Can Malaysia afford to revamp its corporate tax rate?

THE narrow tax base has been a bane for the government, with constricts on the tax base having resulted in a very low taxable percentage compared with gross domestic product.

One trend that may put even more pressure on Malaysia has been the slow and declining trend of average corporate tax rates throughout the world.

Malaysia’s corporate tax rate of 24% would put the country at the higher threshold of what other countries are charging, but the effective tax rate is way lower than the headline number, given the absence of a lot of other taxes and also the ease of doing business which has been a big plus point for Malaysia compared with its peers.

But considering the country’s limited tax structure, is Malaysia in a position to revamp or reduce corporate taxes?

Malaysia is at a crossroads on this with its high corporate tax rate of 24% because of a small tax net, but at the same time, lower corporate taxes are expected to drive more foreign direct investment (FDI) into the country, stimulate growth and eventually increase tax collections.

Deloitte Malaysia tax leader Sim Kwang Gek says that as corporate income tax (including petroleum income tax) represents approximately 32.8% of federal government revenue and the government needs to manage its fiscal deficit, Malaysia may not be able to afford a corporate tax rate cut at this juncture.

“Until and unless Malaysia broadens its tax base and the economy achieves a sustainable growth trajectory, the corporate income tax rate may stay at 24%.

“However, there is a need to review our corporate income tax rate to prevent local companies from shifting their businesses to lower tax jurisdictions and to ensure that we remain attractive for FDI. We may be losing out to regional countries that have more competitive corporate income tax rates,” she says.

Currently, Singapore’s corporate income tax rate stands at 17%, Vietnam, Thailand and Cambodia all at 20%, and Indonesia at 22%.

Pressure will be heaped on Malaysia as other countries are slashing their corporate tax rates to spur investment and business activity.

Sim says that in a move to make India a favoured destination for investment, the country recently announced a reduced corporate tax rate for new manufacturing companies and existing companies to 15% and 22%, respectively.

“With this change, Indian companies can no longer claim most of the tax exemptions or incentives. The Philippines has introduced a reduction of its corporate income tax rate from 30% to 25% beginning July 2020. A further reduction of one percentage point is expected annually from 2023 to 2027 until it reaches 20%,” she adds.

“Although we have attractive tax incentive schemes to attract foreign investments, the tax incentives should be more targeted, as can be seen from the recent tax incentives announced under the Penjana stimulus package and Budget 2021. Perhaps, with the lowering of the corporate income tax rate, there should be a lesser need to fine-tune the current tax incentive regime,” she says.

Ernst & Young Tax Consultants Sdn Bhd Asean Tax Leader and Malaysia Tax Leader Amarjeet Singh says that while Malaysia may not be able to reduce its corporate tax rates today, given the current economic and fiscal circumstances, the government may wish to evaluate the possibility of making announcements in the current period for a gradual reduction of corporate tax rates in the coming years, as part of its tax reform study.

“This will at least provide investors with a view of the tax cost as they make their investment decisions. Investment decisions are made in advance and having the knowledge of tax costs is a crucial factor. At 24%, Malaysia already has one of the highest corporate tax rates in Asean,” he says.

PWC Malaysia tax leader Jagdev Singh says any decision to cut the corporate tax rate is a difficult one for the government because the revenue profile in terms of revenue collection is already fairly challenged.

“I’m sure they would like to reduce it to make us more competitive, as otherwise, you’re relying on incentives to attract investments. And at the same time, you need to encourage domestic investments and the trend in terms of domestic investments over the last few years has not been fantastic. In fact, it has been on a downward trend. So, how do we encourage domestic investments?” he asks.

Jagdev suggests it is time to move away from having widespread incentives to a more competitive corporate tax rate in line with what other countries in the region are doing.

“A better way is to offer a more attractive tax rate that would make us more competitive in the region, and I think the new norm in the region, you would hear, is about 20%. So, most of the countries have either got to 20% or have announced measures that will bring them to 20% over time.

“Maybe what I would have liked to see is the government announcing some forward-looking measures of what our plans are in reducing corporate taxes,” he says.

Right now, the government will need to balance its books by probably broadening the tax base through consumption tax, as well as looking at new taxes, Jagdev says.

Tackling the black economy, where tax revenue leakages are astronomical, is the right policy action to take, with Jagdev saying that the special voluntary disclosure programme in 2018 was an example towards plugging those leaks.

“As long as we can make sure the right amount of taxes are being collected from everyone that should be paying taxes, it puts less pressure on the revenue side of things and helps to sort of boost up government revenue.

“That way then, if you got a multi-pronged strategy, improving your collection of taxes, possibly looking at new taxes as well as a broad-based consumption tax, all these things will help to sort of compensate for any reduction in the tax rates that you can put out there.”