Budget 2023 is comprehensive, disciplined and forward-thinking, with a focus on reforms to build resilience and weather uncertainties amid an increasingly challenging global economic and geopolitical outlook. The Budget also lays the foundation for future growth and competitiveness in strategic areas such as sustainability and digitalization.
The Budget was unveiled against the backdrop of a projected national economic growth of 6.5% to 7% this year, and 4% to 5% in 2023. The spending for 2023 is expected to be 12.1% higher than the Budget 2022 allocation, with an increase from RM332.1 billion to RM372.3 billion.
Budget 2023, themed “Keluarga Malaysia: Makmur Bersama”, focuses on incentives and financing for the B40 and M40 categories, youth, women, the unemployed and entrepreneurs.
The key revenue-raising measures announced were the implementation of the 15% global minimum tax in 2024, e-invoicing, potential carbon taxes and increased Customs enforcement. Where relevant, appropriate transitional rules should be developed to ensure businesses have adequate time to study the impact and prepare for the implementation of such measures. It is also important that these measures be balanced with initiatives to maintain Malaysia’s attractiveness as an investment destination.
In formulating Budget 2023, we note a continuing trend of consultation, focus group discussions and engagement by the Ministry of Finance, including the publication of a Pre-Budget Statement and several Public Consultation Papers prior to the announcement of Budget 2023. This is consistent with international best practices and helps ensure that the budget proposals consider the views of a diverse range of stakeholders.
Sustainable Socio-Economic Resilience of Keluarga Malaysia
With social protection and increasing disposable income as key priorities, Budget 2023 proposes personal income tax cuts for the M40, additional cash handouts and loans, and income tax exemptions for women returning to the workforce after a career break. This underscores the Government’s commitment to providing a robust safety net for Malaysia’s vulnerable socio-economic groups.
The Budget also proposes a significant increase of obligations, assistance and subsidies from RM31.0 billion to RM77.7 billion. The Government will also implement measures to ensure the subsidies are only enjoyed by the targeted groups. For long-term fiscal sustainability, we expect that it is likely for subsidy rationalization to be undertaken in due course.
Budget 2023 also recognized the importance of SMEs, the informal sector workers and youths as engines for growth and innovation, through the introduction of schemes to promote and bolster development in these sectors. These include the reduction of corporate tax rates and the provision of a one-off grant for eligible SMEs, and the introduction of various hiring and training incentives. Collectively, these measures should create a supportive environment for SMEs and serve as a catalyst for economic growth through job creation with increased disposable income.
Minimum tax on MNCs
The targeted introduction of the 15% global minimum tax (GMT) in 2024 underpins Malaysia’s commitment to the Organization for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) 2.0 initiative to combat perceived aggressive cross-border tax planning.
Briefly, the GMT aims to impose an effective tax rate (“ETR”) of 15%, applied on a jurisdictional basis. This will apply to multinational groups with annual turnover exceeding EUR750 million. Where a group pays an ETR of below 15% in any jurisdiction, there will be a top-up tax elsewhere. In relation to the GMT, Budget 2023 also proposed the introduction of a qualified domestic minimum top up tax (“QDMTT”). The QDMTT would ensure that any top-up tax in respect of profits earned in Malaysia is collected in Malaysia, and we will not cede taxing rights to other countries. Other countries have also discussed the implementation of a QDMTT or some other form of minimum tax, for this reason.
Impacted groups will need to ensure that boards and senior management are aware of the potential impact of BEPS 2.0. Further, given the relatively complex rules and exclusions, systems must be capable of capturing and generating the necessary information for compliance.
The GMT will create a level tax playing field between countries. It is crucial that Malaysia continues to position itself as an investor-friendly jurisdiction, with a conducive and flexible business environment. Tax incentives will continue to be relevant but investors will increasingly seek tailored incentives to suit their specific profiles.
Strengthening the tax system
Malaysia will join more than 40 countries which have adopted or will be adopting e-invoicing. Together with the use of the Tax Identification Number (TIN), this will reduce the shadow economy, increase compliance and expand the tax net. This reinforces other initiatives of the Inland Revenue Board (IRB) such as the Tax Corporate Governance Framework (TCGF), which promotes better governance and transparency, and cooperation between the IRB and taxpayers.
Environmental, Social and Governance (ESG) and Sustainability
Budget 2023 also announced major climate change and ESG initiatives including:
- A feasibility study on the implementation of a carbon tax
- The introduction of a Sustainability Framework and targets for a fully ESG-compliant portfolio and carbon neutral operations for government-linked companies
- The extension of various tax incentives under the green income tax exemption (GITE) and green investment tax allowance (GITA) until 31 December 2025 for qualifying green activities
- Measures to incorporate planetary health in the national development agenda such as enhancing penalties on environmental polluters
- The allocation of funds for the development of eco-friendly projects including those supporting carbon market development and forest restoration
- Enhancing the Green Technology Financing Scheme (GTFS) to increase the guaranteed sum to RM3b until the year 2025 and expanding the scope of financing to include the electric vehicle sector
- Electronic vehicle charging equipment manufacturers to be given a 100% income tax exemption on statutory income or a 100% investment tax allowance from the year of assessment 2023 to 2032
It is very encouraging to see the Government taking concrete and strategic steps in promoting the sustainability and ESG agenda. This builds on the proposed launch of the voluntary carbon market (VCM) exchange by Bursa Malaysia by the end of 2022, which was announced earlier.
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