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Malaysia will follow Singapore and introduce digital tax

According to a recent report, Malaysia’s Budget 2019 is scheduled to be announced early next month. It is crucial for ascertaining the country’s next steps. Particularly with regards to the direction and support for the growth of the digital sector in Malaysia.

Experts have noted that the tabling of the 2019 Budget will see the introduction of the Digital Tax. If true, Malaysia will be the second country in Southeast Asia after Singapore to introduce a tax scheme for the digital sector.

The rationale of the tax is aimed level the playing field between international and local businesses in the digital sector. Global digital businesses often avoid paying taxes in Malaysia, due to the reason that the companies have no physical presence in the country.

As such, these digital firms declare their profits in the country where their headquarters are based, causing other countries, such as Malaysia to lose potential tax revenue. Thus, the Digital Tax could help strengthen and expand the government’s revenue base.

While the primary premise of the tax is commendable, several experts and business owners are concerned about its possible negative effects on tech companies and e-commerce players. Some commented that the introduction of the tax will add an extra layer of taxation which could lead to the increase of online goods and services taxes for all players.

The Institute for Democracy and Economic Affairs (IDEAS) predicts that there might be two types of taxes that will be introduced.

One would be a “direct tax” that target the profits of foreign digital companies doing business in Malaysia. And another probably an “indirect tax” that is a consumption tax (like the Sales and Services Tax or SST) to foreign companies selling digital goods and services into Malaysia, paid by the users.

Amidst concerns, the government has acknowledged its concerns and is working to introduce a tax scheme that is fair and levels the playing ground.

The Malaysian Deputy Finance Minister Hamzah commented on the Digital Tax and stated that it will definitely be a matter that official will look into deeply arguing that if the country did not enact the digital tax, the nation might lose a significant amount of revenue.

The Malaysian Finance Minister mentioned that the Inland Revenue Board is expected to work closely with international bodies to address international tax issues relating to the digital and sharing economies.

The past budget statement specified that the government will dedicate RM83.5 million to develop a Digital Free Trade Zone (DFTZ) in partnership with a major e-commerce group.

The funds will be allocated to construct the first phase DFTZ in Aeropolis, Kuala Lumpur International Airport (KLIA), to create a regional gateway for e-commerce. This was great news as the DFTZ is set to benefit thousands of SMEs and is projected to attract more than RM700 million worth of investments.

However, this project attracted criticism following the country’s general elections. The new government sought to review all deals made with China as some were deemed unfavourable to Malaysia in the long term. Included in the scrutiny was the e-commerce company’s investment into Malaysia with the establishment of the DFTZ with the previous government.

Among the criticisms were that the Chinese e-commerce giant held too much control over DFTZ. However, the giant’s executive chairman was quick to addressed the concerns and reassured the public that the DFTZ is focused on benefitting businesses from both countries equally. Without much hesitation, the Prime Minister confirmed the continuity of the DFTZ with the e-commerce group.

According to research calculations, Southeast Asia’s online shopping market is set to generate an estimated RM257.94 billion in 2021, citing a continuous uptrend in the upcoming years. Recently, another report stated that Malaysia’s share of total online retail sales was at was at 2.7% indicating a huge potential for development.

The digital economy presents a great growth opportunity for Malaysia especially when the government is looking to optimise their expenditure to manage its RM1 trillion debt.

The chief economist and head of research at a major bank stated that the government will need to optimise its expenditure during the tabling of the 2019 Budget. This can be done by focusing on priority projects or investments that trickle down positively to the market and people. As such, it is very unlikely that the Malaysian government will side-line e-commerce and the digital industry.

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