The largest-ever federal budget of RM332.1 billion was formulated to accelerate Malaysia’s recovery from the pandemic and to achieve growth of between 5.5% and 6.5% in 2022. Now more than ever, it is crucial that the implementation of Budget 2022 be closely monitored and administered to ensure that the allocations are quickly disbursed and produce the desired impact within the expected time frame. The Budget speech stated that a Budget 2022 Committee (the Committee), chaired by the prime minister and coordinated by the Ministry of Finance, will be established to ensure that the measures under the federal budget achieve their objectives.
The formation of the Committee is another step forward in the government’s efforts to improve its delivery system and adopt international best practices. This follows the establishment of the Inter-Agencies Economic Stimulus Implementation and Coordination Unit, or Laksana, in March 2020, which is aimed at tracking and monitoring the economic stimulus packages and ensuring that they benefit all levels of society. Laksana has been extremely active and issues regular reports, which are publicly available.
What we hope to see from the Committee
Above all, the Committee should be agile, bold and visible. If any of the Budget proposals are ineffective or are not driving the desired behaviour, the government should not hesitate to re-evaluate them and make immediate changes. In these unique and turbulent times, we cannot wait for Budget 2023 before changing direction.
• It is crucial that the Committee be formed quickly and that it has its inaugural meeting soon, to formulate its mandate and detailed objectives.
• The composition and operating strategy of the Committee will be key to its effectiveness and the Committee should meet regularly.
• Any overlaps with other committees or bodies should be identified and addressed, to prevent the duplication of efforts or conflicting actions.
• The Committee must obtain regular reports from the relevant ministries and agencies and there should be a single point of contact in each ministry or government agency reporting to the Committee and driving the execution of the Committee’s recommendations.
It is hoped that adopting some of the best practices of Laksana will enable the Committee to hit the ground running.
Budget 2022 included certain proposals that would have caught certain quarters by surprise. These include the proposals for a 33% corporate tax on taxable income above RM100 million, the removal of the foreign source income exemption (FSIE) and the increase in stamp duty for the trading of listed shares.
While these proposals may have been needed to replace the funds expended for the pandemic stimulus packages and prevent the budget deficit from widening further, the initial reactions to them have been negative, with Bursa Malaysia declining on the Monday following the Budget announcement. Clear articulation by the Committee of the usage of the tax collections and the associated benefits to the country may help restore confidence in the medium term.
Boosting taxpayer and investor confidence
Taxpayers and investors value stability and predictability. The Malaysian tax system has already seen significant changes in recent years, including the move from the Sales and Service Tax (SST) to the Goods and Services Tax (GST) and a quick reversion to the SST, as well as significant changes to the Labuan tax regime. More changes will be forthcoming in the near future, driven by international tax developments such as:
• The Organisation for Economic Cooperation and Development (OECD) and the G20 have agreed to once-in-a-generation reforms to the global tax system, effective from the year 2023.
• Governments are increasingly holding each other accountable for perceived “harmful” tax practices. The EU has been particularly active in this area. For example, the EU Council recently added Malaysia to its so-called “grey list”, due to Malaysia’s FSIE regime. Malaysia has committed to making the necessary legislative changes to remove or amend the harmful features of this regime, and will be removed from the grey list thereafter. Other countries listed alongside Malaysia, and which similarly need to review their FSIE regimes, are Costa Rica, Hong Kong, Qatar and Uruguay. Various countries are on the grey list for other reasons.
One way to boost taxpayer and investor confidence is to ensure clear and regular communication on impending tax changes. The Ministry of Finance and the Inland Revenue Board must be commended for increasingly seeking feedback from stakeholders on the proposed changes to the tax legislation or guidelines. The authorities should also circulate drafts of proposed legislation for comment, take feedback into account when finalising legislation and allow adequate time for businesses to prepare for any proposed changes. In addition, it would be useful to release and regularly update a “tax road map”, setting out the tax changes that Malaysia is contemplating over the next three to five years.
In the immediate term, the authorities should actively seek and monitor taxpayer feedback on the Budget 2022 proposals. For example, we have not yet seen the draft legislation in relation to the proposed removal of the FSIE. The removal of the FSIE in its entirety would be perceived negatively as this would be a fundamental change to the Malaysian tax system, more so at a time when countries are competing more fiercely than ever for investments. Taxpayers and investors would note that Singapore and Hong Kong are maintaining their territorial regimes, with corporate tax rates that are lower than Malaysia’s. While Hong Kong is also on the EU’s grey list, it has committed to retaining its territorial regime, with certain modifications. This may be something for Malaysia to consider in drafting the legislation.
Thinking long term
There is a need to formulate longer-term holistic measures that will generate sustainable growth in tax revenue while maintaining the country’s competitiveness.
We believe that the key to achieving this would be to transform and digitise the tax administration system and broaden the consumption tax base. There are various examples of jurisdictions significantly increasing their tax revenues while clamping down on evasion and leakages, simply by using technological tools such as e-invoicing and data analytics. Even with these measures, these countries continue to attract investments and grow their economies. Such measures will also reduce resentment and concern from compliant taxpayers and potential investors who are troubled by the size of the non-tax-paying “shadow economy”.
We look forward to the success of the Committee and in seeing the Budget 2022 proposals spur Malaysia to greater heights. Above all, we must not allow the short-term pursuit of increased tax revenue to jeopardise long-term growth and confidence.
Anil Kumar Puri is a partner at Ernst & Young Tax Consultants Sdn Bhd. Yeo Eng Ping is EY Asia-Pacific tax leader.