KUALA LUMPUR (Oct 30): Budget 2022 expects an increase in tax collection, with corporate tax collection anticipated to rise to above 2019's pre-pandemic numbers, which is optimistic but challenging if businesses are still trying to bounce back from Covid-19, said Deloitte Malaysia tax leader Sim Kwang Gek.

Specifically, there is an anticipation of a 5.9% increase in overall tax collection on the back of a better economic outlook, while corporate tax is expected to rise 8.1% to RM65.5 billion, Sim noted in a statement.

From a tax reform perspective, Sim said the taxation on foreign sourced income is a "significant change" that will increase the tax bill of companies with overseas operations.

In the Budget, it has been proposed that income tax be imposed on residents in Malaysia with income derived from foreign sources and received in Malaysia from Jan 1, 2022. This, Sim said, is in response to global developments such as the global minimum tax and the recent European Union’s action to include Malaysia in its “grey list”. 

"This is a significant overhaul of our taxation system, which has been predominantly a territorial tax system. Some of the key issues to address is if dividends received locally will now be taxed because the law currently exempts local dividends from income tax due to the single-tier system that Malaysia adopts. There should also be a facility to claim tax relief should the same income be subject to tax elsewhere. In Singapore, certain foreign sourced income, such as foreign sourced dividends, are not subject to Singapore tax subject to fulfilment of certain conditions," Sim said.

"More details should be provided in the Finance Bill in this regard and I hope that there are special circumstances available for companies to continue to enjoy exemption for such income," she added.

Meanwhile, the introduction of the one-off special Cukai Makmur or Prosperity Tax on companies that make super profits, together with the taxation on foreign sourced income, may provide the country with some cushion, Sim said, who also expects tax audits to be intensified to meet the collection target.

"Instead of introducing windfall tax on companies that benefited from the Covid-19 pandemic and enjoyed super profits, Budget 2022 proposes a one-off 33% tax on taxable profits of above RM100 million. This is an increase of 9%, compared with the current headline tax of 24%. This measure should be easier to implement compared to the proposal to impose a windfall profit levy on certain sectors where market prices may be lacking. 

"How much tax revenue can be generated from this measure remains to be seen as more than 90% of total business establishments in Malaysia are small and medium enterprises (SMEs) and there may not be many companies having taxable profits (net of deductible expenses and allowances) of above RM100 million. Considering that SMEs make up more than 90% of business establishments in Malaysia, it remains to be seen how much additional tax can be collected from companies having more than RM100 million taxable profits," Sim said.

Below are more key points of her review of Budget 2022:

Budget 2022 proposes to extend the RA incentive for another two years to the year of assessment 2024. This is available to eligible companies that have exhausted their RA incentive claims. This is a welcomed proposal, encouraging businesses to continue to invest in expanding, automating, diversifying and modernising their operations. Currently, the RA incentive is only available to manufacturing and selected players in the agriculture sector. I was hoping that the RA incentive will be given to the service sector considering the significance of this sector to our economy. However, this is missing from Budget 2022.

The proposal to allow MSMEs to defer tax instalment payments for six months until June 30, 2022 should alleviate cash constraints faced by MSMEs. However, the impact of this proposal may not be felt since most small businesses are facing challenges to bounce back, bearing in mind that there may be minimal or no profits in 2022.

This is a good proposal, especially for businesses that face fluctuations in their financial projections and hence providing reasonable tax estimates may be challenging. Currently, businesses are allowed to revise their tax estimates in the sixth and ninth months without any imposition of penalties. The facility to allow revision of tax estimates in the 11th month would provide businesses an opportunity to submit a more accurate tax estimate without any penalties.

Currently, businesses are only allowed to carry forward tax losses for a maximum of seven years. Budget 2022 proposes to extend it to 10 years and this should provide relief to businesses that have long gestation periods and those who have been suffering from the Covid-19 pandemic.

There were calls to tax gains derived from share trading activities, and instead of introducing a capital gains tax, Budget 2022 seeks to increase the stamp duty rate from 0.1% to 0.15% on contract notes for trading of listed shares and remove the cap of RM200 introduced back in year 2003. This is a quick and easy way to increase tax collection from such activities. It is a good alternative to the capital gains tax regime, which can be complex to administer and requires a careful study before implementation. Removal of the RM200 cap would impact share transaction value above approximately RM134,000.  

Budget 2022 estimates an increase in indirect tax collection by 5.4% compared to 2021. This is largely attributable to the SVDP programme for indirect taxes that the government will be rolling out. The SVDP is a good initiative to encourage taxpayers to come forward and rectify errors. This proposal is also an attractive one in that a full waiver of penalties will be granted during the first phase of implementation followed by a 50% waiver in the second phase. Under the previous SVDP programme for income tax, penalties were only reduced to 10%.

The measures proposed to encourage homeownership, such as affordable housing projects and the Housing Guarantee Scheme, are commendable, but more could be offered to stimulate the property sector. The Home Ownership Campaign should be extended beyond Dec 31, 2021 to boost the property sector. The real property gains tax exemption for disposal of properties above a five-year holding period for Malaysian citizens and permanent residents should provide some cheer and tax savings for these individuals.

See more Budget 2022 highlights here.