The 2017 Budget was announced on Friday 21 October 2016 against the background of a challenging economic environment. The Government has projected a 3% fiscal deficit for 2017, a reduction from 3.1% expected this year. Government revenue for 2017 is projected to be RM219.7 billion while the operating expenditure is RM214.8 billion and development expenditure is RM46 billion. The growth rate is projected to be between 4-5% in 2017 compared to 4-4.5% this year.
Among the key tax measures announced in the 2017 Budget are the following:
§ Recognising the economic challenges faced by companies, a reduced corporate tax rate of between 1% to 4% is proposed for companies who successfully increase their taxable income in the years of assessment (YA) 2017 and 2018. The reduction in the corporate tax rate is based on the percentage of increase in a company's chargeable income (CI) over that of the previous year. The reduced rate only applies to the incremental taxable income which may be difficult to achieve in a stressed economic scenario.
§ The corporate tax rate of 19% on the first RM500,000 of CI for small and medium enterprises (SMEs) has been further reduced from 19% to 18% from the year of assessment 2017.
§ The current deduction of RM500,000 for sponsoring approved local and foreign arts, cultural and heritage activities will be increased to RM700,000 within which the current deduction limit of RM200,000 for sponsoring approved foreign activities (which take place in Malaysia) will be increased to RM300,000 from the YA 2017.
§ Double deductions are currently given to companies for the costs incurred in implementing structured internship programmes (SIPs) for students pursuing full-time degree and diploma courses. The double deduction which was to have expired in YA 2016, has now been extended to YA 2019.
§ At present, the ITA clearly provides that expenses incurred in relation to single tier dividends are to be disregarded in arriving at adjusted income. An amendment has now been introduced to disregard any deductions in relation to single tier dividend income in arriving at chargeable income. This gives rise to the question as to whether adjusted losses, donations, zakat payments, etc. need to attributed to single tier dividend income and then disregarded in computing chargeable income. If this is the case, this will impact companies with business as well as passive sources of income
Payments to Non-Residents for Technical and Other Services
§ In a move to widen the tax base, payments to non-residents falling under Section 4A of the Income Tax Act, 1967 (ITA) will be subject to withholding tax regardless of where the services are performed and will no longer be confined only to services performed in Malaysia. Section 4A broadly covers income of a non-resident from services performed in Malaysia (with the exception of routine day-to-day administrative services between a parent and branch/subsidiary) as well as rental or other payments for the use of movable property. This change will be costly for Malaysian businesses which require the services of foreign parties as typically, the foreign parties will require the Malaysian entity procuring such services to bear the withholding tax cost. The tax authorities also take the view that where the Malaysian entity bears the withholding tax, this tax cost is not a deductible expense. This change will therefore result in significant additional costs for Malaysian businesses which rely on foreign expertise.
§ The definition of the term ‘royalty' has been significantly expanded to cover payments for:
- the use of or right to use software
- the receipt of or the right to receive visual images or sounds transmitted to the public by satellite or cable, fibre optic or similar technology
- the use of or the right to use visual images and/or sound in connection with broadcasting by satellite or cable, fibre optic or similar technology
- the use of or the right to use some or all of licensed radio frequency spectrums
- the total or partial forbearance in respect of the use of or rights covered by the royalty definition.
The change with regard to payments for the use of software sets an end to the long-held argument that such payments are not for copyright but for the use of a copyrighted article and hence should not be viewed as royalties. In this regard, although this potentially results in additional tax revenues via withholding tax on payments for software to non-residents, where the double tax treaty definitions of royalties are narrower, the treaty definitions will prevail. The other changes outlined above will primarily have an impact on businesses involved in the digital transmission of television programmes, films, music, games, etc.
§ The definition of the term ‘public entertainer' has been widened and now includes the following persons:
- "a compere, model, circus performer, lecturer, speaker, sportsperson, an artiste or individual exercising any profession, vocation or employment of similar nature; or
- an individual who uses his intellectual, artistic, musical, personal or physical skill or character,
in carrying out any activity in connection with any purpose through live, print, electronic, satellite, cable, fibre optic or other medium , for film or tape, or for television or broadcast"
It is interesting to note that lecturers and speakers now fall under the category of public entertainers for the purposes of withholding tax under Section 109A of the ITA.
§ The tax incentives for International Currency Business Units which operate Islamic banking and takaful business activities in foreign currencies which were due to expire in YA 2016 have been extended to YA 2020 to enable Malaysia to maintain its competitive edge in the sphere of Islamic finance
§ Given the importance of tourism to the nation, the time-line for the application for the current tax incentives (involving pioneer status or investment tax allowance) for 4 and 5 star hotels has been extended from 31 December 2016 to 31 December 2018. The applications are to be submitted to the Malaysian Investment Development Authority.
§ Recognising the potential for growth for this industry, the incentives currently available to halal industry players operating in Halal Parks (promoted by the Halal Development Corporation) are limited to specific products. The Budget proposals have extended the qualifying halal products to include the production of nutraceutical and probiotic products.
Vendor Development Programme
§ An extension of the time-line for the tax incentives for anchor companies under the vendor development programme has been given for a further 4 years.
§ The current tax reliefs for the purchase of reading materials, sports equipment and a computer will be merged into a single ‘lifestyle relief' of RM2,500. This relief will also cover the purchase of newspapers, smartphones/tablets, internet subscriptions and gym membership fees.
§ Two new reliefs have been introduced to assist young families:
- Relief of RM1,000 will be given once in 2 years for the purchase of breastfeeding equipment for women taxpayers with children aged up to the age of 2
- Relief of up to RM1,000 will be given to a parent who enrols his/her child in registered child care centres or kindergartens.
The idea of collapsing the various reliefs into fewer categories is a good one but introducing more personal reliefs then defeats the purpose.
§ To encourage home ownership, the current 50% stamp duty exemption for first-time home buyers which was due to expire on 31 December 2016 will be enhanced and extended.
§ On the flip side, those in the higher income bracket will be affected by the increase in the rate of stamp duty on the transfer of real property worth more than RM1 million from 3% to 4% with effect from 1 January 2018.
GOODS & SERVICES TAX (GST)
§ Businesses are required to register for GST when their turnover threshold hits RM500,000. In determining this threshold, income arising from the supply of capital assets of the business which was previously excluded will now fall within the RM500,000 threshold, unless the capital assets are supplied or transferred as a result of the cessation of a business. However, supplies made within or between the free zones will now be excluded in determining the threshold.
§ It is proposed that the GST treatment for free commercial zones and free industrial zones, which will now be collectively referred to as Free Zones, will be streamlined as follows:
- GST will not be charged on supplies and removal of goods made within and between Free Zones
- GST will not be due on goods imported into a Free Zone except for goods imported to be used or consumed in the Free Zone
- GST will be suspended on the removal of goods from Free Zones to Designated Areas (i.e. Langkawi, Labuan and Tioman) and vice versa, and on the removal of goods from a free zone to an approved warehouse under the Warehousing Scheme, and vice versa.
§ The rules for the Warehousing Scheme have been amended such that GST is suspended on imports into a ‘warehouse' and disregarded on the supply of goods between ‘warehouses'.
§ The granting of GST relief for the supply of approved equipment for the disabled has been simplified and the list of approved equipment has been extended. Essentially, relief will be given directly to ‘OKU cardholders' (i.e. persons with registered disabilities) by the Social Welfare Department's designated suppliers.
§ Several administrative measures have been introduced, including changes to facilitate the amendment of tax returns in certain circumstances which were not previously provided for in the ITA.
§ An interesting proposal is the setting up of a Collection Intelligence Arrangement under the Ministry of Finance. It involves the IRB, Royal Malaysian Customs Department and the Companies Commission of Malaysia who will share data to enhance efficiency in tax collection and compliance. This, it is hoped, will also enable these agencies to tackle the taxation of the informal economy which, if done effectively, can lead to enhanced tax revenue collection.
The Budget tax proposals and the various Budget allocations including the increased ‘BRIM' payments are largely in line with the Budget theme. As we move forward to face the challenges of 2017, it is also incumbent upon the Government to ensure that the 2017 Budget allocations are appropriately and prudently utilised for the benefit of the nation as a whole. On the administrative front, it is hoped that the authorities will act quickly to ensure that the legislative changes will be implemented smoothly and promptly to facilitate clarity and certainty in assisting taxpayers to meet their compliance obligations.
For the longer term outlook, there is a need for a long term fiscal framework to be developed and made public. We need a holistic review of the entire tax system so as to craft an effective tax system that will be able to sustain the needs of the nation when we reach the 2020 milestone and when we achieve developed nation status.