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 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:
1
 (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.
1
Article 110(4). Assignment of taxes and fees to the States.
Federal Constitution.
2 3
Anuar, Abdul Rahim. “Fiscal Decentralisation in
Malaysia.” Hitotsubashi Journal of Economics, December
2000, Vol. 41, No. 2, International Symposium on
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
5
Section 4A(ii) of the Act .
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.
Decentralization and Economic Development in Asian
Countries (December 2000), pp. 85-95
Taxamo. “Malaysia’s tax on digital services raises over RM
400 million”. https://blog.taxamo.com/insights/malaysia-
digital-tax-annoucement
 6
Thien Ka Meng. “Updates on withholding tax on digital
4
Government of Malaysia. Fiscal Outlook and Federal advertising provided by a non-resident.” BizDo.
Government Revenue Estimates 2021. Section 2, Federal
Government Revenue. 7
KPMG.”Tax Treatment on Digital Advertising Provided
http://belanjawan2021.treasury.gov.my/pdf/revenue/2021/s by a Non-Resident”
ection2.pdf
5
Inland Revenue Board of Malaysia. Practice note no.
1/2018. “Tax treatment on digital advertising provided by a
non-resident”