It was uplifting to hear the recent Covid-19 vaccine announcement by Pfizer and BioNTech, and to see how stock markets around the world — including the FBM KLCI — surged on the news. The world is eagerly awaiting a panacea to return economies to a strong growth path. It is critical that governments ensure the stage is set for recovery, and that people and businesses are ready to capitalise on opportunities to drive the rebound.
There is a strong view that, at this time, governments should adopt policies and measures that build confidence and invigorate demand through large, well-targeted expenditure. This translates into greater public spending, with initiatives that preserve or create jobs and increase cash flow for people and businesses. The International Monetary Fund has acknowledged that governments around the world have taken extraordinary measures to protect the economy with a fiscal stimulus of US$11.7 trillion and more than US$7.5 trillion in monetary measures.
Malaysia adopted this approach early on and continued with an expansionary Budget 2021. Overall, there were no new taxes or levies, and no major tax rate increases. Instead, a number of targeted incentives were proposed, expanded or extended, such as the Global Trading Centre; incentives for capital-intensive manufacturers or certain service providers relocating to or making new investments in Malaysia; incentives for manufacturers of pharmaceutical products and non-resource-based R&D commercialisation activities; preferential individual income tax rates for non-Malaysians holding key positions in companies that relocate to Malaysia; and a two-year extension of various incentives expiring this year. This is a positive pro-growth budget, something that the country needs at this time, as we position for an upturn in 2021.
The next question is, how and when will the extraordinarily large government expenditure be paid? Malaysia is expecting a fiscal deficit of about 6% for 2020 and planning for a 5.4% deficit in 2021. Incidentally, the fiscal deficit was 6.7% in 2009, in the aftermath of the global financial crisis.
As at September, the federal government debt stood at RM874.3 billion, an increase of 10.3% from 2019. This represents 60.7% of gross domestic product (GDP), which is at the top of the current statutory limit. While no major tax-raising measures were announced and there are expectations of a rebounding economy, which will increase government revenue, it is likely that at some point, tax levers will need to be pulled.
Based on data released, the government is expecting a better year in 2021, with GDP growing between 6.5% and 7.5% after an expected contraction of 4.5% this year. The revenue projection for 2021, particularly the tax revenues, provides insights into how the government views the prospects for 2021 and how taxes may trend.
Total tax revenue for 2021 is projected to increase by RM21.1 billion, or 13.8%, after a sharp decline of 15.1% in 2020. However, the expected total revenue for 2021 at RM236.9 billion, which includes non-tax items such as the government’s dividend income, will still be lower than 2019’s total government revenue of RM264.4 billion;
Of this, total direct tax collection is expected to increase by RM16.8 billion, or 14.6%, in 2021 versus 2020, though the 2021 amount will still be slightly lesser than what was collected in 2019;
Interestingly, it is projected that in 2021, tax from individuals will increase by RM6.5 billion, or 18.2%, compared with 2020, and the total collected from individuals will be almost 10% higher than 2019 levels;
On the other hand, tax from corporates is expected to increase by RM5.2 billion, or 8.8%, against 2020. But this will be almost flat against what was collected in 2019;
Total indirect tax collection is expected to increase by RM4.3 billion, or 11.4%, from 2020, with the total collection of RM42.5 billion in 2021 still lower than the 2019 collection of RM45.8 billion; and
However, it is expected that from 2020 to 2021, sales tax collection will increase significantly by RM3.1 billion, or 25.7%, almost catching up to the 2019 level.
While the 2021 GDP is expected to be about 3.8% higher than in 2019, total direct tax revenue is expected to be 2.1% lower than in 2019. This could in part be due to profits that may be sheltered by pre-2021 tax losses and lower petroleum income tax collection. With potentially lower demand due to the impact of the Covid-19 pandemic, the average oil price in 2021 is expected to be much lower (estimated to be about US$40 to US$45 per barrel) than the average US$65 per barrel in 2019.
Interestingly, despite the expectation of strong service tax collection, total indirect tax revenue is expected to be 7.3% lower than in 2019, with a sharp decrease of RM1.7 billion in import/export duties and excise duties. This could reflect a change in demand behaviour or preference for locally assembled cars in the immediate future.
On the other hand, the expected large increase in sales tax, which would almost bring us back to 2019 levels, points to greater overall manufacturing activities, reflecting higher demand for locally manufactured products. However, the question that lingers is whether there are plans to increase the tax base or scope of service tax.
Since the budget measures did not increase personal taxes, and instead proposed a one percentage point cut for the “middle-income” band of RM50,000 to RM70,000 as well as a slew of tax relief, where will the additional individual tax revenue come from? On top of the new 30% income tax bracket introduced in 2020 for individuals, the expected large increase in 2021 collection suggests enhanced enforcement or increased tax audit activity, particularly on high-net-worth individuals.
This is possibly enabled by information obtained from foreign tax authorities through the Common Reporting System (CRS). However, I believe there will also be significant scrutiny on the tax positions of corporates and businesses. The last few months have already seen a sharp increase in tax audits of businesses, and it is unlikely this momentum will change in 2021. The Inland Revenue Board (IRB) has acknowledged the challenges of collecting taxes in an environment of reduced business profits, but the pressure to keep up tax collection is real.
No doubt the IRB should continue to run a robust tax audit programme, particularly targeting evasion and non-compliance. On a related point, it would be important that the “amnesty” for cases agreed under the Special Voluntary Disclosure Programme be respected to increase public-private trust. It is expected that tax issues such as the substantiation of tax losses, group relief, transfer pricing on related party transactions, eligibility for tax incentives claimed, withholding tax interest deductions and real property gains, will likely receive even more attention in tax audits.
All said, a measured approach to tax audits coupled with well-timed administrative relaxations on tax payments and penalties would go a long way to helping businesses recover and sustain business confidence. It must be remembered that corporates and businesses that manage to remain viable through 2020 will likely recover, but growth may be patchy and at different rates depending on sector and circumstances.
In the end, the ultimate objective is to save lives, protect jobs and grow our economy, and we all need to be aligned on how we get there.
Yeo Eng Ping is the EY Asia-Pacific tax leader. The views expressed above are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.