This article first appeared in Forum, The Edge Malaysia Weekly on November 12, 2018 - November 18, 2018

Two days after Budget 2019 was unveiled, I had coffee with Peter, a close friend. We reminisced about the good old days. He is now a very successful entrepreneur running various businesses locally and overseas. Our conversation inevitably touched on the budget.

Tan Hooi Beng: How are you, Pete? It has been a while.

Peter: I am good. I trust you are too. Perhaps you could brief me about the budget, notably on issues of interest to me.

Over the years, I have built my business in various sectors. Most of the companies make a profit while several others make losses. I am aware that the losses could be carried forward indefinitely for set-off against future profit unless there is a major change of shareholders in a dormant company. Under Budget 2019, is this still good?

Good to a certain degree. However, an expiry period has been proposed. Business losses, capital allowance and unutilised incentive benefits can be carried forward for a maximum period of seven years.

Is this an international trend? Wouldn’t Malaysia lose its competitiveness? Could I then transfer profit-making businesses to the loss-making companies so the losses can be utilised in the quickest manner?

Malaysia is not alone. Countries like Thailand (five years), Indonesia (five years), India (eight years) and a few more have adopted the same principle. Be mindful that any business restructuring must be commercially motivated. Otherwise, the tax authority can easily invoke the general anti-avoidance rule to deny the loss utilisation.

Wait a minute. I remember that 70% of the current-year loss can be transferred to another profit-making company within a group. New companies normally incur losses. It looks like I do not need to be overly concerned about the seven years rule, save for the remaining 30%.

I am afraid that the conditions for the group relief facility you mentioned will also be tightened. A new company has to wait for 12 months before it can surrender the losses. Moreover, the surrendering is limited to three years. Companies that have certain unutilised incentive benefits will not qualify as claimants. With all these, your chief financial officer needs to monitor the movement of losses. A timely surrender will be key.

I heard Budget 2019 deals with Labuan companies. I operate a bare-boat charter hire business in the region via a Labuan company. It leases vessels from UK companies and on-leases them to Malaysian and foreign companies. The leasing company has been paying RM20,000 flat tax for many years. Will this structure still work?

Malaysia endeavours to meet the global international tax standards and, hence, the review of the Labuan tax regime. Labuan trading activities, including leasing, will be subject to tax at 3%. Paying tax of RM20,000 annually is no longer an option. Moreover, a Labuan company is expected to have proper business substance. Labuan companies are now allowed to transact in ringgit and with Malaysia residents. However, in this case, the Malaysian payers or lessees will only be granted a tax deduction of 3% of the lease rental. I remember that some of your companies pay interest and premiums to Labuan banks and insurers. These will also be affected.

This is serious. My Malaysian clients (lessees) would not be able to take a deduction on the remaining 97%. Now I have to reconsider my group’s financing and insurance position. A disallowance of 97% is too significant. The group also owns a Labuan international licensing company that owns an intellectual property used by various related manufacturing companies overseas. Will this be an issue?

Unfortunately, the Labuan preferential tax regime will no longer apply to your licensing company. The licence fee will be subject to mainstream tax at 24% if the fees are derived from Malaysia. It is crucial to determine the locality of the licensing fees as Malaysia generally does not impose tax on foreign-source income.

The foreign-source income is a good point. It appears to me that Budget 2019 tightens the corporate tax breaks and reliefs. I am sure there are some tax goodies that could cheer me up, no?

Indeed. Certain SME companies that are owned directly by you will benefit from the reduction of 1% in corporate tax rate for the first RM500,000 of chargeable income. A community-centric person like you could consider employing senior citizens (above 60 years old) and ex-convicts because 200% deduction will be granted on salaries, provided the monthly remuneration does not exceed RM4,000. You could also help your employees settle their PTPTN loans as a tax deduction will be given. If I remember correctly, you have plans to venture into the manufacturing of plastic. Be environmentally friendly as a tax holiday will be available for bio-resin and biopolymer-based plastic. Above all, there is no increase in the personal tax rate for a high-net-worth person like you!

All right, buddy. I have picked up some good points today. One thing is for sure, nothing is certain in life save for death and taxes. I have to confess that I may have omitted certain rental income and commission income previously. Certain companies could have aggressively taken deductions on certain expenses. Should I do anything about this?

Good that you ask. The government has decided to bring back the tax amnesty programme. Essentially, taxpayers who voluntarily disclose their tax shortfalls and settle their arrears will qualify for preferential penalty rates:

The tax amnesty also applies to Real Property Gains Tax (RPGT) as well as stamp duty. I know you disposed of several manufacturing companies and a power plant last month. I am not sure whether those companies were real property companies (RPCs). If so, you will need to file the RPGT return accordingly.

Hang on. Those companies are not property companies per se. How would RPGT apply?

The companies can be RPCs if the main assets of the companies are real properties when the manufacturing companies or power plant first acquired the land or factory. Think about it, it is quite easy for a manufacturer to be an RPC since it would first acquire land and erect a factory on it before anything else!

All right, I will get my CFO to assess this.

Good. Let us do our part as good tax-paying citizens to encourage further progress in this great nation. I just want to let you know that the tax authority will examine and investigate any unexplained extraordinary wealth shown through the possession of luxury goods or real estate. And, if I may add, the difference between tax avoidance and tax evasion is the thickness of a prison wall.

I am not worried about that, save for the few omissions I mentioned earlier. Thanks so much for the insights earlier. See you soon!

Tan Hooi Beng is the deputy tax leader of Deloitte Malaysia. The views expressed are his own.

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