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Recent Developments in Service Tax

28 October 2020

© 2020 Deloitte Tax Services Sdn Bhd 2Recent Developments in Service Tax

Agenda

• Introduction

• The three new guides:

1. Management Services Guide

2. Warehousing Management Guide

3. Reimbursement and Disbursement Guide


Introduction

RMCD adopted a number of principles and concepts from the repealed GST into SST which resulted in SST 2.0 being considerably broader than SST 1.0. However, this resulted in uncertainties

Two of the most challenging areas have been determining the scope of management services and defining what constitutes a reimbursement and disbursement

The RMCD have recently released three new guides specifically focused on these two topics.

The guides will bring some clarity on the RMCD’s view and address many uncertainties, but equally can create new practical issues and uncertainties

This webinar is to walk through the key concepts and principles in these guides and highlight areas of uncertainty observed.

Lastly, to hear from you and get your feedback and questions.

Recent Developments in Service Tax © 2020 Deloitte Tax Services Sdn Bhd 4

Management Services Guide


• Guide dated 1 October 2020 (available only in BM)

• Supersedes Guide issued on 25 August 2018 and subsequently retracted

• Provide some clarifications on what is and NOT subject to service tax

• Some questions and grey areas remain

Overview


Types of taxable management service

Scope

Project management services, whether whole or part of a project (Para 12a)

Project management and construction services

Example 1 Kaya Bhd appoints ABC Sdn Bhd for construction of a shopping complex and appoints Khan Sdn Bhd to monitor the project.

Example 2V Bhd appoints JM Sdn Bhd to build a shopping complex.JM Sdn Bhd appoints SG Sdn Bhd to monitor the project.

Project management services - taxable

Example 3Company A appoints Company B for a construction project. Company Bthen appoints a consortium to carry out the construction project.

Construction services – not taxable




Scope

Maintenance management services

Taxable maintenance management may be performed on goods, buildings or land belonging to clients

Example 4

Mall Owner appoints a building manager to manage the Mall Taxable maintenance service

Example 5

Building Owner lets out shop and collects a monthly maintenance charge from tenants. NOT taxable as maintenance is Building Owners own assets




Scope


Preventive vs corrective maintenance services

Example 6Company supplies elevators to building and enters separate maintenance contract for 2 year period to monitor and conduct periodic inspections to ensure the elevators in good condition. Taxable maintenance management service

Example 7

• Maintenance and repair service only provided when called/requested by customer

Not taxable – corrective maintenance

• Maintenance provided under a contract to regularly monitor and maintain air conditioners of customer.

Taxable maintenance management service.

• Spare parts charged as part of taxable maintenance management service not taxable if segregated in the invoice




Scope


Software and hardware maintenance services

Example 9

• Preventive maintenance contract for software and hardware maintenance – taxable as maintenance management services.

• Software maintenance only – taxable IT services.

• Hardware repair only – not taxable under IT or maintenance (unless provided as part of preventive maintenance contract)



Types of taxable management service (cont’d)

Scope (cont’d)

Warehousing management services (Para 12e)

Services provided by warehousing company in managing the warehousing activities such as goods inwards and outwards, storage, repackaging, safety, handling and othersRefer to Warehouse Management Services Guide

Collection and debt management services (Para 12f)

Managing debt collection from debtors on behalf of the creditors customers, usually in return for a commission for debt recovered is taxableMerely sending reminders and notices to request debtors to pay their creditors is NOT taxable

Car park management services (Para 12g)

Managing car park space in return for commission (whether contingent or fixed) from the owner of the car park space is taxable.

Sports facilities management services (Para 12h)

Managing sports complex, stadiums, competition courts, sports equipment and others are taxable.




Scope (cont’d)

Any other managementservices not specified above, made on behalf of another person (Para 12j)

Examples

• Management of training activities on behalf of another person is taxable. Provider provides location, module and manages the training consultant. Taxable management fee

• Management of private yacht berthed in MY in respect of port management, logistics management, catering arrangement etc Transport management service – NOT taxable.

• Rubbish collection and disposal services appointed by Municipal Council Rubbish collection service NOT taxable



The taxable value of management services :

• Services provided by management service provider the total invoiced to the customer is the value of the service.

• Service provided via a third party service provider only management fee, value-add, mark-up or profit margin potion subject to service tax Invoice must "ítemise" the services provided Include an invoice from the third party service provider to the customer

• Services on a ‘package’ basis total amount of services including services provided by third parties are taxable.

Value of management services for service tax


• In connection with land or building for residential use provided by any developer, joint management body, management corporation or residential association;

• Provided by any person who is licensed or registered with the Securities Commission Malaysia for carrying out the regulated activity of fund management under the Capital Markets and Services Act 2007 [Act 671];

• Provided by any person, Government agency, local authority or statutory body for the purposes of religious, welfare, bereavement, burial, cemeteries, cremation, sewerage, water supply, health, transport, tourism or logistic services;

• In connection with goods or land situated outside Malaysia or other matters outside Malaysia; and

• Provided by a company in a group to companies within the same group of companies.

Non-taxable management services


Services need not be professional in nature to be taxable.

How contract is worded may affect service tax treatment

There must be consistency between what is in the contract, billings, other supporting documents

Treatment of sub-contracted services and reimbursement/out of pocket expenses need to be looked into and addressed (ie whether qualify for B2B relief and other concessions)

The Guide is not law and only provides guidance

Not meant to be exhaustive

Key points so far


Management Services Definition

• Management service covers “arranging and coordination” of any activities in providing services to customers … Activities include organising, supervision, monitoring, planning, control and directing various resources such as human, financial, technology, physical and others.

• Written contract to provide hints whether taxable services are provided

Comments

• Definition still very wide

• Definition interpreted to refer to internal functions carried out to provide any service to another person?

Effective date

• Management services is taxable from 1 September 2018. Amendments made effective 1 January 2019 are meant as clarification and does not affect liability to tax

Comments

• For services clarified as taxable, may have back taxes in audit

• Tax previously charged on service now not taxable – refund?

Uncertainties


Warehousing Management Services Guide


Warehousing management services:

• Provided by a warehouse operator

• Warehouse operator is any person who manages warehouse operations whether the warehouse is self-owned or rented

• Provides a series of services covering including:

Manage the inflow and outflow of goods

Handling

Loading and unloading

Sorting, Repackaging

Consolidation and de-consolidation

Labelling, pick and pack

Inventory control

Storage space

Security control

Documentation

Audit

X Excluded - Transportation of goods

Who and what is taxable


Scope of warehouse management service

Example 1

Warehouse operator provides warehousing management services to a third party – taxable

Third party recharges warehouse operator fee to its own customers.The third party providing a logistics management service to its customer - not taxable

Warehouse space rental by warehouse owner – not taxable

Third party rents warehouse from the owner and provides warehousing management servicesto its own customers – taxable warehousing management service

1

2

3

4


• Warehousing management services to be provided only by the “warehouse operator”

• Warehousing services vs. warehousing management services.

Warehousing services: rental of warehouse space only, not taxable.

Warehousing management services: involve the provision of additional relatedservices, taxable.

• Warehousing management services vs. logistic management services

Warehousing management services: taxable.

Logistic management services: not taxable.

Issues and Key Takeaways


The taxable value of management services :

• Services provided by management service provider the total invoiced to the customer is the value of the service.

• Service provided via a third party service provider only management fee, value-add, mark-up or profit margin potion subject to service tax Invoice must "ítemise" the services provided Include an invoice from the third party service provider to the customer

• Services on a ‘package’ basis total amount of services including services provided by third parties are taxable.

Value of management services for service tax


Reimbursement and Disbursement Guide


Typically, there are 3 parties involved in a reimbursement or disbursement i.e. Service provider, claimant and customer

The difference between disbursements and reimbursements:

• Disbursement – claimant acting as an agent in acquiring the service/cost

• Reimbursement – claimant acting as a principal

Recovery of expenses


1. Existence of a contract:

• Clearly indicating that the claimant is acting as either the principal or agent

• Indicating whether a mark-up can be apply on recovery

2. Where no contract is available:

• Who is party to the contract?

• Who has legal obligation to pay for the service/acquisition?

• Whether claimant is able to alter the value (mark-up) or nature of the expense whenrecovered?

• Whether third party provider and ultimate customer is aware of each other and the costinvolved?

Additional requirements to be identified as disbursement

• A copy of the original invoice of the service provider must be attached together with theinvoice issued by the claimant to the customer.

• Recovery itemised from primary service during billing

Exception: Disbursements with mark-ups – service tax to apply on mark-up values

Key identifiers for reimbursement/disbursement


Example of a disbursement

Service

provider

Claimant

Claimant’s

related

company

1. Contracts to provide SAP implementation

2. Issues invoice for the SAP implementation that is addressed to Claimant’s related company

3. Issues invoice whilst attaching service provider’s invoice


1. Identifying if the recovery is ancillary to a primary service – service tax treatment should follow theservice

2. Whether:

• Contract indicates that customer to bear the cost

• Recovery is made without mark-up

• Supporting documents are produced when making a claim from customer

• Recovery is itemised from primary service

Exception: Where mark-up exists – service tax to apply only on the mark-up

Where the primary service is not taxable, the determination of whether it is a disbursement orreimbursement is not relevant.

Ascertaining service tax treatment for reimbursements


• If not expressly stated in a contract, OPE will be considered a taxable service.

• It will not be taxable service provided all of the conditions below are satisfied:-

(a) It is stated in the contract that the customer will bear the OPE costs;

(b) It is paid on a back-to-back basis (without any mark-up); and

(c) The claimant provides the supporting documents when making the claim from the customer.

Other types of cost recoveries – Out-of-Pocket Expenses (“OPE”)


Additional examples

Service

provider

Claimant

Customer

1. Charges for airfare, travel and other OPE expenses

2. Recovers OPE in addition to providing professional services


Issues

Frequent issues encountered:

• Characterising the recovery of expenses for service tax purposes

• What method used to determine expenses incurred as reimbursement or disbursement

Key Takeaways

• Legal principles are followed by RMCD on recovery of cost:-

• Emphasis is given to the written contract. Any ambiguity in the contract, to see whichparty had the contractual liability or the legal responsibility.

• RMCD’s view on ‘mark-ups’ and ‘OPE’.

• ‘Mark-up’: payment for a separate service and taxable if it is a prescribed taxable service.

• OPE: forming part of the costs of providing the primary service. If the primary service istaxable (e.g. consultancy), then the OPE would also be taxable. However if the service isnon-taxable, then no service tax would apply.

Issues and Key Takeaways


Next Steps…


• Understanding when the guidelines take effect – can it be retrospective?

• Reviewing and revisiting prior technical positions including earlier RMCD clarification letters received – is there a material impact?

• Identifying areas of technical uncertainty or practical issues – what are the gaps for you to be compliant?

• Understanding the options available to get clarity - where, when and how to engage?

Next Steps

32© 2020 Deloitte Tax Services Sdn Bhd

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