Thursday 28 Mar 2024
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KUALA LUMPUR (Nov 29): The one-off corporate tax of 33% to be levied on companies with chargeable income of more than RM100 million is likely to be the Budget 2022 proposal that would have the biggest financial impact on the insurance and takaful industry, said Deloitte Malaysia.

After looking at the tax measures proposed in Budget 2022 and Finance Bill 2021, Deloitte Malaysia said the one-off tax would have an impact on the insurance and takaful sector from both a fiscal and operational perspective.

Its financial services industry tax leader Mark Chan and tax senior manager Leong Mei Seong said not much can be done given the size and scale of most insurance and takaful companies' operations in terms of mitigating the impact of the one-off tax known as Cukai Makmur (Prosperity Tax).

“Conventional life and family takaful companies have the discretion to postpone the transfer of any actuarial surplus to the shareholders’ fund in 2022.

“This may manage the level of profits in the shareholders’ fund to an extent. However, it may not be a welcome move by some shareholders as that would have adverse impact on return on investment expectations in that given year,” they said in a statement on Monday

Chan and Leong said the nature of a company and a business is to produce profits and returns for shareholders, and taxation is a side effect of being profitable.

“One cannot expect a company to intentionally not be profitable because of tax reasons. Any effort to increase tax shelters should result in an enduring of future benefit to the company or at least be in line with improving the financial position of the company,” they said.

Meanwhile, Chan and Leong said the Finance Bill 2021 has proposed some meaningful and impactful changes to the takaful industry which could potentially cushion the blow of Cukai Makmur to an extent.

The first change, they said, is to allow the shareholders’ fund of the family takaful business to tax the wakalah fee income received and claim deductions on management expenses and fees incurred to earn the wakalah fee income.

“This will align the tax treatment to the business model, but potentially result in incremental taxable income if the wakalah fee which is based on percentage of contribution is significantly higher than the management expenses which may not be completely deductible,” they added.

The second change that is welcome by Chan and Leong is allowing the shareholders’ fund of the takaful companies to claim capital allowances.

While this is only applicable to assets acquired and put to use in financial year ending 2022 onwards, they observed that it will give takaful companies a form of tax shelter to cushion the Cukai Makmur, adding that it also puts the tax efficiency of the takaful companies on par with the conventional insurers.

On the withdrawal of foreign income tax exemption, Chan and Leong said the proposal is unlikely to significantly impact the insurance sector as the sector was excluded from the foreign income tax exemption.

“If the insurance company invests through collective investment schemes or invests in retail investment vehicles, returns from these investments would be impacted to the extent these vehicles have exposure in non-Malaysian debts and equities,” they said.

As for withholding tax on payments to agents, Chan and Leong noted the Finance Bill 2021 proposed a new Section 107D that will introduce a withholding tax mechanism on monetary payments to agents, dealers and distributors that are resident individuals who received RM100,000 or more in monetary and non-monetary payments in the preceding year.

As such, the insurance companies in short need to identify the agents that fall within this threshold as at Dec 31, 2021 to implement this tax on Jan 1, 2022.

“This will definitely be an operational challenge given the ambiguity still surrounding this new requirements and the extremely compressed timeline to achieve system readiness.

“We hope the authorities will consider a transitional period to realistically give insurance companies and other affected companies the time needed to adapt and administer this new tax moving forward,” they added.

Edited ByS Kanagaraju
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