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September 28, 2020
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October 19, 2020
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Reimbursement vs Disbursement

Recently on 15 September 2020, the Royal Malaysian Customs Department has released a guide on disbursement and reimbursement in respect of Service Tax. The essence of this guide is to determine the tax treatment on recovery of expenses as an agent or principal.

Where contracts do not specify the agent and principal relationship, the guide expresses that there are four (4) elements to determine if a person acts as an agent or principal which areas follows:

- Contractual liability and assumption of responsibilities and risks

- Legal obligations to make payment or payment arrangement

- Alteration to the nature and value of expenses

- Identities of parties and transaction involved

If the expenses are recovered as a principal, this is deemed to be a taxable supply. If the expenses are recovered as an agent, it is not taxable. However, in contracts that specify the agent and principal relationship, if recovery of expense is done by an agent with a mark-up, this is also deemed to be a taxable supply.

Additionally, if out-of-pocket expenses (OPE) are not specified under the contract, any OPE which forms part and parcel of the supply is deemed to be inclusive in the value of taxable supplies.

We are of the view that this may further change the spectrum of service tax in relation to previous decisions obtained by taxpayers on recovery of expense. As this is effective 1 September 2018, an immediate analysis should be done by taxpayers to determine the exposure. The retrospective effect could be detrimental since the clarification is only done now, after more than two (2) years of implementation.