My glimpse on the budget

Disclaimer:
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.