SMALL and medium enterprises (SME) are aggressively leveraging digital economy to reap its benefits. Among the strategies they are adopting are Enterprise Resource Planning (ERP) systems for strategic planning, cloud computing for general administration, RFID for logistics and social media for marketing.
The Department of Statistics Malaysia announced that the digital business grew by 5.4% year-on-year in the third quarter of 2023.
The government is also making significant efforts to promote digital growth in the country. For example, Budget 2025 offers various grants, loans and credit guarantees for SME to embrace digitalisation.
The Malaysia Digital Economy Corporation, under the purview of the Digital Ministry, and the Finance Ministry have been actively involved in introducing innovative tax incentive schemes for Malaysian digital companies by offering reduced corporate tax rates and investment tax allowances. This allows SME to harness the digital tool while managing their tax affairs to secure tax benefits.
For example, SME that adopt e-invoicing can gain from cost savings, better cash flow management, enhanced security, greater efficiency and reduced errors. This can be strategically carried out by the SME through the utilisation of reliable accounting software for effective tax reporting.
In this digital age, the paramount tax challenge for SME are taxes charged by multiple jurisdictions for cross-border transactions. Such taxes induce complications among SME in ensuring tax compliance.
As SME may have limited financial resources to hire an in-house tax expert, they will require external tax agents’ assistance to manage their tax affairs. This can have a knock-on effect on SME’s bottom line.
Taxes by multiple jurisdictions can be in terms of direct tax and indirect tax, such as service tax or value-added tax. This is also applicable to digital service providers.
Effective from March 1, digital services provided by a foreign registered person to customers in Malaysia are subject to 8%
service tax, a 2% increase from the original rate introduced in 2020. Therefore, it is crucial for SME to be tax-educated to understand the tax implications and compliance requirements for cross-border transactions.
Borderless transactions come with tax risks. In addition to varying tax regulations across different jurisdictions, revenue generated by SME from digital transactions may be subject to double taxation, where the same income is taxed in two or more countries. Therefore, SME should consult a tax agent regarding double taxation treaties between countries as these treaties can help mitigate the risk based on the agreements between the involved countries.
Transfer pricing risk is another tax challenge faced by SME
with related companies across multiple jurisdictions. Transactions between inter-related companies often face stringent scrutiny from tax authorities worldwide, as they intensify efforts to clamp down on profit shifting and ensure a fair distribution of taxes among multinational companies. Therefore, SME with related establishments overseas must be aware of such tax risks.
Complex digital taxation regulations pose a serious challenge for SME as they have limited resources to hire tax experts for guidance. These burdens may hinder SME from pursuing business expansion plans and fully leveraging the digital economy.
Without informed decisions, SME may inadvertently violate tax regulations, leading to issues such as under-reporting income, misclassifying transactions or failing to meet compliance obligations – each of which can result in penalties, fines or legal complications.
The Inland Revenue Board Malaysia has been educating businesses on digital taxation regulations, and with simplified procedures, the compliance burdens for SME can be minimised.
In their pursuit of leveraging the advantage of a digital economy, SME must ensure proper tax management to reduce risks. This not only helps them stay compliant but also enables them to take full advantage of the tax incentives offered by the government.
On a multinational level, SME can increase their profitability by reducing operational costs through digital activities, such as online marketing and sales. However, 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 management to educate themselves on relevant regulations to ensure full compliance.
Assoc Prof Dr Nor Shaipah Abdul Wahab is head of the School of Accounting and Finance, Taylor’s University while
Dr Chin Sok Fun is a senior lecturer.
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