Below please find comments by EY Tax leaders on their expectations with regard to the Malaysia Budget 2022.
Since the start of the Covid-19 pandemic, Malaysia, as with many other nations, has had to spend billions on stimulus measures to save lives and livelihoods. There is now the need to increase the nation’s revenue to fund these measures, and one obvious way to close the fiscal gap is through tax collections.
In considering options to increase tax revenue, policymakers should weigh the impact to the economy, investor and business sentiment or confidence, and the cost of collection and enforcement, against the increase in tax revenue. It is important that our tax policies are business and investor-friendly, based on the principle that the more businesses and investments Malaysia can attract and retain, the more jobs can be created, thus eventually leading to a higher tax revenue for the nation and a better standard of living for the rakyat.
At the same time, there needs to be a rethink and redesign of the tax administration system. Today, to a large extent the onus is placed on the taxpayer to comply with tax rules and there is still heavy reliance on taxpayers to declare their income or gains for tax purposes. This has led to a large leakage of tax revenue due to undeclared income or taxable gains.
There are many measures that the Government can undertake to address this, which includes accelerating the digitalization of our tax administration such that compliance to existing tax rules is made almost automatic. The use of technology has the potential to address various areas and identify players within the shadow economy, therefore creating the opportunity to recover lost revenue, improve taxpayer morale, and restore trust in the system. At full capacity, technology solutions can significantly reduce the level of informal activity and revolutionize the operation and organization of tax authorities and their interaction and relationships with taxpayers.
As part of the Ministry of Finance (MOF)’s pre-Budget Statement on 31 August 2021, it was announced that a Special Voluntary Disclosure Program for indirect taxes (indirect tax SVDP) will be implemented, which is to be administered by Customs.
To encourage taxpayers to participate in the said indirect tax SVDP, it is hoped that Customs would implement the same with the following features:
- With a wide scope covering sales tax, service tax, customs duties, excise duties, tourism tax, and good and services tax (GST);
- With a reasonable period or length of implementation – potentially divided into two phases (e.g., phase 1 for the first six/eight months and phase 2 for a further three months, similar to the previous SVDP administered by the Inland Revenue Board Malaysia (IRB);
- With no or reduced penalties to be imposed, subject to criteria; and
- With an assurance that no tax audits will be conducted on the periods covered in the voluntary disclosures submitted by the taxpayers within the SVDP timeframe.
With several parties anticipating the return of GST, one may infer that this indirect tax SVDP may be a precursor to the impending GST2.0 implementation – giving an opportunity for taxpayers to comply with their sales and service tax (SST) obligations before Customs initiates SST closure audits.
As the country makes progress in its fight against COVID-19 and allows more sectors of the economy to reopen, the Government should consider empowering individual taxpayers to monitor and manage their own health status by expanding existing medical expenses relief to include the purchase of COVID-19 self-test kits. This will enable individuals to take a more responsible approach to monitoring their COVID-19 status and hopefully, reduce the disruption caused to businesses as a result of the spread of the virus. Furthermore, existing medical expenses relief can also be expanded to include psychological treatment which will support individuals suffering from mental illnesses, including those brought about by the pandemic.
In addition, in line with the country’s sustainability agenda, the Government may wish to encourage individuals to use renewable energy by introducing a tax relief for the cost of purchase and installation of solar panels or other forms of renewable energy in their homes.
As Malaysians continue to feel the economic effects of COVID-19, the Government should also consider broadening and reducing the number of income tax bands and should continue to encourage philanthropy by increasing the cap on charitable donations. A broader income tax band provides individual taxpayers with the incentive to improve their earning capability, as they will be able to enjoy a larger portion of their increased wages, which in turn will inevitably increase the individual taxpayer’s consumption of goods and services, whilst enabling them to support the less fortunate in our society.
Small and Medium-sized Enterprises (SMEs)
As the Malaysian economy starts to reopen, the focus for small and medium-sized enterprises (SMEs) is to be resilient and remain relevant beyond the pandemic.
The cost of reopening business can be high for SMEs given that they have to comply with COVID-19 standard operating procedures (SOPs). The SMEs would therefore welcome support in the form of double deductions or grants from the Government for the additional expenses related to preventive health measures such as COVID-19 self-test kits and protective equipments that will be provided to employees.
One lesson learnt from the pandemic is the appreciation for digitalization. SMEs need to continue to invest in digitalizing their business, automating their operations and minimizing manual or labor-intensive activities. The Malaysian Government should continue to provide financial assistance by allocating funds through development financial institutions to support SMEs in meeting their digital investment requirements. In line with this, there is an immediate need for training courses to reskill and upskill the SME workforce to keep pace with technology trends and tools.
The retail industry’s slow but hopeful signs of recovery towards the end of 2020 were quickly halted when the Government announced a series of lockdowns throughout 2021.
Restrictions on the operations of “non-essential” businesses and on high-risk areas such as shopping malls meant that the retail industry was once again met with low consumer traffic. As a result, the industry expects little to no growth in retail sales for 2021 due to continued uncertainties.
In an effort to ease the financial burden of retailers and SMEs, support measures such as the extension of the wage subsidy program, relief for loan repayments, tax relief for rental discounts on business premises and allocations for financing programs for SMEs and micro businesses, amongst others, were offered by the Government. These fiscal incentives have provided the much needed financial support to businesses, and they should be continued into 2022 as the industry gradually recovers.
The move to e-commerce and digital sales by many traditional retailers have been one of the key strategies in reaching out to customers. The Government has continued to show its support for this shift through various initiatives, such as providing additional allocation under the SME Digitalisation Grant, continuing the Shop Malaysia Online and Go-eCommerce Onboarding campaigns and encouraging the use of e-commerce platforms by micro SMEs through Malaysia Digital Economy Corporation (MDEC). These initiatives should be extended to non-SMEs to further support the industry in 2022.
The Government should further consider reducing the corporate income tax rate for SMEs (currently at 17% for the first RM600,000 of chargeable income) to support investment, recovery and growth in the retail industry. For individual taxpayers, an income tax reduction of at least 1% for all income tax brackets should be considered to directly increase disposal income and boost retail spending.
Along with fiscal incentives, the reopening of the tourism sector, which the retail industry heavily relies upon, will be key to a sustained revival of the industry. A combination of fiscal and non-fiscal measures will be necessary to ease the process of recovery for retailers and help build their businesses. back to pre-pandemic levels.
Real estate sector
The market sentiments remain low for consumers and developers due to the uncertainties arising from the COVID-19 pandemic. Most Malaysians’ have also been impacted in one way or another due to the extended lockdowns since early last year. Given the current economic climate, we may continue seeing some in the M40 income group shifting to the B40 income bracket, which may result in a decline in overall consumer purchasing power. This, coupled with the declining trend of bank loan approvals, will further weaken the demand for property. Whilst there are various relief measures and loan moratoriums introduced by the Government through the different stimulus packages, the issue of property overhang remains. In addition, many property owners that have lost their income due to pay cuts, furloughs or layoffs since March 2020 may start to put their investment homes for sale in the secondary market and this may lead to a further surge in property supply.
While Malaysia’s economy is projected to grow post-pandemic in 2022, there are uncertainties in the real estate sector and the Government should continue to focus on addressing the property overhang. Some of the tax measures that could be considered to stimulate the property market include:
- Full stamp duty exemption for first-time homebuyers without a cap on property price
- Extension of the stamp duty exemption period, for the purchase of residential properties under the Home Ownership Campaign
- Re-introducing the personal relief on housing loan interest for a period of three (3) consecutive years starting from the year of assessment 2021
Members of the Organization for Economic Cooperation and Development (OECD) and the G20 inclusive framework on Base Erosion and Profit Shifting (BEPS) finalized a once-in-a-century deal that will revolutionize the global tax system, this month. Commonly referred to as BEPS 2.0, the expectation is that the new framework will:
- Reallocate a certain amount of taxing rights over the profits of the largest multinational enterprises (MNEs), to the “market economies”, i.e., the jurisdictions in which the customers or ultimate users of their goods and services are located. This is a significant deviation from current direct tax rules, which generally only allow the business profits of a multinational enterprise to be taxed in the countries where it has a fixed business presence; and
- Introduce a global minimum tax (GMT) rate of at least 15% for large MNEs
Under the GMT proposals, Malaysia will retain its sovereign right to set its preferred headline and concessionary tax rates. However, large MNEs in Malaysia that pay an effective tax rate below the 15% threshold may expect ‘top up’ taxes in their home countries. These proposals may prompt a rethink of Malaysia’s current tax incentive system as a tool to attract investments. Competition for investments between countries will remain high and we can expect to see creative solutions that may involve alternative incentive programs focused on cash grants and non-tax support.
In its maiden pre-budget statement, Malaysia reaffirmed its commitment to the OECD’s BEPS 2.0 two-pillar initiative but stopped short of providing insight on the alterations to our corporate tax and incentive systems that will inevitably need to occur. Budget 2022 provides the Government with an opportunity to strengthen investor confidence by providing businesses with direction on the policy options that are currently being explored.
The Government announced an ambitious goal for Malaysia to achieve carbon neutrality by 2050 as part of the recently published 12th Malaysia Plan. In particular, carbon pricing instruments will be introduced, in the form of a carbon tax and a domestic emissions trading scheme (DETS). These tools essentially set a value or price on greenhouse gas (GHG) emissions to be paid by the parties responsible, and effectively compel businesses to reduce emissions to remain competitive and sustainable. Given the necessity of wide-reaching engagement and consultation with the public, details of a carbon tax and DETS may not be part of the Budget 2022, but they may be released in the very near future.
While incentives like the Green Investment Tax Incentives (GITA and GITE) cover a wide range of green solutions, we hope that the Budget 2022 would expand to activities which may include carbon capture technologies, plastics and sustainable packaging, sustainability services, and the development of a talent pool with green technology skills. In line with the proposed introduction of the DETS and the development of the voluntary carbon market mechanism, we may expect to see the revival of the exemption of income derived from the trading of certificates of Certified Emission Reduction.
Overall, we expect decarbonization and other sustainability measures to continue to be a key theme in Budget 2022 and in the coming years.
While there have been many discussions on the introduction of new taxes in Budget 2022, focus should also be directed on improving and simplifying the tax administration function. Policies and approaches geared towards enhancing revenue should also focus on simplifying and strengthening the overall tax administration system, so that it is transparent and easy to adopt; and promotes good governance, equity, and inclusiveness.
Today, tax administrators are facing a host of disruptions including economic fluctuations, new industry sectors such as the gig economy, emerging business and supply chain models, varying stakeholder expectations, technological advances, and ever-changing international developments including reporting and information exchange requirements. At the same time, access to information and data is far greater now than ever before. To be effective, tax administrators will need to be able to collect, analyze and use data effectively. They will also need to collaborate more closely with taxpayers to better understand the evolving business landscape and requirements to enforce better compliance.
The vital role and success of a tax administration system in providing quality services and facilities to taxpayers can be reflected through a high level of compliance to the tax rules and regulations, and a low level of non-tax compliance. This will ultimately expand the tax base and increase tax revenues.
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