How new digital tax could tax our struggling industry even further

The reactions surrounding it remain mixed, especially with Google and Facebook slated to charge a 6% digital tax on its services starting next month to Malaysian customers. 

The Digital Service Tax, which was announced at Malaysia’s Budget tabling comes into effect in January 2020. 

The tax is mandatory for companies that provide digital services with a total value  exceeding RM500,000 per year to consumers and companies in Malaysia. 

The tax will affect digital advertising services offered by Google and Facebook, streaming services such as Netflix and Spotify, and game distribution companies such as Steam. 

“Service tax has always existed and as consumption moves from the physical space to digital and online, certainly some form of tax will be imposed and this is expected given the revenues in this space,” Mr Lai Shu Wei, Vice President of unifi Marketing &  Communications at TM Berhad said. 

Shu Wei believes brands with the right value proposition and focus will not be impacted by the taxes. “The taxation gained should be reinvested back to build a safer, more dynamic and robust digital ecosystem for all,” he added. 

On the other hand, Managing Director of PHD, Ms Eileen Ooi, observes consumer sentiments going into 2020 as cautious, in line with the economic outlook. 

“Whilst it is understandable the digital tax makes sense from an economic front; the challenge is the additional burden on consumers,” she said. “With a growing focus on digital not just from an advertising perspective, but also other areas like e-commerce sales and digital services in Malaysia this becomes a significant impact all around for consumers.” 

Problem: Double Tax

The main concern that surrounds the tax is that Google and Facebook will pass on the new digital tax onto media agencies, causing a situation of double-taxation when agencies invoice their clients thereafter.

“Its (double-taxation) impact would be immense as the majority of digital ad spends are on foreign platforms like Google and Facebook,” shares CEO of Trapper Media Group, Mr Sivanathan Krishnan. 

He went on to explain that the heavy taxation would mean less media dollars for advertisers, assuming budgets stay the same, thus affecting business results because clients are required to pay more in order to reach just one person. 

“Taxing the international publishers would be good for the nation, but why exterminate local digital media businesses with double-taxation,” he added.  

The advertising industry foresees clients avoiding the double-taxation by dealing directly with Google and Facebook through Singapore, that practices a one-off GST policy. 

This also means the new digital tax will drive away potential revenue for the Malaysian government to other markets. 

“As it is, Google and Facebook already more than dominate the Malaysian digital advertising market with massive revenues from our economy known to be channelled to tax havens overseas,” CEO of MARKETING Magazine Malaysia, Professor Harmandar Singh said.

“Potentially RM1.4 billion of Malaysia’s digital advertising economy will shift overseas, further increasing the current 80% monopoly the duopoly has over Malaysia’s digital advertising,” said an industry source.

According to the President of Malaysian Media Specialists Association (MSA) and Head of Media Brands at Dentsu Aegis Network Malaysia, Mr Yap Chee Weng, “MSA has always propagated that double taxation goes against the good tax system principle, whereby tax authorities should attempt to avoid this whenever possible.”

“Now with digitalisation and the emergence of new digital technologies, divestment from traditional media to these digital platforms is happening rapidly and this impending double taxation issue will definitely put the entire Malaysian advertising ecosystem at a great disadvantage,” he added, 

According to Eileen, the prediction that advertisers will start in-house digital services  may be true for SMEs but not for big marketers. The reason for this, she explains, is because the agencies’ expertise, consultancies and scale in operational delivery is important in driving a valuable return for advertisers. 

“PHD and Omnicom Media Group (OMG) are working closely with various stakeholders to get clarity, assess the total impact and find better ways to manage this for our clients,” she adds. 

Solution: Flow-Through 

Last year, the implementation of the Sales & Service Tax (SST) which took effect on September 1, 2018 received negative backlash as industry representatives soon learned the tax system would be exponential, causing double-taxation as it moved from one party to another. 

The Ministry of Finance later announced there will be no double-taxation on SST as they agreed there is no need to charge a service tax to advertisers who are already subjected to service tax by the media/production suppliers. This is referred to as a flow-through option.

Industry representatives are hoping this will also apply come 2020 with digital advertising, and while allowing the government to earn valuable revenue from the global internet giants, the industry can also grow together with the economy. 

Attempts have been made by MARKETING magazine to ask other media specialists in the market for their thoughts, but they are still working out their official narrative for us. 

Stay tuned.