In brief
In our previous client alert, we discussed the Royal Malaysian Customs Department’s (“Customs”) Service Tax Guide on Employment Services Version 4 issued on 9 June 2026 (“2026 Guide”), which expanded the taxable value of employment services to include employee-related costs recovered from customers, even where such costs were recharged without mark-up.
Customs has now issued an updated notice on 13 August 2026 (“Notice”) confirming that service tax is imposed only on the employment or management fee charged by the service provider. Costs recovered on a genuine pass-through or disbursement basis are not subject to service tax.
The clarification effectively reverts to the position previously adopted under the Customs’ previous guide on employment services, issued on 5 August 2019 (“2019 Guide”) and 14 May 2024 (“2024 Guide”), and is a much-welcomed development for businesses involved in acquiring manpower and employment services and businesses that acquire such services.
In more detail
1. Reversal of the position in the 2026 Guide
- As discussed in our previous client alert, the 2026 Guide took the position that employee-related costs formed part of the taxable value of employment services even where such costs were recovered from customers without any mark-up. Examples included salaries and wages, Employees Provident Fund contributions, Social Security Organisation contributions and other employee-related expenses.
- Customs has issued the Notice confirming that service tax is imposed only on the employment fee or management fee charged by the employment or manpower service provider. Costs and expenses recovered on a genuine pass-through or disbursement basis do not form part of the taxable value and are therefore not subject to service tax.
- For example, if a service provider charges MYR 12,000 for supplying workers and separately recovers MYR 1,000 of workers’ levy on a pass-through basis, service tax applies only to MYR 12,000. At the rate of 8%, the service tax payable is MYR 960.
- The Notice also confirms that statutory fees, duties, levies, taxes and punitive charges imposed under written laws and paid to the Federal Government or State Governments are treated as disbursements. Such amounts are excluded from the value of taxable services and are not subject to service tax.
- Notably, Customs has removed the 2026 Guide from its website and republished the 2024 Guide.
2. Qualifying pass-through costs
- The Notice reinstates the approach previously adopted in the 2019 Guide and 2024 Guide, under which qualifying expenses recovered from customers without any mark-up are excluded from the taxable value of employment services.
- Examples of qualifying pass-through costs include emoluments (salaries and wages), levy fees, travel costs to Malaysia, work permit fees, insurance fees and mandatory medical examination expenses for workers. The list is not exhaustive.
- However, where any mark-up is imposed on the recovery of such expenses, the entire amount recovered may become subject to service tax. Similarly, where the service fee and reimbursable expenses are not separately identified in the invoice issued to the customer, Customs indicates that service tax may apply to the full amount charged.
Impact to businesses
The Notice issued by Customs is very much welcomed as it confirms that employee-related costs and other qualifying disbursements recovered on a pure pass-through basis with no mark-up are excluded from the taxable value of employment services. This effectively restores the position under the 2019 Guide and 2024 Guide, and reverses the position indicated in the 2026 Guide.
As a result, service tax applies to the employment or management fee charged by the service provider, rather than the total amount invoiced to the customer. This will certainly help to reduce costs of doing business, in particular for businesses which acquire employment outsourcing or manpower services, since the service tax system in Malaysia does not provide for any input tax credits.
Businesses should ensure that employment or management fees are clearly segregated from pass-through cost recoveries and supported by appropriate documentation. This will help facilitate the correct service tax treatment and avoid overpayment of service tax on amounts that do not form part of the taxable value.
Tan Wen Ying, Associate, has contributed to this legal update.
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