In a roundup of the new federal government’s Budget 2019, experts toe the line changes and how these affect individuals or businesses.
Budget 2019 released several measures of change to taxes in a move to enhance the taxation system.
This came after the Ministry of Finance (MOF) formed Tax Reform Committee (TRC) in September 2018 to conduct a comprehensive study on the whole Malaysian taxation system.
The aim is to make the system more efficient, neutral, and progressive, while being capable of generating high-quality economic growth.
As the committee faces high expectations from the rakyat to propose meaningful tax reforms in Budget 2019, the TRC was targeting only low-hanging fruits for this budget, given that this body had only been in existence for two months.
This comes as Malaysia’s tax base was rather narrow, as income tax payers numbered only about two million out of the 1 million labour force, or six per cent of the country’s 32 million population.
By comparison, Singapore’s income tax payers stood at approximately 20 per cent of the population.
To reduce the existing tax gap, the TRC is focusing on ways to reduce tax leakages, exploring new sources of revenue, studying taxation in the digital economy, and reviewing the effectiveness of various tax incentives vis-àvis the conditions imposed.
“Prime Minister Tun Mahathir Mohamad’s administration is expected to work with local and foreign authorities to curb contraband smuggling,false declarations, or fake invoices colluded by freight forwarders.
“Greater focus will also be on material cases of tax evasion, transfer pricing, and tax planning abuses by businesses,” said Datuk Chua Tia Guan, a member of the TRC earlier this week during a post-Budget talk in Kuala Lumpur.
“This can already be seen in some of the measures proposed in Budget 2019, reviewing tax treatments on unabsorbed business losses and capital allowance, and enforcement of smuggling activities.”
New tax moves in Budget 2019
The TRC is to carry out a thorough review of the 130 types of tax incentives available, which are administered by 32 approving agencies with the intention to eliminate incentives that are no longer relevant or can be deemed as duplicitous.
On the other hand, new incentives that can support the current stage of the economic development may be introduced in the near future.
To plug the hole from tax leakages, the government is proposing the removal of the RM20,000 cap for taxes on Labuan-based businesses. It is also removing the restrictions for Labuan businesses to trade with their local counterparts. To avoid base erosion and profit shifting, the government has also imposed new conditions for Labuan-based businesses.
One of the ways the government intends to widen the revenue base is through the Real Property Gains Tax (RPGT).
Budget 2019 saw a new rate of five per cent introduced for Malaysians, while foreigners’ RPGT was increased to 10 per cent from fivefor the sixth and subsequent years.
Regarding the implementation of the digital tax, the government is waiting for the Organisation for Economic Cooperation and Development – along with more than 110 countries and jurisdictions – to come up with an agreed approach towards taxing the digital economy by March 2020.
Meanwhile, foreign suppliers who provide services to consumers in Malaysia – ie business-to-consumer or B2C – are also required to register and be charged a service tax by January 1, 2020.
To increase the efficiency of the Sales and Services Tax (SST), the government will introduce a credit system for sales tax deduction – this is to help small manufacturers that buy sales-taxable raw materials or components from traders.
For services providers, there will be an exemption for specific B2B service taxes for certain registered SST entities. This is expected to prevent compound taxation and reduce the cost of doing business.
In other words, it eliminates the chances of a tax getting charged twice in the supply chain before it reaches the final customer.
Lastly, the Special Voluntary Disclosure Program (SVDP) is a tax amnesty programme for tax evaders to come forth with their tax disclosures and be allowed a low penalty rate of around 10 to 15 per cent before June 30, 2019 on their tax liabilities.
The government has obtained the information and tax record of Malaysians – including bank accounts from other countries – via the Automatic Exchange of Information (AEOI) global standard signed with 102 countries.
By utilising this, the government will be able to go after tax evaders, including those involved with transfer pricing and profit shifting, as well as those with unexplained extraordinary wealth.
What the experts say
Many are pleased to see the government commit, usher and inculcate fundamental fiscal discipline, such as head of tax at KPMG in Malaysia Tai Lai Kok, who saw a balance between the government’s efforts to fix the country’s fiscal finances and improve the well-being of the rakyat.
“Being saddled and grappled with the financial state of affairs has not deterred the government in providing a comprehensive budget that meets the needs of the rakyat.
“The announcement also focused on careful fiscal policies and tax reform measures which will be seen by many as bold and progressive for the betterment of the nation,” Tai said.
Ernst & Young Tax Consultants Sdn Bhd’s partner and Malaysia Tax leader Amarjeet Singh believed that the proposed measures in the Budget were commendable, particularly the focus on encouraging the private sector to spur growth.
This was especially since the government has had the unenviable task of managing a higher than expected government debt against a continued budget deficit trend and rumoured risk of a credit rating downgrade, Singh pointed out.
Finance Minister Lim Guan Eng highlighted in the Budget speech that Malaysia’s fiscal deficit is projected to be 3.7 per cent for 2018.
He had explained that in spite of the current government’s best efforts to reduce cost and postpone non-critical expenditures, it was unrealistic to achieve the previous 2018 deficit target of 2.8 per cent.
“The increase in fiscal deficit arises after we have taken into account previously unbudgeted items such as RM1 billion interest servicing cost for 1MDB debts, RM1.3 billion in compensation for the acquisition of Eastern Dispersal Link in Johor which was announced last year, RM1 billion for Prasarana, RM1.4 billion for Ministry of Transport rail projects and paying back some GST refunds of RM3.9 billion,” Lim stated.
However, on a more positive note, the government has projected a gradual downward trajectory in deficits over the next few years.
Digital tax and imported services
In the run-up to Budget 2019, among the many new tax proposals rumoured to be introduced, the most anticipated had been the digital tax.
Tai noted that the digital tax is one of the tax reform measures by the government which will be seen by many as bold and progressive.
“Digital tax is one such move by the government bearing in mind the complexities that will be faced by the authorities on processes such as registration or monitoring of these online services,” he remarked in a commentary.
“Enforcing the law will also prove to be a challenge as these service providers are located in foreign jurisdictions. These service providers will be required to register, collect and remit service taxes to the Royal Malaysian Customs.
“But, what will the repercussion be in the event that the foreign service providers do not comply with the law?”
KPMG Tax Services Sdn Bhd’s (KPMG Tax Services) executive director of Indirect Tax Dany Oon also weighed in on the digital tax during a KPMG Tax and Business Seminar 2018 held in Kuching.
Oon opined that as far as digital services are concerned, individuals may not really be affected in Malaysia, especially when a lot of free content can easily be found online.
“Do we really buy that much of online content? Not goods, but services, apps, music, videos, subscriptions, do we really pay for these?” he questioned, noting that even if users pay for such services, they will not really pay that much.
“I think the impact towards individuals, from an individual perspective, personally, I don’t think it is that much of an effect.”
In any case, KPMG Tax Services executive director Regina Lau pointed out that the much anticipated Digital Tax will only come on board in 2020 – in tune with implementation of a similar tax announced by Singapore and more recently, by the UK.
“In the meantime, service tax will be broadened and imported services will be subject to service tax from January 1, 2019,” she observed.
“This will create a level playing field for local service suppliers as currently service tax only applies to taxable services by local suppliers.”
“In implementing this however, taxpayers should not be unduly burdened with cumbersome procedures and increased compliance costs.”
• Imported services will be subjected to Service Tax so as to ensure that Malaysia’s local service providers such as architecture, graphic design, Information Technologies (IT) and engineering design services are not unfairly disadvantaged against their foreign competitors starting January 1, 2019.
• For online services imported by consumers, the foreign service providers will be required to be registered with the Royal Malaysian Customs, charge and remit the relevant Service Tax on the transactions with effect from January 1, 2020. Examples of these services will include, but are not limited to downloaded software, music, video or digital advertising.
The unexpected time limit
On businesses facing a proposal to limit carry-forward of losses and allowances to seven years, Singh noted that similar provisions exist in neighbouring countries such as Indonesia, Thailand and the Philippines.
“However, it is unclear how this will be applied to existing losses and allowances,” he said.
According to Lau, companies with unabsorbed tax losses, unutilised capital allowances and allowances under various tax incentives will be greatly impacted by this new measure.
“While such balances can be carried forward indefinitely under current legislation, the period will now be restricted to seven consecutive years. Hence, any balances still remaining after the seventh year will no longer be available.
“While it was greatly expected that tax incentives will be made more restrictive, this time-based restriction of balances which extends to non-incentive balances is quite a surprise,” she said.
Therefore, for those companies looking into restructuring their operations in light of this, Lau has advised that caution should be exercised as the tax authorities will likely scrutinise all such companies closely for aggressive tax planning without commercial substance.
She also noted that given that the change is proposed to be effective from Year of Assessment 2019, the seven-year countdown has already started for some companies with such balances.
“Similarly, the conditions for Group Loss Relief will be restricted from Year of Assessment 2019.
“Affected companies contemplating reorganisation or restructuring in light of these changes should bear in mind the various anti-tax avoidance provisions in the tax legislation and the likely higher level of scrutiny and enforcement by the Inland Revenue Board (IRB) following these changes.”
• The government will also be reviewing the existing reliefs and incentives under the various tax acts to make them relevant and cut down leakages. The government will also now place a time limit on the carrying forward of losses and allowances for tax reliefs to a maximum of seven years. This would apply to unutilised business losses, capital allowances, reinvestment allowance, investment tax allowance and pioneer losses.
Special Voluntary Disclosure Programme
According to Tai, the SVDP is clearly intended to be a win-win situation by encouraging taxpayers to declare unreported income and enjoy reduced penalty rates of 10 per cent or 15 per cent.
“This move by the government to introduce this ‘amnesty’ program would need to be looked into most carefully to ensure that as many taxpayers as possible will be encouraged to participate in the program to make it a success.
“In this context, taxpayers may require clear assurance from the government in relation to the ‘amnesty’ that will be provided to them,” he noted.
Meanwhile, Singh noted that countries such as Indonesia and Thailand have introduced similar tax amnesty programs to positive effect.
“It is expected that this measure will encourage voluntary disclosures and improve tax collection in the short term,” Singh said.
In the recently-held KPMG seminar in Kuching, Tai recalled that this voluntary disclosure program, to a certain extent, was a big deal in Indonesia.
“It started in July 2016 and ended in March 2017. Any unreported income that was reported during this particular amnesty program was brought to tax, depending on time, at the rate of four per cent, six per cent or 10 per cent.
“And if you actually repatriated your income, you repatriated your overseas funds, along with this particular disclosure, the tax rates went down. It went down to two per cent and three per cent.
“Contrast this to what is being suggested now in our voluntary disclosure program. Our voluntary disclosure program suggests that your income will be taxed at normal rates, plus a 10 or 15 per cent penalty.
“Indonesia’s program went for nine months, ours is suggested to go for slightly over six months. But think of the differential there, in Indonesia, it was four, six or 10 per cent tax on their income. In so far, Malaysia, (it will be) normal rates, plus penalty.
“The other thing you will want to think about is how successful was Indonesia, in so far, as this particular program was concerned.”
Tai noted that in Indonesia, 900,000 plus individuals and corporates came forward under this particular program. The nine-month program resulted in a collection of about US$7.6 billion.
However, Tai also pointed out that most of the funds from Indonesia actually ended up in Singapore.
“The one failure of the program was that, although a lot of people reported, only a fraction of the amount were actually repatriated back into Indonesia.”
On the question of certainty or guarantee of the SVDP, Tai opined that this program can only be successful if the revenue provides sufficient comfort to the taxpayer that he will not be prosecuted whether for tax purposes or any other purposes.
“Think about the situation whereby you will voluntarily report and say ‘I’ve got commission payments of X dollars that I received and I didn’t report earlier’. The guidelines says ‘Yes, thank you very much, I will accept at face value. I will issue you the assessment with the penalty.’
“But what about other things? Would that lead the IRB to review other areas of my business that they feel it may not have been reported? Secondly, does it lead to other authorities opening up their eyes on you? Will MACC start to knock on your door, will Bank Negara come to you? Will other authorities come and create discomfort for us as a result of this particular disclosure?”
“I was talking to the Ministry of Finance (MOF) the other day and said for this to be successful, taxpayers has (to have) the absolute comfort in your program.
“If they think they are going to be inconvenienced, if they think they are going to have problems and issues as a result of you (or me) volunteering, then is there any incentive for me to volunteer? Without that element of trust in the system, you have a problem.”
As such, Tai believed this is an area that the MOF will need to clarify on as this basically will decide whether or not the program will be successful.
He added that it could totally fall flat because nobody comes forward or it could be very successful if the IRB and the other authorities basically agree that they will give taxpayers full amnesty.
Furthermore, in Lau’s view, as the current penalty rate for voluntary disclosures is 15 per cent, the discounted rate of 10 per cent is “not much of a carrot”.
“A zero penalty rate for a period of six months to a year would perhaps be greater incentive to encourage tax dodgers to come forward and be responsible taxpayers, thus allowing the government to collect additional past due revenue and increase the existing tax base,” Lau opined.
• The government will launch a Special Voluntary Disclosure Program (SVDP) to offer an opportunity for taxpayers to voluntarily declare any unreported income for Malaysian tax purposes, including that which is in offshore accounts.
• The SVDP will be offered from November 3, 2018 until June 30, 2019 where taxpayers will receive reduced penalty rates. If disclosure of unreported income is made from November 3, 2018 until March 31, 2019, the penalty will be 10 per cent of the tax-payable. If disclosure is made from April 1, 2019 until June 30, 2019, the penalty will be 15 per cent of the tax-payable. After the program ends on June 30, 2019, the penalty rates will range from 80 per cent to the maximum of 300 per cent as provided for in the existing tax laws.
Perks for the private sector
Singh noted that for businesses, it is good news that the government has addressed certain concerns with the SST regime, by proposing service tax exemptions for specific business-to-business transactions and a sales tax credit system to prevent compounded taxation
Similarly, Small & Medium Enterprises Association (SAMENTA) Malaysia’s chairman for Policy and Government Relations Datuk William Ng in a statement said they were happy to note that the government is introducing the credit system for sales tax deduction and SST exemption for specific services provided by registered businesses to other registered businesses.
“While we are disappointed that the tax reduction scheme for incremental income of SMEs is not retained, we are grateful that the government has incorporated a number of measures to assist SMEs,” Ng added.
Meanwhile, Lau from KPMG believed that SMEs have something to cheer in a one per cent income tax reduction for chargeable income up to the first RM500,000, giving a tax saving of up to RM5,000.
• To further improve the efficiency and effectiveness of the Sales and Service Tax (SST), starting January 1, 2019, the government will grant exemptions for specific business-to-business Service Tax for registered Service Tax entities. This will prevent the increase in the cost of doing business as a result of compounded taxation and protect the competitiveness of Malaysia’s local service industry.
• The corporate income tax rate for taxable income of up to RM500,000 and small and medium enterprises (SMEs) with less than RM2.5 million in paid up capital, will be reduced from 18 per cent to 17 per
More tax relief for individuals
On the segregation of tax relief for EPF and life insurance, which will result in an overall increase in the reliefs by RM1,000, Lau opined that this is long overdue and a welcome move.
She also lauded the increase in relief for SSPN savings from RM6,000 to RM8,000.
“These are effective from Year of Assessment 2019 so taxpayers have sufficient time to plan for maximisation of these reliefs.”
• To encourage higher insurance take up rate, the combined tax relief for EPF contribution and life insurance or takaful deduction will be separated into RM4,000 for EPF contribution and RM3,000 for takaful or life insurance premiums. For civil servants under the pension scheme, the tax deduction will be up to RM7,000.
• Additional individual tax relief for all additional savings deposited in the National Higher Education Loan Fund (PTPTN) National Education Savings Scheme (SSPN) from RM6,000 to RM8,000.
Lau noted that while a broader capital gains tax did not materialise, the RPGT will only be zero rated for disposals of residential properties with prices of up to RM200,000 by Malaysian citizens from the sixth year
“This is effective from January 1, 2019. Hence, citizens and PRs who are contemplating to sell properties they have held for more than five years should ensure that the sales are completed by the end of this year in order to enjoy the existing zero rate
The Real Property Gains Tax (RPGT) rates will be revised for disposals of properties or shares in property holding companies after the fifth year as follows:
• For companies and foreigners, the rate shall be increased from five per cent to 10 per cent; and
• For Malaysian individuals, the rate shall be increased from zero per cent to five per cent. However, low cost, low-medium cost and affordable housing with prices below RM200,000 will be exempted.