Unlike most value added tax or goods and services tax systems, the Service Tax system in Malaysia is a single stage tax system that results in a cost to the recipient of the good or service. As such, it is important for businesses to consider eligibility for group relief to mitigate double tax and cascading effects resulting from intra-group transactions.
Group relief for Service Tax is available for certain intercompany transactions within Malaysia and this has been extended to include certain imported taxable services and digital services.
Effective from 1 January 2019, paragraph 3A of the First Schedule of the Service Tax Regulations 2018 provides for group relief on imported professional services (services under Group G of the First Schedule, excluding employment and security services) acquired by a local company from any company within the same group of companies outside Malaysia.
Effective from 14 May 2020, Regulation 5A(1) of the Service Tax (Digital Service) Regulations 2019 provides for group relief on the provision of digital services by a foreign registered person (FRP) to any company in Malaysia within the same group of companies.
Group relief for Service Tax is only available if the following conditions are met:
Generally, group relief for Service Tax would not be available if the same services provided within the group of companies are also provided to unrelated local companies. However, with effect from 1 January 2020, the rules have been relaxed to allow for group relief if the value of the same services to unrelated local companies in that month and the eleven months immediately after that month do not exceed 5% of the annual total value of the same services provided (so-called 5% relaxation).
Under the current law, the above restriction and 5% relaxation are only applicable for local services but, in practice, the same provisions may also be applied to imported taxable services. Notwithstanding this, the 5% relaxation is not granted for digital services.
In view of the expansion of the scope of Service Tax to include imported taxable services and digital services, businesses should review their current intercompany transactions to explore whether there are opportunities to benefit from the extended group relief available for Service Tax.