This article addresses the advanced aspects of service tax in relation to the provision of management services.
The article is relevant for candidates preparing for ATX (MYS) Advanced Taxation. The article is written on the assumption that candidates have a basic understanding of the service tax principles in Malaysia and based on prevailing laws as at 1 January 2020.
Service tax is a consumption tax imposed on certain prescribed services referred to as 'taxable services'. Generally, professional services including management services are regarded as taxable services. A person who provides taxable management services exceeding a threshold of annual turnover of taxable services of RM500,000 is required to be registered and thereafter, charge service tax on the provision of taxable services to his customers. Other professional services which are taxable include legal, accounting, surveying, engineering, architectural, consultancy, information technology, employment and safety / security services.
Whilst this article focusses on the service tax treatment of management fees, the principles discussed such as intra-group relief, imported taxable services and business to business exemption similarly apply to other professional taxable services (other than employment services and safety / security services).
Since the reintroduction of service tax effective from 1 September 2018, the scope of taxable management services has been amended a couple of times. At the inception of the legislation, its scope was broadly defined to include provision of all types of management services and other charges in connection with the provision of management services. Such services consist of project management or project coordination but exclude provision of services supplied in connection with goods or land situated outside Malaysia and other matters relating to goods or land outside Malaysia.
This has resulted in ambiguity over the application of service tax to management services and therefore, to provide further clarity, the scope of management services was amended on 1 January 2019 and then again, on 1 September 2019.
Based on the amendment as of 1 September 2019, the scope of taxable services includes –
'Provision of any the following management services;
(i) Project management services, full or part of the project;
(iv) Maintenance management services;
(v) Warehousing management services;
(vi) Collection and debt management services;
(vii) Carpark management services;
(viii) Sport facilities management services;
(ix) Secretarial management services;
(x) Any management services other than specific in (i) to (ix) made on behalf of another person;
excluding the following management services:
(xi) the management services in connection with land or building for residential use provided by any developer, joint management body, management corporation or residential association;
(xii) the management services 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;
(xiii) the management services 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 logistics services; and
(xiv) the management services in connection with goods or land situated outside Malaysia or other matters outside Malaysia;'
Based on the above, the scope of management services is rather wide. While items (i) to (ix) outline the specific services regarded as 'management' in nature, there is also a general provision that any management services made on behalf of another person can be caught within the ambit of service tax as well.
A Sdn Bhd (ASB) is involved in the provision of repair of stamping machines. Its customers send their machines to ASB for repair as and when required. ASB has recently secured a contract with a new customer, a large manufacturing company, B Sdn Bhd (BSB) to provide regular maintenance to keep BSB’s stamping machine working efficiently and minimise downtime to the manufacturing process. This requires ASB to carefully plan and schedule the repair and maintenance services of the machines.
The provision of mere repair of machines on an ad-hoc basis is not regarded as management services. In addition, machine repair services do not fall within the scope of taxable services. However, the contract with BSB which requires ASB to manage the maintenance activities of the machines to improve efficiency and minimise downtown would likely be regarded as maintenance management activities which would then fall within the scope of management services.
C Sdn Bhd (CSB) contracted D Sdn Bhd (DSB) to process its employees’ travel and expense claims. DSB is required to coordinate and process the claims submitted by CSB’s employees based on the parameters set out by CSB. DSB attends to any claim enquiries from the employees and address issues, if any on behalf of CSB.
As DSB is managing the processing of the employee claims on behalf of CSB, such services are likely to fall within the scope of management services.
Generally, exported services are not subject to service tax. Under the scope of management services defined above, the provision of management services in connection with goods or land situated outside Malaysia or other matters outside Malaysia is not subject to service tax.
Following on from Example 2, CSB is also contracted by DSB’s subsidiary in Indonesia to provide claims management services in Indonesia.
As the claims management services are provided in respect of an Indonesian business – ie subject matter outside Malaysia, service tax is not applicable.
Business to business (B2B) exemption
Under the service tax regime, there is no concept of input tax credit mechanism. This means that a registered person who is charged service tax on the purchase of services suffers 'double taxation' as the service tax incurred on the purchase of services cannot be recovered. For example a company, say Co X, secures a contract to provide taxable services to its customer but has to subcontract a portion of the work to another company (Co Y) as it does not have certain expertise. If both companies are service tax registrants, Co Y will charge Co X service tax when billing its service fee. When Co X invoices its customer, it has to charge service tax on the full service fee (including the portion of work subcontracted to Co Y). This would mean that the services subcontracted to Co Y will be taxed twice, resulting in a tax cascading effect.
In order to avoid the double taxation, effective from 1 January 2019, an exemption may be claimed by a taxable person who acquires taxable services of the same category. Under the rule, if a taxable person is registered for the provision of the same taxable services as he acquires from a service tax registrant supplier, then the taxable person may claim exemption from service tax. In this respect, the supplier is not required to charge service tax to the taxable person. The B2B exemption is applicable to all professional services except for employment and safety / security services.
E Sdn Bhd (ESB) is a service tax registrant for the provision of management services. The firm is appointed by a manufacturing company to provide strategic management services to develop, manage and implement the company’s business plan for a fee of RM200,000 (exclusive of service tax). ESB subcontracts a portion of the work to F Sdn Bhd (FSB), another service tax registrant to provide change management services. The fee for the change management services is RM50,000 (exclusive of service tax).
As a service tax registrant, ESB is required to charge service tax in relation to the strategic management fees invoiced to the manufacturing company. The service tax amount would be RM12,000 (6% x RM200,000).
In relation to the change management fees invoiced by FSB, as the service performed is used as an input to the strategic management services provided by ESB, ESB can claim the B2B exemption. In this respect, FSB is not required to charge ESB with service tax.
G Sdn Bhd (GSB), a service tax registrant, recently secured a contract to provide human resource management. In order to deliver these services, it has contracted an information technology (IT) company, another service tax registrant, to implement a dedicated IT system as a tool to deliver the human resource management services.
GSB is providing human resource management services to its customer. In order to deliver these services, it has incurred IT services to develop the required tool. Notwithstanding that the IT services procured form part of the delivery of the human resource management services provided by GSB, the B2B exemption does not apply in this case as the type of services involved are different.
Imported taxable services
The concept of imported taxable services was introduced on 1 January 2019, to provide equality between local and foreign service providers. Without imposing tax on imported services, there would be a preference for Malaysian businesses to procure taxable services from foreign service providers who are not required to charge service tax.
Imported taxable service refers to any taxable service acquired by any person in Malaysia from any person who is outside Malaysia.
In this regard, any person, whether service tax registrant or not who in carrying on his business acquires any imported taxable service should account for service tax at the prevailing rate of 6%. The service tax is due at the time when the payment is made or invoice is received for the service, whichever is the earlier.
In the case of a service tax registrant, the service tax on imported taxable services can be accounted for in its service tax return. However, where the imported taxable service is acquired by a non-registrant, the acquirer is required to account for service tax in a prescribed form (Form SST-2A) which is due by the end of the following month.
H Sdn Bhd (HSB), a manufacturer and registered for sales tax has appointed a Singapore company to provide treasury management services for its Malaysian business. HSB received an invoice dated 15 November 2019 for the management fee of RM100,000 on 2 December 2019. The invoice was paid on 5 January 2020.
Treasury management services are regarded as taxable services and, as the services are procured from a company outside Malaysia, they will be subject to the imported taxable service rule. HSB will need to account for service tax on the service fee charged by the Singapore company. While HSB is a sales tax registrant, it is not a service tax registrant. Therefore, the service tax on the imported taxable services would need to be accounted for through a prescribed form. The service tax amount would be RM6,000 (6% x RM100,000).
As the tax is due on the earlier of payment or receipt of invoice, in this case 2 December 2019, the due date to submit the prescribed form, together with the tax is 31 January 2020 (the end of the following month).
HSB also paid property management fees to a UK company to manage its properties in the UK.
As the property management services relate to land situated outside Malaysia, such services fall outside the ambit of taxable services. Therefore, there is no requirement to account for service tax in relation to the property management services fees paid to the UK company.
It should be noted that effective from 1 January 2020, the B2B exemption discussed above is also applicable to a taxable person who acquires imported taxable services.
Where a company in a group of companies (as defined below) acquires taxable management services from any company within the same group of companies outside Malaysia, such service shall not be regarded as an imported taxable service.
The same facts as Example 6 apply, except that HSB is a 100% subsidiary of the Singapore company.
On the basis that the Singapore company and HSB are within the same group of companies, there is no requirement for HSB to account for service tax on the management service fee charged by the Singapore company.
Provision of services within the group
It is common for groups of companies, to centralise their group management activities in a company which services the whole group. The legislation provides for specific rules in relation to services provided to companies within the same group.
The above specific rules for service tax purposes apply where there is a company which provides services within the same group of companies, the group consists of two or more companies and one of the companies controls each of the other companies. A company shall be taken to control another company if:
(i) the first mentioned company holds directly, indirectly through subsidiaries or together directly or indirectly from subsidiaries more than 50% of the issued share capital of the second mentioned company; or
(ii) the first mentioned company holds directly, indirectly through subsidiaries or together directly or indirectly from subsidiaries from 20% to 50% of the issued share capital of the second mentioned company and the first mentioned company has exercisable power to appoint or remove all or a majority of directors in the board of directors in the second mentioned company.
I Sdn Bhd (ISB) is the holding company with shareholdings in a number of companies. ISB provides management services.
* ISB has entered into an agreement with the other shareholders of D which allow it to appoint and remove the majority of directors of the company.
The analysis of whether ISB is providing services to companies within the same group is as follows:
|As ISB holds a 100% shareholding in A (ie more than 50% of the issued share capital), both ISB and A would be regarded as companies within the same group.|
|As ISB holds a 60% shareholding in B (ie more than 50% of the issued share capital), both ISB and B would be regarded as companies within the same group.|
|ISB only holds a 40% shareholding in C. As such, C cannot be regarded as a company within the same group of ISB.|
|While ISB only holds a 45% shareholding in D, it has the ability to appoint or remove the majority directors of the company. Therefore, it meets the conditions for a company within the same group as ISB.|
|E is indirectly held by ISB through B. The effective shareholding in E is 45% (60% x 75%). In this respect, ISB does not meet the condition of holding directly or indirectly more than 50% of the issued share capital of E. Hence, E cannot be regarded as a company within the same group of ISB.|
Where the services are provided to companies with the same group, the provision of such services would be regarded as non-taxable services whereby no service tax is applicable. The service provider must only provide services to companies within the same group to avail of this relief.
Where a company provides the same services to another person outside the group of companies, such services will be treated as taxable services regardless of for whom the services are performed. In other words, where the service provider provides the same taxable service to both group and non-group companies, the provision of services to companies within the same group will be tainted and also subject to service tax.
The same facts as Example 9 apply, however ISB only provides management services to Companies A and B.
On the basis that Companies A and B are with the same group of companies as ISB, the provision of management services by ISB to Companies A and B is not subject to service tax.
The same facts as Example 9 apply. ISB provides management service all companies – ie Companies A to E.
As ISB is providing management services both to companies within the same group and outside the group, all the service fees charged by ISB to Companies A to E are subject to service tax.
It is proposed in Budget 2020 that, effective from 1 January 2020, the rule which prohibits the service provider from being eligible for group relief if it provides the same taxable services to companies outside the group, be relaxed to allow for the same services to be rendered to persons outside the group, provided that the value of the services does not exceed 5% of the total value of services provided by that company within 12 months.
It should be noted that where service tax is applicable to group services and the recipient of the service is connected with the taxable person or where the services are provided for free, the value subject to service tax is based on the open market value of the taxable service – ie provided in the ordinary course of business to a person not connected with the taxable person.
The same facts as Example 11 apply. ISB is required to charge service tax on the provision of services to the companies within the same group. In the case of Company A, as the company is loss making, ISB has decided not to charge the management fee to Company A.
Since both ISB and Company A are connected persons, notwithstanding that there is no charge, service tax would need to be accounted for based on the open market value of the taxable service.
Written by a member of the ATX (MYS) examining team