INLAND REVENUE BOARD OF MALAYSIA

GUIDELINES ON TAXATION OF
ELECTRONIC COMMERCE TRANSACTIONS

13 MEI 2019
TABLE OF CONTENTS

PAGES

ACRONYMS ........................................................................................................... III

1.0 INTRODUCTION ................................................................................. 4

2.0 INTERPRETATION ............................................................................. 4

3.0 E-CT BUSINESS MODELS ................................................................. 5

4.0 SCOPE OF CHARGE .......................................................................... 8

5.0 SCOPE OF TAX LIABILITY FOR BUSINESS .......................................9

6.0 SCOPE OF TAX LIABILITY FOR SPECIAL CLASSES OF INCOME . 10

7.0 SCOPE OF TAX LIABILITY FOR ROYALTY...................................... 11

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ACRONYMS

DTA - Double taxation agreements

e-commerce - Electronic Commerce

e-CT - Electronic commerce transaction

ICT - Information and Communications Technology

ITA 1967 - Income Tax Act 1967

IRBM - Inland Revenue Board of Malaysia

OECD - Organisation for Economic Co-operation and

Development

YA - Year of Assessment

PE - Permanent Establishment

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GUIDELINES ON TAXATION OF ELECTRONIC COMMERCE TRANSACTIONS

1.0 INTRODUCTION

1.1 Inland Revenue Board of Malaysia (IRBM) has introduced guidelines on

taxation of e-commerce that was published on 1 January 2013. With the

evolvement of the e-commerce transactions (e-CT) and the emerging of new

business models, there is a need to replace the existing guidelines.

1.2 Therefore this new guideline seeks to provide some guidance on income tax

treatment in respect of e-CT. Currently there is no specific provisions under

the ITA 1967 governing e-CT, as such the current tax law and interpretations

are applicable to determine taxability in this context.

1.3 IRBM adopts the principle of neutrality where both e-CT and conventional

transactions are subject to the same tax treatment. As such, taxpayers in

similar situations and carrying out similar transactions should be subjected to

the same tax treatment.

2.0 INTERPRETATION

For the purpose of this guidelines –

“digital currency” means a digital representation of value which is recorded on a

distributed digital ledger whether cryptographically-secured or otherwise, that

functions as a medium of exchange and is interchangeable with any money,

including through the crediting or debiting of an account.

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“digital token” means a digital representation which is recorded on a distributed

digital ledger whether cryptographically-secured or otherwise.

“e-commerce transaction” means any sale or purchase of goods or services,

conducted over any networks by methods specifically designed for the purpose of

receiving or placing of orders. The goods or services are ordered by those methods,

but the payment and the ultimate delivery of the goods or services do not have to

be conducted online. An e-CT can be between enterprises, households, individuals,

governments, and other public or private organisations.

“Royalty” has the same meaning assigned to it under subsection 2(1) of the ITA

1967.

3.0 e-COMMERCE BUSINESS MODELS

3.1 The e-Commerce has given rise to a number of new business models. Some

of the models may complement or overlap with each other (e.g., payment

service could be described under e-commerce or under cloud computing).

The business models are by no means exhaustive. The innovation in the e-

CT allows the rapid development in new business models. The common new

business models are identified as follows:

Business
No. Description
Model
1. Online trading/  Sale or purchase of goods/services, conducted
service over computer networks by methods specifically
providers designed for the purpose of receiving or placing of
orders.
 Gathering and analysing data on customers, to
provide personalised service, advertising and
manage logistics and supply stores with products

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Business
No. Description
Model
 However, the payment do not have to be done
online
 Example of the modus operandi:
a. Online Retailers.
e.g.: Lazada, Qoo10, Amazon, e-Bay
b. Providing online educational services such
as online tutor, e-books, video tutorials.
e.g.: [Link]
c. Providing online consultation services such
as service provided by doctors /
prescriptions online, health and lifestyles
consultations
e.g.: [Link]

2. App stores  A type of digital distribution platform for software

 Accessible through consumers’ device whereby
consumer can browse, view, purchase and
automatically download and install on the device
 Example of the modus operandi:
a. Subscription based offered by any companies
or individuals
e.g.: Spotify (apps for audio streaming), iflix,
netflix (both apps for video streaming)
b. Services offered online via internet or
electronic medium
e.g.:park by phone, web design,
programming, apps development, online
tuition, web hosting, aggregator (trivago,
skyscanner, traveloka), myeg
c. Self-broadcasting through online platform for
generating income from viewers
e.g.: Youtube, Bigo Live

3. Online  Uses the Internet as a medium to target and

advertising deliver marketing messages to customers
 It is in a form of display ads and search engine
ads
 Example of the modus operandi:
a. Income generated from advertising on online
platform either directly or indirectly.
Advertising activities can be in the form of
advertising space, product reviews and
advertorial. Payments can be received
directly from advertisers or using

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Business
No. Description
Model
intermediaries such as Google Adsense or
Nuffnangs.
e.g.: Instagram paid reviews, Google,
Facebook, Blogger

4. Cloud  Provision of standardised, configurable, on-

computing demand, online computer services which can
include computing, storage, software, data
management, using shared physical and virtual
resources.
 Online services where users can access the
service using various types of device provided
that they have internet connection.
 It is a cost effective alternative to purchasing and
maintaining customers’ own IT infrastructure
 Advantage of this business model is it is largely
driven by economies of scale in setting up the
infrastructure and maximising server usage by
sharing space among clients whose need for
space and processing power may vary on a
flexible basis.
 Most common cloud computing services:
- Infrastructure-as-a-service
- Platform-as-a-service
- Content-as-a-service
- Data-as-a-service
 Example of the modus operandi for cloud
computing:
a. Peer-to-peer (P2P) based activity of
acquiring, providing or sharing access to
goods and services that are facilitated by
online platform. The goods could be rooms,
apartments, house or vehicles.
e.g.: AirBNB, Uber, O-Bike, matdespatch,
runner2u

b. Practice of funding a venture by raising

money from a large number of people using
online platform.
e.g: mystart sdn bhd, pitch platforms sdn
bhd.

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Business
No. Description
Model
5. Payment  Payment via online transaction between online
services purchasers and sellers
 Payment methods may use credit card, direct
debit facilities, real-time bank transfers or direct
deposit.
 Other alternatives of payment methods are cash
payment solutions; E-wallets / cyber wallets and
mobile payment solutions
 Example of payment gateways available in
Malaysia:
a. Companies and individuals providing
financial services through online platform.
e.g.: ipay88, MOLPay, Boost.

6. Digital Currency/  Mining of the digital currency or digital token.

token  Buying and selling the digital currency or digital
token.
 Example of digital currencies or digital token
transacted in Malaysia’s market:
a. BitCoin, Ripple and Ethereum

4.0 SCOPE OF CHARGE

4.1 Generally, income tax is imposed on the income of any person accruing in or

derived from Malaysia.

4.2 Any income in relation to e-CT is deemed to be derived from Malaysia if it is

associated to any activities in Malaysia regardless of whether that income is

received in Malaysia or otherwise.

4.3 A non-resident person who derives income from e-CT may also be deemed

to derive that income from Malaysia in relation to:

a. Special classes of income; and

b. Royalty.

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5.0 SCOPE OF TAX LIABILITY FOR BUSINESS

5.1 For business income, where the business operations are carried on in

Malaysia, the income of the person attributable to those business operations

is deemed to be derived from 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 in

Malaysia.

5.2 Pursuant to Section 2 of ITA 1967, business is defined to include profession,

vocation and trade and every manufacture, adventure or concern in the

nature of trade, but excludes employment. This would include carrying a

business via company or an individual performing or rendering services.

Thus, the following example is to illustrate this point -

Example 1

Miss Orangee is an active blogger in fashion through her social media

accounts (eg. Instagram or Facebook etc) and gained more than 1 million

followers in those platform(s) because of her popularity. Assuming that for

YA 2017, Miss Orangee received income from advertising space and product

reviews of RM4 million. That income is taxable under Section 4(a) of ITA 1967

based on the facts that she is carrying on the activity by way of a profession.

5.3 In the case where a DTA is applicable, in order to determine whether

Malaysia has taxing rights over the business income is based on whether PE

exists.

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6.0 SCOPE OF TAX LIABILITY FOR SPECIAL CLASSES OF INCOME

6.1 Under Section 4A of ITA 1967 special classes of income received by a non-

resident person is subject to tax in Malaysia via withholding tax under section

109B ITA 1967.

6.2 Any amount paid in consideration of any advice given, or assistance or

services rendered in connection with the management or administration of

any scientific, industrial or commercial undertaking, venture, project or

scheme in relation to e-CT can be classified as special classes of income.

6.3 The derivation of Special Classes of Income shall be deemed to be derived

from Malaysia if:

a. the responsibility for the payment lies with the Government, a State
Government or a local authority;

b. the responsibility for the payment lies with a person who is resident in
Malaysia for that basis year; or

c. the payment is charged as an outgoing or expense in the accounts of

a business carried on in Malaysia.

Thus, the following example is to illustrate this point -

Example 2

Hotel N a Malaysian resident is using an online service via a platform

provided by sookaTravel (who is a non-resident). Under this service

arrangement, Hotel N’s customers can now book rooms and also make

payments via this platform. Subsequently, after deducting fees or

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commission from these bookings, sookaTravel will release the balance to

Hotel N.

Based on the facts, if it is proven that the service is rendered in Malaysia then

the fees or the commission received by sookaTravel is subject to withholding

tax under section 109B ITA 1967. However, if it is proven otherwise the

withholding tax on services is exempted under Income Tax (Exemption)

(No.9) Order 2017.

7.0 SCOPE OF TAX LIABILITY FOR ROYALTY

7.1 Any royalty paid to a non-resident in relation to e-CT will be subjected to

withholding tax under section 109 ITA 1967.

7.2 Effective from YA 2017 the definition of “Royalty” has been amended where

the word “software” has been added to the definition of “Royalty” where as

mentioned in the ITA 1967, to include the use or the right to use of software,

any transmission through satellite, payment in respect of total or partial

forbearance, the use of, or the right to use of know-how or information

concerning technical, industrial, commercial or scientific knowledge,

experience or skill and use or the right to use licences with regards to some

or all of the part of the radiofrequency spectrum.

Thus, the following examples are to illustrate scenarios that fall under

category of royalty payment –

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Example 3

MB Sdn Bhd (MB) undertakes the activity of online trading in scarves and

accessories. MB uses a renowned social media company as a platform to

advertise the sales of its products. The social media company allows its

customers including MB to create its own advertisement campaign using its

platform. The payment made to the social media company is classified as

royalty and it is subject to withholding tax under section 109 of ITA 1967.

Example 4

OL Sdn Bhd (OL) is a manufacturing company that uses accounting software

for its financial reporting. On 2nd March 2018, OL purchased a software

solution from UBS (foreign) for the amount of RM70,000 and on top of that

pays an annual licensing fee of RM3,000. Based on these facts, payment for

the use or the right to use software is considered as royalty under section 2

of ITA 1967. Therefore the payment of RM70,000 and licensing fee of

RM3,000 is subject to withholding tax under section 109 of ITA 1967.

Example 5

Saloma Enterprise runs an online business, selling its items worldwide

through an online selling platform owned by AhBAY (who is a non-resident)

Saloma Enterprise will then receive payment for the goods sold via an online

payment service platform provided by Bayarkawan (who is also a non-

resident.).

1. AhBAY charges the following:

 Monthly subscription fee (USD 19.95)

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 Transaction fee for every successful sales (8% per successful
transaction)

In the agreement between Saloma Enterprise and AhBAY, it was stated

that the monthly subscription fee is related to the right to use AhBAY’s

application. Saloma Enterprise is also obliged to pay transaction fee in

relation to services performed by AhBAY.

Under section 2 of ITA 1967, the monthly subscription fee falls under the

category of payment for the use or the right to use software and it is

considered as royalty. The payment is subject to withholding tax under

section 109 of ITA 1967.

The transaction fee received by AhBAY on the services rendered is

subjected to withholding tax under section 4A of ITA 1967. However,

since the services were performed outside Malaysia it is not subject to

withholding tax.

2. Bayarkawan charges the following:

 3.9% per transaction

In the agreement between Saloma Enterprise and Bayarkawan, it was

stated that the transaction charges of 3.9% will be deducted from the

value of each transactions.

The transaction charges received by Bayarkawan on the services

rendered is subjected to withholding tax under section 4A of ITA 1967.

However, since the services were performed outside Malaysia it is not

subjected to withholding tax.

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7.3 For further clarifications for the above illustrations, please refer to IRBM’s

Practice Notes 1/2018 on Tax Treatment on Digital Advertising Provided by

a Non-Resident.

Note:

All enquires with regards to this guideline can be forwarded to:

Tax Policy Department

Inland Revenue Board
Level 17, Menara Hasil
Persiaran Rimba Permai
Cyber 8, Cyberjaya
63000 Selangor

Tel. No. 03-83138888

Date : 13 Mei 2019

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