This article first appeared in The Edge Malaysia Weekly on October 8, 2018 - October 14, 2018

TALK of new taxes being introduced normally intensifies as the tabling of the annual budget approaches. However, this year might be different, given that Malaysians are painfully aware of the country’s RM1 trillion debt, not to mention the missing RM19 billion Goods and Services Tax (GST) refunds that have yet to be repaid.

Taxing the digital economy tops the list when it comes discussion about new taxes. Many feel it is a matter of time before this happens given the changing business and buying patterns of late.

Apart from that, the possibility of an inheritance tax as well as a tax on capital gains have also come under the spotlight. Technically, such taxes should only affect the rich and ultra rich as they are partly designed to reduce the inequality gap.

New taxes, says Baker Tilly Malaysia tax partner Anand Chelliah, will certainly add to the country’s revenue base, especially in a time of shortage.

“Having said that, I do not see a likelihood of new taxes being introduced at this point in time for two reasons. Firstly, following on from the recent past, there is a need for the government to be seen trying to manage the economy without burdening the people and new taxes are not something that will please the masses.

“Secondly, to bring in new taxes without being certain of the benefits versus costs, the return on investment (ROI) is something that needs to be carefully considered. With the current timeframe (from the change of government to the tabling of the budget in November), it is too short a period to study the ROI yield from new taxes and to have them implemented,” Anand opines.

Inheritance tax

It is worth noting that an inheritance tax was implemented in Malaysia under the Estate Duty Enactment 1941. Back then, the estate of a deceased was liable to a 5% tax if it was valued above RM2 million, and 10% above RM4 million. However, this legislation was repealed in 1991.

Anand says if an inheritance tax were to be reintroduced, the taxable threshold would be key. “It could be a good way for the government to raise revenue, but it can also cause hardship for the people. This is because estate taxes need to be paid in cash over a short period of time, but the assets they are levied on, like property, can be quite illiquid.”

Adeline Wong of Wong & Partners says although reintroducing an inheritance tax could be an added source of revenue, it is worth considering if it will actually impact revenue collection.

“Malaysians are now more forward thinking, and high-net-worth individuals no longer wait to plan for the succession of their wealth. Far-sighted families may also have moved some of their assets outside Malaysia. High-net worth individuals may already have in place structures to hold their existing assets (like trusts), for smooth succession planning purposes, says Wong, who heads the Tax, Trade and Wealth Management practice at the law firm.

“Further, we are now in the era of the passing of the baton from one generation to another, and we are seeing family businesses already having a succession mechanism in place, as opposed to an abrupt handover triggered by the death of a founder. This means there is less of the pie that can be taxed under an inheritance tax,” she explains.

Depending on how it is implemented, an inheritance tax could work as a deterrent to foreign investment in the country, she adds. She cites the example of the UK, which has had an inheritance tax since 1986 but amended the rules in view of the changing economic and social landscape.

“Recent amendments were made to the inheritance tax rules in the UK in 2017, which resulted in non-residents (who acquired UK real property) scrambling to restructure their holdings of UK real property. There was a public consultation this year by an independent office of the HM Treasury on public feedback on the inheritance tax in the UK. The consultation was intended to address a few areas for review, including the complexity of the inheritance tax rules and the impact of any distortion to taxpayers’ decisions and investments,” Wong says.

“From a practitioner’s view, this uncertainty in the implementation of the inheritance tax, coupled with the high inheritance tax rate, may potentially discourage individuals from investing in the UK for the time being.”

In the UK, inheritance tax is levied at a rate of 40% for estates valued at more than £325,000, with the exception of estates entirely left to the spouse or civil partner, or when everything is left to a charity.

Capital gains tax

Currently, Malaysia only imposes taxes on one type of capital asset — real property, under the Real Property Gains Tax Act 1976.

In tax jurisdictions like Australia, a tax on capital gains forms part of the income tax regime. While gains are taxed, losses incurred during the disposal of a capital asset can be used to offset current or future capital gains.

In countries like the US, the capital gains tax is more complicated as it segregates the gains into short term and long term. Short-term capital gains — those held for less than a year — are taxed at the prevailing income tax rate. Long-term capital gains are taxed at 0%, 15% or 20%, depending on the taxable income of the taxpayer.

Tax Policy Centre, an independent analysis website for tax matters in the US, reports that the top 1% of income distribution in the US received about 69% of all realised long-term capital gains in 2017.

Wong believes the introduction of capital gains tax will make Malaysia uncompetitive as an investment destination, given that countries in the region, including Singapore and Hong Kong, do not have such a tax.

“A capital gains tax will not only impact individuals but also corporations seeking to expand and invest in Malaysia,” she says.

Research papers in the US have said that a high capital gains tax creates a “lock-in effect” whereby investors avoid heavy taxation by not selling assets. This, in turn, could result in reduced economic growth as it prevents the reallocation of capital in low-performing investments to more profitable ones.

Having said all that, tax consultants believe the tax system should be looked at holistically before any kind of new taxes are introduced.

Do you think that an inheritance tax, capital gains tax, or digital tax are on the cards this coming budget? Log on to www.theedgemarkets.com to take the poll.

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