Malaysian Small and medium enterprises (SMEs) are aggressively embracing digital economy by adopting Enterprise Resource Planning (ERP) systems for strategic planning, cloud computing for general administration, RFID for logistics, and social media for marketing.
During the digital age, one of the paramount challenges for SMEs is related to various taxes and conditional tariffs charged by multiple jurisdictions for cross-border transactions. The multi-layer tax entries make tax compliance more difficult, leading to accounting and audit complication and increased operational cost.
As SMEs may have limited financial resources to hire an in-house tax expert, they require the assistance of external tax agents to manage their tax transactions in ensuring tax compliance. This will in turn have a knocked-on effect on the SMEs’ bottom line given the high service fees charged for such professional services.
Taxes by multiple jurisdictions can be in terms of direct taxes and indirect taxes in the form of service tax or value-added tax.
It is crucial for SMEs to be tax educated to stay alert of tax implication and compliance requirement for cross-border transactions. For illustration, effective from 1 March 2024, a foreign registered person (FRP) providing digital services to customers in Malaysia is liable to pay eight (8) percent service tax, a two (2) percent increase compared to the initial six (6) percent charged when the tax was first introduced in 2020.
In addition, it is pivotal for SMEs to understand that the borderless nature of digital economy can heighten task-compliance risk. In addition to different tax regulations by different tax jurisdictions, revenue generated by SMEs from digital transactions can possibly be taxed multiple times by two or more countries. Thus, SMEs are to advised to seek advice from professional tax agents or directly submit their enquireies to tax authorities in clarifying trade agreement clauses pertaining to tax arrangement among the nation’s trade partners.
Profit shifting and transfer pricing can also add to the tax challenges already engulfing SMEs that have business operations across multiple jurisdictions. Transactions between interrelated companies or subsidiaries often face stringent scrutiny from tax authorities worldwide, as they are increasingly aggressive in clamping down on profit shifting and manipulation of prices through transfer pricing, in a bid to ensure fair distribution of taxes to host countries. Therefore, SMEs with subsidiaries, branches or joint venture (JV) deals overseas must be aware of such tax risk.
Complex tax regulations pose a serious challenge for SMEs as the tax obstacle may hinder SMEs from pursuing business expansion and capitalising fully on the digital economy. Without adequate tax knowledge, SMEs may inadvertently violate tax regulations, ending up with issues such as underreported income and misclassified transactions which can result in penalties, fines, or legal complication.
In summary, in their pursuit of digital economy, SMEs must ensure proper tax management to reduce tax-related risk and reap tax benefit. In other words, SMEs must stay tax compliant, and at the same time take advantage of the tax incentive or tax exemption offered by the government. Additionally, digitalisation of management, operation and legal processes, such as ERP on cloud, online marketing and tax e-invoicing, can elevate such pursuit of digital economy for added revenue and profit.
Therefore, business enterprises should be mindful of the varying tax regulations across different jurisdictions. While consulting tax agents is beneficial, it is equally important for SME owners and
managers to educate themselves on relevant tax regulations to ensure full compliance.
e-Invoicing
In the backdrop of robust digital economy, the government has announced various grants, loans, credit guarantees as well as tax incentives to promote digital economy and digitalisation, some of which through Budget 2025 tabled in October.
One of the latest national digitalisation drivers is e-invoicing which can help businesses to achieve optimised cost saving, better cash flow management, enhanced security, greater efficiency, and reduced errors. The e-invoicing initiative, implemented in phases, will be fully effective on 1 July, 2025.
According to information published by the Inland Revenue Board of Malaysia (IRBM) or Lembaga Hasil Dalam Negeri (LHDN), tax-paying entities with an annual turnover more than RM100 million have already adopted e-invoicing given the August 2024 deadline. The next category of tax-paying entities with an annual turnover threshold from over RM25 million up to RM100 million must comply before the end of 2024. As scheduled, e-invoicing will be fully implemented among all taxpayers by the 1 July 2025 deadline.
Source: https://www.businesstoday.com.my/2024/12/08/smes-warned-of-tax-compliance-issues-amid-digital-waves/