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2011 Malaysian Budget – Focus on Private Investment Growth
The Malaysian Budget proposals for 2011 were tabled in Parliament on 15 October 2010 by the Prime Minister. The theme of the 2011 Budget is "Transformation Towards a Developed and High-Income Nation". The Budget is intended in the words of the Prime Minister to lay "the foundation for Malaysia to become an advanced economy". Taxand Malaysia reviews the 4 key budget strategies, resulting tax measures of the 2011 Budget and impact on taxpayers.
To this end, the four key Budget strategies are as follows:
1. Reinvigorating private investment
2. Intensifying human capital development
3. Enhancing the quality of life of citizens
4. Strengthening public service delivery
The Budget proposals include commendable strategies relating to human capital development, improving the quality of life of citizens and strengthening the delivery of public service. However a question that arises for the private sector, is whether the Budgetary measures are sufficient to reinvigorate private investment, given the declining foreign direct investment figures and the fact that the Government will be relying on the "private sector to resume its role as the engine of growth". Growth is expected to be driven by infrastructure investments on projects that are expected to commence in 2011. Is there enough in the 2011 Budget to attract private investment? The following explains some of the tax measures arising from the 2011 Budget.
2011 Budget Proposals
Typically, tax measures offer a catalyst for private investment. However, the Budget is largely tax neutral with no reductions in direct taxes, no innovative tax breaks, etc. reflecting the tight fiscal constraints which the Government is facing.
We set out below the key tax proposals arising from the 2011 Budget.
The corporate tax rate remains unchanged much to the disappointment of businesses. However, the following was announced:
- Tax incentives will be given for the development of the Kuala Lumpur International Financial District, which is an initiative targeted as developing Kuala Lumpur as a financial centre and attracting selected financial services players. The Government has also announced that several other key infrastructure projects will be initiated for which tax incentives may be negotiated on a case by case basis.
- To boost the Islamic financial sector, the double deduction given for costs incurred in relation to the issuance of certain Islamic securities has been widened to include Islamic securities issued under the principles of Murabahah and Bai Bithaman Ajil based on the principle of Tawarruq.
- To address environmental concerns, the existing incentives for the generation of energy from renewable sources and for the conservation of energy will be extended for a further 5 years to 31 December 2015, and the current tax exemption on income derived from the sale of Certified Emission Reductions will be extended for another 2 years till the year of assessment 2012.
- The time frame for certain other incentives, e.g. food production incentives have also been extended for a further 5 years to 31 December 2010. However, the scope of the popular Reinvestment Allowance has arguably been restricted by changes to prevent claims of more than one incentive in the same taxable basis period. This change appears to plug a loop-hole which taxpayers have sought to take advantage of, and which the tax authorities have consistently challenged. A recent High Court decision in favour of a taxpayer is likely to have initiated this change in the law.
There are few changes of significance to the personal tax regime. Nonetheless, the following should be noted:
The existing personal RM6,000 relief for life insurance premiums and contributions to the Employees Provident Fund (EPF) will be extended to include contributions to private pension funds (PPFs) for both employees and the self-employed. The reality is that a significant portion of employees who would potentially have the capacity to contribute to PPFs are likely to already fully utilise the RM6,000 relief in respect of their EPF and life insurance contributions. While the self-employed may find this proposal beneficial, the widening of the RM6,000 relief is unlikely to give private pension funds the boost that is needed to kick-start these funds and revitalise the capital markets as announced by the Prime Minister.
Although the Government has indicated its intention to further defer the introduction of the much debated Goods and Services Tax (GST), instead of introducing GST, the Government has decided to increase the rate of service tax from the existing rate of 5% to 6%. Additionally, the scope of service tax has also been extended to include paid television broadcasting services.
There are also several measures to reduce indirect taxes, including abolishing import duties on 300 consumer items to promote Malaysia as a tourist destination, the exemption of sales tax on all mobile phones, increasing the current exemption of excise duties on national cars purchased by the disabled from 50% to 100%, etc.
In line with the extension of the 'green' tax incentives referred to above (i.e. renewable energy projects, energy conservation, etc.), existing import duty and sales tax exemptions available for such projects will be extended a further two years to 31 December 2012.
To encourage home ownership, a 50% stamp duty exemption will be given in respect of the first time acquisition of homes costing not more than RM350,000 as well on loan agreements in relation to the purchase of such homes.
The above summarises the key tax measures announced in the 2011 Budget. These are limited and are not the bold measures needed to encourage private investment and Foreign Direct Investment. The introduction of GST with a corresponding reduction in corporate tax rates would have been a bold measure which would have created a sustainable source of revenue to the Government as well as given businesses an impetus to invest.
Nonetheless, companies in the food production sector and those involved or focussed on green energy should review the tax incentives available and take advantage of these. Companies seeking to set up or invest in strategic projects should consider the possibility of seeking 'pre-packaged' tax incentives from the Ministry of Finance. In our view, while tax incentives are important, the reality is that tax measures will only be drivers when it is clear that private sector investment will generate the desired returns. The business environment, the absence of red-tape and bureaucracy, transparency, a sound legal framework, the availability of quality human capital are all essential to attract private investment and these are areas that the Government needs to focus on.
In August we reported on the Introduction of Islamic Finance to Malaysia - read the full article here
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Murabahah and Bai Bithaman Ajil are both Islamic financing methods which involve a financial institution (FI) financing the acquisition of an asset on a deferred sale basis where the deferred sale instalment payments take into account the FI's profit element. Murabahah is generally used for short-term financing needs, e.g. working capital or commodity financing, and Bai Bithaman Ajil is generally used for longer term financing needs, e.g. for financing the acquisition of assets. Tawarruq involves an arrangement in this instance where the asset has been purchased from the FI using a Murabahah or Bai Bithaman Ajil facility and is then sold immediately to obtain money. This is a commonly used method of financing in commodities trading.