MALAYSIA’S strategic location offers well-connected infrastructure along with a robust ecosystem of manufacturers and suppliers, making it attractive for foreign direct investments (FDIs). This is one of the plus points for the nation as it weathers the global economic headwinds amid geopolitical tensions far away from its borders.
Looking at the proposed Budget 2024 for the federal government, a number of chartered accountants also discussed some of the proposed tax reforms and commitments on the environmental, social and governance (ESG) front.
Prime Minister Datuk Seri Anwar Ibrahim, who is also the finance minister, tabled the proposed federal government budget on Oct 13. The budget, totalling RM393.8 billion — RM303.8 billion for operating expenditure and RM90 billion for development expenditure — has garnered substantial attention due to its ambitious goals and implications for the country’s economic future.
The unity government, backed by Pakatan Harapan (PH) and Barisan Nasional (BN), as well as a host of parties from Sabah and Sarawak, has outlined plans to boost Malaysia’s export-driven economy amid moderating growth. It is also coming at a time of a weakening local currency and a rising cost of living.
Among others, the Anwar administration plans to introduce a capital gains tax (CGT) and a tax on high-value goods. They also have mooted the idea of gradually cutting subsidies as a sure way to bolster its fiscal position.
On Nov 2, the Dewan Rakyat passed the Supply Bill 2024 at the policy stage with a voice vote upon the conclusion of the bill’s winding-up speech by Anwar. The bill then moves to committee level for a second reading and then a third reading. It is then presented to the Dewan Negara and finally submitted to Yang di-Pertuan Agong for royal assent.
FDI and Data Centres
KPMG PLT partner Kevin Foo pointed out Malaysia’s strategic location and how it is a boon to attracting FDIs. Naturally, some of Budget 2024 proposals are a potential opportunity to revitalise the Malaysian economy and attract FDIs.
“Traditionally, Malaysia has offered tax incentives to attract FDIs. However, Budget 2024 proposes a shift towards outcome-based and tiered incentives, aligning them with measurable impacts,” said Foo in response to the Institute of Chartered Accountants in England and Wales (ICAEW) Malaysia.
Foo, a former chairman of the ICAEW Members’ Society, Malaysian Chapter, duly cautioned that attracting FDIs goes beyond tax incentives. It necessitates policy consistency, ease of doing business, and a culture of friendliness within government agencies.
“FDIs should not only bring capital but also promote knowledge transfer, reduce reliance on imports and foster collaboration with local small and medium enterprises (MSMEs). In addition, it is also imperative to embed measurable ESG commitments into the framework to help ensure that foreign investors contribute positively to the local environment and society,” he said.
One of the key components in FDIs are data centres. On this, Minister of Communications and Digital Fahmi Fadzil has recently reiterated that Malaysia continues to be a preferred investment destination particularly for investments in data centres.
He said there has been growing interest in what Malaysia could play with regards to hosting data centres, and the government is committed to developing governance structures, public policy and regulatory frameworks.
“We are prepared to engage with businesses and organisations in order to have a particularly robust and future-ready ecosystem, what more given that Malaysia will chair Asean in 2025. At this stage, different countries within Asean possess slightly different preparedness when it comes to regulatory framework particularly around data protection.
“As such, we will not only be working on economic framework agreement but we will also be working with my counterparts to accelerate the development of regulatory frameworks within Asean, to make sure that 660 million people are more ready to embrace and participate in digital economy,” he said at a digital transformation event in Kuala Lumpur on Nov 22, reported Bernama.
In the Malaysian context, Bernama reported that Fahmi said one of the things that need attention is convincing not only the Malaysian public but also businesses on the opportunities of how technologies, including 5G, could help to not only reduce cost, increase efficiency and productivity, but fundamentally shift and bring some changes to organisations to prepare for future technologies.
Capital Gains Tax
KPMG Malaysia Corporate Tax Advisory associate director Elliot Voon took note of the introduction of CGT on companies, particularly related to the sale of shares in unlisted companies. It highlighted the need for clear guidance to avoid double taxation and maintain market stability.
Notwithstanding that, he said ease of doing business in Malaysia is crucial and simplifying government processes through a unified digital platform would help streamline interactions with various government departments and agencies.
The Ministry of Investment, Trade and Industry (MITI) and the Malaysian Investment Development Authority (Mida) now have an expanded role in facilitating investment-related issues.
“Such a move strengthens the nation’s appeal to investors, offering them a transparent and stable environment in which to operate and invest,” he said.
Fiscal Needs
Grant Thornton Malaysia PLT country CEO and ICAEW Malaysia vice chairman Kishan Jasani feels that Budget 2024 strikes a balance between the fiscal needs of the country and fostering economic growth. He said the focus was on fiscal reformation, and the subsidy question is a tricky one.
“We can observe the right steps being taken through this process. As chartered accountants, we understand that it boils down to the needs of the many versus the needs of the few. Some discussions are premature at this stage, but what’s crucial is achieving that balance,” he said in his response to the ICAEW Malaysia queries.
Kishan said the government recognised that the country is operating under the First Fiscal Responsibility Act.
“The present government is adopting a responsible fiscal policy, and it’s evident that this can be achieved through a careful re-evaluation of subsidies. Rationalisation, especially in sectors like electricity, is imperative. Without these structural changes, we’ll encounter long-term challenges.
“We’re at a juncture where we must prioritise the needs of the many over the government’s requirements. It’s reminiscent of Adam Smith’s concept of unlimited wants and limited resources. We are indeed at a crossroads, and the current government is earnestly addressing these complex issues,” he said.
Taxation
Grant Thornton indirect tax and transfer pricing senior ED and the Chartered Tax Institute of Malaysia (CTIM) current council member Alan Chung had touched on the budget deficit target of 4.3% from 5%.
Naturally, the budget deficit can be reduced by either cutting expenditure or increasing revenue. Reducing expenditure, especially development expenditure, is out of the question as the nation aspires to have expansionary budgets. Malaysia has a relatively narrow tax base — its tax revenue is merely 11.8% of the GDP in 2021 compared to the average of 34.1% in OECD countries. But there are various ways to broaden the tax base.
He noted that the reintroduction of the GST, drummed loudly prior to the tabling of Budget 2024, would be one of them. GST, in comparison, has a far broader coverage but is still neutral to businesses.
But the government did not take that route. At this juncture, GST is still off the books.
Apart from GST, Chung said other tax reforms can be introduced to reduce inefficiencies and increase the effectiveness of our tax collections.
“These reforms can help reduce the shadow economy and increase tax collections. Pushbacks to these new measures will not be surprising, as there will be an understandable reluctance to pay more taxes, as well as the burden of additional compliance requirements.
“The introduction of any new measures or reforms can be facilitated by clear guidelines and roadmaps with ample time for their implementation,” he said.
Two ICAEW chartered accountants at BDO PLT agreed that building upon the commitment to fiscal discipline established in the Malaysia Madani Budget 2023 earlier this year, Budget 2024 provides greater assurance of the unity government’s dedication to reform Malaysia in line with Madani principles, which promote economic growth and income equality.
BDO head of tax advisory David Lai and ED for tax Tan Chin Teck said that to address the budget deficit in the face of declining oil revenue, the government has confidently reaffirmed its proposals for new taxes, which it believes to be more progressive and less burdensome for the rakyat.
With the introduction of CGT, a high-value goods tax (HVGT), multinational and domestic top-up taxes (MTT & DTT), and the increase in rate and wider scope of the service tax, fine-tuning of the details will have to be made to mitigate any unintended inflationary effects.
In their joint response, they said one of the most encouraging proposals in Budget 2024 is the government’s commitment to promote ESG principles in Malaysia.
“This commitment is reflected in its proposal for annual income tax deductions of up to RM50,000 for ESG-related expenditures, such as e-invoicing, compliance reporting with ESG standards, corporate governance framework reporting, and the preparation of contemporaneous transfer pricing documentation,” they said.
Challenges Ahead
With Budget 2024 falling in place, what are the challenges ahead? A recent survey by a German business chamber provides some inkling into what probably lies behind the thinking process of foreign companies. This, certainly, impacts local players as well.
German companies in Malaysia foresee 2024 to be a challenging year due to geopolitical tensions playing out across the globe, the declining ringgit and high-interest rates, according to the latest AHK World Business Outlook Fall 2023 survey.
In the biannual survey which captures the sentiments of German firms operating in Malaysia, 49% of companies said the outlook for Malaysia next year will remain the same, while 34% said the local economic development will be favourable.
When asked about the economic risks for companies in the next 12 months, 51% of respondents said demand was a major concern, followed by a lack of skilled workers (46%) and high exchange rates due to the declining ringgit (46%).
Noting that skilled labour is a challenge, 51% of German companies in Malaysia intend to increase employment and only 10% intend to lower employment development next year.
This points to a positive for job opportunities in the country but also underscores the crucial need to enhance technical and vocational education and training (TVET) in Malaysia to bridge the gap between education and industry needs, according to a statement released by the Malaysian-German Chamber of Commerce and Industry (MGCC).
The AHK World Business Outlook is based on a survey of member companies of the German Chambers of Commerce abroad, delegations and representative offices among over 40,000 member companies in 92 countries around the world. It is a biannual research exercise conducted by the German Chamber of Commerce and Industry.
Despite the risks, the survey said that the good news is that 66% of companies expect business development to improve in the next 12 months. In terms of spending, the majority of respondents (49%) said their investments will remain the same, 39% of respondents intend to ramp up investments, 7% will lower their investments in Malaysia and 5% have no investments planned for the coming year. However, significant investments are expected to be made in the areas of production and manufacturing (46%), sales and marketing (43%) and services such as shared service centres (41%).
Amid the prevailing global uncertainties, MGCC ED Daniel Bernbeck said Malaysia’s adoption of several mechanisms including the New Industrial Master Plan 2030 (NIMP 2030) and the National Energy Transition Roadmap (NETR) and being part of the Regional Comprehensive Economic Partnership (RCEP), as well as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) free trade agreements (FTAs) will support the country’s transformation along with the economies worldwide and at the same time ensure Malaysia remains relevant and competitive globally.
There is definitely light at the end of the tunnel.
Source: https://themalaysianreserve.com/2023/11/27/a-look-at-budget-2024-and-challenges-ahead/