This article first appeared in Forum, The Edge Malaysia Weekly on October 21, 2019 - October 27, 2019

Budget 2020 provided fresh optimism and the strong message on encouraging investments resonated well with the business community. While we are not unfamiliar with the call for new foreign investments, the emphasis on retaining investments that are currently in Malaysia is an overt recognition that investment dollars are mobile and we need to also pay attention to current investors, including homegrown companies.

For multinational corporations, it has been proposed that an allocation of RM1 billion per year for five years be given for customised incentive packages to attract Fortune 500 companies and global unicorns in the high-technology, manufacturing, creative and new economic sectors to Malaysia. Such companies will be expected to make significant investments in Malaysia, support Malaysian small and medium-sized enterprises and create 150,000 high-quality jobs over five years. Further, a special channel under InvestKL will be established to facilitate investors from China.

For Malaysian export-oriented businesses, there will also be a RM1 billion per year allocation for five years for customised incentive packages for companies that can prove their ability to grow and export their products and services globally. Although the reinvestment allowance incentive was not extended, a special five-year investment tax allowance has been proposed for existing businesses in the electrical and electronics sector that are no longer eligible for reinvestment allowance, albeit at 50% of the reinvested expenditure.

The competition for investments, especially in the high-value, technology and innovation-

related spaces, is ever increasing. Other countries in the region have also polished up their incentive packages for investors. Indonesia, for example, introduced tax incentives in June and announced plans to reduce the headline corporate income tax rate from 25% to 20% over time, starting in 2021. Last month, Thailand announced a package of incentives, including a 50% tax cut, to capture companies that are looking to relocate production in view of the US-China trade tension. As a result, Vietnam is already receiving a lot of interest and investment flows. Not to be outdone, India has announced that new manufacturing companies that commence operations by March 31, 2023, will enjoy a 15% tax rate.

Based on the Asean Investment Report 2018, Malaysia trailed a number of other Asean countries in terms of size of foreign direct investments received in 2017. Singapore received the highest flows, followed by Indonesia, Vietnam, the Philippines and Malaysia. It is notable that Malaysia ranks fifth, whereas in the previous five years, it ranked slightly higher. Hence, it is hoped that the current (ongoing) review of Malaysia’s tax incentives will result in a framework that spurs investments and is business-friendly.

The need to foster a conducive business environment was not lost on the policymakers, with Finance Minister Lim Guan Eng indicating in his speech that Malaysia will continue to improve its processes for business registrations. The focus on providing cutting-edge technology to businesses, by way of investments in fibre optics and 5G infrastructure, is also encouraging. The World Economic Forum’s (WEF) Global Competitiveness Report 2018-2019 ranked Malaysia 25th out of 140 economies, the highest-ranked among the developing Asian countries. It is hoped that the various positive measures from Budget 2020 will help us improve our position.

The minister of finance also said Malaysia’s tax to gross domestic product ratio is comparatively low, with countries such as Vietnam, South Korea, Poland and Chile having a higher ratio. However, contrary to pre-budget expectation, no new taxes or digital taxes were proposed, and Lim clarified that the Goods and Services Tax (GST) would not be reintroduced. There is a proposal to increase the top personal income tax rate from 28% to 30% for individuals with taxable income of over RM2 million. This is expected to affect about 2,000 taxpayers, a small proportion of the total tax-paying population. So, where can we expect additional tax revenue to come from?

Whatever has been said about the GST system, it probably helped bring certain tax defaulters into compliance. Moving forward, better tax administration and a focus on uncovering delinquent businesses and individuals using data and technology is the way to go to reduce the shadow economy.

Tax administrations around the world are transforming, leveraging technology in the way they operate and interact with taxpayers, and disrupting the way businesses operate their tax function. The Inland Revenue Board (IRB) of Malaysia is relatively progressive in terms of its adoption of technology, with significant investments in IT systems and infrastructure for more than 15 years ago to support various capabilities such as e-filing. Other than e-filing, the IRB also uses data analytics for risk identification for audits. Technology is also used for data-matching, where information from different sources is compared and analysed for inconsistencies.

The IRB is not resting on its laurels. A few days after the Budget 2020 announcement, it issued a press release announcing plans to transform its processes and procedures. The IRB will make use of big data technology to detect taxpayers who are still operating outside the tax net. Of particular concern are the tax leakages from the shadow economy, which is estimated to be 21% of the country’s GDP. IRB CEO Datuk Seri Sabin Samitah has indicated that the board will continue to develop its compliance strategy and focus on taxpayer awareness and education to ensure that the amount of tax collected is in line with the country’s GDP.

The introduction of a Tax Identification Number (TIN) for all companies as well as income-earners above 18 years of age will also hopefully make it more difficult for unscrupulous businesses and individuals to avoid their tax obligations. In the press release, the IRB also confirmed that the Special Voluntary Disclosure Programme (SVDP) will not be extended, despite hopes for a SVDP 2.0. Moving forward, taxpayers can expect penalties ranging from 45% to 300%, depending on the nature of the offence. As such, increased penalties from stricter enforcement may also help raise tax revenues.

Overall, Budget 2020 is positive and we look forward to seeing the new measures being put in place by the Ministry of Finance, IRB and other relevant agencies to ensure that the budget proposals are implemented in an impactful manner.

Yeo Eng Ping is Asia-Pacific tax leader at EY. The views above are hers and do not necessarily reflect those of the global EY organisation or its member firms.

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