Reforming the tax system to relaunch the recovery


MALAYSIA has finally arrived at the turning point of the Covid-19 pandemic. Despite the more optimistic outlook, any increase in tax revenue resulting from the economic recovery is likely to take time.

The country’s statutory debt limit, which was recently raised to 65% of gross domestic product or GDP (from 60% previously), reflects an impending expansionary budget.

How quickly the Malaysian economy recovers will depend on which fiscal measures the government chooses to implement, and the 2022 budget to be announced on Friday will be the key event to watch.

The theme of the 2022 budget will focus on the 3 Rs, namely recovery, resilience and reform.

In the short term, it will be crucial to implement tax policies to reduce the financial burden on some businesses, especially smaller ones, to help them survive and overcome disruptions.

At the same time, a reform of the tax system will be necessary in the medium term to make it a more robust and reliable source of income.

Unfortunately, the current tax system is leaky and too many taxes are borne by a narrow base of compliant taxpayers. There is a clear need in the medium term to broaden the tax base and address existing loopholes.

In the above context, the following four fiscal measures can be considered in the 2022 budget to support Malaysia’s economic recovery:

> Reduce the tax burden of industries affected by OLS

Real estate development, construction and tourism are among the most affected sectors. Currently Malaysian citizens are exempt from Real Estate Gains Tax (RPGT) on gains from disposal of residential property from June 1, 2020, but this expires on December 31, 2021.

To further encourage individuals to purchase residential property beyond December 31, 2021, buyers should be assured that any subsequent disposal, say over the next two years through December 31, 2023, will not attract RPGT.

Any increase in demand would help revitalize the real estate development and construction sectors and help generate multiplier effects on increasing employment and stimulating support industries.

In addition, a boost to the domestic tourism sector would be welcome. In order to promote domestic tourism, the double deduction currently available to hotels and tour operators for promotional expenses incurred outside Malaysia can be extended to expenses incurred in Malaysia.

In addition, to encourage greater use of hotel facilities and conference centers, companies hosting events such as annual dinners and conferences may be eligible for a double deduction on expenses incurred at hotels or conference centers. .

With greater economic activity in the real estate development, construction and tourism sectors, the potential for longer-term tax revenues will increase.

> Help businesses improve information and communications technology (ICT) infrastructure to compete globally

Unfortunately, many businesses are unable to operate remotely due to poor ICT infrastructure. Although most economic sectors have now opened up, these businesses continue to suffer from the new normal.

Since a 10% withholding tax currently applies to the payment of royalties (for the license or use of software) to non-residents (this can generally apply to payments of software or vendors of software). online services to facilitate e-commerce), the government may consider providing an exemption from withholding tax for, say, up to two years.

In addition, accelerated depreciation deductions (ACA) and depreciation deductions (CA) for the purchase of ICT equipment and for custom software development, respectively, can be used in full in the year of purchase. (currently ACA and AC are spread over four years).

The above measures should help local small businesses to compete with foreign companies and e-commerce operators.

> Green taxes

To align with the third theme of Malaysia’s 12th Plan to Advance Sustainability, a commendable medium-term fiscal strategy is to promote a greener Malaysia.

Three possible taxes that are practiced in other jurisdictions can be considered.

The first is the carbon tax, which can be levied on the combustion of carbon-based fuels. The second is the emissions tax, which can be levied on pollutant emissions. The third is the resource tax, which can be levied on the extraction of natural resources.

With more companies encouraged to switch to greener alternatives, Malaysia could reduce its greenhouse gas (GHG) emissions intensity by 45% (from 2005 levels) by 2030, in support of the Paris Agreement.

While this may not be the perfect time to introduce these new taxes due to the focus on cost containment, it is a possible mid-term solution to broaden the revenue base.

> Special Voluntary Disclosure Program (SVDP) for indirect taxes

The SVDP announced in the 2022 pre-budget statement is a step in the right direction and many are eagerly awaiting detailed rules.

Taxpayers may have made real mistakes due to changes in the legislation and interpretation of the Sales and Services Tax (SST) since its introduction on September 1, 2018.

Although some concessions have been granted by Royal Malaysian Customs, a penalty of 40% would apply for underpaid OHS even if it is voluntarily disclosed.

In order to ensure that the SVDP is attractive, it would be good to see full penalty waiver with assurance that no further customs audits will be performed.

The SVDP is a quick way to encourage a greater level of compliance and for Customs to increase tax collection.

When formulating the 2022 budget, the government will face pressures from many angles – from policy to public finances to global competition.

With the huge spending on Covid-19 stimulus packages, it will be difficult to find a balance in the 2022 budget.

Overall, short-term tax measures can be expected to focus on reducing the burden on businesses and individuals to accelerate economic recovery, and medium-term measures to broaden the base. revenue and reduce tax leakage.

David Lai is Executive Director of BDO Tax Services Sdn Bhd, Fellow of the Malaysian Institute of Chartered Accountants and Board Member of the Chartered Tax Institutes of Malaysia. The opinions expressed here are those of the author.

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