Taxing the digital economy in Malaysia: How do we balance growth with sustainability?
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Malaysia wants the digital economy to play a central role in the next chapter of the country’s development—that much is clear. However, what may be less clear is why taxation should be part of the policy mix that will help deliver the country’s digital economy ambitions. This is important because taxes raise the cost of doing business rather than reducing it.
The fact is that many of the key enablers for growth of the digital economy are going to require public investment, and this will require funding. Overcoming the human capital constraints in the country, as described in a new World Bank report, is just one example of that.
As the economy becomes increasingly digitized, the tax system will need to reflect that change. But taxation can do more than just fund necessary investments—it can also help ensure that digital entrepreneurs in Malaysia are operating on a level playing field. Like other businesses in Malaysia, digital entrepreneurs will have to account for sales taxes on the goods and services they provide to their customers.
During our recent conference on ’Public Policy in a Digital World’ we found that 72% of people on Facebook in Malaysia are currently linked to a small business outside the country. At the moment, those businesses are not required to pay sales taxes here - which gives them an edge over domestic suppliers. We also learned that 87 million Facebook users outside Malaysia are connected to businesses in the country. Increasingly, Malaysian businesses selling online to foreign customers will find they have to account for taxes on consumption levied in the countries where their customers are based. In February, Singapore announced that it would be applying its sales tax to imported digital services — a step many other countries are already taking. This reflects an international consensus that taxes on consumption should also apply to goods and services supplied across borders. With a well-established model in place, this means that Malaysia has an opportunity to follow suit in order to secure sales taxes from foreign suppliers. This would also remove the incentive for consumers to favor foreign suppliers over their domestic competitors.
Our report on Malaysia’s Digital Economy delves further into this, and discusses how Malaysia might also approach the taxation of profits generated from cross-border activity within the digital economy. This is an important issue as the digitization of the world economy has made international sales much easier to achieve, including for SMEs. Aspects of how digital businesses operate across borders raise some novel issues for the designers of income taxes.
For example, policymakers around the world are wrestling with the fact that a digital business can have a sizeable presence in a local market, and yet have no physical footprint there at all — no local staff, no offices and no equipment. This is often described as having “scale without mass”. If that business is making significant profits because of its virtual presence in an economy — through advertising or through the sale of data - some of its profits could also be taxable in that economy. Some governments take the view that this is particularly true of businesses that rely on their users to create the content that attracts other users to their platform. The equal treatment of domestic and foreign businesses is also part of the debate about how best to tax the profits of international digital businesses. The report discusses developments internationally in the field and sets out options that Malaysia can consider as it develops a tax policy that supports growth in its domestic digital economy.
To put it simply, good tax policies can play an important role in delivering the results that Malaysia has set itself when it comes to the digital economy. The report provides a framework for thinking about these different options. This framework could serve as the foundation for a balanced approach that is fair and clear, and which also fosters growth that is both rapid and sustainable.