IN ensuring that businesses remain resilient amid the Covid-19 pandemic, the government has done very well with the implementation of economic stimulus and assistance packages.
They are closely monitoring the economic dynamics regionally and internationally.
A review is also being undertaken on the investment tax incentive framework, ensuring that tax incentives offered to investors remain relevant and in line with the current business landscape.
Environmental, social and governance (ESG) factors have become increasingly important in investors’ decision-making process.
In recognising this, the 12th Malaysia plan (12MP) has incorporated “Advancing Green Growth” as one of the transformative approaches.
This approach aims to accelerate a nationwide shift to exercise sustainable economic practices and lifestyles that value natural endowments and environment.
We know that Malaysia offers a range of green incentives to promote the adoption of green practices in businesses.
An additional area to be considered in Budget 2022 is electronic waste (e-waste).
E-waste as it stands, is the world’s fastest growing domestic waste stream, particularly as the world progresses into the digital economy. Currently, various countries have introduced initiatives to reduce e-waste.
For example, China’s e-waste treatment fee imposed on producers and importers of electronic products, and California’s e-waste recycling fee on the retail sale and lease of electronic products.
Based on the Global E-Waste Monitor 2017 Report by the United Nations University, Malaysia generates approximately 280,000 tonnes of e-waste annually. This is expected to grow at an average rate of 14% per year.
Out of this 280,000 tonnes, only 25% is recycled. This brings to head the need to develop strong policy measures to ensure that we play our part in upholding our sustainability priorities.
While a “stick” approach by introducing a waste treatment fee may be adopted, the “carrot” approach by introducing incentives for producers that has achieved a certain “recycled target” based on their percentage of annual sales, may be considered.
Additionally, the current green incentives which will expire in 2023 should be evaluated and extended to effectively encourage the recycling of e-waste.
Another “carrot” that can be put forward is to have expenditure incurred by businesses in complying with the ESG standards such as professional fees for the preparation of the sustainability report should be accorded full tax deduction.
Compliance with tax laws is an important component of the overall tax governance framework of a business.
Therefore, equal treatment should be accorded to professional fees incurred for tax compliance services such as tax returns preparation and transfer pricing documentation.
Promoting a cohesive, consistent and co-ordinated investment environment
As a developing nation, foreign direct investment (FDI) remains a key factor in sustaining economic growth. This is especially so given the impact of pandemic over the last 16 months.
Malaysia needs to convince investors that its investment climate and policy remains conducive.
One of the challenges often faced by investors is the differing interpretations between the approving authority and the tax authorities on the conditions attached to the tax incentives granted to investors.
To address this, the approving authority should be the agency that determines the compliance status of the taxpayer, coupled with the consultation with the tax authorities, as and when necessary.Alternatively, the government may consider consolidating the approving and compliance authorities with a view to reduce bureaucracy, maximise resources and more importantly, instill confidence among investors.
Expansion of the RA incentive
The reinvestment allowance (RA) incentive has been around for decades. It is available to companies in the manufacturing and selected agricultural sectors that reinvest in qualifying capital expenditure incurred for 15 consecutive years of assessment in expanding, diversifying, automating, and modernising their business operations.
To address the challenges caused by the pandemic as well as economic and geopolitical shift, a special reinvestment allowance incentive of three years was given to companies that have exhausted the 15-year time frame. The special RA incentive is set to expire in 2022.
As Malaysia progresses towards embracing Industry 4.0 and recognising the service sector as a significant contributor to our economy, I would propose that the RA incentive be made available to all sectors and the 15-year cap be removed. This would incentivise businesses to continue to invest, grow, and modernise their operations.
SMEs
No one should be left behind, including the small and medium-sized enterprises (SMEs) as they are the backbone of the Malaysian economy, contributing nearly 40% of GDP and employing almost two-thirds of the workforce.
However, incentives offered to SMEs must be easily adopted without burdensome administrative application procedures.
Perhaps online applications and expedited approval based on a fixed set of criteria may be considered for certain tax incentives targeted for SMEs.
Perhaps a further tax cut of 10% for the next three years to help SMEs recover from this challenging time and extension of group relief to family owned SMEs, may also be considered.
Global minimum tax
With the Organisation for Economic Cooperation and Development’s (OECD) global minimum tax (GMT) proposal, the future of tax incentives in Malaysia is often asked. Suffice to say, while the issue of GMT remains fluid, it does not necessarily spell the end of our tax incentive regime in promoting foreign investment in Malaysia.
As part of the OECD Inclusive Framework, Malaysia can work with its peers to lobby for a carve out policy for investments that has economic substance and therefore, the GMT rules should not apply.
After all, the principle of the GMT is to prevent artificial shifting of profits to low tax jurisdictions and genuine investments with economic substance cannot be part of the GMT scope.
For investors that have granted been tax incentives, that should be respected. Not only that, continuous discussions and negotiations should be encouraged.
Malaysia has been competitive due to other X-factors such as strategic location, ease of doing business, and livability.
In terms of political stability, the government is certainly doing its best.
In terms of workforce, Malaysia will need to continue developing a talent pool in a timely manner to ensure a constant supply of skillful workforce and invest in innovation.
Budget 2022 is expected to continue to focus on strengthening the national recovery plan to boost the business dynamism and rebuild national resilience.
Revamping our tax incentive framework with a more targeted and practical approach coupled with simpler administration would be most welcomed. – THESTAR
- Writer is the government grants and incentives leader of Deloitte Malaysia. The views expressed here are the writer’s own.
