Replenishing Malaysia’s coffers
AS Malaysia moves into a postpandemic recovery stage, the recently announced Budget 2022 aims to accelerate the nation’s recovery by focusing on boosting economic recovery, restore national resilience, and catalyse reforms.
In order to achieve this, the government said it will continue with an expansionary fiscal policy and this led to a recordhigh budget of RM332.1 billion includes a higher allocation of RM75.6 billion for the gross development expenditure.
According to the research team at MIDF Amanah Investment Bank Bhd (MIDF Research), based on the projection for Budget 2022, the government’s fiscal deficit is expected to fall to six per cent of Malaysia’s gross domestic product (GDP) as the size of the overall deficit will decline slightly to RM97.5 billion.
However, it pointed out that the reduction in the deficit mainly reflects the lower allocation for Covid-19 fund. The fiscal spending, both operating expenditure (OE) and development expenditures (DE), will increase further next year following the expansionary government spending.
Under Budget 2022, tax is one of the most focused topics as the overall fiscal revenue is projected to increase by 5.9 per cent to RM234 billion next year, mainly driven by higher collection from tax revenue that accounts for the large portion (or 73.2 per cent) of the total revenue.
To replenish the government’s depleting coffers, several new taxes were introduced under Budget 2022. In addition to that, measures pertaining to generating more tax revenue were also announced under the Budget 2022.
MIDF Research noted that the RM7.3 billion increase in tax collection will be supported by an eight per cent increase in tax payment from the corporate sector and a three per cent rebound in taxes on personal income, where both taxes will contribute 44 per cent of the total revenue next year.
In addition, petroleum income tax is also projected to rebound by 7.8 per cent, contributing RM12.4 billion to the fiscal revenue compared with RM11.5 billion in 2021.
Tax experts at Deloitte Malaysia also pointed out that tax collection is expected to increase by 5.9 per cent on the back of a better economic outlook with the government anticipating a 5.5 per cent to 6.5 per cent GDP growth in year 2022.
“Corporate income tax collection is expected to increase by 8.1 per cent to RM65.5 billion, which is higher than prepandemic numbers in 2019.
“This is optimistic but remains challenging as many businesses are still attempting to bounce back post Covid-19. The introduction of the one-off tax on companies that make super profits and taxation on foreignsourced income may provide some cushion,” Deloitte Malaysia country tax leader Sim Kwang Gek commented in special report on Malaysia’s Budget 2022.
“Overall, Budget 2022 places greater emphasis on measures to revive the economy and provides assistance to those affected by the pandemic, together with some measures to boost tax collection,” she added.
Cukai Makmur: Talk of the town
One of the most talked-about tax announced during Budget 2022 is a one-off corporate tax called ‘Cukai Makmur’ which is expected to be imposed on companies generating a high income during the Covid-19 pandemic period.
This is also in line with recent international trends such as the Organisation for Economic Cooperation and Development’s (OECD) move to impose higher taxes on larger and more profitable companies from the year 2023.
According to the Ministry of Finance, companies are expected to see its chargeable income up to the first RM100 million subjected to a 24 per cent tax rate while the remaining chargeable income is taxed at 33 per cent.
The tax is expected to be effective next year.
Deloitte Malaysia noted that instead of windfall tax, a similar concept in the form of the above prosperity tax is imposed on companies that generate high income during this Covid-19 pandemic period. This is in support of the government’s initiative that those prospering in such trying times assist those adversely affected, in the spirit of shared national prosperity.
“While the intention is to tax companies that have done well despite the pandemic, it remains to be seen how much tax revenue can be generated from this proposal, considering more than 90 per cent of business establishments in Malaysia are SMEs,” it said in its post-Budget commentary.
“As this proposal affects all companies, it appears that the oil palm plantation sector, that is already subject to the windfall profit levy, will be caught too.
“Perhaps, the proposal to increase the threshold of crude palm oil (CPO) prices for imposition of this levy is intended to provide some relief to this sector.
“On the flip side, Cukai Makmur could incentivise large corporates to increase business spending and accelerate capital investment, in an effort to reduce taxable profits below the threshold.
“The proposed extension of various incentives such as the special reinvestment allowance would be a strong influence to encourage corporates to invest more,” it added.
Taxing foreign-sourced income
Aside from the Cukai Makmur, the government is also looking to review the tax on foreign sourced income (FSI).
Under Budget 2022, this tax is aimed at providing equitable tax treatment with the income accrued in Malaysia or derived from Malaysia and in line with Malaysia’s commitment towards compliance with the international tax best practices. It is proposed income tax be imposed to residents in Malaysia on income derived from foreign sources and received in Malaysia.
According to Deloitte Malaysia, as a transition, it is proposed that the FSI received in Malaysia from January 1, 2022 until June 30, 2022 will be taxed at three per cent on a gross basis. The FSI received in Malaysia from July 1, 2022 onwards would be subject to tax, based on the prevailing income tax rate.
“Given the recent inclusion of Malaysia in the European Union (EU) grey list where Malaysia’s territorial sourced tax regime is considered harmful, this proposal in Budget 2022 is not a total surprise.
“However, since EU is concerned only where such regimes create situations of double non-taxation, income such as dividend would not be a concern as it would not rank for a deduction.
“That being said, the Finance Bill 2021 seems to cover all kinds of FSI, including foreign dividends received in Malaysia,” it noted.
On the possible impact of this tax on companies, Deloitte Malaysia explained that dividends received in Malaysia by Malaysian resident companies from foreign subsidiaries would be taxed in Malaysia with effect from January 1, 2022.
Foreign dividend withholding tax suffered would be creditable against Malaysian tax payable while certain tax treaties allow foreign tax paid by subsidiary companies in respect of their income out of which dividends are paid to be part of the credit.
It noted that another common situation would be the interest from money lent to borrowers outside Malaysia, including intra-group lending, would also be taxed upon remittance moving forward. Remittance of profits of operations outside Malaysia, notably branch profits, would also be subject to Malaysian tax after taking into account the foreign tax paid.
“All-in-all, additional topup tax would occur where Malaysian tax is higher than the foreign taxes,” it said.
As for Malaysians, this tax could also the rental income earned by a Malaysian tax resident from a real property located outside of Malaysia.
“From January 1, 2022 next year, income remitted to Malaysia would be taxed. In this case, both countries have the right to tax,” it highlighted.
To avoid double taxation on the same rental, Malaysia, being the country of residence would grant a foreign tax credit based on a prescribed formula that takes into account the taxes paid in the foreign country, against the Malaysian tax payable. However, the Malaysian resident landlord would still need to pay the net tax to the Malaysian Government, it said.
It is also worth noting that this tax could affect Malaysians residing in Malaysia but are working abroad.
Deloitte Malaysia explained that before January 1, 2022, Malaysians could remit their salary in Malaysia without paying Malaysian tax. However, under the new rule, their remittance would be subjected to Malaysian tax.
In short, there would be an incremental tax.
“An immediate course of action would be to identify any FSI (which may not have been given much attention before this), timing of their receipt and the quantum of any incremental tax liability after factoring in the availability of any tax credits.
“This is especially important for companies with a December 31 financial year end since the deadline for submitting their estimate of tax payable for year of assessment 2022 is close.
“Moving forward, businesses would also have to consider the potential tax impact when planning the timing of repatriation of their FSI to meet their commercial requirements locally,” Deloitte Malaysia advised.
“Corporate income tax collection is expected to increase by 8.1 per cent to RM65.5 billion, which is higher than pre-pandemic numbers in 2019.”
— Sim Kwang Gek, Deloitte Malaysia country tax leader