E-commerce players: The taxman cometh
By Karamjit Singh March 15, 2013
- Leading tax expert says no merit in those screaming that this will kill e-commerce activities in Malaysia
- One leading merchant concurs, does not expect momentum to slow down because of this
THE free ride – make that ‘tax-free ride’ – that e-commerce players in Malaysia have enjoyed since the beginnings of the industry in the country circa 1997, is about to come to an end.
Yes, that sound was the groan of all blog shop owners. Notwithstanding their dismay, the Inland Revenue Board (IRB) of Malaysia has come up with a document listing a series of guidelines on how income derived from e-commerce is to be taxed. The table shows a summary of the positions taken by the authorities under various scenarios (click image to enlarge).
To begin with, e-commerce itself is defined as “any commercial transactions conducted through electronic networks including the provision of information, promotion, marketing, supply, order or delivery of goods or services though payment and delivery relating to such transactions may be conducted off-line.”
Interestingly, the IRB also makes clear that the location of the server/website is not a determinant in whether an individual is taxed of not. Paragraph 5.1 of the e-commerce guidelines states that although the server and website facilitate the performance of business activities, a server/ website by itself does “not carry any meaning in determining derivation of income.” Income from e-commerce is regarded as derived from Malaysia if the business operations test shows that the business is carried on in Malaysia.
There goes the excuse of those whose sites are located overseas. Paragraph 5.2 provides three examples of situations where income from e-commerce is deemed to be derived from Malaysia even though the company (in each example) conducts business through a website which is hosted on a server located outside the country.
While the Malaysia Government has previously indicated that it wants to enforce these guidelines by July 1, with the general election due anytime, it is unsure if this can be achieved. But the guidelines will be welcome as they seek to provide some guidance on basic tax issues and income tax treatment in respect of e-commerce transactions.
According to the IRB, the guidelines should be read together with the Income Tax Act 1967 (ITA 1967) and other relevant legislations and legal procedures currently in place.
If e-commerce players are going to complain that the income tax will harm the growth of the industry, the IRB states that it is simply adopting the principle of neutrality where both e-commerce and conventional business are subject to the same tax treatment. As such, taxpayers in similar situations and carrying out similar transactions should be subject to the same tax treatment.
As Dr Veerinderjeet Singh, chairman of Taxand Malaysia, which is part of a global organization of independent tax advisers, says: “All developed countries have the tax neutrality policy i.e. the tax treatment of e-commerce transactions will be the same as the tax treatment of transactions carried out via conventional means. So there is no merit in a person screaming that this will kill e-commerce activities in Malaysia.”
According to Veerinderjeet, whatever mode of business one does must be treated the same way – that is, you must register your business, you must keep a set of accounts and records under the laws of the country you are registered in, and you must report what your taxable income is for the year.
One of the leading tax experts in the country, Veerinderjeet (pic) emphasizes that this is not a separate tax.
“The issue in carrying out transactions in cyberspace is to define and delineate which country has the taxing right and here various principles have been set or agreed to by the OECD (Organization for Economic Cooperation and Development),” he says.
“Malaysia is just adapting those principles and issuing a guideline which is actually only explaining what is taxable and what is not when one is involved in e-commerce.”
Lim Kok Hing, executive director of regional online payment gateway iPay88, likes the categorization made on how income derived from e-commerce can be taxed. “I think this helps to avoid confusion as to whether tax needs to be paid in Malaysia or not.”
He does not feel that the imposition of a tax on e-commerce earnings will impact iPay88’s business as merchants who use its payment gateway and various payment solutions will continue to sell online, with or without the guideline being issued. “I do not see the level of e-commerce activity being affected,” he says.
As for the impact on iPay88 itself, Lim holds the view that if a tax needs to be paid, it will be paid, subject to the current year tax structure.
Meanwhile, the Chartered Tax Institute of Malaysia has issued a circular to members detailing highlights of the IRB guidelines. To downlod the circular, click here. The following is an extract:
Scope of charge
Paragraph 4 of the IRB’s guideline discusses the scope of tax liability for a business under the law. The main points are:
- In general, income of a person accruing in or derived from Malaysia is subject to income tax in Malaysia.
- Where business operations are carried on in Malaysia, the income attributable to those business operations is deemed to be derived from Malaysia. The scope and extent of business operations in Malaysia is a determinant factor in considering whether income is derived from Malaysia.
- In the context of e-commerce, some determinant business activities that may be considered include sourcing of content, procurement of goods, promotions, advertisement, selling, updating and maintaining of website, uploading and downloading of contents, etc.
- In cases where a Double Taxation Agreement (DTA) is applicable, determination of Malaysia’s taxing right over the business income is based on the Permanent Establishment (PE) concept.
Paragraph 6 examines various business models of e-commerce with varying assumptions, in each case, stating in conclusion, the IRB’s position on whether or not business income is deemed to be derived from Malaysia. These positions are summarized in the table above.
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