New digital tax will increase costs, prices: Ideas

PETALING JAYA: A new direct digital tax in Malaysia would increase the costs of digital goods and services, which would in turn, increase prices for consumers and businesses, said the Institute for Democracy and Economic Affairs (Ideas).
In a brief titled “Tax in The Digital Age” published by Ideas, it said that a direct digital tax could increase revenue in the short term but could slow the development of the digital economy, particularly for new start-ups and small and medium enterprises (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,” it added.
According to Ideas, the case for an “indirect tax” on digital activity, that is applying sales and services tax (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 Malaysia and drive up prices.
“Also, with the recent switch from goods and services tax (GST) to SST, implementation would have to be handled with care,” it said.
In the brief, Ideas argued that there is no definitive evidence that digital companies pay less tax than traditional companies, but noted disagreements over where that tax should be paid.
It highlighted the importance of a collective agreement by all countries on this issue, to avoid double taxation whereby companies are taxed on the same profits twice, and a slow down in the digital economy.
The brief, which was presented to the Deputy Finance Minister Datuk Amiruddin Hamzah at a roundtable discussion on the topic hosted by Ideas on Tuesday, considers the current global debate around tax and the digital economy and assesses the implications of Malaysia introducing a new digital tax.
New taxes fall into two categories namely, new “direct taxes” that target the profits of foreign digital companies doing business in Malaysia, and “indirect taxes” that apply consumption taxes (like SST) to foreign companies selling digital goods and services into Malaysia, paid by the users.
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,” he said.
“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,” he added.