The Malaysian tax authority has recently issued guidelines on the taxation of electronic commerce in Malaysia. The document provides guidance on the tax treatment of e-commerce transactions, including scope of the tax liability, treatment of servers and websites in determining the location of the ecommerce income, issues on withholding tax and double taxation and examples of the various business models with relevant explanations.
A new approach to the internet taxation
While Malaysia has not implement the VAT taxation (it applies sales tax) it has introduced a unique way to tax ebiz. This is effected by imposing a withholding tax (“WHT”) liability on the Malaysian recipients (both B2B and B2C) in relation to any royalty type payments made to non-Malaysian companies.
Royalties include copyrights, know-how as well as payments to use copyrights of intangible products such as downloads of digital contents, licensing agreements etc. To be clear, in practice this includes software, games (including their updates), music, films, learning courses or any other eservices that are subject to a fee and delivered online.
The Malaysian ecustomers have to transfer the tax withheld to the Malaysian authorities, along with a return including the non-resident esellers’ business name, address, tax number and the invoice issued (if applicable). This involves quite a lot of paper work, which could essentially stop any spontaneous internet based sales.
The second worst case scenario is that foreign companies will be able to collect only 90% of their sales price, because their Malaysian customers will be obliged to pay 10% of the sales price as withholding tax to the Malaysian tax authorities.
We imagine that setting up accounting and shopping cart systems compliant with the new Malaysian WHT requirements to correctly accommodate this charge of withholding tax might be quite a challenge.
The key definitions from the guidance
This is a relatively new guidance. Some definitions might be seem unusual (especially to those used of dealing with EU VAT). We expect that their application will become clear in the future – in the mean time it might be best to consult with your Malaysian tax adviser how it is applied in practice. Please note that in principle the WHT obligations also apply to B2C customers. However, how this will be pursued in practice remains to be seen.
Where income from e-commerce of a non-resident is deemed not to be business income derived from Malaysia because the business operations is not carried on in Malaysia, payments to the non -resident in the nature of royalty and deemed to be derived from Malaysia is subject to withholding tax.
The term ‘royalty’ includes payments for the use of or the right to use copyrights, know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
7.2.1 Payment for the use of, or the right to use copyrights of intangible products such as:
(a) Downloading of a digital product to a customer’s hard disk or similar media.
(b) Licensing arrangements to reproduce, modify and adapt, the absence of which would constitute an infringement of copyright.
In the above example, if the payment is for the use of, or the right to use copy rights, the income constitutes royalty. On the other hand if the payment is for the purchase of the product, the transaction would not result in royalty income.
7.2.2 Payment for the use of, or the right to use know-how (intangible products).
Any form of electronic supply of know-how (i.e. undivulged technical knowledge, information, experience or technique that is necessary for the industrial reproduction of a product or process) which take the form of technical data, samples or patterns, or details of processing or production methods for which payment is made constitutes “royalty”.
7.2.3 Payment for the use of, or the right to use information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
Any electronic use or the right to use the above information which may include access to unpublished knowledge or information gained through scientific, technical etc. experience. This may include supply of information on markets or fashion trends, information concerning future technological advances or access to unpublished information contained in a database. Payment for these constitutes royalty.
Royalty is deemed to be derived from Malaysia if the payer is a resident, the government, a state government or a local authority. If the royalty payment is charged as an outgoing or as an expense against any business in Malaysia, it is also deemed derived from Malaysia
The above are only the key definition from the guidance – we suggest you to read the whole guidance for additional details.
What does this mean for you
If you are an eservice provider with no presence in Malaysia and the payment you are entitled to receive from your Malaysian customer qualifies as royalty, your customer is required to deduct and remit WHT (currently 10%) to the tax authority. This means that you (a non-resident business) will only get the net amount of the invoiced amount (e.g. 90% of the sales price). We note that the currently applicable WHT rate of 10% may be reduced by the relevant Double Tax Treaty between your country and Malaysia (if there is any).
You might be even able to declare this withholding tax in your domestic corporate tax return – but only if you will have paperwork to back up this claim, which might be easier said than done.