Brief on Vietnam
Malaysia is a democratic constitutional
monarchy. The King (colloquially known as the
Yang di-Pertuan Agong) is the head of the state
while the Prime Minister is the head of
government. Malaysia is a federation of 13
states and 3 federal territories and executive
power is exercised by the federal government
and the 13 state governments. There is
separation of powers between the legislature,
executive and the judiciary.
The Federal Parliament comprises the House of
Representatives and the Senate. The 222
members of the House of Representatives are
elected for a maximum of five year terms based
on voting districts. Senators are elected for
three-year terms, 26 of whom are elected by the
13 state assemblies, 40 are appointed by the
King
The Federal Constitution provides for the
separation of competencies between the
Federation and the States. The federal
government has legislative power over external
affairs, including making laws and
implementing treaties domestically, justice
(except civil law cases among Malays or other
Muslims and other indigenous peoples,
adjudicated under Islamic and customary law),
federal citizenship, finance, taxation, commerce,
industry, and other matters. States enjoy
legislative power over matters such as land,
local government, Shariah law and Shariah
courts. Article 75 of the Federal Constitution
asserts that a federal law shall prevail over any
inconsistent state laws. Federal laws enacted by
the Parliament of Malaysia apply throughout the
country, including making laws applicable to
States as regards international agreements
Fiscal Decentralisation
According to the constitution of Malaysia all
States in the federation shall receive all
proceeds from the taxes, fees so far as collected,
levied or raised within the State. The Federal
government may also allow transfer of the full
amount or a portion of revenue raised by a
federal tax or allow states to levy new taxes as
long as it’s authorized by federal law. Power to
do so, however, resides with the federal
government1.
With regards to sources of revenue for states, in
addition to state taxes, the constitution
prescribes a capitation grant from the federal
government to the state governments based on a
prescribed formula based on the annual
population projections of the State as
determined by the Federal Government and
calculated as of the last population census. The
States are also entitled to a Road Grant based on
the average cost to a State of maintaining a mile
of State road at the minimum standard
determined for State roads in those States by the
Federal Government. Other revenue accruing to
the States include taxes from land, mines
forests, entertainment tax etc. A state reserve
fund has also been established to assist the
States in balancing their budgets.
Overall, the allocation of revenue powers is
highly in favour of the Federal government. The
share of State revenue in Federal-State revenue
remained significantly low2. The Federal
government raises more revenue than the States.
The State have to rely heavily on grants and
loans from the Federal Government.
Digital Tax
Effective 1st January 2020, service tax shall be
charged and levied on any digital service
provided by a foreign registered person (FRP)to
any consumer in Malaysia at a rate of 6 %. The
Service Tax Act 2018 defines certain key terms
for the purposes of this tax:
“digital service” means any service that is delivered or
subscribed over the internet or other electronic network
and which cannot be obtained without the use of
information technology and where the delivery of the
service is essentially automated;”
“foreign service provider” means any person who is
outside Malaysia providing any digital service to a
consumer and includes any person who is outside
Malaysia operating an online platform for buying and
selling goods or providing services (whether or not such
1
person provides any digital services) and who makes
transactions for provision of digital services on behalf of
any person
“consumer” means any person who fulfils any two of the
following:
(a)makes payment for digital services using
credit or debit facility provided by any financial
institution or company in Malaysia;
(b)acquires digital services using an internet
protocol address registered in Malaysia or an
international mobile phone country code
assigned to Malaysia;
(c)resides in Malaysia
Online distance learning and online newspapers,
journals and periodicals have been exempted
from the tax. Any FSP which provides digital
services to consumers, whose total value exceed
RM 500,000 a year, is required to register as an
FRP. It is important to note that this tax applies
to both business-to-business as well as business-
to-consumer transactions. However, it will not
apply if an FRP or FSP provides digital service
to a company in Malaysia within the same
group of companies i.e. intra company
transactions will not be under the purview of the
tax.
As of December 2020, Malaysia had collected
RM400 million in tax revenue under the digital
service tax3. Overall, the revenue from Sales
and Service Taxes (SST) was RM 24.5 billion
in 2020. Collection from indirect tax is
anticipated to rebound by 11.4% to RM42.5
billion, mainly contributed by higher SST
collection. In 2021, SST collection is forecast at
RM27.9 billion, an increase of 13.7%
contributed by higher consumption spending4.
In addition to the service tax, the government
has also imposed a withholding tax on digital
advertising. The Malaysian Inland Revenue
Board has issued a Practice Note to provide
guidance in relation to withholding tax (WHT)
on income from digital advertising provided by
a non-resident (NR). There have been debates
on whether the payment for digital advertising
falls under royalty or special classes of income
under the Income Tax Act 1967.
According to the Practice Note, the tax
treatment on payment of digital advertising to
non-residents depend on the facts of the case.
Where the non-resident has no Permanent Establishment
(PE) or where there is no business presence in Malaysia,
payment is subject to withholding tax under:
(i) Section 109 of the Income Tax Act 1967
(the Act), if the payment received is a
royalty income under the Act; or
(ii) (ii) Section 109B of the Act, if the payment
received is an income within the scope of
Section 4A(ii) of the Act5.
Based on the Practice Note, the main criteria to
determine whether withholding tax under
Section 109 or Section 109B of the Act applies
is based on whether or not it is for the purchase
or use of applications that allows the payers to
create their own advertisement campaign. If
affirmative, the payment to non-residents could
be subject to withholding tax under Section 109
of the Act. Otherwise, if it does not involve the
use of an application but a provision of service
to deal with all aspects of digital advertising, the
payment would be subject to withholding tax
under Section 109B of the Act6.
Specifically, in the first case, the tincome from
the purchase is treated as royalty income of the
NR and subject to WHT of 10% under the
Section 109 of the ITA.
In the second case, it is treated as special class
of income of the NR under Section 4A of the
ITA and subject to WHT of 10% under Section
109B of the ITA. Where services are rendered
and performed outside Malaysia, WHT under
Section 109B is not applicable, except for
services rendered and performed in the period
between 17 January 2017 to 5 September 20177.
1
Article 110(4). Assignment of taxes and fees to the States. Federal Constitution.
2
Anuar, Abdul Rahim. “Fiscal Decentralisation in Malaysia.” Hitotsubashi Journal of Economics, December 2000, Vol. 41,
No. 2, International Symposium on Decentralization and Economic Development in Asian Countries (December 2000), pp.
85-95
3
Taxamo. “Malaysia’s tax on digital services raises over RM 400 million”. https://blog.taxamo.com/insights/malaysia-
digital-tax-annoucement
4
Government of Malaysia. Fiscal Outlook and Federal Government Revenue Estimates 2021. Section 2, Federal
Government Revenue. http://belanjawan2021.treasury.gov.my/pdf/revenue/2021/section2.pdf
5
Inland Revenue Board of Malaysia. Practice note no. 1/2018. “Tax treatment on digital advertising provided by a non-
resident”
6
Thien Ka Meng. “Updates on withholding tax on digital advertising provided by a non-resident.” BizDo.

7
KPMG.”Tax Treatment on Digital Advertising Provided by a Non-Resident”