Monday 8 September 2008

My glimpse on the budget

This is going to be a rather technical write-up and not the regular sounds-funny-make-you-laugh kind of entry. If you are a Malaysian, it will directly or indirectly impact you so, read on if you care to know. Otherwise, you may choose to go… oh, I am not an expert, these are just my thoughts.

What was announced during the Budget Speech 2 weeks ago is not the complete picture of what is to be implemented. Behind the speech, there is a piece of document called the Finance Bill, one which documents all the changes to the law. 90% (or more) of the changes are tax related. It goes to show that Malaysia still heavily relies on tax initiatives to drive the economy, although it is quickly becoming a thing of the past from the global view.

As an ordinary rakyat, our attention is mainly focused on the changes and incentives given to us as individuals, such the reduction of tax rate, tax exemptions of meal and transport allowances and others.

But we must not be oblivious and forget about changes in law that affects the corporate world. Make no mistake, without these modern slavery masters, we will not be getting our salary or allowances, rendering all the reduction in tax rates and tax exemption on allowances absolutely futile. If they get a raw deal and are screwed, so are we.

One amendment made to the tax law is the tightening of this particular tax incentive known as “Reinvestment Allowance” (“RA”), the most common tax incentive enjoy by companies in the manufacturing industry. I am not going to go into the details as it will probably bore you but in short, a manufacturing company can effectively reduces its tax liability by as much as 70% under this incentive.

Putting that into numbers, it simply means a company with tax to pay of RM10m can reduce it to as low as RM3m under this incentive. This incentive is attractive and is rather easy to claim. I would say it is one which is keeping the already depleting number of factories in Malaysia.

Nevertheless, the govt, via the latest budget changes has now placed multiple restrictions into this incentive; making it extremely difficult for manufacturing businesses to claim it. The reason for the tightening of the rules was “to avoid abuse”.

Based on my experience, I do not deny that there are some over-aggresive companies out there in terms of claiming this. However, this can be dealt with via proper enforcement of rules, more proper tax audits for instance. You do not punish the entire industry and risk affecting the economy while at it.

This certainly will not bode well with highly manufacturing driven states such as Penang and Selangor. What happened to making this country business friendly? And is it a co-incident that Penang and Selangor are Pakatan states?

Another measure introduced is this concept called “thin capitalisation”. It basically restricts tax deduction on interest in companies which have small amount of capital. In a nutshell, it simply means that if a company is funded mainly by loans from related companies, it will have to pay more taxes.

In the last year or so, I have personally witnessed foreign investments coming in under my watch as Malaysia does not have thin capitalisation rules. No doubt, thin capitalisation is not foreign to countries such as Australia, UK, America, Canada and Japan. But then again, they are Australia, UK, America, Canada and Japan, while we are… Malaysia. Economically, I think the country is not ready for this new measure.

Just to make matters worse, in true Malaysian fashion, our law-makers intend to govern the entire thin-cap rules with just 2 new sub-section (not even one whole section by itself) in the Income Tax Act, 1967. I was told that thin-cap rules in Australia stretch to about 40 pages.

This has caused a lot of anxiety for a lot of businesses and the industry which will be impacted most is the industry which forms the bread and butter for a lot of nation… the banking industry. I am talking the about the industry which is pushing the economy of America to a near collapse as you read this.

Although it will not cause the economy to fall by just introducing this rules, but it has certainly created a lot of complications in doing businesses in Malaysia. On one hand, the govt may be trying to promote more fixed capital injection in Malaysia. On the other, it might just drive a lot of foreign investors away. As long as the economy is not solid, I think we are just not ready for this rule.

The other new proposal which I think is not very business-friendly is the introduction of withholding tax on “other income” to non-resident. It is very technical to go into the details and you will certainly fall asleep if I am to dwell into it. In short, Malaysia’s treaty partners will not be very happy about this rule.

In addition, it also creates a lot of confusion among Malaysian taxpayers (both individuals and companies) as it is rather difficult to interpret “other income” under this rule. And if this rule is not adhered to, it’s the Malaysian tax payers which will be penalised.

It’s not all gloomy, there are some new tax goodies given to companies. But I feel these goodies only benefit a small portion in the corporate world. Like what I have mentioned in my earlier post, if you want to encourage more tourists to buy more “nasi lemak”, do you give incentives to the tourists, or the “nasi lemak” seller?

In an effort to apparently encourage more foreigners to get listed in Malaysia, tax exemption will be given on corporate advisory fees rendered to foreigners. It means income of the local company providing corporate advisory to foreigners will be tax exempt. And apparently, this will encourage more foreigners to be listed in Malaysia.

Just to digress a little, can someone tell what ECM Libra does?

People always say we only know how to condemn, only know how to criticise. Instead of doing that, we should provide solutions and genuine ideas to improve things. I cannot agree with that more.

But there is one big problem. Do you think they will listen when we sincerely present our ideas to them? Genuine brilliant ideas to improve things, when put forward, tend to end up just like this blog-post… be read, perhaps attract some comments… and be forgotten.


mistipurple said...

a bit 'cheem'.
i only know that to be a nasi lemak seller, i must make enough to make a profit to feed my kids. and school isn't getting cheaper. nor clothes and food. talking about which, i should increase my nasi lemak price by $0.50 at least. because the auntie who sells the milo increased hers by $0.20.

Dan-yel said...

Hey Zewt, thanks for educating us on this. This is very enlightening.

whoalse said...

Very interesting budget.......let's see what are in store (or not) for PR-led states.

Anonymous said...

interesting entry, but could you enlighten how this is going to affect ppl's everyday life?

i get that, but i think to hammer in your point, you've got to explain how all these tax incentives can affect one's rice bowl. if not they're just not going to care...

my 2 cents worth :)

flaminglambo said...

Fark me. Thin cap rules in 2 sections. Must be raya season.

myop101 said...

well zewt,

i hear you.

but what to do when our govt is running at 13th consecutive year of deficit?

there are lots of mouths to be fed, what with a long queue of people lining up to join civil service and Malaysia has the highest density of civil servant per capita in this region?

like you pointed out, a good tax audit enforcement should do the trick rather than unnecessary cause anxiety to the slave masters by continue changing policies.

i wonder if a drastic resources reallocation would do the trick? but this is never popular of course, more so for the biggest slave master in the country....

myop101 said...

dear zewt,

i just glance through the "tax commentary booklet". it would seem to be rather brief like you said and referring to the finance bill would be best.

anyhow, here's my 2 sen based on reading on the reinvestment allowance.

i noticed they are tightening the rules like you said. as a non-mfg person, my gut feel is that 5 years wait is kinda long but then again, to let these companies go about on a constant trading in machines after 2 years is not exactly healthy either. also, i noticed they are mostly restricting on the selling part and reclaiming of reinvestment allowances.

of course again, like you said, a little good tax audit enforcement will go a long way.

anyhow, i have not referred to the revised definition of mfg companies but i am sure many companies are pissed as hell if they find their industries removed from it. but will this alone justify moving out of this country? i think there are more to it and this might just be the straw that breaks the camel back.

as for the thin capitalisation *grumble, grumble*, i would need to read the finance bill.

no time for that now though...but i trust you know your stuff...*wink wink*

Huei said...

"it might just drive a lot of foreign investors away"
they already are! thats y my ex guai lou boss close down the company la! XD

n coincident it is..just like how they invest a whole bunch to develop east msia..coincindent indeed!

forgotten? noo! ofcourse not! they'll definitely put ideas into's just that they're so buzy, u know, so those will just gona have to wait! they will work on it..sooner or later..but it's probably gona be the latter cos they're too buzy with the coincidenceS!

Terra Shield said...

I was a product of the science stream, so this is something new I've learnt. I must admit though that reading between the lines, we may be headed towards difficult times in the future? (Shudders!!)

Anonymous said...

Very enlightening. Thanks!

"Joe" who is constantly craving said...

now readin on thin cap rules for my tax paper..ahah just 16 subdivisions in the act that talks abt thin cap..not to mention 1 subdiv got sub sub yeah i reckon 40 pgs is abt right..

Anonymous said...

i feel this budget is too good to be true!

do we really have this kinda money to do all this CHARITY?


Anonymous said...

"Genuine brilliant ideas to improve things, when put forward, tend to end up just like this blog-post… be read, perhaps attract some comments… and be forgotten."

That's business as usual in Malaysia, innit? Sighs...

Anonymous said...

Thanks for this post.
ECM Libra man. Gee....

zewt said...

mistipurple - hahaha... congrats, u have just mastered basic economics.

dan-yel - always a pleasure.

whoalse - more to come i am sure.

pavlova - i know what you mean, but it was getting too long hehehe....

flaminglambo - 2 SUB sections!

myop101 - resources reallocation? how? they have also removed the 'processing' bit from RA. i must say the definition of manufacturing is not too bad but then again, why do you have to do that? now, players in the manufacturing industries are jumping up and down having to rebudget the P&L.

zewt said...

huei - also sending everyone to taiwan for holiday... also coincident!

terra shield - things can be changed so long as the authorities listen to the cry of the trade association and put forward true economincal viable measures.

anon @ 9/9 1.57pm - you're welcome.

constantly craving joe - hahahaha... yup... i got that confirmed!

EdiÁ•ě - we do... but will it be really charity?

life for beginners - absolute boleh-ness.

Jed Yoong - always a pleasure :)

Anonymous said...

The budget announcement may just make things more complicated and difficult (also costly) for businesses. A tax system in my humble view, should be simple, easy to understand and administer.

Countries like the US and Australia are trying to reduce the complexity of their tax system, and we should look at moving this way as well. I support the Hong Kong model, where tax is low and easy to administer. The decision makers up there are focussing on tweaking micro areas.

On thin cap rules, we have to start somewhere. I am a supporter of the new rules, as I am sure a lot of Malaysian tax revenues are lost taking advantage the absence of specific rules.

Anonymous said...

Thought the fella sold his ECM Libra shares to deng-deng-deng-deng-deng-deng-deng-deng...? For a laughable figure (read obscene). Guess he finally went complaining to bapak mertua about his 5% being deducted every six months, huh?

myop101 said...

what i meant by resource allocation involves downsizing a bloated civil service la... and get proper people to do the tax investigation and audit on the IRB side...:P

as for the re-budgeting part, tsk are talking about Malaysia la... even though we have the same govt since 1957, our govt has flipflopped many times on policies...

part of the risk of doing business here in M'sia.

myop101 said...

oops...forgot to tell you. ECM Libra is now an investment bank...

Anonymous said...

there is always holes in the tax......every biz tycoon would just smile

in order to make changes...we should dwell from the inside

zewt said...

YoYo - it's not that i dont support the rules, just that when u wanna implement something, you have to do it properly. but our system is not ready to do that, or should i say, not capable of doing that, or anything at all for that matter.

myop101 - well, since we are looking at a potential collapse... who cares right? :P

erm - and look outward from therein... :)

Anonymous said...

I couldn't agree with you more and I also have another question: "Isn't there anything that we could do?"

I'm ashamed to say that I've only brushed up on my politics in March 2008. As the next election is ages away, is there really anything anyone can do?

Kind of frustrating esp as I'm reading funny, funny news about Malaysia while I'm abroad. It's really embarrassing!

zewt said...

KittyCat - we should have all done something in march 2008. sometimes, we have to cease the moment. for now, the supposed hope lies in the hand of one man.

SLACKER said...

i thoroughly enjoyed this post. i totally agree with your point of view on the recent budget.

as you know, i deal with tax audits and transfer pricing... the rigidness of the RA claim today will effect alot of companies and with thin cap in the picture... virtually all mncs run the risk of transfer pricing exposure....

i like ur nasi lemak analogy... however i dont really have an answer.... its an interesting point to note...

i suppose i'll go with the tourist... without them.. there'll be no nasi lemak stalls...

hence why i need to country needs to relook at its FDI policy / incentives carefully...

zewt said...

SLACKER - the problem is.. we all know what we need... we all know what needs to be done to get what we need... but we also know, it wont happen. i just came back to singapore... how i wish we are like them.