In 2020, the Netflix Tax in Malaysia will affect more than Netflix, Facebook & Spotify

Starting from 1^st January 2020, the so-called “Netflix tax” will be implemented in Malaysia. This is a 6% digital tax on foreign service providers as announced in the 2019 budget. This is done in line with the Malaysian Sales Tax Act 2018 and Service Tax 2018, and will expand the scope of the Sales and Service Tax (SST) to cover foreign online-based service providers who before this paid 0% tax in Malaysia.

Recently, Google, Facebook and Adobe have one by one announced that they will start charging users the tax for their paid services. So now, if previously you paid RM100 for any of their services, it will cost you RM106 (RM100 + 6% tax) come the new year. But looking at the list of companies, this might affect much more than your entertainment bills.

The tax might cover almost everything online

So which companies are to be affected? We look to see the exact definition. In the Service Tax Industry Guides, there are two requirements: they are foreign service providers who provide digital services.

So let’s see what does digital service mean in the first place. Digital service is defined under Section 10 in the Guides provided by the Royal Malaysian Customs Department (RMCD) as:

So this would probably cover practically any online-based service we use.

Next, we need to figure out who are the foreign service providers affected. Basically any company earning more than RM500K located outside Malaysia which provides the following digital services will fall under this scope:

So how will it affect Malaysian users?

From the consumer’s perspective, the main concern will be on its impact on pricing. Currently, experts say the most likely scenario is that the cost of digital tax will be passed to Malaysian users. This can be seen when Google and Adobe have decided to charge their Google G Suite and Adobe Creative Cloud users respectively, as well as Facebook which charges for advertising on its platform.

However, do note that the tax only applies if you’re using a paid service from a foreign service provider. To illustrate, if you subscribe to Netflix you can’t get away from this new SST. Otherwise if the service you’re using is free, you won’t have to pay tax for it. Using Facebook as an example, it will remain free to be used, but if you’re paying for an advertisement on it, there will be a 6% tax on the advertising service.

Why are we paying for it?

This digital tax will provide the government with potential extra revenue. The RMCD has confirmed that at least 126 foreign digital service providers have registered as of now. Those companies who evaded the tax will be fined up to RM50K or go to jail up to 3 years if found guilty under the new law. The earnings will likely be more than RM2.4bil a year, based on the Statistics Department’s survey that estimated Malaysia’s e-commerce income at RM398 billion in 2015.

Not only that, according to our Deputy Finance Minister Datuk Amiruddin Hamzah, the tax is implemented to level the playing field between foreign and local online-based service providers. Previously, our local providers are already required to pay the 6% service tax in Malaysia, while foreign providers paid a grand total of 0%, so now the digital sector in our country will be more fair and balanced for the local ones.

The consumers might not like the idea of this tax but even with the extra 6%, Malaysians are probably still going to continue to subscribe, Netflix and chill.