Digital Service Tax

The strategic context of digital service tax

With at least 464 foreign entities from 29 countries registered under the scheme as of 2024, the initiative generated RM 1.6 billion (approximately US$360 million) in government revenue during that year alone.

Contributing Advisor

Quinn Lu

Senior Associate, International Business Advisory

Unlike many international digital tax regimes that exclusively target business-to-consumer (B2C) transactions, Malaysia's framework uniquely encompasses both B2C and business-to-business (B2B) digital services. This comprehensive approach requires foreign digital service providers—including major platforms such as Google, Facebook, Netflix, Spotify, and Amazon—to register, collect, and remit service tax on all qualifying transactions with Malaysian users. 

The implementation follows a "soft approach" characterized by engagement rather than punitive enforcement during the initial phases, with the Royal Malaysian Customs Department (RMCD) providing guidance through detailed regulations and regular updates to facilitate compliance. However, penalties for non-compliance remain significant, with fines reaching up to RM 50,000 (US$ 118,000) or imprisonment for up to three years for various offenses. This balanced regulatory stance reflects Malaysia's intent to encourage voluntary compliance while maintaining robust enforcement mechanisms. Defining digital services under Malaysian Law

The RMCD guide establishes a comprehensive definition of digital services as any service subscribed to or delivered over the internet or other electronic networks with minimal human intervention from the service provider. This definition emphasizes three critical characteristics:

• Delivery through information technology mediums,
• Essential dependence on internet connectivity, and
• Automated delivery with minimal provider involvement.

The regulatory framework provides illustrative examples of taxable digital services, including software and applications, digital content and media, platform and infrastructure services, online advertising, and digitally delivered educational or professional services. It also clarifies exclusions, such as physical goods delivered tangibly, professional services requiring substantial human intervention, and traditional telecommunications services. These distinctions are critical for businesses with hybrid offerings, as each service component must be assessed separately to determine the correct tax treatment.

Foreign service provider categories and registration requirements

Malaysia’s digital tax framework classifies Foreign Service Providers into three categories: direct sellers to Malaysian consumers, sellers operating through intermediaries or agents, and online platforms that facilitate sales as marketplace operators.

Upon meeting the registration threshold, an FSP must register as a Foreign Registered Person via the MySToDS system using Form DST-01, supported by detailed corporate, ownership, and operational information. Threshold compliance may be assessed using either a historical or future projection method approved by the Royal Malaysian Customs Department, and once registered, the FRP must display its status, with registration generally taking effect from the month following approval.

Revenue threshold and ongoing obligations

Foreign digital service providers must register once annual turnover from Malaysian consumers exceeds RM500,000 over any rolling 12-month period, a threshold unchanged since January 2020 and applicable across all FSP categories.

All Malaysian-sourced revenues are included in the calculation, with foreign currency amounts converted to ringgit using a consistent and reasonable exchange rate methodology. Failure to register on time may result in penalties of up to RM30,000 or imprisonment of up to two years, while registered Foreign Registered Persons must comply with ongoing obligations, including quarterly filing of Form DST-02, timely payment of service tax, proper invoicing, and record retention.

Tax rate and current framework

Malaysia initially implemented the digital service tax at a rate of six percent effective January 1, 2020. This rate positioned Malaysia competitively within the regional and global context, with the Finance Ministry noting that it was lower than comparable jurisdictions including Norway (25 %), Russia (18 %), and New Zealand (15 %).

However, effective March 1, 2024, the service tax rate on digital services increased to eight percent as announced by the Minister of Finance. This rate adjustment reflects Malaysia's evolving fiscal priorities and the government's assessment of appropriate revenue generation from the digital economy sector. The increase followed detailed transitional rules published by the RMCD to guide providers through the rate change period.

The current eight percent rate applies uniformly across all categories of digital services and all types of consumers, whether individuals or businesses. This contrasts with Malaysia's broader service tax framework, where rates can vary by service category. The uniform application simplifies compliance for international providers serving diverse Malaysian customer bases.

Defining and identifying consumers

A consumer is defined as any business or individual that fulfills any two of three specified criteria. The first criterion examines payment method: making payment through a credit or debit card facility provided by a financial institution under Malaysia's Ministry of Finance indicates Malaysian consumer status.

The second criterion focuses on residence: physically residing in Malaysia establishes consumer location regardless of other factors. The third criterion utilizes technical indicators: acquiring the digital service through an internet protocol (IP) address registered in Malaysia provides evidence of Malaysian consumption. The requirement to satisfy any two of these three criteria provides flexibility while ensuring reasonable accuracy in consumer identification.

Exemptions and group relief provisions

Malaysian regulations provide targeted relief provisions that narrow the practical scope of digital service tax obligations. Most significantly, effective May 14, 2020, service tax does not apply to digital services provided by FRPs to companies within the same group of companies. This intra-group exemption prevents cascading tax on internal corporate transactions that do not represent true economic consumption.

To qualify for group relief, specific conditions must be satisfied. The Malaysian recipient must be a company (not an individual or partnership), both entities must belong to the same corporate group through ownership or control relationships, and the exemption generally does not apply if the FRP also provides the same services to unrelated local companies. However, regulations introduced a "5 percent relaxation" rule: group relief remains available if the value of identical services to unrelated local companies in any month and the eleven succeeding months does not exceed five percent of the annual total value of those same services.

Mandatory e-invoicing in Malaysia

Malaysia’s mandatory e-invoicing framework, implemented by the Inland Revenue Board of Malaysia (IRBM), fundamentally changes how businesses document and report transactions by requiring all B2B, B2C, and B2G invoices to be generated, validated, and transmitted through a government-approved platform.

Rolled out in phases based on turnover—from August 2024 for businesses exceeding RM 100 million, progressively extending to smaller taxpayers through July 2026, with exemptions generally for businesses below RM 500,000—the framework allows graduated adoption, supported by transitional relief for early phases. Its core objective is to enhance tax transparency, improve reporting accuracy, and reduce fraud by giving tax authorities near real-time visibility over commercial transactions while streamlining tax administration.

E-invoicing transaction mechanisms

• The IRBM offers two primary mechanisms for e-invoice transmission, allowing businesses to select the approach best suited to their operational scale and technical capabilities. The MyInvois Portal is a web-based platform hosted by IRBM and accessible to all taxpayers at no cost. This portal accommodates businesses needing to issue e-invoices where Application Programming Interface (API) connections are unavailable or impractical.
• The MyInvois Portal supports both individual invoice creation through manual data entry and bulk invoice generation through spreadsheet uploads using pre-defined templates. This flexibility makes the portal particularly suitable for small and medium-sized enterprises (SMEs) with lower transaction volumes or limited technological infrastructure. Users can access the portal via computers, laptops, and smartphones, enabling invoice management from any location at any time.
• The API integration option enables direct data transmission between taxpayers' existing Enterprise Resource Planning (ERP) or accounting systems and the MyInvois system. This approach requires upfront investment in technology and adjustments to existing systems to establish secure, automated data exchange. API integration proves ideal for large taxpayers or businesses with substantial transaction volumes, as it eliminates manual data entry, reduces processing time, and seamlessly incorporates e-invoicing into existing workflows.
• Businesses implementing API integration must develop or acquire software capable of formatting invoice data according to IRBM specifications, typically in XML or JSON format, establishing secure authentication protocols, transmitting invoices to the MyInvois system, receiving validation responses, and handling error corrections or rejections. While technically complex, API integration delivers significant efficiency gains for high-volume operations, enabling real-time invoice processing without human intervention.

E-invoicing Process for B2B Transactions

The e-invoicing workflow for B2B transactions follows a structured six-step process designed to ensure validation, transparency, and proper documentation.

• Step 1: Issuance of e-invoice commences when a supplier generates an e-invoice following a completed sale or transaction. The supplier transmits this invoice to the IRBM via the MyInvois Portal or API for validation, including all mandatory data fields such as supplier and buyer information, transaction details, tax calculations, and unique identifiers.
• Step 2: Validation occurs when the IRBM performs real-time verification of the submitted e-invoice against established standards and criteria. The system checks file format compliance, mandatory data field completion, Tax Identification Number (TIN) accuracy, and mathematical accuracy of amounts and tax calculations. If validation succeeds, the IRBM generates a Unique Identification Number (UIN) for the invoice, ensuring traceability and preventing forgery. If errors are detected, the system returns an error message identifying specific issues requiring correction before resubmission.
• Step 3: Notification follows successful validation, with the IRBM automatically notifying both supplier and buyer through the MyInvois Portal or API. For portal users, email notifications inform both parties of the validated invoice. For API users, notification APIs communicate validation status directly to integrated systems, facilitating efficient workflow continuation.
• Step 4: Sharing of e-invoice requires the supplier to provide the validated e-invoice—embedded with a QR code containing the validation link—to the buyer. The QR code enables instant verification of invoice existence and status through the MyInvois Portal, providing assurance of authenticity. Suppliers can transmit the validated invoice via email, integrated system-to-system transfer, or other electronic means convenient for both parties.
• Step 5 and 6: Rejection or cancellation of e-invoice provides a 72-hour window following validation during which either buyer or supplier may request rejection or cancellation. The requesting party must provide justifications for the rejection or cancellation. If no action occurs within 72 hours, the e-invoice is automatically deemed accepted. Subsequent modifications are not permitted; adjustments require issuance of a new e-invoice such as a credit note, debit note, or refund note e-invoice
• Step 7: MyInvois Portal accessibility ensures both suppliers and buyers can retrieve e-invoice data, access transaction histories, and generate reports through the portal. This centralized repository supports compliance audits, financial management, and transparent record-keeping throughout the required retention period.

E-invoicing Process for B2C Transactions

B2C e-invoicing introduces unique considerations reflecting the distinct nature of consumer transactions. The IRBM recognizes that individual consumers typically do not require detailed invoices for every purchase and that requiring e-invoice generation for every retail transaction would impose excessive burdens.

Consequently, the framework differentiates based on consumer requests. When a buyer explicitly requests an e-invoice—for example, for expense reimbursement or warranty purposes—the supplier must generate and validate an individual e-invoice following the standard process. This ensures consumers can obtain properly documented evidence of their transactions when needed.

However, when buyers do not request e-invoices, suppliers may issue consolidated monthly e-invoices aggregating all non-requested transactions. This consolidated approach dramatically reduces administrative burden for retailers, restaurants, e-commerce platforms, and other businesses conducting high-volume consumer transactions. The consolidated invoice must still undergo IRBM validation and include summary information sufficient for tax administration purposes, but individual transaction details need not be itemized.