How the retabled Budget 2023 will reshape the tax landscape in Malaysia

The retabled Budget 2023 offers measures that are focused on broadening the nation’s tax base and improving the efficiency of the tax system.

In brief

• The proposed introduction of a capital gains tax on disposals of non-listed shares by companies is a fundamental departure from the current Malaysian tax framework. 
• Considerations on the scope and implementation should include the impact on the cost of doing business in Malaysia and on its attractiveness as an investment destination.

The retabling of Budget 2023 was a clarion call by our Prime Minister and Finance Minister, Dato’ Seri Anwar Ibrahim, to all Malaysians to muster strength to “forge a new direction”. 

He plainly laid out some unvarnished hard truths – on where we stand economically as a country with headwinds due to slowing global growth in 2023; high inflation the effects of which have been increasingly felt throughout the four quarters of 2022; high unemployment particularly among the youth; and less foreign direct investments into Malaysia compared to pre-pandemic levels. He called out the ineffectiveness of certain areas of governance in administration, as reported by the Auditor General, and acknowledged the downward trend of Malaysia on key international rankings such as the Corruption Perception Index and the World Competitiveness Ranking. 

Fiscal consolidation is a key goal and the Government plans to gradually reduce the fiscal deficit to 3.2% by 2025, with a planned deficit of 5% for 2023. The key tax policy themes of this Budget center around the broadening of Malaysia’s tax base and improving the efficiency of the tax system, as they had been the focus for a number of years. One trend in particular is becoming more prominent - increased taxes where they can be afforded, coupled with lower taxes for the needy. We see this in the proposals to increase the individual taxes of higher inco inflation me individuals, reduce the taxes of middle-income individuals, impose a luxury goods tax; and lower the tax rate for micro, small and medium enterprises (MSMEs). We have also heard that the timing is not right to reintroduce the goods and services tax, given the difficult economic situation faced by the majority of Malaysians. There are also timely measures to increase tax collections, for example, to step up on tax enforcement to curb leakages due to smuggling and encourage taxpayers to come forward with a new round of voluntary disclosures from 1 June 2023[1] to 31 May 2024, with the possibility of a 100% penalty waiver. Plans were also announced to restructure the tax incentive regime so that tax rates are tiered based on outcomes, while strengthening the monitoring of the incentives granted. A few well-considered tax incentives were introduced or extended to encourage environmental, social and governance (ESG) e.g., carbon capture and storage, and electric vehicles.

However, one proposal to widen the tax-base has caught a lot of attention – the potential introduction of a capital gains tax (CGT) in 2024 on disposals of non-listed shares by corporate shareholders, which if implemented will represent a significant change to our tax system, which currently generally only imposes tax on “income”, with limited exceptions, e.g., the real property gains tax (RPGT). 

The International Monetary Fund (IMF) conducts an annual surveillance of the economic and financial policies of member countries, and through a process called the Article IV Consultation, provides its evaluation and recommendations. The 2022 report states that “Malaysia’s tax revenues have been on a declining trend and are low compared to peers, and the pandemic highlighted the need for revenue mobilization” and suggests the need to fiscally consolidate in the medium term via sustainable revenue-raising measures. The report said that “The 2022 Budget introduced targeted, mostly one-off, tax measures to raise revenues. These measures are to be complemented by more permanent measures that would address Malaysia’s long-standing revenue weakness under the medium-term revenue strategy.

The report goes on to suggest that “the authorities should continue to implement past fund advice on fiscal governance reforms contained in the 2018-2019 Article IV consultations reports, with a focus on reducing vulnerabilities to corruption.” This refers to advice to “… broaden the tax base and reduce investment incentives (which are tax expenditures) (2018). At the current juncture, other revenue measures will be needed, such as strengthening the SST, revisiting tax incentives, increasing excise taxes, broadening the PIT tax base, and introducing a capital gain tax (2019)…”

The IMF report provides some context on the need and timing of the proposal to introduce the CGT mentioned. The proposal is couched as something that will be studied further, which is both thoughtful and necessary, in order to gain more confidence that this proposal will yield a net positive outcome for Malaysia and gather ideas on how best to develop the tax rules and design how this should be scoped and implemented. 

A few immediate considerations come to mind:

• Impact on the attractiveness of Malaysia as an investment destination. A capital gains tax on disposal of shares will increase the tax cost and overall cost of investment. However, the extent to which this will affect investment decisions depends on many factors. In regard to tax, the relative overall tax cost among competing locations is a relevant aspect. As said, many countries do impose tax on gains on transfers of shares, and if we compare the position of major ASEAN countries, Indonesia, Thailand, Vietnam and the Philippines already tax such gains. The only exception is Singapore, but Singapore may not necessarily be viewed as a direct competitor to Malaysia for certain types of investors or investments. In his speech, the Finance Minister alluded to a lower rate of tax, if the CGT is implemented, and presumably this will be positioned to ensure Malaysia continues to be tax competitive compared to other competing investment destinations. There may also be a need to consider exemptions, “safe harbour rules”, or a 0% rate or nominal rate for certain shareholding profiles e.g., those that have been held for long periods.