MALAYSIA’s rise in the 2023 IMD World Competitiveness Ranking, from 32nd place in 2022 to its current standing at 27th place, is a testament to the nation’s resilience and growth.
This progress aligns with the government’s ambitious goal outlined in the Madani Economy framework: to ascend towards the top 12 global competitiveness ranking within the next decade.
Achieving this ambitious goal requires thoughtful consideration of initiatives to attract foreign direct investment (FDI) and boost investor confidence, both domestically and internationally.
With the tabling of Budget 2024 around the corner, this would be an opportune moment to introduce incentives that will bolster Malaysia’s competitive edge.
Beyond that, it is imperative to also focus on addressing several present challenges faced by the country including stagnation of labour productivity, skillset mismatch and talent shortages, limited financing for new ventures, and the need to improve ease of doing business.
KPI-based tax rate cut
To stimulate productivity, the government may consider a key performance indicator (KPI)-based rate cut system, where reductions in tax rates may be accorded based on the demonstrated increase in productivity.
Drawing inspiration from precedents in 2017 and 2018, where corporate income tax rates were reduced by 1% to 4% contingent on the percentage increase in the chargeable income of a company compared to the preceding year, this measure should be implemented on perpetual basis rather than as a one-off initiative, to stimulate sustainable business growth.
Mitigate talent drain
Malaysia’s multilingual talent pool has been our nation’s comparative advantage.
However, with the weakening ringgit and ease of global mobility, many local talents are moving abroad to seek more lucrative career opportunities.
The Human Resources Ministry indicated earlier this year that Malaysia’s brain drain rate is currently at 5.5% of the population, which exceeds the global average of 3.3%.
While Malaysia already has incentive packages to attract returning experts, more should be done to counteract the talent outflow.
The initiatives that can be considered include preferential income tax rates for local talents in the science and technology industries, tax credits for companies investing in training and skills development as well as tax incentives to encourage collaboration between educational institutions and the private sector to produce quality graduates with skillsets required by the employers.
Moreover, additional personal tax relief such as interest subsidy and utilities relief would also provide added advantage, as they help alleviate the burden of many working adults and families who are feeling the pinch from the rising cost of living.
Attracting MNEs
To ensure that Malaysia remains a magnet for talent and economic growth, it is also critical to attract multinational enterprises (MNEs) to invest in Malaysia.
Instead of the conventional focus on approved products and capital investment, more progressive tax incentive packages can be offered based on the level of commitment towards human capital development, local hiring as well as research and development. These incentives should be outcome-based, with specific KPIs to be met to qualify for the incentives.
To incentivise high-quality MNEs to remain in Malaysia after the end of their five-to-10-year tax incentive period, further tax breaks in the form of lower tax rates for an extended duration can be explored as a means to reward companies that continue to expand and reinvest in Malaysia.
Navigate global tax landscape
Global tax change is on the horizon, with countries worldwide adopting a 15% global minimum tax rate under the Organisation for Economic Co-operation and Development Inclusive Framework’s Global Anti-Base Erosion Rules and as part of the Base Erosion and Profit Shifting Pillar 2 initiative.
Pillar 2 is designed to ensure a level playing field between countries in attracting FDI, as MNEs are obliged to pay at least a minimum 15% of the effective tax rate (ETR).
Although the benefit of tax incentives could be significantly diminished by the top-up tax, if an MNE’s ETR drops below 15% in a particular jurisdiction, alternative fiscal and non-fiscal incentive schemes tailored to the specific merits of the investors can still be considered by the government, to maintain its competitiveness in attracting FDI.
Empowering SMEs
As not all small and medium enterprises (SMEs) will be affected by Pillar 2 (with the threshold set at a global annual turnover of €750mil or more), Malaysia should continue to focus on accelerating the growth of our SMEs to stimulate domestic direct investments.
One approach would be to consider expanding the scope of the existing Reinvestment Allowance incentive to cover the services sector and expenses related to digitalisation, automation and sustainability initiatives.
Embrace the ESG agenda
In line with the global shift towards the environmental, social and governance (ESG) agenda, more incentives should be provided to encourage investment in clean energy and carbon footprint reduction.
Tax credits for the utilisation of renewable energy and adoption of waste management initiatives, low interest loans for green asset purchase, and tax incentives for green technology investment, without limiting the number of qualifying entities per group, are avenues to promote green spending.
In addition, reviewing and increasing tax deductions for contributions to approved charitable entities and social enterprises, currently capped at 7% for individuals and 10% for companies, would demonstrate a commitment to supporting social causes.
Need for clarity
Attractive tax incentives can only be effective if they are accompanied by certainty and clarity in policies.
Historically, tax changes and incentives were announced prematurely, leaving investors waiting for months until clear guidelines and details were available.
We collectively hope that the government will introduce impactful policies replete with clear details in the Budget 2024 proposals to further elevate Malaysia’s status as the preferred investment destination.
Source: https://www.thestar.com.my/business/insight/2023/10/12/enhancing-competitiveness-via-strategic-incentives