This article first appeared in Forum, The Edge Malaysia Weekly on April 27, 2020 - May 3, 2020

As Malaysians grapple with the new normal of quiet streets, virtual meetings and heightened health awareness, it seems irrefutable that the current health crisis precipitated by the Covid-19 pandemic is rapidly sliding into an economic crisis. The contraction of traditional Malaysian export markets and a shrinking domestic economy reinforced by social distancing measures will affect the profitability and growth trajectory of Malaysian companies.

Bank Negara Malaysia recently revised the country’s GDP growth at between -2.0% and +0.5% for 2020 compared with 4.3% for 2019. Similar effects can be felt globally, with the International Monetary Fund recently mentioning in its World Economic Outlook, April 2020 that the current “Great Lockdown” is expected to rival the “Great Depression” of the 1930s, with an expected global economic contraction of 3%.

While the suite of economic stimulus packages announced by the government is certainly a welcome balm, companies would also need to take a cold, hard look at their fundamental robustness to determine whether any restructuring would be required to conserve and improve cash flow in the short term and enhance profitability, as well as optimise return on capital in the long run. Restructuring is generally two-pronged, where a company looks to restructure financially to achieve improvements in its enterprise value and/or restructure operationally to increase the viability of its underlying business model.

From a tax lens, some of these restructuring measures may result in unintended adverse tax consequences and it would certainly be an added boost if one or two of these impacts can be mitigated by certain tax measures by the government.

Financial restructuring

Introduction of debt to the capital base: While interest expense incurred on loans used for business purposes is generally tax deductible, any costs incurred to raise the debt (for example, guarantee fees, advisers fees) are not, unless they relate to issuance of certain Islamic securities. An extension of this deduction to all types of debt financing would be most welcomed as companies seek to adjust and reallocate their capital base.

Debt restructuring: Companies experiencing financial distress and liquidity problems may have to renegotiate debt financing terms with lenders, which may include debt conversion or rescheduling. From a tax perspective, any expenses incurred in connection with these exercises — for example, professional fees, which are generally capital in nature — should for now be granted a special tax deduction.

Operational restructuring

Streamline corporate structure: Legacy corporate structures comprising many legal entities within a group may need to be reviewed to mitigate any cost inefficiencies by eliminating duplication, optimising economies of scale and reduction of administrative costs. While the current tax legislation provides for relief and neutrality on stamp duty and real property gains tax (RPGT) arising from such intra-group restructuring, this requires prior approval from the Malaysian tax authorities under certain prescribed conditions. In the current times, some flexibility through blanket approvals for certain fact patterns will certainly be welcomed.

One option would be to align the tax treatment to a corporate amalgamation framework that is permitted under the Companies Act 2016 with court consent to ensure that there is tax neutrality achieved such that the transferee company is seen to have stepped into the transferor(s) shoes from a tax perspective and no sale is seen to have occurred.

Disposal of non-core businesses: Where companies choose to focus on their core competencies and unlock gains via the disposal of non-core businesses or assets, the capital nature of such gains should be protected and not be disputed by the Malaysian tax authorities, who have in some recent cases argued for them to be taxable under the Income Tax Act on the basis of being compensation for loss of income. RPGT, which is applicable on any gains arising from sale of real property in Malaysia, can either be exempted or taxable at a reduced rate for a prescribed timeframe.

Cessation of unprofitable lines of business: Any one-off expenses incurred in connection with the cessation — such as penalties for early termination of commercial contracts, which in normal circumstances would usually not be tax deductible — should instead be allowable for a prescribed period. Where trade debts are also written off in the course of the closure, it is hoped that the Malaysian tax authorities would be less stringent in their documentation requirements and instead take a pragmatic approach in allowing a tax deduction.

Where the taxes asked are concessionary in nature and would not ordinarily be exempt or tax deductible, such allowances would need to be time-based to facilitate the measures adopted by companies to maintain and improve business viability. For example, any exemption of RPGT would only be for a prescribed period similar to the RPGT-free period from April 1, 2007 to Dec 31, 2009 to tide companies over during the 2008 financial crisis.

To paraphrase Dickens, these are the worst of times and yet these can be the best of times. We have witnessed the bottomless selflessness and courage of our frontliners and the extraordinary resilience and adaptability of the human will to protect others and self. The country is strongest when we all work together as one. So, while some of these measures may result in a temporary reduction in tax collection, the positive impact of these commercial restructurings for companies puts us on a much stronger footing and, it is hoped, translates into the greater good of the economy in the long run.

Gan Pei Tze is a partner and Lee Boon Siew a senior manager at PwC Taxation Services Malaysia

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.