Need for holistic view in crafting measures to spearhead digital initiatives

BUDGET 2018, themed “Shaping the Future”, is expected to focus on innovation and digital economy and I hope it will take a holistic view in crafting effective measures to spearhead digital initiatives. The establishment of the Digital Free Trade Zone (DFTZ) this year will be a boost to Malaysia’s e-commerce roadmap which aims to double the nation’s e-commerce growth and increase the GDP contribution to RM211bil by 2020. The opportunities for businesses to tap into the digital economy are tremendous.

Reinvestment allowance incentive

The present reinvestment allowance incentive in the form of additional 60% deduction on qualifying capital expenditure is available to companies in the manufacturing and selected agriculture sectors for 15 consecutive years in expanding, diversifying, automating or modernising their business operations. It was extended for another three years to 2018 to encourage reinvestments by companies that have exhausted their 15-year incentive period.

To tap into the digital economy, investment in technology is vital in transforming the tra- ditional business model. The reinvestment allowance incentive should be expanded to include sectors such as the logistics and retail sectors where substantial investments in technology are crucial in modernising and digitalising operations.

Increasing startups

Recognising the important role of startups in the development of the digital economy and to position Malaysia as a choice location for startups in the region, Budget 2012 introduced the angel investor tax incentive which provides a tax relief of up to RM500,000 to high net worth individuals or high income earners that invest their personal income in qualified companies vetted by the Angel Tax Incentive Office under Cradle Fund Sdn Bhd. This incentive applies to applications submitted from Jan 1, 2013 to Dec 31, 2017.

To increase equity investments in startups, the angel investor tax incentive should be extended for five more years. The threshold of RM500,000 should be removed and the angel investor be allowed to carry forward any excess amount of investment (where the investment exceeds the aggregate income of the investor for a particular year) as a credit for set off against future tax liability.

Intellectual Property (IP) regime

Innovation is key to future economic growth.

A number of countries have IP or patent box regimes providing preferential treatment in respect of profits from qualified IP to promote research and development (R&D). To meet international standards, some IP regimes have been aligned to be compliant with Action 5 of OECD’s Base Erosion Profit Shifting (BEPS) Action Plan, which requires alignment of the benefits of these incentives with substantive R&D activity.

Presently, Malaysia does not have a specific IP regime. To attract R&D hubs to Malaysia and commercialise and exploit the resulting IP, Malaysia can consider introducing an IP incentive providing lower tax rate (say, 10%) on qualifying IP income and the incentive should be made conditional upon meeting certain criteria such as performance of the R&D activities in Malaysia, commercialisation of the results of these activities and IP ownership.

Protecting our tax base

One of the major challenges arising from the advent of technology and digital economy is determining the taxable profits derived from such activities. The traditional way of taxing businesses based on physical presence in a country is no longer relevant. Take for example, the e-hailing and e-accommodation business model that is able to generate substantial profits from Malaysia through the use of technology to connect people with service providers. The recommendation from OECD BEPS project is for profits to be reported whenever substantive economic activities take place and where value is created, and countries around the world have taken steps to tax transactions related to e-commerce.

The Royal Malaysian Customs Department plans to amend the goods and services tax (GST) Act 2014 to enable the Government to collect taxes from foreign companies offering digital services in Malaysia. In our 2017 budget, the withholding tax on royalties and services were expanded to include services rendered outside Malaysia and the use of software. Undoubtedly, this was proposed to capture digital transactions into the tax net but confusion lies around the interpretation of what constitutes “royalty” and whether it is fair to subject all kinds of services to withholding tax.

Timely and detailed clarification on this subject matter will ensure smooth implementation and compliance with the law.

Whilst we do not have specific provisions under the Income Tax Act 1967 to deal with e-commerce transactions, providing clarity on how such profits should be taxed in Malaysia is vital in ensuring compliance. I expect the Guidelines on Taxation of Electronic Commerce issued on Jan 1 2013 to be updated to take into account international developments.

Under the TN50, Malaysia aspires to be a top 20 nation in economic development, social advancement and innovation. Crafting the Budget 2018 with a digital and innovation-led purpose will put Malaysia on the right track towards achieving economic prosperity through new sources of growth.