Part 3 of this article will focus on digital service tax and service tax issues on imported services for e-Commerce transactions, under the Service Tax Act 2018.

Part 2 of this article will focus on withholding tax issues around ‘royalties’ (Section 109, Income Tax Act 1967) and ‘services’ (Section 109B, Income Tax Act 1967) for e-Commerce transactions.

In this present age, business cannot avoid but to rely on digital services to reach out to their customers and suppliers in order to operate or enhance their business functions. The reliance on digital services to conducting a business is accelerated particularly so with the Movement Control Order (MCO) being implemented in Malaysia which limits the ability of businesses to continue doing business, the ‘traditional’ way. Some of the most common digital services relied on by businesses would include software applications, digital advertising, payment gateways and cloud storage, which are generally dominated by foreign service providers such as Google, Microsoft and Facebook.

Such digital services would obviously involve payments for the use of such digital services to the service providers and therefore, you have to be aware of the tax implications behind the use of digital service, namely:

1. Withholding tax under the Income Tax Act 1967; and
2. Digital service tax or imported services tax under the Service Tax Act 2018.

This series of short articles intend to provide some general guidance on the tax implications of payments for such services to service providers who are not residing in Malaysia.

Pursuant to Section 83 of the Income Tax Act 1967 (ITA 1967), we wish to remind all employers of their responsibility to inform the Inland Revenue Board of Malaysia (IRBM), via prescribed forms (as below), on the following:

1. General electrical installation
2. Lighting
3. Gas System
4. Water System
5. Kitchen fittings
6. Sanitary fittings
7. Door, gate, window, grill and roller shutter
8. Fixed partitions
9. Flooring (including carpets)
10. Wall covering (including paint work)
11. False ceiling and cornices
12. Ornamental features or decorations excluding fine art
13. Canopy or awning
14. Fitting room or changing room
15. Recreational room for employee
16. Air-conditional system
17. Children play area
18. Reception area
19. Surau

Effective from year of assessment 2014, the income tax return form includes a disclosure on whether TP documentation has been prepared. From FY 2019 onwards, the income tax return form was amended again to include additional disclosures as follows:

1. Disclosure on whether tax payers carry out controlled transactions under Section 139 and 140A Tax payer is to disclose all type of transactions they are involved in with a related party and the amount. Tax payer would also have to declare if TP documentation have been prepared.
2. Disclosure of whether the taxpayer is subject to interest restriction under Section 140C.
   
   In 2019, the tax authorities introduced Restriction on deductibility of interest under Section 140C of the Income Tax Act 1967, in effect from 1 July 2019 onwards. They also released the Restriction on Deductibility of Interest Rules 2019 and the Guidelines aimed at restricting the deduction of interest expense in relation to cross border transaction. The Rules are applicable to:
   • companies who have been granted any financial assistance in a controlled transaction;
   • the total amount of any interest expense for all such financial assistance exceeds RM500,000 in the basis period.

The maximum amount of interest that is deductible is 20% of the Tax EBITDA. The balance is allowed to be carried forward.