Possibility of digital tax unnerves Malaysian startups

• iPay88 argues that the tax comes at te wrong time, will hinder innovation
• Tax incentives should be given to companies building digital ecosystem 

AS THHE spectre of a possible digital tax weighs heavy on Malaysian startups, iPay88 Holding Sdn Bhd’s executive director and co-founder, Chan Kok Long has come out strongly against the introduction.

iPay88 is an NTT Data company and a leading Malaysian-based provider of online payment solutions in Southeast Asia and Bangladesh.

Chan’s key concern is that Malaysian startups are not ready for such a tax, not when most are not profitable yet. He believes that Introducing such a tax now could have dire consequences.

“Taxing them now may even push them to collapse or seek other countries as their base, which will be a loss to the country,” he cautions. It will also hinder innovation and the growth of the industry at a time when international players are entering the market.

The World Bank, in its September 2018 report, Malaysia’s Digital Economy, agrees with Chan (pic, right), saying that it is important that the domestic fiscal framework encourages the development of a vibrant digital economy. At the same time it calls for taxing the digital economy as a means to diversify and strengthen the tax base.

“It is equally important that Malaysia secures its fair share of tax revenue from the profits generated in its economy by providers of digital goods and services that are based outside the country,” says the Bank. Yet, the World Bank acknowledges that effectively and efficiently taxing digital transactions is a challenge facing most countries, developed and developing.

Believing that international players should be taxed as they have already established themselves, Chan suggests that instead of an industry-based tax, the government should look at taxing based on profits.

If Malaysia were to introduce such a tax, it would be the 4^th country after New Zealand, Australia and Singapore, which announced in February that its digital tax will kick-in from January 2020.

Although seen to be more mature than Malaysian-based digital companies, Singapore’s startups are struggling to turn profitable as well, but that has not deterred the government from introducing the tax.

In a February 2019 blog post about the possible implications in Singapore, Gartner analyst, Adrian Lee, points to the increased operational costs for compliance with the new e-tax. But beyond that he sees changing consumer behaviour as well with consumers reducing purchases and/or switching to lower-value purchases.

He also believes that digital providers will most likely also proactively lobby for progressive tax structures to soften the impact, based on revenues earned.

And while we will know by 5pm tomorrow if such a tax will be introduced, and Chan and his peers have to invest time and money to lobby the government to soften the blow, Gartner’s Lee believes the introduction of this tax will dampen the growth of digital services in Singapore, though it should not constrain it.

Call for dedicated Ministry of Science & Technology to capture opportunities

Meanwhile, Chan didn’t just call for the digital tax not to be introduced. He also wants to see fresh incentives for the entire ecosystem and is asking for a dedicated ministry to run the science and technology part of the ministry.

His rationale is that technology is a very powerful economic tool and means for a country’s future growth. “Look at the unicorns or those successful tech giants. Their valuation surpasses certain third world or developing countries GDP. Technology builds economic power for a country. Therefore it has to be managed by a dedicated ministry,” says Chan.

Among the incentives Chan would like to see are tax free benefits be extended to companies that show very promising market share domestically and regionally.

He says, “Most of these companies normally build the industry ecosystem. Example iPay88 for the first seven years was building a payment ecosystem and we didn't make a good profit or we had no profit at all. “

It only benefited from being tax free for the remaining three years of its MSC status and those profits enabled iPay88 to begin its regional foray.

He also wants to see tax incentives given to companies involved in payment gateways, data centres, logistics and marketplaces to build the digital ecosystem and infrastructure.

And, rather than deal with an additional digital tax, “the government should create incentives and soft loans so that the micro-segment can benefit more from e-commerce,” concludes Chan.