Digital service tax in Malaysia: Will agencies be saddled with this extra 6% burden?

The year 2020 will see a 6% service tax come into effect for digital services such as Facebook ads, Google's G-Suite, and Adobe's software subscriptions in Malaysia. For Facebook in particular, the tax will affect advertisers whose "Sold To" country on their business or personal address is set to Malaysia. Also, the tax is added when one is charged for ads regardless of whether they are purchasing for business or personal purposes.

The sales and service tax (SST) was first introduced in September 2018 to replace the 6% goods and services tax which was suspended on 1 June 2018. Previously, the SST only covered industries such as advertising services, F&B, telco, automotive, and professional services. The digital service tax was announced later in November 2018 during Budget 2019 and reiterated by Finance Minister Lim Guan Eng in October this year during Budget 2020.

With the 6% digital service tax is finally kicking in, industry players still remain divided on its impact on the adland. Shanker Joyrama, founder and CEO, Orion Social Media told A+M that the 6% tax impacts Malaysian agencies "more than anything".

"In a time when we are facing disruption and high competition with agencies from numerous fronts and across the region, it is disappointing to learn that brands and agencies will now be saddled with this extra tax that increases the cost instantly by 6%," he explained. Joyrama said this is on top of the 8% to 10% withholding tax that companies have to deal with. According to the Inland Revenue Board of Malaysia, withholding tax is an amount withheld by the payer on income earned by a non-resident, also known as the payee, and paid to the Inland Revenue Board of Malaysia.

With that being, he does not think that clients will turn away from advertising on Facebook or Google, only because majority of consumers are still on the platform. However, Orion is also taking the initiative to explore alternative marketing channels including content marketing as a means to achieving brand objectives.

"I'm not worried at all about clients bypassing agencies. They could do that now and the charges would still apply, but I'm guessing clients would be impacted in a way if they've failed to take this into consideration for their 2020 budgeting," Joyrama said.

Much like Joyrama, PHD Malaysia's MD Eileen Ooi also said that despite the imposition of the tax, Facebook and Google will continue to dominate digital adex in 2020 since most Malaysian consumers are primarily on those platforms. Even so, there could potentially be some advertisers which might shift their adex to big local publishers such as Media Prima, she added. She too is of the view that the advertising and marketing industry will be impacted, explaining that while there might be an increase in digital adex at the expense of offline adex, this still would not translate to an overall increase in adex.

"The tax will add significant pressures for advertisers, especially against a shrinking adex in the market and tough consumer sentiments, as well as a mature consumption market," Ooi said.

The broader concern of the impact is the tunnel vision of constantly focusing on driving cost efficiencies versus effectiveness for the brand.

Quoting a report by the Institute of Practitioners in Advertising, Ooi said advertising effectiveness is on a declining trend, as marketing focus shifts to being more performance-focused and driving cost efficiencies. From PHD's perspective, the Malaysian market requires a challenger mindset approach to marketing and business operations. "As advertisers, we all need to focus on driving brand effectiveness over efficiencies," she explained.

Similarly, Ooi said agencies will also face increasing pressure of delivering cost efficiencies to make up for the additional 6% digital tax amidst the shrinking adex. However, she believes that more mature advertisers will continue to see value in working with their agency partners to manage the situation and effectively drive business results on their digital campaigns.

For smaller clients such as SMEs, the tax may likely provoke a potential direct relationship with Facebook and Google potentially.

Despite this, Ooi said PHD is working very closely with both partners to deal with the implications of the digital tax, as well as demonstrate agency value through strategic thinking and strong technical optimisation beyond just plain media buying.

Although he shares the same view that the duopoly will remain dominant in Malaysia, Anurag Gupta, ADA's chief operating officer, said there should not be much impact on agencies or the ad industry, as SST on adex or import inventory has been in practice since the beginning of 2019. Agencies already had to pay 6% SST regardless of whether the SST was charged by the digital platforms.

With this tax imposition, it would now be more transparent to compute and pay the accurate tax amount.

Gupta also added that these charges are to be passed on to the clients, unless there are some exemptions. Meanwhile, he also does not foresee clients bypassing agencies to save on SST, as it will be charged regardless, be it through agencies or directly. "Some clients may choose to go direct for their own reasons. However, they will then miss the expertise agencies have at reaching the right audience to get them better ROI." he explained.