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2007 budget highlights
The 2007 Budget was presented in Parliament on 1 September 2006.
The expected economic growth rate for 2006 is expected to be 5.8% whereas that of 2007 was forecasted to be 6%.
The budget was an expansionary one with allocations to a broad range of sectors and it involved a total of RM159.4 billion compared to the 2006 budget which amounted to RM134 billion.
- New provisions were introduced granting the tax authorities specific power to issue Public Rulings. In addition, an Advance Rulings system is to be introduced from 1 January 2007.
- Guidelines are to be issued by the tax authorities pertaining to the framework for conducting tax audits and tax investigations so as to establish transparency in the way the tax authorities carry out such activities.
- An independent body in the form of a Customs Appeal Tribunal is to be set up from 1 March 2007 to decide on appeals against decisions of the Director General of Customs.
- A customs rulings system is to be introduced from 1 January 2007.
- Corporate tax rate to be reduced from 28% to 26% by one percentage point each year over the next 2 years, i.e 27% in the year of assessment 2007 and 26% in the year of assessment . This also applies to trust bodies, an executor of the estate of a deceased person and a receiver appointed by the court.
- Payments to non-residents for the rental of ships is no longer subject to withholding tax.
- The definition of an investment holding company has been revised such that companies deriving a business source of rental income may still be viewed as being investment holding and hence will be subject to certain restrictions in terms
of deductibility of expenses and utilisation of losses.
Several new incentives to encourage the growth of Islamic banking and financing have been introduced, including the following:
- a 10 year exemption for Islamic Banks and Takaful Companies on income derived from Islamic banking businesses and Takaful businesses conducted in international currencies;
- a deduction for pre-commencement expenses incurred in setting up an Islamic stock broking company;
- a 10 year exemption on fund managers managing funds of foreign investors established under Islamic principles;
- the tax deduction allowed for the issuance of Islamic securities is extended for a further 3 years;
- a SPV set up under Islamic financing schemes is no longer subject to tax
- profits/interest income from Islamic financial institutions is exempt from tax in the hands of non-residents; and
- a 20% stamp duty exemption has been granted for 3 years on instruments used in Islamic financing.
- Incentives given to the banking sector to encourage expansion overseas - banks which are currently taxed on a world wide scope are encouraged to expand overseas by the grant of a tax exemption on income derived from newly established foreign branches and subsidiaries for a period of 5 years.
- Review of tax treatment of Real Estate Investment Trusts (REITs) - where a REIT distributes 90% of more of its income for a particular year, the REIT will be exempt from tax that year. The tax treatment of unit holders in respect of dividend income from a REIT has also been relaxed. Unit holders will be taxed as follows:
- All other investors -15% withholding tax
- Foreign institutional investors -20% withholding tax
- Resident companies -prevailing corporate tax rate
- Non-resident companies -withholding tax at prevailing corporate tax rate
(Previously, unit holders were taxed at the prevailing income tax or corporate tax rates, and non-residents were subject to 28% withholding tax).
- The system of granting bilateral tax relief has been revised to allow for relief on foreign tax suffered on Malaysian sourced income.
- Property developers and contractors are now permitted to carry back losses to preceding years upon the completion of a project.They are also allowed to spreadback the profit to earlier years where the actual gross profit earned is less than the estimated profits computed (using the required percentage of completion method of accounting).
- Penalties imposed in respect of non-compliance with withholding tax provisions have been relaxed to 10% of the unpaid tax as opposed to 10% of the gross fees which is subject to withholding tax.
- A tax deduction is now allowed for the cost of leave passage within Malaysia for a yearly event which involves the employer, employee and the employee's immediate family.
- With the introduction of group relief (introduced in the previous budget), now the surrendering company has an avenue for appeal where it is penalised for the overstatement of losses which have been claimed by another company within the group.
- Zakat contributions (obligatory alms for Muslim) to Islamic religious authorities paid by companies are allowed a tax deduction up to 2.5% of aggregate income. This deduction has now been extended to trust bodies and cooperative societies.
- Tax deductions for approved donations now include contributions to sports activities and projects of national interest. Further, the limit for such a claim has been increased from 5% to 7% of the aggregate income of a company.
- The limit on tax deductions for sponsoring local and foreign arts & cultural performances has been increased from RM300,000 to RM500,000. Of this RM500,000, the sponsorship of foreign performances is still restricted to RM200,000.
- The amount of debt released in respect of expenditure on which tax depreciation (capital allowances) have been claimed previously will be taxed as part of the gross business income in the year in which the debt is released.
Additional tax incentives to promote the growth of the biotechnology industry have been introduced and these include the following:
- an enhancement of the existing tax exemption incentive where the exemption period commences from the first year the company derives a profit as opposed to the date from which commercial production is commenced;
- an approved company will be given a concessionary tax rate of 20% for a period of 10 years upon the expiry of the tax exemption period;
- a company/individual investing in an approved company will receive a tax deduction on the total investment made in seed capital or early stage financing;
An approved company undertaking a merger/acquisition exercise with a biotechnology company will be exempt from stamp duty and real property gains tax ('RPGT') for a period of 5 years until 31 December 2011
- buildings used solely for biotechnology research activities will be granted accelerated industrial building allowances ('IBA') over a period of 10 yrs (i.e. 10% per annum).
- the qualifying criteria for incentives given for seed capital investment by venture capital companies in venture companies to qualify for a 10 year tax holiday has been relaxed from investing at least 70% to at least 50% of its investment funds.
- a double deduction for the advertising expenses for the promotion of a Malaysian brand name is no longer restricted to the company which holds the proprietary rights to the brand. Now the double deduction can be claimed by another company in the same group as long as more than 50% of the shareholding of the company is held by the registered proprietor of the brand. This deduction is restricted to one company within the group per year.
- the existing tax exemption incentives (for inbound and local tourists) granted to tour operators have been extended for a further 5 years. Further, a 50% excise duty exemption is granted on locally assembled 4WD vehicles.
- the double deduction for allowances paid to participants of the Capital Market Graduate Training Scheme is extended to all companies which come within the purview of the Securities Commission and not just listed companies (as was announced in 2005). This incentive is effective for 3 years until 31 December 2008.
- the geographical areas granted additional tax incentives (to promote the development of such areas) have been extended to include the Northern State of Perlis. (The other states currently listed as 'promoted areas' are Kelantan, Pahang, the Mersing district of Johor, Sabah and Sarawak.)
- In recognition of the importance of the use of technology, individuals will be given tax relief of RM3,000 once every 3 years for the purchase of a personal computer. (Prior to this, a rebate of RM500 was given once in 5 years instead).
- The annual tax relief on the purchase of books, journals, magazines, etc, has been increased from RM700 to RM1,000.
- The tax exemption on the provision of 3 leave passages within Malaysia has been extended to cover the provision of food and accommodation. Previously, an individual was only exempt from being taxed on the benefit of the air-fare or travel cost.
- An income tax exemption of upto RM1,000 will be given in relation to long-service awards for employees who have worked with the same employer for more than 10 years.
- Employees will be exempted from tax (i.e. to the extent of RM 6,000 for a completed year of service) in respect of payments received pursuant to a voluntary separation scheme (i.e. a scheme whereby the employee is given an option to terminate the employment contract), subject to certain conditions.
- The scope of tax relief of RM5,000 for further education has been extended to include Islamic financing courses in line with the Government's focus in this area.
- The tax exemption for seafarers has been extended to include the income of an individual working on a foreign ship operated by a resident shipping company.
Real Property gains tax ('RPGT')
- The legislation has been changed pertaining to conditional contracts to effect the date the contract was made to be the 'disposal date' to compute the applicable rate of RPGT. The date the conditions are fulfilled may only be taken as the disposal date where Government approval is required.
- Transfer of assets into stock is to be a deemed disposal and the disposal price at which RPGT is to be computed is based on the market value of the asset at the time of transfer. Further, the cost of the asset when entered into stock will also be taken at the market value at that date.
- The stamp duty payable on loan instruments for small and medium enterprises ('SMEs') has been reduced by 50% for loans up to RM1million.
- The eligibility period for claiming a refund of sales tax or service tax related to bad debts has been reduced from 12 months to 6 months. Further, refunds are allowed where debts have not been written off but merely provided for, as long as all reasonable steps have been taken to recover the debt.
- The upper limits to the compounds and fines for the under declaration and smuggling of goods has been removed to further deter such activities.
- Excise duty on cigarettes, alcohol and similar products has been further increased.
o Overall, the 2007 Budget was a broad-ranging one with a focus on new growth areas such as Islamic banking and biotechnology and was well-received.
o It was also a budget that focussed on human capital development via continued allocations to the education sector.
o The only real surprise was the reduction in corporate tax rate.
o It is expected that some reduction in personal income tax rates may materialise in next year's budget.
o No announcement was made on the actual date for the implementation of the proposed Goods & Services Tax which had been deferred from the initial date of 1 January 2007.