By Assoc Prof Dr Nor Shaipah Abdul Wahab & Dr Chin Sok Fun

Small and medium enterprises (SMEs) are aggressively leveraging the digital economy to reap its benefits. This includes using 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 per cent year-on-year in the third quarter of 2023.

The Malaysian government is also making significant efforts to promote digital growth in the country. The 2025 Budget for example offers various grants, loans and credit guarantees for SMEs to embrace digitalisation.

The Malaysia Digital Economy Corporation, the Ministry of Digital and the Ministry of Finance have been actively involved in introducing innovative tax incentive schemes for Malaysian digital companies by way of reduced corporate tax rate and investment tax allowance.

Thus, SMEs may harness the digital tool while managing their tax affairs to secure tax benefits.

For example, SMEs that adopt e-invoicing can gain cost savings, better cash flow management, enhanced security, greater efficiency and reduced errors. This can be strategically carried out by the SMEs through the utilisation of reliable accounting software for effective tax reporting.

Taxes charged by multiple jurisdictions

During the digital age, the paramount tax challenge for SMEs are taxes charged by multiple jurisdictions for cross-border transactions. Such taxes induce complications among SMEs in ensuring tax compliance.

As SMEs 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 will then have a knocked-on effect on the SMEs’ bottom line.

Taxes by multiple jurisdictions can be in terms of direct tax and indirect tax, for example service tax or value-added tax. This is similar within the context of digital service providers.

Effective 1 March 2024, digital service provided by a foreign-registered person (FRP) to customers in Malaysia is subject to 8 per cent service tax, a 2 per cent increase compared to when the rate was first introduced in 2020.

Thus, it is important for SMEs to be tax educated to ensure the awareness on tax implications and compliance requirements for cross-border transactions.

The borderless transactions entail tax risks. In addition to different tax regulations by different tax jurisdictions, revenue generated by SMEs from the digital transactions can be subjected to double taxation in which a particular income is subject to tax at two or more countries.

Thus, SMEs have to seek advice from the tax agent on double taxation treaties between countries as such treaties can mitigate the risk based on the agreement between the countries involved.

Transfer pricing risk

Transfer pricing risk is another tax challenge that SMEs face that have related companies in multiple jurisdictions. Transactions between interrelated companies often face stringent scrutiny from tax authorities worldwide, as they are increasingly aggressive in clamping down on profit shifting and ensuring a fair distribution of taxes among multinational companies.

Therefore, SMEs with related establishments overseas must be aware of such tax risk.

Complex digital taxation regulations pose a serious challenge for SMEs as they have limited resources to hire tax experts for guidance. These burdens may hinder SMEs from pursuing business expansion plans and fully leveraging the digital economy.

Without informed decisions, SMEs may inadvertently violate tax regulations, leading to issues such as underreporting 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 SMEs can be minimised.

Proper tax management

In their pursuit of leveraging the advantage of the digital economy, SMEs must ensure proper tax management to reduce risks. By this, SMEs not only stay compliant but are also able to utilise tax incentives offered by the government.

On a multinational level, SMEs can increase their profitability by reducing operational cost through digital activities such as online marketing and sales. However, the 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.

-- BERNAMA

Assoc Prof Dr Nor Shaipah Abdul Wahab, CPA(Australia), is the Head of School for the School of Accounting and Finance, Taylor’s University and Dr Chin Sok Fun is a Senior Lecturer in the same school.