Expectations for Budget 2020
Kuala Lumpur, 7 October 2019
Below please find comments by EY Tax leaders on their expectations with regard to the Malaysia 2020 Budget.
With a confluence of factors affecting the global economy and pointing to a weak economic outlook in the near term, we look forward to greater clarity and direction from the Government of its vision and focus on sustainable growth, identifying specific priority sectors to encourage foreign and domestic investments, commitment to innovation, and introduction of measures that will elevate the quality of life for Malaysians in the long run.
Tax reforms and incentives
Since its formation in September 2018, the Tax Review Committee (TRC) has been mapping measures to reduce tax leakages, tax the underground economy, enhance tax administration and identify new revenue streams. The Prime Minister has indicated that the TRC’s proposals will enhance tax revenue while laying out holistic and simplified tax investment incentives that will attract future investments. This is definitely good news for the business community and the general public, and we look forward to well-formulated and sustainable pro-growth tax reforms, in addition to improvements to tax administration, particularly in terms of clarity, consistency and transparency. Beyond the Budget, we expect to see changes introduced to the tax system in the near future based on the work that the TRC has done.
In terms of attracting foreign direct investments, it is essential to identify the sectors for future development and the types / sources of investment we want to attract, particularly as we compete with other countries such as Thailand and Indonesia which are already introducing competitive tax packages, rates and benefits to foreign investors seeking to relocate their production facilities.
Sales and Service Tax (SST)
A year after the implementation of the SST, assessing the taxability of a service can still sometimes be a major challenge for businesses. Aside from the many legislative updates that need to be tracked, the ambiguity surrounding certain categories of taxable services (e.g., consultancy, management, and information technology services, and even the coverage of digital services) does persist. Tax-on-tax scenarios drive up costs of doing business. On a positive note, the Royal Malaysian Customs Department (RMCD) does regularly issue guidance to provide a clearer understanding of the relevant implications, and taxpayers’ obligations under the legislation.
Our wish list for Budget 2020 to address some of the concerns are as follows:
- Setting up an advisory panel of industry experts for consultation with Customs on SST matters
- Re-introduction of an input tax mechanism or a credit system into the Service Tax regime to counter the effects of tax-on-tax
- An expanded coverage of the business-to-business (B2B) and intragroup exemptions to include other groupings of taxable services
These are some measures that can be made available to preserve Sales and Service Tax as a single-tier tax, and for the tax to be imposed only to end-consumers of the taxable products and services.
From a personal income tax perspective, the Government should consider broadening and reducing the number of income tax bands. Broader income tax bands would encourage individuals to improve their earning capability through increased productivity and self-development as they would be able to enjoy the fruits of their labour, thereby improving our efforts to become a high-income nation. The additional take-home income would also allow for the increase in consumption of goods and services, some of which are subject to SST.
Additionally, the Government should seek to simplify reliefs by reducing the number of reliefs available whilst increasing the amount of relief for self, spouse and children. This would reduce the record-keeping burden on taxpayers and the effort required by the authorities to audit such claims which ultimately have a relatively small tax impact.
Businesses are organized and conducted very differently nowadays. We hope, with the upcoming Budget 2020, more attention will be given to measures to support growth of businesses and enhance the current tax administration. Overall, we expect that the tax framework will continue to provide a simplified and enhanced tax administration that is progressive and equitable.
- Clarity on the issue of taxation of the digital economy - This includes consideration of the impact of taxing this new segment of the economy and ensuring that comprehensive engagement with industry and professional bodies is conducted to ensure clarity and fair treatment.
- To promote clarity and compliance, it is hoped that there will be avenues for taxpayers to seek guidance on positions that may be unclear such as those relating to transactional issues and specific treatment on certain business transactions. Avenues for taxpayers to address areas of concern and seek confirmation from the tax authorities should be increased and be more efficient.
- Policies to encourage the growth of industry sectors that will help advance the Malaysian economy - Key policies should be centered around innovation and research and development, skilled manpower and talent development, embracing digital technologies, automation, adapting new technologies, as well as growth of certain sectors / industries such as hospitality, selected manufacturing, education, small-medium enterprises (SMEs) and emerging businesses. Attention needs to be given to innovation- related businesses such as cloud computing, mobile wallets, block chain, robotics and big data.
Real estate sector
The Government had introduced and implemented measures to stimulate the property sector post the Budget 2019 announcement, particularly in terms of providing affordable homes to the low- income earning group (B40 group), ease of financing for first-time home buyers, and stamp duty relief. However, housing affordability is still an ongoing issue for the rakyat, especially those living in urban areas among the M40 group due to high property prices and increasing cost of living in the cities. In addition, the property overhang issue persists due to the large supply of condominium and serviced apartments that are in excess of market demand.
As the young M40 would likely be the group of people who could provide further traction to the housing market, the Government could introduce some measures targeting this specific group, e.g. (i) extending the period of stamp duty exemption on the purchase of a residential property under the National Home Ownership Campaign without a cap on property price; (ii) re-introducing the personal relief on housing loan interest for a period of three (3) consecutive years starting from year of assessment 2020 to encourage the younger generation to own a home in Malaysia; and (iii) providing double tax deduction on housing loan interest subsidized by employers to encourage private sector participation and increase property demand.
Besides the fiscal stimulus, the Government should also consider market intervention in the unprecedented issue of over-supply and over-pricing of residential properties.
The commercial sector in Malaysia appears to have a weak domestic absorption capacity and the situation could be similar in the housing sector if supply increases. The current situation has created a conducive tenant-led office market in the main cities. There is also a growing trend of decentralizing office locations to outside the city centers due to the expanding public rail transit lines and the availability of good grade office space. This is a positive sign for the country and the Government should continue to enhance infrastructure and support facilities in the outskirts of cities to facilitate commercial property decentralization for balanced township development.
There is of course always an expectation of foreign investment into the commercial property sector to boost demand. However, the introduction of the earnings stripping rules (ESR) on 1 July 2019 that limits deductibility of interest expenses against rental business income may put a dent in related-party foreign investments into Malaysia. Specifically, the ESR may have an adverse impact on foreign investments relating to asset-backed securities, Islamic financing and other commercial arrangements by foreigners in the property sector. Hence, the Government is strongly urged to consider expanding the ESR exemptions to the above financing arrangements for originator companies and special purpose vehicles that are carrying on a business and involved in raising foreign related-party finance in the real property sector.
Oil and gas sector
Over the years, Malaysia has developed into a formidable player in the oil and gas industry and can now offer industry players an opportunity to operate in Malaysia at almost any point in the supply chain. From an upstream perspective, tax incentives have been introduced for, amongst others, enhanced oil recovery as well as marginal, deep-water and high CO2 fields, to encourage continued exploration activity. From a downstream perspective, PETRONAS’ Refinery and Petrochemical Integrated Complex (RAPID) is a game changer for Malaysia.
As such, the oil and gas landscape in Malaysia is sound. We obviously cannot control outside factors which may impact the oil and gas landscape and pricing, such as the proposed Chinese tariffs on US crude oil, or political issues.
What we can do is to continue to support the industry domestically and consider the gaps in the international supply chain which Malaysia can focus on filling. One potential area is oil trading – with the Global Incentives for Trading (“GIFT”) programme announced in 2011, we took a big step towards providing a platform to attract oil traders. Eight years on, we should refine our focus on and promotion of this incentive to attract the industry’s biggest players.
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