local banks — but not the local payment networks and gateways — suggests that they meant for these intermediary transaction fees to be taxable.
“To this end, I believe that several large international card and digital payment networks, as well as local payment networks and gateways, have started to register with the RMCD as tax collectors. Concurrently, I also think players in the ecosystem may be looking into the possibility of gaining exemption from the tax.”
International bank transfers
Under the initial rules of the tax, a common applicable example would be when one uses an online bank account to execute a telegraphic transfer of funds from a local account to an international account, for instance, for the benefit of a child studying in Australia. In this scenario, the local bank would charge the local account a fee for performing this transfer and the fee would have attracted the 6% tax. With this latest exemption, this outbound transaction fee would not be hit with the tax, which is good news for local account holders.
However, Senthuran does not rule out the possibility of the tax being imposed at some point in the transaction if a transfer takes place in the opposite direction. In fact, there is a possibility of unnecessary complication where foreign players are involved, he says.
“If a local bank provides a service to a foreign bank and charges a fee, that fee would be exempt from the tax. However, the rules do not exempt foreign banks if the situation is reversed.
“When it comes to the movement of money across borders, you may well have a foreign bank charging the local bank for the service. In this scenario, where processes tend to be highly automated and the foreign bank is the one providing a service, they may be charging the local bank a fee and this fee could fall within the scope of the tax.”
A possible implication here would be that the tax on the fee is passed on to the consumer at the other end of the transaction (since the local bank would be considered exempt), says Senthuran.
Finally, he believes there is an additional indirect implication, other than extra costs on the part of the end user. “In the light of the compliance costs that the digital service tax will entail, would foreign digital businesses be less inclined to provide services to Malaysian users?
“After all, it is a matter of weighing the total compliance costs against the prospects of generating business in Malaysia. Would a foreign digital business simply block Malaysian IP [internet protocol] addresses from accessing its services altogether?”