Taxation of Digital Business in Malaysia

Taxing The Digital Business

While digital business platforms generate billions of dollars in revenue, many digital enterprises are not liable to pay tax. In fact, tax evasion in the digital economy has become a growing concern to governments worldwide (Bacache‐Beauvallet & Bloch 2018). The advent of the digital economy poses great challenges to the international tax arena. Governments worldwide, including Malaysia, are looking at introducing the “digital tax”, which will be imposed on technology companies and e-commerce players. Tax authorities across the world are reviewing the ways to collect taxes from digital enterprises under the current international rules. The Organisation for Economic Cooperation and Development’s (OECD) view is that the digital economy should be taxed on the same principle that is currently being used to tax traditional businesses. Currently, the international tax law is lagging behind the business models in the digital era.

The reason is international permanent establishment rules are used to determine how much a company should be taxed based on a threshold of its activity in a given country. The concept is mainly based on physical presence such as the existence of offices, factories, warehouses etc. in a country. Based on existing tax rules, these digital companies report their profits in the country where their businesses are based, thereby depriving other countries of potential tax revenue.

The keys to classic business models are of little relevance for Silicon Valley giants like Google, Amazon & others. Today, digital businesses are able to have significant economic or digital presence without necessarily having a substantial physical presence. For instance, in July 2017 the French Government has failed to recover 1.1 billion euros (US$1.3 billion) for years 2005 to 2010 from Google as there was no permanent establishment in France (Reichert 2017). As such, France is pushing for digital tax to be implemented.

There is increasing pressure on governments to ensure that digital business owners pay their fair share of tax. Current taxation concepts for international cases were basically developed for the world in the early 20th century. According to Nellen (2015), tax practitioners are continually facing challenges in both understanding the technology and how tax rules apply. OECD und EU are examining alternative taxation concepts for digital business models. The US government is also keen to find an effective way to tax the new digital economy and is watching EU’s plan closely. The Malaysian government has been studying the possibility of collecting taxes (indirect tax and direct tax) from foreign companies that offer digital services in Malaysia. Malaysia has now confirmed that a digital tax will be coming to the country based a similar model and timeline in Singapore. According to the World Bank Group (2018), tax imposition on the digital economy will allow diversification of the Malaysia’s revenue sources. Currently there is no common action to tackle the taxing of digital business globally and each country is making its own proposals. There is a need for a global solution to the issue of how, what and where to tax income from the digital economy.