Broad tax effects of an election budget

Instead of introducing new taxes or raising tax rates, the government may focus on increasing the level of tax compliance and effectiveness.

PRIME Minister Datuk Seri Ismail Sabri Yaakob recently proposed to bring forward the Malaysian National Budget 2023 (Budget 2023), originally set to be presented on Oct 28, 2022, by three weeks to Oct 7.

If this is indicative of an earlier general election, Budget 2023 will be an opportunity for the government to update its tax strategy to instil confidence.

However, what the rakyat wants and what the country needs are not necessarily the same.

The 2023 pre-budget statement recognises that while the needs of the rakyat for recovery should be addressed, reforms to strengthen Malaysia’s resilience is crucial.

With raging global inflation and continued interest rate hikes, coupled with the upcoming general election, what tax changes could we expect in Budget 2023?

Balanced budget

Given the Covid-19 stimulus packages and the largest ever spending in Budget 2022, Malaysia is understandably facing a setback in its efforts to reduce the fiscal deficit and government debt.

Although Malaysia is fortunate that its fiscal position is buffered by the increase in oil prices, it is far from being immune to the effects of imported inflation and the rising US dollar from the Russia-ukraine conflict.

Given the pressures, there will be no escape for Malaysia from having to enhance its tax revenue base in the long term.

The right timing is of the essence, and any attempt to increase tax revenue too soon could undo the recovery efforts and discourage foreign direct investments.

Instead of introducing new taxes or raising tax rates, the government may focus on increasing the level of tax compliance and effectiveness.

Trust and transparency

Budget 2023 is an opportunity for the government to further enhance trust and public perception of its administration.

A good place to begin is to provide longer lead times for tax policies to be communicated before they are implemented.

Whether a policy proposal will achieve its objectives depends not only on technical viability but also on practical considerations.

Therefore, the practice of issuing a “white paper” for major tax policy proposals to obtain feedback from professional bodies and businesses should be encouraged.

Surprises to investors and businesses, especially on major tax changes, would indicate a lack of transparency and result in Malaysia being perceived as a high-risk country.

Facilitating tax compliance

A possible way to enhance tax compliance is to have a more comprehensive system for private and advanced tax ruling applications.

Although the income tax self-assessment system has been in practice for over 20 years, taxpayers have often been denied tax rulings on certain transactions, such as a confirmation on whether a gain is subject to income tax or real property gains tax.

For the self-assessment system to operate equitably and to encourage transparency, the Inland Revenue Board (IRB) must be willing to commit to their technical interpretations whenever requested.

Such commitments should not disadvantage the IRB as there are sufficient penalty provisions in the tax legislation to address concerns about any incorrect disclosure.

OECD Pillar Two approach

The 2023 pre-budget statement indicates that Malaysia is reviewing the technical details of the Organisation for Economic Cooperation and Development’s (OECD) Pillar Two approach to counter base erosion.

A consultation paper was issued by the Ministry of Finance on Aug 1, 2022, for the implementation of domestic rules for Pillar Two, which requires global minimum tax to be at 15%.

Ideally, Malaysia should communicate its domestic rules in Budget 2023, which may include a qualified minimum domestic topup tax, as clarity on the requirements would facilitate early preparation for compliance and decisions on any restructuring.

ESG and tax commitments

Tax policy plays an important role in encouraging sustainable behaviour and environmental, social and governance (ESG) commitments.

However, it may be too soon for new “green” taxes in Budget 2023 due to current concerns about the cost of doing business. Instead, the introduction of further tax incentives to encourage ESG should be welcomed.

For example, it may be possible for indirect tax exemptions for electric vehicles to be extended to other plants and machinery that consume biofuels or renewable energy.

Concluding remarks

We hope the government will strike the right balance between the rakyat’s wants and the country’s needs for fiscal sustainability.

Any proposed “handouts” or increase in individual tax relief and corporate tax incentives will have to be outweighed by more tax revenue generated from increased business activity and spending.

Hopefully, the government will address the importance of transparency and risk perception in Malaysia, and will provide longer lead times for communication before the implementation of any major tax changes.

The level of tax compliance may be increased by enhancing the tax ruling processes.

Although goods and services tax (GST) may not be announced in the 2023 Budget given the elections, doing so would only enhance transparency as the reintroduction of GST is widely expected to be just a matter of time.