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The good and bad for business from tax perspective
SM Thanneermalai 
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BUDGET 2018 should be welcomed by industry as it focused on sectors which will help fuel the growth momentum. Such existing sectors which will have a major impact on employment are SMEs, tourism, agriculture, logistics, manufacturing, and oil and gas. Simultaneously, the budget has also provided grants and tax incentives to keep industry at the forefront of the digital and industrial revolution.

Most of the budget measures have been given by way of direct allocations, grants, soft loans, guarantees, etc. Although this budget has used taxation measures selectively to keep the growth momentum, it is very important to understand the impact of the taxation changes: the good and the bad.

 

What is good?

The streamlining of the accelerated capital allowance (ACA) and automation equipment allowance (AEA) to provide manufacturers investing in automation equipment such as robotics and using technology drivers from the digital space (up to a maximum of 200% tax deduction on such expenditure) will certainly provide the manufacturing sector a big boost.

It was a relief that no new tax measures were announced to tax companies involved in the digital economy despite the hype generated in the media before the budget. In fact, it was the reverse with the announcement of the progress of the construction of the Digital Free Trade Zone. This is a zone that will help SMEs, in particular, to participate in the digital economy. Although no announcements were made on any tax breaks, it is anticipated that there will be tax concessions given from both indirect taxes such as GST, customs duties and income tax in due course.

Tax incentives have been extended from 2018 to 2020 for principal hub, tourism sector (investments in four- and five-star hotels), tour operating companies, and medical tourism. GST relief will be given for the import of big-ticket items in the area of shipping, oil and gas, aviation and other similar industries which require big-tickets items.

Similarly, benefit has also been given particularly to the import of oil and gas equipment from the designated areas of Labuan, Langkawi and Tioman. Another welcome incentive is to allow companies to claim capital allowance on expenditure incurred on the development of customised software which was denied previously.

The incentives have been extended up to 2020 for the manufacturing sector adopting automation and those moving up the value chain adopting the industry 4.0 initiatives such as new types of expenditure on big data analytics, artificial intelligence, and simulation. The incentives are accorded in the form of ACA and AEA.

Similarly, in the health sector, the tax incentive has been increased from 50% to 100% of the income derived from the export of private healthcare services.

Providing a one-year income tax exemption for women who have taken a career break for at least two years on Oct 27 will certainly help industry: bring back senior talent which is in short supply, and at the lower end, help reduce the dependence on foreign labour.

Reducing the investment limit at the seed, start-up and early stage by a venture capital company (VCC) from 70% to 50% to benefit from the tax exemption will allow the VCCs to invest in more start-ups. Similarly extending the period of the tax incentive for angel investors up to 2020, allowing them a tax exemption of up to the amount of the investment made in the investee company, will also encourage them to continue taking risks with start-ups.

 

What is not so good?

The big bombshell is hidden away in appendix 30 of the budget speech is a big surprise to many taxpayers. The proposal here is to limit interest deduction on loans between related companies within the same group to a ratio to be determined by the Inland Revenue Board, ranging from 10% to 30 % of either earnings before interest and tax (EBIT) or earnings before interest, tax, depreciation and amortisation (EBITDA).

We have to wait for the rules to be issued before the full ramifications are known.

This will impact both multinational and domestic groups.

The intention is to curb the aggressive tax planning using interest as a means to shift profits into tax shelters such as low tax countries or tax havens or set off against tax losses or other tax incentives.

However, in the “cross-fire” innocent parties could get caught, for example with regards to interest on genuine intercompany loans.

There are many questions that need to be answered by the policymakers before this rule is implemented otherwise there will be confusion in the marketplace. For example, interest is subjected to different levels of scrutiny: Purpose of the loan for basic deduction, withholding tax on payment of foreign interest, interest is further restricted if it is not used for business purpose, related party interest has to also meet the arms-length rule under the transfer pricing regime and finally we have to come around these “earnings stripping rules”.

What is the order of priority in determining the amount of interest that can be claimed? If an amount is disallowed, will that portion be allowed to be carried forward to be set off against the future?

The proposal is a good one as it is aimed at curbing or attacking aggressive tax planning. At the same time, care should be taken to devise a methodology to separate the genuine interest incurred for business purposes from the interest inserted as part of an aggressive tax plan to avoid paying the proper taxes.

 

Transparency and global exchange of information

Malaysia has committed to sharing tax information with other countries which have signed the various conventions promoted by the Organisation for Economic Cooperation and Development (OECD). Similarly, Malaysia will also receive information on Malaysian taxpayers from overseas tax authorities.

Hiding from the tax authorities is becoming more and more difficult. It is best to come clean and avoid sleepless nights.

SM Thanneermalai is managing director, Crowe Horwath KL Tax Sdn Bhd, and chairman of the Board of Trustees, Malaysian Tax Research Foundation 



This article first appeared in Focus Malaysia Issue 257.