In brief
The Royal Malaysian Customs Department (“Customs”) issued Version 4 of its Service Tax Guide on Employment Services on 9 June 2026 (“2026 Guide”). The 2026 Guide introduces three key changes. It expands the taxable value of employment services to include certain employee-related costs recovered from customers, adds two conditions for secondment arrangements to fall outside the scope of service tax, and confirms that the business-to-business (B2B) exemption and group relief do not apply to employment services. Businesses that provide or procure manpower, labour supply, employment agency or similar services should review their existing arrangements, contracts, invoices and service tax treatment.
In more detail
1. Employee-related cost recoveries are now taxable
- Customs’ previous guides on employment services, issued on 5 August 2019 (“2019 Guide”) and 14 May 2024 (“2024 Guide”), allowed certain employee-related expenses to be excluded from the taxable value if they were recovered from the customer without any mark-up. These included emoluments, levy fees, travel to Malaysia, work permits, insurance and mandatory medical screening.
- The 2026 Guide takes a different position. Employee-related costs, including salaries, wages, Social Security Organizations (SOCSO) and Employees Provident Fund (EPF) contributions and other related expenses, now form part of the taxable value even if they are recovered without any mark-up.
- For example, if a service provider charges MYR 12,000 for supplying workers and recovers MYR 1,000 as pass-through costs for the workers’ levy, service tax applies to the full amount of MYR 13,000. At 8%, the service tax payable is MYR 1,040.
- This change may increase the service tax cost for providers that recharge payroll and other employee-related expenses.
2. Additional conditions for secondment arrangements
Secondment remains outside the scope of service tax. Under the 2019 Guide and 2024 Guide, the following five conditions had to be met:
- The employee is transferred temporarily and returns to the original employer after the assignment;
- The employment relationship with the original employer remains continuous and unbroken;
- During the secondment, the employee works solely for the seconded company;
- The seconded company has the total control over the employee; and
- The seconded company pays the employee’s remuneration directly or indirectly, and no extra charges are imposed.
The 2026 Guide adds two further conditions:
- There must be a secondment agreement between the original employer and the company to which the employee is seconded; and
- The original employer must carry on business activities other than providing employment services.
3. No B2B exemption or group relief
The 2026 Guide expressly clarifies that employment services do not qualify for the B2B exemption or group relief. Accordingly, the relevant relief is not available merely because the customer is another registered person providing the same taxable service or because the service is supplied between companies in the same group.
Impact to businesses
The 2026 Guide does not provide for a transition period. Businesses which receive such employment services should review their existing arrangements, contracts, invoices and pricing, and assess whether any additional service tax may arise.
Companies involved in providing such employment services should also consider the impact of the changes and ensure that the service tax obligations are accurately complied with, taking into account the nature of their arrangements with their customers and the requirements of the service tax legislation.
Tan Wen Ying, Associate and Natalia Vera Aw, Chambering Pupil, have contributed to this legal update.
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