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Highlights of the 2012 Budget
The provisions of the 2012 Malaysia Budget Speech announced in October 2011 have now come into effect. However, not all the proposals were passed.
The much hoped for reduction in either the individual or corporate tax rate did not materialize. The Goods and Services Tax (GST) that had its first parliamentary reading in December 2009 was also not addressed in the 2012 Budget speech. As such, the date for its introduction remains uncertain. Nonetheless, no additional indirect taxes were introduced.
Tax incentives were proposed to encourage the development of the Kuala Lumpur International Financial District (KLIFD), the establishment of Treasury Management Centers, the provision of industrial design services and the establishment of private profit oriented schools. These incentives along with the proposed liberalization of 17 services sub-sectors in 2012, reflect the shift to a service-based economy that is expected to contribute to 60% of the country’s GDP by 2015.
To curb speculation in real property, the real property gains tax (RPGT) rate of 5% on properties disposed within a period of 5 years was amended. With effect from 1 January 2012, properties that are disposed within a period of 2 years from the date of acquisition will be subject to an increased RPGT rate of 10%. Properties that are disposed after 2 years but within 5 years from the date of acquisition will continue to be subject to RPGT at the rate of 5% whilst a nil tax rate remains for properties held for a period of more than 5 years.
Some of the changes affecting corporations are discussed below.
Corporate tax changes for companies and businesses
- Income tax deduction on franchise fees on local product brands
Expenses incurred on a franchise such as royalty, training fee etc. qualify for a deduction. The franchise fee has been denied a deduction previously on the basis that it is an expense that is incurred before the business commences. The change which provides for an income tax deduction on franchise fees takes effect from YA 2012 and is introduced to encourage the development of local franchise brands.
Corporate tax incentives
Tax incentives have been introduced to encourage investments in the following sectors.
An income tax exemption of 70% of statutory income for 5 years or investment tax allowance of 60% on qualifying capital expenditure incurred within 5 years (set off against 70% of statutory income) has been introduced for new investments in 4 and 5 star hotels in Peninsular Malaysia. Similar incentives are already provided in Sabah and Sarawak.
This incentive is effective for applications received between 8 October 2011 and 31 December 2013 by the Malaysian Industrial Development Authority (MIDA). This incentive is introduced to encourage hotel owners to develop better accommodation so as to attract higher-spending tourists to Malaysia.
- Industrial design services
For the first time, this service sub-sector has been given an incentive that entitles the industrial design service provider to an income tax exemption of 70% of statutory income for 5 years. This incentive is only available for applications received by MIDA between 8 October 2011 and 31 December 2016.
This incentive is in line with the Government’s aim to encourage creativity and innovations towards building a value-added economy. Conditions have to be met to qualify for this incentive such as being registered with the Malaysian Design Council and employing at least 50% Malaysian designers. It is interesting to note that neighboring countries such as Singapore and Thailand have similarly provided tax incentives to this sub-sector.
- Treasury management centers
To encourage multinational companies to establish treasury management centers (TMCs) in Malaysia to provide financial and fund management services to related companies, 70% of the statutory income from such prescribed services will be tax exempt for a period of 5 years. In addition, interest paid to overseas banks and related companies in relation to the prescribed services will be exempt from the interest withholding tax, and stamp duty exemption will be provided on all loan and service agreements executed in relation to the qualifying TMC activities.
These incentives are applicable to applications received by MIDA from 8 October 2011 until 31 December 2016.
- Hybrid and electric cars
Import duty and excise duty exemptions were given in 2011 on new completely built-up (CBU) hybrid and electric cars that satisfy certain conditions. To continue to promote green technology, these exemptions have been extended for another 2 years from 1 January 2012 i.e. the incentives continue to be effective for applications received by the Ministry of Finance up to 31 December 2013.
Administrative and compliance changes
- Reduction in time period for a tax audit
The time bar for a tax audit is typically 6 years from the date the assessment is made. The new proposal is to reduce the time period to 5 years with effect from year of assessment 2013 (for cases that are not based on false declaration, wilful late payment or negligence by the taxpayer).
Although this proposal is welcomed, it remains to be seen how it will be implemented because the Finance Bill has not included this amendment in the Income Tax Act (ITA). In addition, the accompanying statement to the proposal emphasizes that the requirement to keep records for 7 years in accordance with Sections 82 and 82A of the ITA will continue. The latter statement appears inconsistent with the proposed objective to reduce the time period for a tax audit to 6 years.
It is hoped that all relevant provisions in the ITA will be amended to coincide with this new proposal and time-line.
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