RSM Malaysia

eNewsletter 07/2020: Special Tax Alert

The RMCD has released a service tax guide. The salient points of the Guide are as follows: -

Term Definition
Disbursement The recovery of a payment made on behalf by a claimant who is acting as an agent
Reimbursement The recovery of a payment made on behalf by a claimant who is acting as a principal from another party 
Claimant A registered person who recovers expenses he incurred on behalf of the customer
Customer Any person who receives a service directly or indirectly from a service provider through a claimant
Service provider A person who provides directly or indirectly, a service to the customers through a claimant

Recovery of expenses as Principal or an Agent

To determine if a recovery of expenses is a disbursement or a reimbursement, it is important to establish whether the claimant acted as a principal or as an agent when he acquired the service from the service provider. 

When there is a written contractual agreement

When a written contractual agreement exists between the claimant and the customers. The contractual terms should indicate if the claimant incurred the expense as an agent or a principal.

  Principal Agent
Recovery of expenses Treated as service provided by the claimant to the customer Not treated as a service provided by the claimant to the customer
Recovery with mark up Claimant is treated as a principal and such recovery will be treated as a reimbursement (i.e. subject to service tax)  

When there is no written contractual agreement or ambiguous contract

Without a written agreement between the claimant customer, or where the agreement cannot identify clearly the contractual relationship, the status of the claimant shall be determined according to any of the following rules: -

Rules Principal Agent
Contractual liability and assumption of responsibilities and risks Acquired the services in his own name or capacity Not a party to the contract and merely arranged for the provision of services on behalf of his customer
Legal obligations to make payment or payment arrangement Has the legal obligation to make payment to the service provider for the services Does not have the legal obligation to make payment to the service provider unless authorised by the customer
Alteration to the nature and value of expenses Can alter the nature or value of the services and make a decision on the value of expense to recover Not able to alter the nature or value of services made between the customer and the third-party service provider unless authorised to do so by the customer
Identities of parties and transaction involved The claimant is the only party known to the third-party service provider and the customer does not know the cost incurred by the claimant on the acquisition of services from third party service provider The third-party service provider knows the identity of the customer and the customer knows the exact cost incurred by the claimant on the acquisition of services from the third-party service provider

Service Tax Treatment on Disbursement and Reimbursements

Service tax treatment Disbursement Reimbursement
Agent or principal Non-taxable (if no mark-up) Taxable (if it relates to making a prescribed taxable service)
Agent or principal  Agent Principal
Customer’s knowledge of service Customer knows the services are provided by a service provider and not the claimant Customer does not know the services are provided by the service provider
Amount claimed from customer Exact amount is claimed from the customer and the claimant shall not alter the nature of the services or add on the value of the services Amount claimed from the customer may include mark-up and the claimant may alter the nature of the services or add on the value of the services
Supporting documents Copy of invoice from the service provider is attached together with the invoice issued by the claimant to the customer as supporting document No supporting documents attached
Treatment of mark-up Full amount recovered is regarded as a provision of service and subject to service tax (if it relates to a taxable service being performed). The claimant would be treated as a principal as he can alter and change the value of the original service (i.e. service by the third-party service provider). However, if the service provider’s invoice is attached with the claimant’s invoice , then only the mark-up  will be subject to service tax.  

 

Treated as a separate service and will be subject to service tax. However, this only applies if the cost of recovery and mark up are separately itemised and the service provider’s invoice is attached when the claimant issues the invoice to the customer.

 
A reimbursement is ancillary to a primary service, if such recovery forms part of the overall price that the claimant charged to his customer. The service tax treatment for such recovery of expenses will generally follow the taxability of the primary service.

 

Other types of cost recoveries i.e. out-of-pocket expenses (OPE)

Where not specifically stated in a contract, OPE are generally considered taxable services as they form part and parcel of the taxable services provided. However, OPE which are charged separately would not be a taxable service provided by the claimant to his customer if all the conditions below are fulfilled: -

  • It is stated in the contract that the customer will bear the OPE costs;
  • It is paid on a back-to-back basis (without any mark-up); and
  • The claimant provides the supporting documents when making the claim from the customer.

KEY CONTACTS

Ms Mayadevi Karpayah
Tax Director
E: [email protected]

Mr Kalvinder Singh
Senior Tax Manager
E: [email protected]


 

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