Registration and Taxation of Online BusinessMay 2016
by , Lee Sen Ching
As online business grows popular, the authorities including Inland Revenue Board of Malaysia (“IRB”) and the Ministry of Domestic Trade, Co-operatives and Consumerism (“MDTCC”) are evaluating the legal requirements in relation to doing business online including taxation and registration of online business.
In a statement made in May, the IRB stated that online business is taxed in the same way as conventional business. The IRB clarified that income tax imposed on online business was not new and that online business has been subject to the same income tax chargeable on conventional business.
Pursuant to section 4 of the Income Tax Act 1967, the income upon which tax is chargeable includes income in respect of gains or profits from a business. For the year of assessment 2016, the income tax rate for online business undertaken by an individual will be from zero up to 28% whereas the income tax rate for online business undertaken by a company will be between 19% and 24%.
The IRB issued the Guidelines on Taxation of Electronic Commerce (“Guidelines”) in 2013, which provides guidance on income tax treatment of electric commerce (“e-commerce”) transactions. Under the Guidelines, “e-commerce” means commercial transactions conducted through electronic networks including the provision of information, promotion, marketing, supply, order or delivery of goods or services though payment and delivery relating to such transactions may be conducted off-line.
Key points from the Guidelines are as follows:
(a) e-commerce and conventional businesses are subject to the same tax treatment;
(b) income of a person accruing in or derived from Malaysia is subject to tax in Malaysia. The determination of whether or not an income is derived from Malaysia is a question of fact and degree. The wider the scope and extent of the business operations in Malaysia, the greater the likelihood that the income of that operations is subject to tax;
(c) some activities that may be considered in determining the scope and extent of business operations include sourcing of content, procurement of goods, promotions, advertisement, selling, updating and maintaining the website, uploading and downloading of contents, etc;
(d) if the business operations of a person are substantially carried on in Malaysia, business income from e-commerce is deemed to be derived from Malaysia and will be subject to income tax;
(e) if the business operation of a person is carried on outside Malaysia, business income from electronic commerce would not be considered as derived from Malaysia and will not be subject to income tax;
(f) a website hosted on a server in Malaysia without business operations in Malaysia, would not amount to carrying on of a business in Malaysia;
(g) royalty payments to non-residents deemed to be derived from Malaysia are subject to withholding tax. Royalty includes payments for the use of or the right to use copyrights, know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill to a non-resident; and
(h) in the event the income from e-commerce by a resident person is subject to tax both in Malaysia and the foreign country, provision for relief is available in the Income Tax Act 1967 and the relevant double taxation agreement entered into by the Government of Malaysia and the foreign country.
It follows that online business must also be registered with the Registrar of Businesses in the same manner as conventional business. Whilst there is no specific legislation requiring online business to be registered with the authorities, section 5 of the Registration of Businesses Act 1956 requires business, which includes every form of trade, commerce, craftsmanship, calling, profession, or other activity carried on for the purposes of gain, to be registered with the Registrar of Businesses. Failure to do so is an offence and may result in a fine of up to RM50,000 or imprisonment of up to two years or both.
The MDTCC is in the process of drafting regulations which would require registration of all online sale of items with the Companies Commission of Malaysia including one-offs. The registration will be valid for 30 days and the seller will have to reregister if the item(s) are not sold after the expiry of 30 days.