Guessing game on new taxes
WHEN the Prime Minister spoke about the possibility of introducing new taxes last week, it naturally sparked a lot of speculation on the kind of taxes the government could put in place.
Among the popular opinions were that the government may look at taxing businesses on the digital platform, capital gains tax (CGT) on stocks, and taxes on stamp duties for property purchased by foreigners.
Others suggested that the upcoming Budget 2019 may see an announcement of an inheritance or carbon tax, or taxes on food or drinks with high sugar content.
Arguably, the most discussed form of tax over the past week has been the CGT.
While this tax was not part of the party’s manifesto for the 14th general election, the previous coalition – Pakatan Rakyat – had listed this particular tax in its 2015 alternative budget.
The CGT was also mentioned in Pakatan Harapan’s alternative budget for 2016.
In a nutshell, the CGT is defined as a tax levied on capital gains or profits from the sale of certain types of assets.
At the moment, Malaysia has a real property gains tax – a form of CGT – which was suspended temporarily in April 2007 and reintroduced in 2010, with the most recent rate increase in 2014.
Zooming in on the arguments for and against the CGT, many have voiced opposition on taxing the sale and purchase of shares, saying it will drive away investors.
Malayan Banking Bhd macro thematic economist Chua Hak Bin says the calculation of the CGT is also a cumbersome process.
“The problem is, many other Asian countries don’t have the tax - which means the stock market here will be hit.
“Imposing taxes on stocks is a bad idea. The market is already bad, and the money will just shift to other countries,” he says.
Deloitte Malaysia senior adviser Datuk Tan Theng Hooi is of the opinion that the CGT, if implemented, should be limited to transactions involving companies not listed on the stock exchange.
“If you tax gains on Bursa Malaysia, it will be very disruptive to the capital market, and transactions on the stock exhange are also dificult to monitor.
“For private companies or unlisted companies, it is easier, for example, when the companies buy or sell assets, and the gains can be quite large in these transactions compared to the transaction of shares,” he says.
He also argues that according to basic tax principals, if you impose tax on profits, you must give deductions for losses.
“You cannot just tax profits and ignore losses. Also, when you take profits and losses into account, you will not be able to raise much revenue from this,” he says.
Another form of tax that is seen as a very likely option for the government is the digital tax.
Apart from increasing revenue, the tax will also help level the playing field between brick-and-mortar retail and online vendors.
Plans to impose tax on online businesses, however, had been in the pipeline even before the change in government earlier this year.
In September last year, the Customs Department revealed plans to amend the GST Act to enable the government to collect taxes from foreign companies operating in Malaysia under the digital economy.
According to the department’s director-general Datuk Seri Subromaniam Tholasy, the amendments would allow the government to tap a segment worth “billions of ringgit”.
The Institute for Democracy and Economic Affairs (IDEAS) said last month that this could slow the development of the country’s digital economy, particularly for new startups and SMEs.
IDEAS notes that the new taxes fall into two categories - new “direct taxes” that target the profits of foreign digital companies doing business in Malaysia, and “indirect taxes” that apply consumption taxes (like the sales and service tax) to foreign companies selling digital goods and services into Malaysia, paid by the users.
“There is no definitive evidence that digital companies pay less tax than traditional companies, but there are disagreements over where that tax should be paid.
“It is important that agreement on this issue is made by all countries collectively, to avoid double taxation (companies being taxed on the same profits twice) and a slowdown in the digital economy,” it says.
Learning from the experience of neighbouring countries
Experts say the inheritance tax, or estate tax, is another option.
In Singapore, the estate tax was abolished in 2008 to encourage more local and overseas investors to hold their assets in the country and to promote Singapore as a wealth-management hub.
At the time, the country had been collecting about S$75mil per year from its estate duty.
Prior to abolishing the tax, immovable property, bank accounts, publicly listed shares and items in a safe deposit box were all taxable.
Tax Advisory and Management Services CEO Yong Poh Chye does not recommend the inheritance tax, saying the amount of revenue collected does not commensurate with the time and effort spent on collecting the revenue.
“It also creates problems, for example, the beneficiaries cannot get the estate transferred to their names until and after the grant of probate or letters of administration have been extracted, and this can take about one to two years,” he says.
According to Chua, while the inheritance tax is an option, it can be quite tricky to implement, as there are loopholes that can be used by the wealthy to avoid paying it.
“It is an option, but people with money can find ways to get around it. For example, by setting up a trust fund.
“Ultimately, the amount of tax collected, due to all this evasion, is not much,” he says.
Imposing a higher stamp duty on property purchases by foreigners, he says, is a much better option for the Malaysian government.
“I think this form of tax has become quite acceptable. It is also done in Singapore, Australia and the UK - and it can raise a substantial amount of revenue,” he says.
While Malaysia currently has certain price thresholds for properties that foreigners are allowed to buy, Chua notes that the government does not gain income from this.
“Through the higher stamp duty, the government can benefit from the previously untapped opportunity.
“Maybe the government can apply a higher stamp duty, say 20%, on foreigners’ property purchases below RM500,000. And for purchases above RM1mil, maybe a rate of 10%,” he says.
He adds that the move can also Federal Government Revenue 1990-2018 help move inventory, in view of the property glut.
“It also becomes more acceptable to sell property to foreigners if they are paying more for it than Malaysian citizens,” he adds.
In August, special officer to the finance minister, Tony Pua, was reported as saying that the government was considering imposing a soda tax on soft drinks like CocaCola.
However, he denied the reports the next day, saying they were considering all options to increase revenue.
Another tax that could potentially benefit health, and in this case, the environment, is a carbon tax.
During a panel session last week, Asian Development Bank principal economist Bernard Ng brought up this idea.
A carbon tax basically refers to a tax on fossil fuels, especially on major polluters, intended to reduce the emission of carbon dioxide.
Aside from strengthening the national revenue, Ng says that such a tax would benefit the environment and facilitate the country to achieve its aim of cutting carbon emissions by 45% by 2030.
Many countries globally, including China, the EU and Japan, have implemented or announced plans to implement carbon taxes, while Singapore has announced plans to roll out the tax next year.
It is reported that to-date, at least 40 countries have put in place some form of carbon pricing strategy, which means it is high time Malaysia catches up.
While all we can do now is speculate and share views, the reality of what kind of new taxes Malaysians will be faced with may be known in less than a month, when Budget 2019 is tabled on Nov 2.