Malaysia reverses SST on employee cost recoveries in EOR services.

Malaysia’s Royal Malaysian Customs Department (RMCD) has reversed its earlier position on how service tax applies to employment services, including Employer of Record (EOR) arrangements. In a notice dated 13 August 2026, RMCD confirmed that service tax applies only to the fee charged by the provider, and that genuine pass-through costs recovered from clients fall outside the taxable value. The change reinstates the treatment that applied before June 2026 and affects any business that provides or uses employment services where salaries and other employment costs are recovered alongside a provider fee.

This update matters because it undoes a short-lived expansion of the tax base. A guide issued on 9 June 2026 had widened the taxable value to include employee-related costs recovered from clients, even where no mark-up was applied. The August notice withdraws that guide and restores the earlier approach. The sections below explain what is now taxable, what qualifies as a pass-through cost and how the reversal affects EOR pricing.

What changed on 13 August 2026

Under the June 2026 guide, employee-related costs such as salaries, statutory contributions and insurance formed part of the taxable value even when recovered without a mark-up. RMCD has now removed that guide from its website and republished the earlier 2024 version. Service tax applies to the provider’s employment or management fee, while qualifying costs passed on to the client without a mark-up sit outside the taxable value. Statutory fees, levies and taxes paid to federal or state government are also treated as disbursements and excluded on the same basis.

What counts as a pass-through cost

A pass-through cost is an amount the provider pays on the client’s behalf and then recovers at cost. Examples include salaries and wages, levy fees, work permit fees, insurance, travel costs to Malaysia and mandatory medical examinations for workers. The list is not exhaustive. The exclusion depends on two conditions: the cost is recovered without a mark-up, and the relevant disbursement criteria are met. Where a provider adds a margin to a recovered cost, that amount can fall back into the taxable value.

The effect on EOR pricing

For most EOR arrangements, the reversal lowers the service tax base. Tax now applies to the provider fee rather than the fee plus recovered employment costs. The table below shows the difference using an indicative example.

The practical result is a lower service tax charge on arrangements where employment costs are recovered at cost, provided no mark-up is applied.

What this means for businesses

Businesses that adjusted invoicing or pricing in response to the June guide may find those changes no longer reflect the current position. Providers can revisit how they apply service tax across employment and management fees, disbursements and any recovered costs that carry a mark-up.

Clients using EOR services can review recent invoices to confirm the treatment applied from 13 August 2026, particularly where pricing assumed pass-through costs were taxable. Because the exclusion turns on the no-mark-up condition and the disbursement criteria, the correct treatment can vary by contract.

Conclusion

RMCD’s August notice restores the pre-June treatment of employment services, so genuine pass-through costs recovered without a mark-up are again excluded from the taxable value, and service tax applies to the provider fee. The reversal affects both providers setting their invoicing and clients checking what they are charged.

Given how quickly the position has moved this year, the treatment of a specific arrangement can depend on its contract terms and how costs are recovered. To confirm how the current rules apply to your EOR or payroll arrangements, consider speaking with an Acclime tax specialist in Malaysia.