LETTER | The Institute for Democracy and Economic Affairs (Ideas) has published a brief 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 countries around the world. The Organisation for Economic Co-operation and Development (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 secondly, “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 there is collective agreement among all countries on this issue to avoid double taxation (companies being taxed on the same profits twice) and a slowdown 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 the goods and services tax (GST) to sales and service tax (SST), implementation would have to be handled with care.
The brief was presented to the Deputy Minister of Finance Amiruddin Hamzah at a roundtable discussion on the topic hosted by Ideas yesterday. The roundtable was attended by government officials, representatives from the 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 the Ministry of Finance.
The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.