Global Tax Alert | 31 October 2013

Malaysia announces 2014 Budget Proposal

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Executive summary

On 25 October 2013, Malaysia’s Finance Minister1 delivered the 2014 Budget (Budget) Speech. The key Budget announcement was in relation to the implementation of the long-awaited Goods and Services Tax (GST) that will be effective for a transaction occurred on or after 1 April 2015, at the rate of 6%. The GST will replace the current sales and service tax regime. Businesses are given 17 months to prepare for the implementation of GST. The Budget also includes a one percentage point reduction in a corporate tax rate and increases in capital gains tax on gains arising from disposition of real property. This Alert summarizes the key items in the Budget.

GST implementation

GST is charged on any taxable supply of goods and services made by a GST-registered person in Malaysia. The importation of goods and services into Malaysia is also subject to GST but some transactions are zero rated, exempt or excluded from GST. The 17-month transitional period to implement the GST system requires businesses to take into consideration additional costs to implement the system as well as other ancillary matters, such as cash flow management, review of current accounting system capabilities, training of employees and potential legal implications of existing long-term contracts, among others.

Corporate tax rate reduction

The Budget will reduce the current 25% tax rate to 24% applicable to domestic and foreign companies, business trust, a trust body and a limited liability partnership. The concessionary 20% rate will also be reduced by one percentage point to 19% if domestic companies qualify for the concessionary rate on the first RM500,000 (US$160,000) of taxable income,2 because their paid-up ordinary capital is RM2,500,000 (US$800,000) or less at the beginning of a basis period for a year of assessment. The proposal will become effective for taxable years beginning in 2016.

Real property gains tax (RPGT) rate increase

The current RPGT rates are imposed on gains from the disposition of real property and shares in real property companies at a 15% rate on gains arising from dispositions made within a period of two years from the date of acquisition; 10% for a disposition between the third to the fifth year after the acquisition and 0% thereafter. The Budget proposes substantial increases in these rates as well as changes in holding periods as follows3:

  • Disposition within three years of acquisition – 30%
  • Disposition in the fourth year after acquisition – 20%
  • Disposition in the fifth year after acquisition – 15%
  • Disposition thereafter – 5%

The rate changes will become effective for a disposition occurring on or after 1 January 2014.

Extensions of sunset provisions:

  • Tax incentives for new 4 and 5- star hotels to 31 December 2016

The 2014 Budget proposes a three-year extension to the expiring tax incentives to hotel operators undertaking new investments in 4 and 5-star hotels. These incentives offer the hotel operators either a pioneer status with a tax exemption of 70% of statutory income for a period of five years or an investment tax allowance of 60% on qualifying capital expenditure incurred within a period of five years, to be set off against 70% of statutory income. The incentives are provided for approved applications received by the Malaysian Investment Development Authority from 8 October 2011 (30 August 2008 for hotels located in Sabah and Sarawak) until 31 December 2013. To further promote Malaysia as a preferred tourist destination and to ensure an adequate supply of international standard accommodation, the Government has proposed the three-year extension of the application period to 31 December 2016.

  • Accelerated capital allowances on information and communication technology (ICT) equipment and software

Under the current provision, ICT equipment and software qualify for an accelerated capital allowance, resulting in a full purchase price deduction in the year of purchase. This incentive that is due to expire in a taxable year beginning in 2013 is proposed to be extended up to taxable year beginning in 2016.

Double deduction on GST related training in accounting and ICT

The Budget proposes to allow a double deduction for taxable years beginning in 2014 and 2015 on expenses related to training of employees in accounting and ICT, in preparation for the implementation of GST.

Endnotes

1 He is also the Prime Minister.

2 The balance is taxed at the regular 25%.

3 Excluding rates applicable to individuals.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Consultants Sdn Bhd, Kuala Lumpur
  • Yeo Eng Ping
    +6 03 7495 8288
    eng-ping.yeo@my.ey.com
  • Sockalingam Murugesan
    +6 03 7495 8224
    sockalingam.murugesan@my.ey.com
  • Anil Kumar Puri
    +6 03 7495 8413
    anil-kumar.puri@my.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM3928