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Taxation Challenges and Legal Issues

Inland Revenue Board ofMalaysia

Prepared by :Inland Revenue Board Malaysia

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E-commerce started in the mid-ninetiesTo facilitate e-commerce growth, governmentset up

Multimedia Super Corridor (MSC) in 1996Malaysian Communication and MultimediaCommission (MCMC) in 1998

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Domain names in Malaysia increases from80,786 (2008) to 130,505 (2010).

Most household turn to internet to seekinformation, < 50% involved in internet tradingMajor contribution of e-commerce:

Airlines (e.g. AirAsia, Malaysian Airlines System)Travel (e.g. Hotels booking)Financial sectors (e.g. internet banking)

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IRBM had established e-commerce division on1 Mac 2009.Main functions of division are:

to develop and maintain e-commerce databaseSelect e-commerce business for field audit from thedatabase

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E-commerce division not utilizing anyautomated tools for information gatheringUsing top search engines e.g. Yahoo or GoogleOfficers resort to posing as a buyer

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No specific provisions under MalaysianIncome Tax Act (ITA) 1967 for e-commerceGenerally under ITA 1967 income tax isimposed on income on any person accruing inor derived from MalaysiaE-commerce is treated under the same generalprovisions and interpretations of ITA 1967

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Regardless of the server location Determined business activities through the

business operation, e.g.: Sourcing of contents Procurements of goods Promotions Advertising Selling Updating and maintaining the website Uploading and downloading of contents

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Royalty under ITA 1967 is define: Includes the payment for use of or the right to use

copyrights, know-how or information concerning

technical, industrial, commercial or scientificknowledge, experience or skill to non-resident. Payment in nature of royalty to non-residents

is subject to withholding tax. Example:

Downloading of a digital product to a consumershard disk or similar media

Licensing arrangement to reproduced, modify andadapt.

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Tracking process anonymity of the internet,identity of a person has no relation to actualidentity

Easy to setup business online (without registeringwith local law) No physical presence such as having a virtual

office (place of business) Non-compliance and non-filers Borderless transaction (taxing rights, tax loss etc) Banking regulations in Malaysia

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Major e-commerce models in MalaysiaBusiness-to-Consumer (B2C)Business-to-Business (B2B)

Consumer-to-Consumer (C2C)Mobile commerce (M-commerce)

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Consumer exchange goods and services withother consumersOnline auction sites is have become morepopular for C2CTop C2C auction sites in Malaysia arelelong.com.my and mudah.my

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Auction sites revenue from membership feesand transactionsMembers also making money by charging fixedrate delivery cost or postage fees.

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Larger companies supplying merchandise tosmaller businesses who then sell to theircustomers.

Activities includes purchasing andprocurement, supplier management, inventorymanagement, channel management, salesactivity, payment management, and serviceand support

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Malaysian top B2B platform allowingcompanies (SMEs) to optimize their dailybusiness processes.

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Any website that has a product for sale, musicdownloads and etc.AirAsia is a top Malaysian B2C selling airlines

tickets, car rentals, holiday packages, hotelroom bookingsAirAsia maintains its presence and reachability through Facebook page, Twitter page,Flickr page, Youtube channel

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MyEG.com.my is a portal for various servicesfor consumers such as:

Buy various types of insurance

Payment for Police SummonsPayment for maid renewal fees to the ImmigrationDept.Road Tax renewal services

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Purchases of products and services that occuracross a mobile data platform (e.g. GPRS, SMS,3G )

Example M-Commerce in Malaysia:Purchase of Coke drinks from vending machinePurchase of ringtones ,games and screensaversPurchase of airline tickets, hotels rooms, car rentals

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Some of the related provisions of ITA 1967applicable for auditing e-commerce:

Section 78 : Power to call for returns and books

Section 79 : Power to call for statement of bankaccountsSection 80: Power to access to buildings anddocuments

Section 81: Power to call for information

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Section 80 of ITA 1967 applicable for auditinge-commerce:

Power to access to buildings and documents.

Shall have access to computerized data whetherstored in a computer or otherwise.Shall provided with necessary password, encryptioncode, decryption code, software or hardware

Shall provide any other means required to enablecomprehension of the computerized data

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Inland Revenue Board ofMalaysia