Below please find comments by EY Tax leaders on their expectations with regard to the Malaysia Budget 2023.
Malaysia is en route to post-pandemic COVID-19 recovery and all eyes are on Budget 2023. The upcoming budget is set to cover important issues impacting the economy, particularly employment opportunities, talent upskilling, rising cost of living and income brackets. A detailed plan for business survival, continuity and growth opportunities is expected to be tabled this Friday.
It is hoped that some measures will be introduced to support the middle 40% (M40) category in the form of reliefs or by increasing the thresholds for tax exemptions. There should be initiatives to encourage foreign direct investments and domestic investments. Investors revitalize economic sectors and create opportunities for the transfer of knowledge. Malaysia should continue to support and incentivize strategic and sizeable investments, in a flexible and targeted manner.
Furthermore, the Government should identify the types of investments and investors needed for the country to help targeted sectors and industries grow in order to maintain a sustainable and resilient economy.
From a tax administrative perspective, it is important to collect the right amount of taxes without incurring hefty administrative and compliance costs on the government and taxpayers. Voluntary compliance programs such as the Tax Corporate Governance Framework (TCGF) introduced on 11 April 2022 to encourages companies to voluntarily participate in the TCGF programme, are a right move toward cooperative compliance. Such programs serve as guides to taxpayers in managing their tax affairs in an easy, yet transparent manner. For example, the European Commission considered promoting voluntary compliance as part of the key requirement of an efficient tax administration. The way forward is for both taxpayers and tax authorities to voluntarily move toward improving tax governance.
Electronic invoicing or e-invoicing, for instance, allows for the automated transfer of billing information between businesses and the tax authorities. This allows for improvements in tax compliance, the reduction of costs and simplification of the tax system. E-invoicing allows for paper-based or manual processes to be replaced, thus providing better integration of billing and payment systems, greater accuracy and easier access to information. E-invoicing also channels the most current information in real time to tax authorities to strengthen compliance.
As one of the potential means to sustainably broaden its revenue base amidst the country’s widening budget deficit, the Government has embarked on studying the approach to re-introduce the Goods and Services Tax (GST) regime in Malaysia. We are of the view that the reintroduction of the GST may not be announced in Budget 2023 as we understand that the Government has yet to make a decision on the matter. Nevertheless, there may be mention of indirect tax reform in the near future.
On a separate note, in order to further increase tax collections via enhanced tax compliance, it is hoped that the Government would consider implementing, and embedding within the respective indirect tax legislations, a “facility” similar to the Special Voluntary Disclosure and Amnesty Programme (VA Programme) that has been administered by the Royal Malaysian Customs Department (RMCD) from 1 January 2022 to 30 September 2022. Through this, we can expect taxpayers to be further encouraged to come forward and voluntarily disclose any unpaid or underpaid indirect taxes to the RMCD (even beyond the VA Programme), due to concessions as may be provided by the law; and this may help in further reducing tax leakages which are eroding the national revenue.
Rising inflation is a conundrum that the country faces today. To help Malaysians cope with the rising cost of living, the Government should consider measures that will increase household disposable income especially for the bottom 40% (B40) and M40 groups. This may include broadening and reducing the number of income tax bands and reintroducing a special tax relief that may be available for specific income groups.
In addition, as the economy rebounds and unemployment falls, the Government should consider a program to encourage the replenishment of employee provident fund (EPF) savings that were withdrawn over the last couple of years as households struggled with the pandemic.
Lastly, in line with the country’s sustainability agenda, the Government should increasingly discourage the use of single-use plastic and 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.
Strengthening the resilience of small and medium-sized enterprises (SMEs)
As businesses swing back to fully reopening their doors to consumers in the post-pandemic period, small and medium-sized enterprises (SMEs) continue looking to strengthen their path for a stronger future in the new, digitalized economy. Beyond cost savings, boosting digitalization and advanced technology adoption while pivoting towards the green agenda are some key areas that businesses are looking into.
The Survey on Business Conditions and Economic Outlook for SMEs 2022-20231 conducted in July 2022 showed that only around 10% of SMEs are fully digitalized. This clearly indicates that in 2023 onwards, SMEs must continue to focus on accelerating their digital transformation journeys. As Malaysia aims to be “carbon neutral” by 2050, the SME sector will have a vital role to play in the national climate change agenda. SMEs need to analyze the costs and benefits of adopting green initiatives for their businesses, as they do not have the financial strength as compared to the larger companies. That said, SMEs that invest in technology and sustainability will likely have a competitive edge and help in future-proofing their businesses.
To support SMEs as they start to focus on digitalization and the green agenda, the Government should continue providing support such as matching grants, financing schemes with low interest rates as well as more targeted tax incentives such as a broader scope for accelerated capital allowance, special reinvestment allowance (RA) and double tax deductions for expenses incurred for the implementation of environment, social and governance (ESG) and automation projects. It is also hoped that a green tax incentive which is tailored specifically for SMEs will be introduced in Budget 2023, to further encourage this important segment of the economy to pursue green initiatives.
Additionally, a simpler tax system will facilitate and enhance compliance and reduce tax leakages. Simplicity should be the mantra, from legislation to compliance procedures. Time and effort required for compliance should all be kept to the minimum. In this regard, the Government may explore the introduction of a simplified tax system for SMEs.
Recent retail trade sales data released by the Department of Statistics Malaysia showed that the retail sector continued a robust recovery, registering a year-on-year retail trade sales growth of just under 20% for the first half of 2022. The reopening of borders has given the tourism sector a much-needed boost that will positively contribute to retail sales growth well into Q4 2022 and into 2023, notwithstanding headwinds from a potentially slowing global economy amidst inflationary pressures.
Budget 2023 will likely highlight the need to support lower and middle-income families as the rate of inflation in the prices of goods and services outpaces the rate of wage growth, despite the recent increase in minimum wages. We would expect to see targeted measures to extend aid primarily to the lower and middle-income groups, due to limited fiscal space for the Government to implement broad based stimulus packages. A reduction in personal income tax rates for those in the middle to lower end of income brackets can also be expected. Together with targeted subsidies, this will result in higher disposable incomes and will translate positively for the retail sector.
Business owners, especially SMEs, on the other hand, continue to face difficulties due to the prolonged global uncertainty in supply chains and rising commodity as well as input prices. The Government may consider providing support through tax incentives, for example, extending the special deduction for the reduction of rental income or by providing a double deduction on expenses such as staff recruitment costs. 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 the recovery and growth of the retail industry.
Real estate sector
The property sector showed early signs of recovery at the end of 2021 and received much needed help to boost the demand side via the Budget 2022 announcement in October 2021 which allocated RM1.5 billion worth of dedicated funds for low-cost housing projects and RM2 billion for the housing credit guarantee scheme, as well as real property gains tax (RPGT) exemption for Malaysian individuals and permanent residents when they dispose of their real property after six years of ownership.
However, the positive rebound outlook which started late last year is now hampered with rising inflationary pressures and interest rate hikes. These have weaken demand and put pressure on property developers in launching new projects. Targeted fiscal and non-fiscal measures that could stimulate the property market may include:
- Full stamp duty exemption for first-time home buyers
- Extension of the stamp duty exemption period, for the purchase of residential properties under the Home Ownership Campaign
- Re-introducing personal relief on housing loan interest
- Providing double tax deduction on housing loan interests subsidized by employers
- Supply side measures to address the labor shortage and master plans to create a local supply chain of raw materials to address rising costs
The Organization for Economic Cooperation and Development’s (“OECD’s”) Two-Pillar Base Erosion and Profit Shifting (“BEPS”) 2.0 Project continue to be a focus of tax authorities and taxpayers around the world. Pillar One seeks to re-allocate the taxing rights over part of the profits of multinational groups with annual turnovers exceeding EUR20 billion and profits exceeding 10%, to the jurisdictions in which their customers are located. Pillar Two seeks to implement a global minimum tax rate of 15%, applied on a jurisdictional basis. Pillar Two applies to multinational groups with annual turnovers exceeding EUR750 million.
Initially expected to be implemented in 2023, the implementation date will be delayed until 2024 for Pillar One, and also for Pillar Two in many countries. Any further delays to the global implementation of Pillar Two may result in unilateral tax rules being enacted by individual countries. For example, a recent joint statement by the governments of France, Germany, Italy, Netherlands and Spain said that if there is no unanimity in the European Union (“EU”) on Pillar Two, these countries are ready to implement the global minimum tax in 2023 “by any possible legal means”.
In Malaysia, the Ministry of Finance (“MoF”) indicated in its 2023 Pre-Budget Statement released on 3 June 2022 that it is reviewing the technical details of the two Pillars, including the introduction of the Qualified Domestic Minimum Top-up Tax (“QDMTT”) under Pillar Two. If Malaysia introduces the QDMTT, this means that impacted groups will pay a 15% minimum tax in Malaysia, hence ensuring that any top-up tax is done in Malaysia and taxing rights are not ceded to other countries. Malaysia’s seriousness in implementing Pillar Two was reinforced by the release of a Public Consultation Paper (“PCP”) on 1 August 2022, with the consultation period ending on 15 August 2022.
Given the complexity of Pillar Two, since there are still many areas of uncertainty and since further guidance is still awaited from the OECD, it is hoped that Malaysia will be cautious and measured in it approach to implementing Pillar Two, and that the MOF will take into consideration all the responses to the PCP. It is important to consider how other countries, including our ASEAN and Asia Pacific neighbors, are reacting. It is also crucial that Malaysia continues to position itself as an investor-friendly jurisdiction, with tax incentives and a business climate which continue to promote investment whilst allowing investors the flexibility they will need after the implementation of the global minimum tax. Above all, investors want certainty and clarity.
We would expect carbon tax to be imminent but not implemented in the coming year. Bursa Malaysia has announced the launch of voluntary carbon market (VCM) exchange by the end of 2022. To support the VCM in becoming competitive internationally, certain tax incentives may be considered, including income tax exemption on gains on the disposal of carbon credits as well as deductions for related expenses.
In terms of green technology incentives, various incentives are only available for applications until 31 December 2023, unless further extension of time is granted. We would welcome a review of the current green incentives framework, from the scope of coverage to making the application or approval process more efficient. In particular, a simpler process for claiming green incentives, e.g., green investment tax allowance in the MY Hijau directory, may be considered, perhaps by introducing thresholds under which prior application or verification is not required. To encourage more awareness and focus on ESG initiatives, the Government may also consider granting incentives such as special or double deductions for training or education courses related to climate change or ESG matters, as well as costs incurred by businesses in relation to ESG matters such as improving corporate governance frameworks.
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