Malaysia tax developments

Published on 9/16/2021 - Issue Q3/2021

The Industry4WRD Readiness Assessment Programme ("IRA Programme") was implemented by the Malaysia Productivity Corporation ("MPC") in order to assess the level of readiness as well as gaps of companies to adopt Industry 4.0 to boost productivity growth.    

In this respect, the Income Tax (Deduction for Expenditure on Industry4WRD Readiness Assessment) Rules 2020 gazetted on 21 September 2020 provide that, effective Year of Assessment ("YA") 2019 to YA 2021, in ascertaining the adjusted income of a qualifying company from its business for a YA, a special deduction is allowed for fee expenditure incurred in relation to the IRA Programme (up to MYR 27,000), subject to meeting certain conditions.

Subsequently, the Income Tax (Deduction for Expenditure on Industry4WRD Readiness Assessment) Rules 2021 gazetted on 2 August 2021 extend the qualifying period of the special deduction for fee expenditure capped at MYR 27,000 incurred by qualifying companies in relation to the IRA Programme. The deduction is extended to cover fee expenditure incurred during the period from 2 January 2019 to 31 December 2025 (previously 31 December 2020).

Accordingly, an extension is also granted with respect to the  application for the special deduction which is to be made through MPC before 31 December 2026 (previously 31 December 2021).

Amendments to Service Tax Policy No. 10/2020

(relevant for banks and financial institutions providing digital services)

On 17 April 2020, The Royal Malaysian Customs Department ("RMCD") issued the Service Tax Policy 10/2020 on the Service Tax exemption applicable to digital services provided in relation to banking and financial services.

Following the above, the RMCD issued the Service Tax Policy No. 10/2020 (Amendment No. 1), dated 9 August 2021, to update Service Tax Policy 10/2020; and to provide clarification on the scope of exemption of the service tax applicable on digital services provided by banks and financial institutions.

The following amendments have been effected:

• Paragraph 1 of the STP 10/2020 has been amended to take into account the amendment in Item (l) as well as the deletion of Item (m) in Group G, First Schedule of the Service Tax Regulations 2018 which were effective from 14 May 2020;
• A new Paragraph 4.4 has been included in STP 10/2020 stipulating that the service tax exemption is applicable only on the fee or service charges charged by a local digital service provider directly to the service recipient (bank account holder) for the initiation or withdrawal.

Revised guides on Clubs and Transmission and Distribution of Electricity Services

The RMCD has recently issued revised guides dated 4 August 2021, to clarify service tax treatments concerning specific transactions across industries. The following guides are revised:

• Guides on clubs (Group C, D & E)
• Guide on Transmission and Distribution of Electricity Services

The key amendments in the above revised guides are as follows:

Guide on clubs (Group C, D & E)

• The revised guide supersedes the previous guide dated 13 October 2020;
• The revised guide clarifies that a registered or liable to be registered beauty spa operator who provides beauty treatment package services (such as laser treatment, hair removal, waxing, hair, face & body massage) is required to charge service tax on all taxable services provided within its establishment;
• In addition, the revised guide clarifies that the provision of rehabilitation services such as physiotherapy and process work therapy for the purpose of helping someone to recover from injury, illness or post-surgery, is subject to service tax. Exemption from service tax is only provided to an operator who is either registered under the Private Healthcare Facilities and Services Act 1998, a Government healthcare facility or a healthcare facility managed by any university established under the Universities and University Colleges Act 1971 or the Universiti Teknologi MARA Act 1976. 

Guide on Transmission and Distribution of Electricity Services

• The revised guide supersedes the previous guide dated 1 July 2020;
• The revised guide clarifies that the exemption from service tax for the first 600 kWh is only given to the billing cycle which has not less than twenty-eight days. A new paragraph 13 has been inserted to reflect this. In addition, the revised guide has also been amended to show that service tax is charged on the total electricity usage if the for billing cycle is less than 28 days.

Revision on service tax for management services

On 4 August 2021, the RMCD issued a new Guide on Management Services which supersedes the previously issued Guide on Management Services dated 15 January 2021.

The new Guide on Management Services clarifies that service tax is not applicable on rental, and fee for maintenance and management of common areas charged by the owner of the building to its tenants. However, service tax will be applicable for fees charged for providing maintenance management services in the area rented by the tenant.

This revised Guide on Management Services is welcomed as maintenance service should not be equated to management service, and hence should not be included as part of taxable services for service tax purposes.

On a separate matter, it has also been clarified in this New Guide on Management Services, that training management service should involve arranging training by appointing service providers.