Customs mulls amending GST Act to tax foreign online service suppliers

KUALA LUMPUR: The Royal Malaysian Customs Department is considering amendments to the Goods and Services Tax Act (GST Act) to start taxing foreign online service suppliers, said deputy director-general Datuk Subromaniam Tholasy.

“E-commerce is pretty much catered for, except business-to-consumer (B2C) for example, downloads from overseas, how do we tax the foreign party if they are not registered here? We may need to change the law but we are still studying the impact,” he told reporters at the Welcoming the Fourth Industrial Revolution Conference yesterday.

Subromaniam said a task force comprising Customs and the Finance Ministry is studying the impact of taxing cross-border services in terms of social, financial and competitiveness of local businesses as well as issues like double taxation.

“Some time in the future we definitely need to change the law and tax B2C suppliers ... there are a lot of issues we need to consider but we need a very progressive tax law,” he added.
Subromaniam said the government does not want local businesses to be at a disadvantage but amending the law would take time and is unlikely to happen in the next Parliament session.

He said taxing the digital economy is a global issue and many countries do not have provisions for taxing online B2C suppliers.

“For business-to-business (B2B) we have provisions to cater for imported services but for B2C there are issues when the supplier is overseas and the consumer is here. Our laws do not allow them to register here.

“Moving forward, the OECD has strongly recommended registering foreign suppliers for the supply of services if they reach the threshold. Currently we are looking at that option but it will not be overnight,” he said, referring to the Organisation for Economic Cooperation and Development.

Tax and managing director Leow Mui Lee said there are possible GST leakages to the government in B2C transactions with foreign online suppliers, as the reverse charge mechanism for imported services doesn’t apply to individuals buying online services.

“The reverse charge applies to businesses (B2B) so no GST is paid. This gives an unfair or biased treatment between local and foreign service providers,” she said during a dialogue session at the conference.

She said the OECD came up with guidelines at the end of 2015 to address the issue of unfair tax treatment to governments worldwide and to encourage a level playing field between local and foreign service suppliers.

“One of the ideas that was set up in this guideline was to have a registration process for foreign service providers so that they can register and account for GST to the government,” Leow said, adding that the guideline’s principle is for GST to achieve neutrality.

Meanwhile, Subromaniam said out of the 20,000 companies that have been audited to date, one-third still face non-compliance issues.
He said the free hand-holding programmes organised by Customs received lukewarm response while many companies do not send the right personnel to the programmes.

On special refunds, Subromaniam said a majority of the valid claims have been refunded with only a few claims subject to review.

He said many claims were rejected as the businesses did not discount the sales tax before imputing GST.