This article first appeared in The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020
THE RM35 billion short-term Economic Recovery Plan unveiled by Prime Minister Tan Sri Muhyiddin Yassin last Friday is generally comprehensive and well thought out, taking into account both employees and businesses, according to tax consultants.
However, some of the incentives may be overly generous and lacking in clarity, which may then attract the wrong types of businesses, they say. In addition, the stimulus package does not go far enough to encourage domestic investments, which have decreased noticeably over the past years.
One initiative that particularly stood out in the “mini budget” to help restart the economy in the wake of the Covid-19 pandemic is the introduction of tax incentives to attract foreign direct investment (FDI).
“Multinational companies have realised the need to diversify their manufacturing hub either because of the trade war between the US and China or Covid-19. Countries like Vietnam and Thailand have announced incentives to attract FDI. So, this is Malaysia’s way of being competitive to attract FDI,” says EY Asean and Malaysia tax managing partner Amarjeet Singh.
He says Malaysia’s incentives are usually generous but the qualifying criteria can be quite rigid. However, this time around, Putrajaya appears to be focused on capital investments and the generation of jobs.
Companies in the manufacturing sector that relocate to Malaysia will be able to enjoy a 0% tax rate for 10 or 15 years depending on the amount of capital investments made. In addition, a 100% Investment Tax Allowance for five years has been extended to existing companies in Malaysia that relocate their overseas facilities back to the country.
“The incentives are broad based this time and the threshold is reasonable — 0% tax rate for 10 years for capital investments between RM300 million and RM500 million and 15 years for investments above RM500 million.
“The catch is that they have to shift in 12 months and be fully invested in three years. This is important to jumpstart the economy,” stresses PwC Malaysia tax leader Jagdev Singh.
Tricor Malaysia chairman Dr Veerinderjeet Singh, however, thinks the incentives may be overly generous and giving too much away.
He is also concerned that Putrajaya has not adequately spelt out the businesses or types of investments that would be welcomed.
“It also lacks clarity on the type of manufacturing businesses that they are looking for. This is dangerous because we could go back to the old ways of low-value manufacturing that rely heavily on foreign labour.
“Perhaps, they can come up with a list of sectors later on and, hopefully, it is focused on technology-intensive sectors,” he says.
Veerinderjeet notes that the Investment Tax Allowance to encourage relocation back to Malaysia is a good measure — but says the targeted sectors need to be specified.
While the incentives are generous and could attract foreign companies to relocate to Malaysia, Jagdev believes the recovery package lacks measures to encourage domestic investments.
“Domestic investments have been declining in the last three to four years. Many of the measures are specifically for the small and medium enterprises (SMEs), but what about the bigger companies? How are we going to encourage them to invest more in Malaysia?” he asks.
Besides providing tax incentives for FDI, the focus is also to give a boost to SMEs. The government has decided to provide income tax rebate of up to RM20,000 a year for three years of assessment for SMEs newly set up between July 1, 2020, and Dec 31, 2021.
Amarjeet thinks this is a good move as the more the number of businesses established, the greater the opportunity for job creation.
The government will also exempt SMEs from paying stamp duty for any instrument executed for mergers and acquisitions (M&A) between July 1, 2020, and June 30, 2021.
The consultants feel that the exemption should be extended to all businesses, not just SMEs.
“While the focus is understandably on SMEs, the current crisis has also forced larger companies to restructure to be more agile, efficient and competitive. In this regard, the stamp duty exemption should apply to all businesses and not be limited to SMEs,” says Deloitte Malaysia country tax leader Sim Kwang Gek.
“In addition to stamp duty exemption, a Real Property Gains Tax exemption should be introduced as RPGT cost may [be incurred] in many M&A activities or restructuring projects,” she adds.
The recovery plan also introduced measures to encourage consumers to spend, especially on real estate, where the property glut has been worsened by the pandemic’s decimation of the economy.
Measures to stimulate the property market should bring some cheer to property developers and potential homebuyers.
These include stamp duty exemption on the instrument of transfer and loan agreement for the purchase of residential homes priced between RM300,000 and RM2.5 million, subject to developers’ providing a minimum discount of 10%.
“We have to remember that in a pandemic, there are some who will be severely affected, some slightly and some who won’t be affected. I think the exemption is targeted at those who are not affected, to encourage them to spend in an effort to spur the economy,” says EY’s Amarjeet.
RPGT exemption will also be granted for the disposal of residential homes from June 1, 2020, to Dec 31, 2021, and is limited to three units of residential homes per individual.
Although this measure provides some tax savings for individual taxpayers, Sim says its impact on stimulating the property sector is unclear because of downward prices in the secondary property market.
At the end of the day, the consultants agree many good and specific measures were announced to address the ailing economy, specifically in the form of grants and funding.
However, it still boils down to how fairly and transparently these grants and funding are disbursed to businesses in need.
Propelling businesses
• Government to collaborate with e-commerce platforms to co-fund digital discount vouchers to encourage online spending on products from local retailers
• SME Digitalisation Matching Grant totalling RM100 million, in partnership with telcos
• SME Technology Transformation Fund totalling RM500 million loan, application opens July 2020
• Smart Automation Grant of RM100 million, capped at up to RM1 million per company
• Additional RM2 billion funding by banking sector for small and medium enterprises (SMEs) at 3.5%, maximum loan size of RM500,000 per SME
• RM1 billion Penjana Tourism Financing (PTF) facility to finance transformation initiatives by SMEs in tourism sector
• New funding programme for SMEs and micro enterprises at subsidised 3.5%
• RM50 million earmarked for women entrepreneurs
• Perbadanan Usahawan Nasional Bhd (PUNB) to provide RM200 million financial assistance to bumiputera-owned shariah-compliant businesses
• RM300 million working capital loans to affected bumiputera entrepreneurs through Majlis Amanah Rakyat (Mara)
• Maximum loan amount of RM1 million with 3.5% annual interest rate from Mara
• SME Bank to provide financing support to contractors and vendors awarded small government projects under Pakej Rangsangan Ekonomi (PRE) 2020 and Prihatin
• Extend period and scope of expenses allowed as tax deduction or capital allowance for Covid-19 prevention
• 50% remission of penalty for late payment of sales tax and service tax due and payable from July 1, 2020 to Sept 30, 2020
• Extension of special tax deduction for renovation and refurbishment of business premises to Dec 31, 2021
• Extension of Accelerated Capital Allowance on eligible capital expenses including ICT equipment to Dec 31, 2021
• Extension of special deduction equivalent to 30% reduction in rent for SMEs to Sept 30, 2020
• Income tax rebate up to RM20,000 per year for three years of assessment for new SMEs established between July 1, 2020 and Dec 31, 2021
• Stamp duty exemption for SMEs on any instruments executed for M&A, for period between July 1, 2020 and June 30, 2021
Stimulating the economy
• Establishment of investment fund to match institutional private capital investment with selected venture capital and early-stage tech fund managers
• RM50 worth of e-wallet credits and additional RM50 in value through vouchers, cashback and discount to Malaysians earning less than RM100,000 annually
• Stamp duty exemption on instruments of transfer and loan agreement for the purchase of residential homes priced between RM300,000 and RM2.5 million. Exemption on the instrument of transfer is limited to the first RM1 million of the home price while full stamp duty exemption is given on loan agreement effective for sale and purchase agreements signed between June 1, 2020 and May 31, 2021.
• RPGT exemption for disposal of residential homes between June 1, 2020 and Dec 31, 2021, limited to the disposal of three units per individual
• Uplifting of current 70% margin financing limit for property valued at RM600,000 and above during Home Ownership Campaign period
• Full sales tax exemption on locally assembled passenger cars and 50% on imports
• Tax incentives for company relocating to Malaysia
- 0% tax rate for 10 years for new investment in manufacturing sector with capital investment of RM300 million to RM500 million
- 0% tax rate for 15 years for new investment in manufacturing sector with capital investment above RM500 million
- 100% Investment Tax Allowance for five years for existing company in Malaysia relocating overseas facilities to the country with capital investment above RM300 million
- Special Reinvestment Allowance for manufacturing and selected agriculture activity, from YA 2020 to YA 2021
• hotels to June 3, 2021
• Extension of period for income tax relief of RM1,000 for tourism expenses to Dec 31, 2021
• Extension of period for deferment of tax instalment payment for tourism industry to Dec 31, 2020
• Micro-credit financing under Agrobank for agropreneurs of RM350 million at 3.5%
• 100% export duty exemption for crude palm oil, crude palm kernel oil and refined bleached deodorised palm kernel oil from July 1, 2020 to Dec 31, 2020
• Sukuk Prihatin issue by MoF in the third quarter of 2020
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