THE imposition of a capital gains tax could be either a boon or a bane for the Malaysian economy, depending on its planning and implementation.
The issue resurfaced when Inland Revenue Board (IRB) CEO Datuk Seri Sabin Samitah suggested last week that the government should consider introducing a capital gains tax to broaden the tax base and increase revenue for the national coffers to put Malaysia on a par with other countries in the region.
Sabin was addressing a question about taxation on income from the stock market during the Deloitte TaxMax 2020 webinar on Nov 23 when he said a capital gains tax could be a good check and balance in the tax system while addressing poverty and income inequality. He alluded to the fact that its absence enabled tax evasion.
Tax experts agree that a capital gains tax can help ensure equity and fairness in the tax system provided it is implemented properly.
The argument has always been that since the wealthy have a disposable income and assets, it seems fair to impose a capital gains tax on this category of taxpayers. However, the concern is that the negative economic outcomes of the tax, as with other taxes such as wealth and inheritance tax, collectively outweigh the revenues they generate.
Equitability and fairness
Currently, Malaysia’s only form of capital gains tax is the Real Property Gains Tax (RPGT), which is chargeable on gains arising from the disposal of Malaysian real property or shares in a real property company.
For many years now, the debate has been over whether the capital gains tax on real property should be widened to include other forms of assets.
While the introduction of a capital gains tax in Malaysia would broaden the tax net to include more capital assets — leading to a higher collection of tax revenue — it could also adversely impact the income of genuine long-term investors who rely on dividends and capital gains.
This can only be managed if a mechanism similar to that in RPGT is introduced to reduce the capital gains tax rate after the investments have been held for a stipulated period, KPMG Malaysia head of tax Tai Lai Kok points out.
For instance, Malaysians who dispose of real property in Malaysia within three years or less of its purchase will be subject to paying 30% of the gains as RPGT. The rate is reduced to 15% by the fifth year and 5% thereafter.
Under Penjana 2020, Malaysians who sell off their residential property between June 1, 2020 and Dec 31, 2021 are exempted from paying the 5% or higher RPGT for the disposal of properties.
“Besides, it may also be difficult to monitor and administer [a capital gains tax], especially for the individual taxpayer,” Tai adds.
Definition of revenue and capital gains
Ernst & Young Tax Consultants Sdn Bhd’s Amarjeet Singh believes the capital gains tax is fundamentally a fair and equitable tax regime.
It is, after all, not just a vehicle to increase tax revenue but a notion birthed out of the principle of fairness in tax collection, which requires that all forms of gains and incomes be taxed.
“Expanding Malaysia’s RPGT to now cover all forms of capital gains should be studied comprehensively, including whether it would adversely impact the economy, whether it would result in capital flight or make Malaysia a less attractive destination for investments,” the tax leader for EY Asean and Malaysia stresses.
“If capital gains are to be included as part of the income tax legislation, then a highly detailed review of the legislation is required. Implementation costs as well as a cost-benefit analysis should be undertaken,” he adds.
Amarjeet points out that Malaysian income tax is not applicable to gains that are capital in nature but, instead, relies on a set of principles to establish whether a gain counts as revenue or capital.
For this reason, he recommends proper definition and clarity in the legislation to establish what would constitute income and capital gain. For instance, there should be a holding period threshold to show what constitutes a gain on disposal and what is capital in nature.
“If implemented properly, capital gains tax should result in a fairer tax system as the rich — high net worth individuals and companies — will be paying more taxes under the regime due to their ownership of big-ticket assets,” says Grant Thornton Tax Advisory & Compliance senior executive director Chow Chee Yen.
“But it should be implemented gradually by way of a lower rate and limited scope, for starters. This is so as to not cause a major shock to the market, which may portray Malaysia as business-unfriendly. At any rate, it should definitely not be implemented during the current economic condition due to the pandemic,” Chow says.
Losing the business-friendly edge
Among Malaysia’s competitive advantages is the absence of a capital gains tax apart from the RPGT. A number of neighbouring countries do not tax capital gains either.
“Should the capital gains tax on assets be imposed, Malaysia runs the risk of losing its attractiveness and competitive edge in the eyes of investors, particularly foreign ones. This could have an [adverse] impact on economic growth in Malaysia,” cautions KPMG’s Tai.
Should the government broaden the capital gains tax, it could be on share trading activities, he predicts.
“While [the stock market] may potentially be a source worth tapping, capital losses are equally possible in these trading activities. [The government] will need to consider how best to deal with it. Taxing the gains but not making allowances for losses will not be equitable. Consider the impact on the share market and investor [community],” Tai says.
“Should capital gains tax be introduced in the future, the legislation should be carefully drafted to take into account its impact on the investment climate in Malaysia. While short-term investors and speculators should rightfully pay their fair share of tax on gains attained, long-term investors should preferably not be badly affected so that Malaysia remains an attractive investment location.”
Non-executive chairman of Tricor Services (Malaysia) Sdn Bhd and Malaysian Institute of Accountants president Dr Veerinderjeet Singh concurs, saying that the government should not impose capital gains tax on listed companies’ shares if the country wants to encourage growth in the stock market.
After all, he points out, it is hard to tell at this point if the widening of the capital gains tax would actually provide substantial revenues to the Malaysian government.
“If the government is thinking of implementing capital gains tax, it will need to consider the scope of tax — that is the type of corporate gains it wants to tax — as well as the tax rates. Starting at a low rate and working its way up should be the way to go,” says Veerinderjeet, who is also president of the Malaysian Institute of Certified Public Accountants.
To illustrate, Chow says the market valuation of an unlisted company differs from that of a listed one, in that the former’s refers to the shareholders’ funds, while the latter’s refers to stock market valuation. Therefore, the imposition of a capital gains tax on shares in unlisted companies may result in double the taxation on the same income, which is already subject to corporate tax.
“This is because capital gains tax is a levy on the growth in the value of investment,” Chow explains.
Capital gains tax in other countries
While it is widely believed that capital gains tax is best suited for developed countries, a number of developing nations have adopted some form of capital gains tax.
Indonesia imposes a capital gains tax of 22% on residents and 20% on non-residents, with a 0.1% withholding tax on the sale of publicly listed shares.
According to EY’s Amarjeet, the total capital gains tax collection in Indonesia amounted to less than 1% of its total revenue collection in 2018.
In Vietnam and Thailand, capital gains are generally assessed together with ordinary income and subject to the standard corporate tax rate.
A capital gains tax of 15% is levied on gains from the sale of non-listed company shares in the Philippines; 10% on oil and gas exploration and extraction companies in Myanmar; and 2% on non-listed shares in Laos.
“The Philippines has different capital gains tax rates for different types of gains, such as 0.6% for listed shares, 6% for real property and 5% to 10% for non-listed shares. Based on available data for 2018, the capital gains tax collection was approximately 1.2% [of overall tax collection],” Amarjeet explains.
For Cambodia, a capital gains tax of 20% will be implemented effective Jan 1, 2021.
Currently, Singapore and Hong Kong do not impose a capital gains tax. Like Malaysia, Singapore bases the consideration for taxability on whether the gains from a disposal are considered capital (not taxable) or revenue (taxable) in nature.
“Based on publicly available information, indications are that the portion of capital gains tax collected is not substantial as compared to corporate tax, individual tax and indirect tax,” KPMG’s Tai observes.
In China, capital gains tax is levied on nationals at a flat rate of 20% for the transfer of assets such as securities, equity interest, land use rights, buildings, equipment and vehicles. While gains on the transfer of stocks on the Chinese stock market are provisionally tax exempt, foreigners who have been residents in China for less than five years pay tax on gains arising from their Chinese investments.
In Australia, the Philippines, India and the UK, gains on the sale of shares of listed companies are subject to capital gains tax. India imposes a 15% capital gains tax on sales of shares but exemption is given for capital gains arising from long-term investments of more than one year.
In the UK, taxpayers pay a capital gains tax rate of 18%, which can go up to 28% if the total taxable gains and income overshoot the income tax basic rate band.
“While the capital gains tax may generate more revenue for the national coffers, it alone does not make a significant contribution to the government. We cannot compare with advanced nations as we are still a developing country. Our priority should be to remain attractive to foreign funds so that we can achieve our aim of becoming a developed nation,” observes Grant Thornton’s Chow.