This article first appeared in The Edge Malaysia Weekly, on October 26 - November 1, 2015.

The top 20% of income earners would have been rudely surprised when Budget 2016 was unveiled. The budget proposed to increase the tax rate for those with a chargeable income of RM600,001 to RM1 million to 26% from 25% previously, and for those with chargeable income exceeding RM1 million to 28% from 25% previously.

Some corporate leaders have voiced their concerns about this.

Supermax Corp Bhd managing director Datuk Seri Stanley Thai (picture) thinks the increased rate for high income earners will encourage some to move their tax residence from Malaysia to countries like Singapore or Hong Kong.

“It not only encourages a capital drain but also a brain drain. The government should review this bold and unfavourable policy for the country,” he says.

Taxand Malaysia Sdn Bhd managing director Renuka Bhupalan concurs. “In Singapore, the maximum tax rate is 20% for those with a chargeable income of S$320,000 and above,” she says.

The grass could be greener across the Causeway due to the weakening ringgit. Currently, the local currency is at 3.04 to the Singapore dollar.

The tax hike is particularly disappointing given that personal income tax was supposed to gradually decline following the implementation of the Goods and Services Tax, says tax consultants.

“High-income earners are quite mobile, and there is a greater tendency for them to seek opportunity elsewhere as the tax rates are not competitive locally,” says Deloitte Malaysia’s country tax leader Yee Wing Peng, adding that it is possible that some highly paid talent may move to Singapore.

Some wonder if this hike in personal tax rates could worsen the brain drain the country is facing and perhaps even deter highly talented individuals from returning home.

However, Renuka says that would not be a deterrent for individuals considering moving back to Malaysia, as the Returning Expert Programme allows individuals to opt for a 15% flat tax rate on their chargeable employment income for five consecutive years.

That may provide some comfort but the higher income tax rates will certainly make it a little less desirable for high-income earners to remain in or return to Malaysia.

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