Thailand
Malaysia – Budget 2020: Tax measures amid taxing times
THE International Monetary Fund has slashed its 2019 global gross domestic product (GDP) growth from 3.5% to 3.2% due to the ongoing US-China trade tensions and global economic uncertainties.
Malaysia, as a significant trading nation will not be spared. Budget 2020 themed “Shared Prosperity: Sustainable and Inclusive Growth Towards High Income Economy” is expected to look into measures that will insulate the economy against global headwinds and at the same time focus on the well-being of the rakyat.
Accelerate adoption of Industry 4.0
The Finance Minister, in his opening speech for 2020 Budget Consultation, mentioned that the government has identified Industry 4.0 as the new source of productivity and economic growth. This specifically means the digitalisation of the economy and wider application of new technology such as artificial intelligence, big data and robotics.
To accelerate the adoption of industry 4.0, I would propose for the reinvestment allowance incentive to be reviewed. Businesses need to continue to invest in new technology to transform their operations to be more efficient, technologically enabled and productive.
At present, the reinvestment allowance incentive is available to companies in the manufacturing and selected agriculture sectors, which reinvest in qualifying capital expenditure incurred for 15 consecutive years of assessment in expanding, diversifying, automating or modernising their business operations.
I would propose for the reinvestment allowance incentive to be made available to all sectors and the 15-year cap to be removed. This would be a welcome move for businesses that have exhausted their reinvestment allowance claim, and incentivise companies to invest further. The current rule of allowing only companies that have been in operation for at least three years to be eligible for reinvestment allowance, and the claw back of reinvestment allowances claimed for assets disposed within five years should also be relaxed, because of the rapid change in technological advancement.
Incentives for Intellectual property (IP)
According to the 2019 International IP Index, countries that prioritise IP are 26% more competitive and 55% more likely to transform their economies using sophisticated, state-of-the-art technology. Prioritising policies that bolster IP could allow Malaysia to continue its upward trajectory, make additional headway in its transformation into a knowledge-based economy, and assert leadership among its Asean peer economies.
The 2019 IP Index ranked Malaysia 24th out of 50 economies and within South-East Asia, Malaysia came in second after Singapore.
The Singapore government offers an IP Development incentive (in the form of a reduced tax rate of 5% or 10% on a percentage of qualifying IP income for 10 years) to encourage use and commercialisation of IP rights arising from research and development activities.
In Budget 2019, tax deduction on licensing payments and IP registration fees was increased to 200% capped at S$100,000 per year for each payment. On top of that, qualifying research and development (R&D) expenses will enjoy a super tax deduction of 2.5 times.
Following Malaysia’s commitment to adhere to OECD’s Base erosion and profit shifting (BEPS) minimum standards, royalty and other income from IP rights derived by contract R&D companies, Labuan entities and principal hubs no longer enjoy tax exemption. To attract companies to relocate their R&D hubs to Malaysia and commercialise and exploit the resulting IP, Malaysia should consider introducing a BEPS-compliant IP incentive that provides lower tax rate (say, 10%) on qualifying IP income.
This incentive should be made conditional upon meeting certain criteria such as performance of the R&D activities in Malaysia, commercialisation of the results of these activities and IP ownership.
Attracting FDIs
Malaysia’s approved foreign direct investments (FDIs) have increased by 73.4% during the first quarter of 2019 to RM29.3bil from RM16.9bil a year ago as reported by our Finance Minister. The approved FDI increase was driven by a 127% manufacturing investment surge to RM20.2bil, compared to RM8.9bil a year ago.
Out of the RM20.2bil in approved manufacturing FDI, RM11.5bil came from the US and RM4.4bil from China, proving that Malaysia is benefiting from the trade war between two of the world’s largest economies.
This is indeed positive and efforts must be intensified to court high value investments into Malaysia that generates high value employment and spin offs for local businesses.
However, we are not the only country competing for FDIs. Fair competition is inevitable and Malaysia must move ahead of the curve and stand out as the top spot for foreign investments. In this regard, I believe a review of our corporate income tax rate is timely.
Our corporate income tax rate of 24% is relatively one of the highest in South-East Asia if compared with countries like Singapore, Thailand, Vietnam and Cambodia. The corporate income tax rate in Singapore stands at 17%, while Thailand, Vietnam and Cambodia is currently at 20%.
In a move to draw more foreign investments amid a global slowdown, the Indonesian government has proposed to slash its corporate income tax rate from 20% to 17% for five years. This is for publicly listed companies that have floated 40% of their shares on the Indonesia Stock Exchange. For non-listed companies, the rate will be cut from 25% to 22% in 2021 and to 20% in 2023. Meanwhile, the Indian government has just announced a number of measures to promote growth and investments. The most notable is the cut in its corporate tax rates from 30% to 22% for domestic companies and from 25% to 15% for new investment in manufacturing. These measures translate into a loss of revenue of approximately US$20bil, demonstrating the Indian government’s serious commitment to revive its economy and attract more foreign investments.
To remain competitive, Malaysia needs to take heed of these developments and plan for a gradual reduction of our corporate income tax rate from the current 24% to 20% over the next two to three years.
Simplifying post-incentive approval process
Although Malaysia offers a wide range of tax incentives, the post-approval process can be improved. The current process is administratively cumbersome where companies are required to submit applications to confirm compliance with conditions attached to the tax incentives granted, before claims can be made in the tax return.
As Malaysia has already adopted the Self-Assessment Tax System since 2001, I would propose for these procedures to be simplified by doing away with the post-approval applications. Instead, allow companies to start claiming the tax incentive within a certain timeframe subject to meeting conditions stated in the approval letters. To ensure effective implementation, the conditions attached to the tax incentives must be clear and measurable. Audits can be carried out by the relevant authorities to confirm compliance and prevent abuse.
I applaud the government’s recent initiative in establishing a joint-ministerial committee, co-chaired by our Finance Minister and International Trade and Industry Minister, to speed up decision making and simplifying approval process at the highest level, especially for projects relating to high-technology and high-value investments. This increases investors’ confidence in doing business in Malaysia and expedites the implementation of such investments.
Going green
An inclusive growth and sustainable development story will not be complete without putting environmental interests at heart.
Energy, Science, Technology, Environment and Climate Change Minister Yeo Bee Yin mentioned that the government would continue all current incentives such as the Green Technology Financing Scheme and the Green Investment Tax Allowance to incentivise the growth of renewable energy, targeted at 20% of electricity generation by 2025.
While we should incentivise efforts in going green, a carbon tax may be introduced to prevent deterioration of our environment.
The Singapore government introduced a carbon tax effective Jan 1,2020 where the rate is set at S$5 per tonne of greenhouse gas (GHG) emissions from 2019 to 2023. A review of the carbon tax rate will be made by 2023 with plans to increase it to between S$10 and S$15 per tonne of GHG emissions by 2030.
Malaysia may consider similar measure to preserve a cleaner, greener and liveable environment.
Final thoughts
Escalating US-China trade tension with no resolution in sight and global uncertainties could threaten future economic growth and erode business confidence, investment and trade. Difficult as it may, Budget 2020 must be well crafted to future-proof our economy and restore Malaysia as the Asian tiger.
Will we be seeing a fiscal stimulus in Budget 2020? Perhaps the priority to further reduce our fiscal deficit gap can take a back seat in 2020.
Source: https://www.thestar.com.my/business/business-news/2019/10/07/budget-2020-tax-measures-amid-taxing-times#KzBHAD3Qv6Wz6CR1.99