During this COVID-19 pandemic, more businesses are starting to use digital advertising (such as google ads, facebook ads, linkedin, etc.) to survive from this pandemic. Businesses should take note on the following direct/indirect tax implications when making payment to non-resident (“NR”) for using the digital advertising before being penalized by the relevant authorities:
- Withholding tax (“WHT”); and
- Imported service tax.
Most businesses especially SMEs would have confusion over these two (2) types of taxes. They would normally ask why they have to pay twice on taxes for the same expenses? After reading this article, you will have a general understanding on how to differentiate between these two taxes.
Withholding tax (“WHT”)
Withholding tax is an amount withheld by the party making payment (payer) on certain income earned by a non-resident (“NR”) and paid to the Malaysian Inland Revenue Board (“MIRB”) within one (1) month of paying or crediting the amount to the NR. This means that the payer withheld the tax from NR and pay it over to the MIRB.
MIRB has issued a Practice Note (“PN”) on 16 March 2018 to provide guidance in relation to WHT on income from digital advertising provided by a NR. It contains the MIRB’s interpretation and practices in relation to the tax law as it stood at the date of publication.
Based on the PN, where the NR has no permanent establishment or business presence in Malaysia, the tax treatment on payments to a NR in relation to digital advertising would be determined by assessing the facts of the case and the Income Tax Act, 1967 (“ITA”): –
|Purpose of payment||Tax treatment|
|Purchase or use of an application (App) by the payer that allows payer to create their own advertisement campaign.||Treated as royalty income of the NR and subject to WHT of 10% under the Section 109 of the ITA.|
WHT rate is subject to the provisions in the tax treaties concerned.
|Does not involve the purchase or use of an App but merely provision of service by the NR where the payers solely rely on the service provider to deal with all aspects of digital advertising||Treated as special class of income of the NR under Section 4A of the ITA and subject to WHT of 10% under Section 109B of the ITA.Where services are rendered and performed outside Malaysia, WHT under Section 109B is not applicable, except for services rendered and performed in the period between 17 January 2017 to 5 September 2017.WHT rate is subject to the provisions in the tax treaties concerned.|
To determine whether the digital advertising shall be treated as royalty or services, we will need to assess the facts of each case based on the documents available.
What happen if you fail to pay the WHT to MIRB?
- A late payment penalty of 10% on the WHT due to MIRB;
- Disallowance of the gross amount payment as a tax deduction in the tax computation where the corresponding WHT together with the penalty (if applicable) are not paid/remitted to the MIRB by the due date for submission of the tax return; and
- The WHT is still a debt due to the government of Malaysia. The government still has the right to ask for the WHT even though the gross amount has been disallowed as a tax deduction in the tax computation.
Imported service tax
Imported service tax (“IST”) was imposed with effect from 1 January 2019. Another service tax known as the digital service tax (“DST”) with effect from 1 January 2020.
The imported service tax of 6% should be “accounted for” by a person who carrying on business in Malaysia when it purchases “taxable services” from a foreign service provider (“FSP”). This means that the user should collect the tax from himself and pay it over to the Royal Malaysia Customs Department (“RMCD”) i.e., the user is the tax collector. Being a service tax specifically for businesses, this imported service tax should not affect non-business consumers.
The RMCD has provided a few examples in the “Guide on Digital Services by Foreign Service Provider” of the services which are considered as Digital service (“DS”) and not considered as DS as follows:
|Digital services||Not considered as a digital service|
|Software, application and video gamesMusic, e-book and filmAdvertisement and online platformSearch engines and social networks Database and hosting Internet based TelecommunicationOnline training (except for preschool education, primary and secondary education or tertiary education including vocational education and professional trainings)Others (e.g: Subscription to online newspapers and journals, provision of other digital content like images, text, information and payment processing services).||• The services can be obtained without the use of IT;|
• The transmission of the services via email: The services delivered via email is not considered as digital services if the delivery of the services require human intervention. The delivery of the services cannot be associated with the transaction of selling and buying.Online newspaper, online journals and periodicals.
Based on the “Guide on Information Technology Services” issued by RMCD dated 13 July 2020, “periodic payments, subscription or maintenance for continued use and updates website related services, eg. Development, customization, maintenance of webpage, web portal and online platforms” are taxable services. Therefore, digital advertising is a taxable service under IT services as stated in the Service Tax Regulations 2018.
However, with effect from 1 January 2020, if a person purchases digital services from a registered FSP in Malaysia. The person can be exempted to account for imported service tax if the person had been charged digital service tax by a registered FSP on the same service. The person shall keep the invoice received from FSP as a record in the event of a Customs audit.
Businesses can check the FSP status in https://mystods.customs.gov.my/. If the FSP is not registered, you will still need to account for imported service tax for the purchase of digital services.
Orange Sdn Bhd has made a payment of RM2,000.00 (as per invoice) on 12.12.2020 to GG Inc, a non-resident for using their advertising platform to create a campaign.
- GG Inc is a non-resident and has no permanent establishment or business presence in Malaysia.
- GG Inc insisted to receive the amount as per invoice.
- GG is a non-registered foreign service provider.
Based on the above, Orange Sdn Bhd has to:
- Pay the 10% withholding tax under subsection 109A of ITA of RM200 (RM2,000 x 10%) to the IRB within one month from 12.12.2020.
- Account for imported service tax of RM120 (RM2,000 x 6%) and remitted to RMCD via SST-02 form for service tax registered person or SST-02A form for non-service tax registered person.
Based on the above explanation, you will roughly know how to differentiate between WHT and imported service tax. In short, WHT is a tax for income earned by a non-resident and has to be paid to MIRB. While imported service tax is a consumption tax for the services provided by the FSP in Malaysia and has to be paid to RMCD.
Need more information on the above, please contact us here.