Budget 2008 : Views from StarBiz

Towards a more competitive Malaysia

StarBiz deputy news editor Jagdev Singh Sidhu spoke with Deloitte Touche Tohmatsu Tax Services Sdn Bhd managing director Ronnie Lim, KPMG Tax Services Sdn Bhd managing director Khoo Chin Guan, PricewaterhouseCoopers Capital Sdn Bhd senior executive director Mohd Anwar Yahya and Ernst & Young Tax Consultants national tax director Kenneth Lim for their views on Budget 2008.

STARBIZ: What are your impressions of Budget 2008?

Ronnie Lim: I am very impressed because there was a whole range of proposals announced which will enhance the competitiveness of Malaysia.

For example, there was an announcement on lower corporate tax rate, delivery systems being enhanced, streamlining of administration in relation to licences, work permits and professional visit passes.

From the standpoint of competitiveness, it was really good.

Khoo: The introduction of a one-tier corporate tax system basically changes the current way dividend is taxed or dividend computation.

What it means here is that the profits have been taxed at the corporate level and would be regarded as final tax as opposed to the current situation whereby taxes paid by companies are imputed as tax credit in the hands of shareholders when companies pay dividend.

From the corporate standpoint, this is clearly a much simplified process.

Certainly, I think this is a proposal that should be welcomed by corporations.

From the shareholders’ perspective, it depends on who these shareholders are. If shareholders who are exempted from tax under the current situation, whatever dividend they received is net of tax. If you are the exempted party, of course the tax credit attached to the dividend would be refunded by the tax authority.

However, under the new single-tier tax system, such corporations are no longer eligible for the refund of tax credits.

Anwar: Yes, I think it is certainly good to have this single-tier tax system and reduction in corporate tax rate. But I think it comes with a commitment.

Companies that enjoy the break would have to practise good corporate governance. The Public Companies Accounting Oversight Board will be monitoring the auditors of the public companies.

You have the goodies on one side while on the other hand it comes with a commitment for corporate governance. It also includes things like improving the quality of public listed companies as well as ensuring that internal audits are properly done.

There is also what we call corporate social responsibility. Companies are required to disclose employment by composition, race, gender as well as getting bumiputra vendors into their companies.

Kenneth: My view of the budget is that there are not a lot of physical changes but more on spending on infrastructure, providing and preparing the country towards being attractive in attracting investment.

There is a lot of focus on the development of human capital in this budget. A lot of money is being allocated for human capital development schools and encouragement of post-graduate programmes.

StarBiz: Is it a fair assessment that this budget is more for the businessman than the rakyat?

Kenneth: With the one percentage point corporate tax cut to 25% in 2009, our corporate tax has gone down three percentage points from 2006.

This will make Malaysia more attractive although this trend is quite common in the region.

Singapore has cut its corporate tax to a very low level but it is necessary due to the competitive environment we are in.

Ronnie: The lower corporate tax bracket is part of the global trend. Many countries are reducing their corporate tax rate and shifting the tax to indirect taxes.

China has reduced its tax to 25% from 33% while France has reduced it to 20% from 33% within five years. The Netherlands has moved from 29.6% to 25.5%.

There is a global trend to reduce corporate tax. Countries with high corporate tax rates would find the flight of capital including human capital. Countries with high corporate tax find that their revenue is reducing.

Khoo: The tax cut raises questions if it would make the nation more attractive for foreign direct investment. I guess one has to take into account all the incentives introduced by the Government for investors because if one factored the tax incentives into the equation, the effective tax rate could be as low as 7.5%.

There are also concerns if the lower tax would affect the Government’s revenue. One of the ways the Government can compensate is from the goods and services tax (GST). However, there is lack of announcement on when GST would be implemented.

There will be more room to lower the corporate tax when GST is implemented.

StarBiz: Were you surprised there was no deduction on personal tax?

Anwar: Yes. I think there was a lot of expectation for a personal tax rate. I suppose the Government has its reason for not announcing it yet. The Government has focused on the well-being of the nation. The Government emphasised, in this Budget, on housing and accommodation, urban poverty and also security.

StarBiz: The threshold for service tax for consultants has been removed and e-filing by accountants for their clients has been permitted. What is your opinion?

Kenneth: What has happened is that regardless of income threshold, any consultant or professional will now be liable for 5% service tax.

The implementation of this service tax may be an issue.

E-filing facility is a very commendable thing but there is a risk issue.

StarBiz: Key performance indicators (KPIs) for secretary-generals and heads of services have been announced to improve the public delivery system. How important is it for us to improve this element of the cost of doing business, given there is so much competition from other countries for investment?

Anwar: It’s certainly a move in the right direction. The heads of the ministries can set their KPIs and those KPIs can be cascaded down to individuals in various departments of the ministries.

I think it is very interesting, because you have someone who is truly accountable for the level of service for that department or ministry.

This one really stands out as one of the most important aspects of the budget in terms of improving the delivery system, because you are pinpointing the responsibility at one person and the person has to ensure that the department or ministry delivers.

Khoo: Taking on the point of e-filing, this is a measure I think that should be viewed positively. The Inland Revenue Board has mentioned that taxpayers who file electronically can expect their tax refunds faster.

The second point on service tax is to bring more service providers into the tax net. Before this, a lot of time was spent to determine if a consultant fell within the tax threshold.

I think at the end of the day, if you were to enforce it properly, the revenue would then flow.

StarBiz: Another highlight for the man in the street is the provision to use their EPF money from account two to make payments on their housing loan on a monthly basis. What’s your take on that?

Ronnie: I look at it from a bigger picture, as incentives for the property sector.

The EPF move is one, the reduction in stamp duty by 50% is another.

All these are incentives in favour of the property sector.

Kenneth: In fact, there are already some provisions in place to allow EPF contributors to make withdrawals to purchase houses. This is yet another option to allow potential house owners to acquire properties.

StarBiz: We hear of many retirees using up their EPF funds very quickly. If EPF withdrawals were allowed for property purchase, wouldn’t retirees run out of funds even faster?

Khoo: The move was made to boost the property sector and also to ease the burden on the man in the street in terms of loan maintenance.

On this issue of retiree income, the introduction of the one-tier corporate tax system creates a situation for individual shareholders who were previously not subjected to tax because their income level was below the threshold.

In this situation, they would have been entitled to tax deducted at source by way of tax refund from the authorities. Now they would be denied the refund. I think this is one area we need to address.

StarBiz: With neither a cut in personal tax nor a bonus for civil servants, does this look like an election budget?

Anwar: It is definitely not an overt election budget.

Ronnie: Going back to spending and the allocation, it is still an expansionary budget. The amount of spending is definitely not lower than this year, although the deficit has come down.

Kenneth: Although there aren’t any direct tax cuts, I think the focus is not on the physical changes but the allocation to education, human capital and sectors such as agriculture and public utilities.

The spending was to have direct effect for the people as much as to prepare the country to be more competitive. In that sense I think it is significant spending that can also benefit the market.

StarBiz: There are a lot of incentives for Islamic finance. What is your assessment of this?

Anwar: If you look at the services industry in Malaysia in the first six months of the year, it grew by more than 9%.

Suddenly this year, services have come into the limelight and are driving growth. Certainly the Government knows this and the industry is being given more incentives.

Incentives for takaful, Islamic fund management, ICT or tourism are all part of driving home the fact that the services sector will be the driver of the economy.

StarBiz: Could you summarise what you think about the budget?

Kenneth: Well, I wish there was a bit more in terms of personal tax reductions.

I am fairly neutral about this budget; there’s a fair bit about certain areas that the country should focus on. This is particularly in human capital development and indeed on the delivery system where I think very clear benchmarks have been mentioned by the Prime Minister, which to my mind is an extremely important aspect to develop to invite foreign investment.

I think it is very important that this is being addressed. Clearly there are very specific benchmarks that have been put in place and it is very important for the country.

Anwar: To me, it is not an obvious election budget. This is more of a serious effort to try to make the environment more business friendly in terms of public service delivery and incentives.

But it comes at a price. There is corporate social responsibility.

There is a lot of emphasis on education, about schools, which is good.

We want a knowledgeable workforce. We got to move up the ladder from a lower income country to a medium income country and later to a high income country.

People who are driven by innovation will find here incentives that will put us in the right direction.

Khoo: I think from the tax perspective, certainly for the corporate as well as the man in the street, the tax measures announced should be welcome. And certainly there have not been any measures that adversely affect these two categories of taxpayers.

To further promote the tax competitiveness of Malaysia as a whole, I would perhaps urge the Government to re-look at the tax measures in the previous budget that made Malaysia competitive.

There has to be some refinement in areas such as group relief. Currently, you are only talking about the company being able to surrender only 50% of the losses.

Perhaps the Government should consider allowing the surrender of 100% of losses. In addition to that, the Government should also consider surrendering capital allowances, like is allowed in some jurisdictions such as Singapore.

The other area I would like the Government to look into is the carrying forward of unabsorbed business losses and capital allowances.

Ronnie: Who is the winner in this budget? I would say Malaysia, because of the increased competitiveness and we have become more business friendly.

In a scene of globalisation, manufacturing can be done anywhere in the world and with better terms than we have here.

On the delivery system, who wants to work in a country where it is so difficult to do business.

If one has to face difficulties, say blockages at the port all the time, he will go elsewhere. If getting a licence takes forever and ever, he will go elsewhere.

And so some of the measures mentioned here, although they don’t appear significant or sensational in relation to the elections, are significant and the promise has been made that this would be a business friendly budget and it has been.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: