The world has never witnessed such a disastrous impact as that made by Covid-19 on people’s health and global economic activities. Many countries are still reeling from the effects of the pandemic. It will be a long-drawn battle even with the availability of vaccines to contain the outbreak.
In this scenario, the thrust of Budget 2022 should be as follows:
• Malaysia, in the upcoming Budget 2022 proposals, cannot rely on its past experiences to address the woes of, and revive, its economy while containing the spread of the pandemic and turning it into an endemic.
• The government needs to recognise that working from home (WFH) may be a permanent feature moving forward for both the public and private sectors. This needs to be taken into account in the budget when crafting proposals.
• It is also important to note that many young people are involved in the informal sector, contributing to the country’s economy either directly or indirectly. However, the pandemic has shown that the economic safety net of the workforce in the informal sector needs urgent attention for the protection of their retirement fund and health.
• Many industries, including the services sector, have been badly affected by the pandemic. The government must look at how to revive the affected sectors by providing the necessary aid/attention as well as stimulus for them to increase the employment of many who have lost their jobs over the past 18 months or so.
• Malaysia needs to review and revamp the existing tax incentives that have seen little change under the Promotion of Investments Act 1986 (PIA). The country is the base for many multinational corporations that are among the world’s largest producers of their respective products. We should encourage these MNCs to continue investing in Malaysia by listening to their needs and, where possible, offering them customised tax incentives with the condition that they transfer higher-level technology knowledge to train Malaysians to acquire higher technical skill sets.
• The property sector is among the worst hit, apart from the tourism sector. The government has introduced many sweeteners to boost property sales such as the Home Ownership Campaign (HOC), discounts by developers on new properties and stamp duty exemptions for the benefit of younger homebuyers. However, the secondary property market has been overlooked and lacks similar tax incentives. Many of these secondary market properties are located in areas closer to central business districts or in quite developed suburbs, which are attractive to potential buyers (probably the M40 and T20 groups) who wish to have their homes nearer to their offices/businesses. Under the Real Property Gains Tax Act 1976, a 5% RPGT on the disposal of real properties from the sixth year onwards was reintroduced in 2019. This has discouraged existing homeowners (many of them in their fifties) from disposing of their real properties and moving from the bustling city to smaller homes in newly developed areas to prepare for their retirement and build up their retirement fund. Here, the 5% minimum tax on disposal of properties — for six years or more — needs to be abolished to spur the secondary property market.
• To the business community and the government, it is a no-brainer that the Goods and Services Tax (GST) is a better form of indirect tax revenue collection that is more transparent than the current opaque Sales and Service Tax 2.0 system. In fact, the Organisation for Economic Cooperation and Development (OECD) has recommended that Malaysia consider introducing GST 2.0 to overcome its huge fiscal deficits. However, the government must learn from past tax issues arising from the implementation of GST 1.0 due to confusion in the guidelines issued, late GST refunds to the business sector, and complicated GST exemptions on many goods and services. It may not be a good time to introduce GST 2.0 in the Budget 2022 proposals, but efforts must be made now to study in greater detail and provide the groundwork for its introduction either in 2023 or latest in 2024 at an acceptable rate (< 6%).
Budget 2022 wish list
1. Provide tax rebates for those WFH. It is not possible for employers to allocate additional allowances to their employees who are WFH. These employees have to incur additional electricity and other costs to operate their laptops and mobile phones to carry out their work and attend virtual meetings within the company and with their clients. In this respect, the government should provide additional tax relief — say, RM10,000 — to individuals to reduce their tax chargeable income and tax payable.
2. Improve IT infrastructure and internet connectivity by encouraging the IT services sector to invest in capital expenditure or the use of intangible assets to develop the industry, either by providing grants or giving a relief or partial duty exemption on the import of capex to build such infrastructure. Tax incentives may be given for huge investments brought in by foreign players that have the know-how and technical expertise to invest in Malaysia.
3. Propose that individuals working in the informal sector be required to contribute to the Employees Provident Fund and Social Security Organisation (Socso), and to ensure that they have at least a minimum amount of savings when they retire or leave the workforce.
4. Review the existing tax incentives and promoted products/activities under the PIA. Promote and tailor tax incentives that adopt Fourth Industrial Revolution (IR 4.0) programmes, such as the use of artificial intelligence, robotics and 3D prototyping.
5. Provide similar tax incentives to boost the sales of properties on the secondary market. Abolish the 5% RPGT on the disposal of real properties from the sixth year of acquisition onwards.
6. Adopt the OECD’s Base Erosion and Profit Shifting (BEPS) 15 Action Plans, especially on the taxation of the digitalisation economy, to be in line with international tax practices. The current tax guideline on e-commerce by the Inland Revenue Board does not take into consideration the taxation of e-commerce, as issued by OECD and the advanced economies.
7. The government must explain how it is preparing Malaysia in the implementation of the proposed global minimum tax of 15% under the BEPS 2.0 Pillar 2 Blueprint, if adopted by OECD. How will Pillar 2 affect the existing tax incentives offered by the government — and, especially in Labuan, how will it affect the Federal Territory’s position as an attractive offshore financial centre for foreign investors?
8. To revive the tourism sector to attract both domestic and international tourists, provide a one-off special capital allowance for hotels and Airbnb of various categories to upgrade their facilities and rooms to boost tourism in the recovery period of the pandemic.
9. Unabsorbed tax losses are only allowed to be carried forward for a maximum period of seven years effective YA2019 onwards. This has caught many taxpayers off guard, especially foreign investors who have invested heavily in Malaysia. Many of these businesses have longer gestation periods before they become profitable.
Canada allows its taxpayers to carry forward unabsorbed tax losses for up to 20 years. The US used to impose a limit, which it has now removed, allowing unabsorbed tax losses to be carried forward indefinitely. The UK has a similar practice, subject to certain conditions.
Both the US and the UK allow a percentage of their taxpayers’ current taxable profits to be offset against brought forward unabsorbed tax losses, and the balance unabsorbed tax losses to be carried forward. We propose that Malaysia allows brought forward unabsorbed tax losses to be offset against 50% of taxpayers’ current year statutory income, and the balance to be carried forward to the following year.
Daniel Woo is senior executive director and head of international tax and tax advisory at Grant Thornton Malaysia