Kuala Lumpur, 19 September 2018 – Today, IDEAS has published a Brief Ideas titled “Tax in The Digital Age”. The paper considers the current global debate around tax and the digital economy and assesses the implications of Malaysia introducing a new digital tax. The previous BN government had been considering introducing a new digital tax and the new PH government has recently confirmed it is considering new taxation on online businesses ahead of the Budget 2019 in November.

Proposals for new taxes on digital companies are being developed by many different countries around the world. The OECD has formed a taskforce to develop proposals that all countries can agree on but some countries are choosing to press ahead with their own measures. The Malaysian government has not ruled out this option. New taxes fall into two categories: firstly new “direct taxes” that target the profits of foreign digital companies doing business in Malaysia, and second “indirect taxes” that apply consumption taxes (like SST) to foreign companies selling digital goods and services into Malaysia, paid by the users.

In the Brief, IDEAS considers the arguments for and against a new digital tax and concludes that:

• There is no definitive evidence that digital companies pay less tax than traditional companies but there are disagreements over where that tax should be paid. It is important that agreement on this issue is made by all countries collectively, to avoid double taxation (companies being taxed on the same profits twice) and a slow down in the digital economy.
• Although it could increase revenue in the short term, a new digital tax in Malaysia would increase the costs of digital goods and services, in turn increasing prices for Malaysian consumers and businesses. This could slow the development of the digital economy in Malaysia, particularly for new start-ups and SMEs.
• If Malaysia introduces a “direct digital tax” that might encourage other countries to do the same which would be damaging for Malaysian firms looking to export to those markets. As an open trading nation, Malaysia stands to benefit more from a pro-trade, pro-innovation approach to the digital economy.
• The case for an “indirect tax” on digital activity (i.e. applying SST to digital purchases from abroad) is less controversial than a new “direct tax” and many countries have already taken this approach. Doing so in Malaysia would also level the playing field between foreign and Malaysian companies, as local digital firms are already subject to SST. It would however still increase the cost of digital goods and services in Malaysian and drive up prices. Also, with the recent switch from GST to SST, implementation would have to be handled with care.

The Brief was presented to the Deputy Minister of Finance, YB Dato’ Dato’ Ir. Haji Amiruddin bin Hamzah at a Roundtable Discussion on the topic hosted by IDEAS yesterday. The Roundtable was attended by government officials, representatives from industry and economists. The Roundtable raised a number of important issues for the government to consider, including the impact of any new taxes on the development of the digital economy in Malaysia. The detailed outcomes of the Roundtable will be shared with Ministry of Finance.

Commenting on the release of the Brief, IDEAS CEO Ali Salman said: “It is important to strike the right balance between tax and growth in the digital economy. The government rightly has great ambitions for the digital economy, including supporting new start-ups and encouraging SMEs to export online. New taxes which increase the costs of digital goods and services could deter growth in the digital economy. The world is not united on this issue, and Malaysia should advocate for a pro-trade and pro-innovation approach.”

“Modifying SST so that it covers digital purchases from abroad is less contentious and would level the playing field between foreign and domestic firms. But it would still increase prices for Malaysian businesses and consumers and would need to be implemented very carefully given the recent transition from GST to SST.”

Brief IDEAS No 11 – Tax in the Digital Age can be downloaded here