When a Malaysian company pays for software, cloud tools or AI services from an overseas provider, two separate taxes may be relevant: service tax, administered by the Royal Malaysian Customs Department, and withholding tax, administered by HASiL. Each is decided under its own law, so the answer for one does not settle the other.
Service tax
Service tax can apply to digital services provided by a foreign service provider that is registered in Malaysia, known as a foreign registered person (FRP). Customs guidance on the change in the service tax rate on digital services states that service tax is charged on any digital service provided by an FRP to a consumer in Malaysia, and that the rate increased from 6% to 8% with effect from 1 March 2024.
Separately, MySST explains that service tax is also imposed on imported taxable services, and becomes due when payment is made or the invoice is received, whichever is earlier. Which rule applies depends on the service and on the parties involved.
Check the provider’s foreign-registered-person (FRP) status and invoice before self-accounting. Where an FRP charges Malaysian service tax on digital services acquired in carrying on a business, Item 3 of the Schedule to the Service Tax (Persons Exempted from Payment of Tax) Order 2018, as amended by the 2020 amendment order, exempts the recipient from self-accounting on that service if the recipient would otherwise account under section 26 or 26A of the Service Tax Act 2018 and holds the FRP’s invoice or document issued under regulation 6(1) or 6(2) of the Service Tax (Digital Service) Regulations 2019. Otherwise, assess the imported-service rules and any other applicable exemption.
Withholding tax
HASiL's withholding tax guidance places the obligation on the payer to withhold tax from certain payments to non-residents and remit it to HASiL. The categories include royalties and special classes of income, among others. Review the contract, licence rights, provider’s tax residence and any services supplied with the subscription. The invoice label alone does not decide whether withholding tax applies.
For the wider picture, see our articles on withholding tax in Malaysia and service tax on digital services and e-invoicing.
This article is general information only. Requirements depend on each company's circumstances; please refer to the official guidance from HASiL and Customs, and see Saifudin & Co's tax advisory and compliance services if you would like assistance.