2015 MALAYSIAN BUDGET HIGHLIGHTS
The 2015 Budget proposals were presented to Parliament on 10 October 2014 by the Prime Minister. The 2015 Budget outlined seven main strategies:
Strengthening economic growth Enhancing fiscal governance
Developing human capital and entrepreneurship Advancing the Bumiputera agenda
Upholding the role of women
Developing a national youth transformation programme Prioritising the well-being of the rakyat
The 2015 Budget proposals were presented against a backdrop of a very credible expected Gross Domestic Product growth of between 5.5% to 6% for 2014. Growth is projected to remain strong into 2015 with the economy expected to register a rate of growth of between 5% to 6%.
A key concern is the Government's fiscal deficit but a clear commitment has been made to reduce the projected 2014 deficit of 3.5% to 3% in 2015.
Against uncertain head-winds, the management of the Malaysian economy will be premised on three strategic broad initiatives:
Driving growth with a slew of welfare initiatives to benefit a broad segment of the population, particularly the lower income group;
Growth from the increasingly important Services Sector; and
Expansionary investment involving a number of high-value infrastructure projects which will involve public/private sector collaboration.
The introduction of GST on 1st April 2015 forms an important element of the Budget strategies, as GST, together with the commitment to continue with subsidy reductions are efforts designed to enhance fiscal consolidation.
The promotion of investments, particularly Foreign Direct Investments remains a key policy towards enhancing industrialisation. Multinational companies (“MNC”) will be offered customised incentives to locate their operational centres i.e. Principal Hubs, details of which will be introduced next year.
There are few tax changes introduced in the proposals and the main changes are outlined hereunder:
Corporate Tax
Automation of Labour Intensive Industries - To encourage automation in the
manufacturing sector, capital allowances of 200% will be given on the first RM4 million of capital expenditure incurred from 2015 to 2017 to automate labour intensive industries (e.g. rubber products, plastics, wood, furniture and textile industries). Other industries will qualify for the 200% capital allowance on the first RM2 million of capital expenditure incurred from 2015 to 2020. This incentive would be welcomed by companies which may not or are no longer eligible to claim the reinvestment allowance. Islamic Financial Sector - To maintain Malaysia’s competitiveness in the Islamic
Financial sector, the deduction for expenses incurred on the issuance of approved Islamic securities (i.e. sukuk issued under the Ijarah and Wakalah principles) will be extended from the year of assessment (“YA”) 2015 to YA 2018. Additionally, the tax treatment accorded to companies which establish a special purpose vehicle solely for the issuance of Islamic securities under Section 60I of the Income Tax Act 1967 (“ITA”) will be extended to REITs and Property Trust Funds approved by the Securities Commission.
Human Capital Development - As part of the strategy to develop human capital, double / further deductions are allowed for prescribed periods of time in respect of the following expenses subject to various criteria:
o Scholarship (encompassing course fees, educational aid and cost of living expenses) awarded by companies to Malaysian students pursuing full time vocational and technical courses in institutions recognised by the Government;
o Prescribed expenses incurred in implementing a minimum 10-week structured internship programme (“SIP”) approved by TalentCorp for Malaysian students pursuing full time vocational and diploma courses;
o Training expenses incurred by companies for employees to obtain industry recognised certifications and professional qualifications from accredited vocational and professional bodies;
o The existing double deduction accorded to companies which are approved by the Economic Planning Unit to provide training to unemployed graduates under the Skim Latihan 1Malaysia will be extended to 31 December 2020.
Related party transactions - In trend with the continued efforts to prevent tax avoidance in the context of related party transactions, provisions have been introduced to ensure that passive sources of income owing between related parties are brought to tax, regardless of whether the amounts have been paid. Where such amounts become receivable in a particular year, the amounts are deemed to have been received in the following year. This provision extends to transactions between individuals who are relatives as well, and covers both passive income as well as employment income in such situations.
Transfer Pricing – In the context of related party transactions, in line with the persistent efforts to tighten the transfer pricing framework, the time bar for issuing assessments/additional assessments as a result of transfer pricing adjustments has been surprisingly extended to 7 years (as compared with the 5 year time bar currently applicable). This applies to both the ITA as well as the Petroleum (Income Tax) Act 1967 (“PITA”).
Small Value Assets - The threshold for the claim of capital allowances on small value assets has been increased. It is proposed that 100% capital allowance, capped at RM13,000 (previously RM10,000) can be claimed on assets each costing not more than RM1,300 (previously RM1,000). The impact of this is minimal and will only benefit small businesses.
Reinvestment Allowance (“RA”) – The RA provisions have been clarified to state that: o RAs which are clawed back should be treated as part of the business statutory
income in the basis period for the year of assessment in which the asset is disposed of; and
o RA will only be given against statutory income in respect of a qualifying project within a business rather than from the business as a whole. For instance, where a manufacturing business undertakes a new project which qualifies for RA, the income from that project must be segregated from the rest of the manufacturing source and the RA can only be set off against the income from that project. This is another attempt to minimise the impact of the RA and appears rather impractical in requiring a dissection of profits arising from the project from the total business profits. This will create an additional compliance burden for such businesses. Tax Administration - The due date for payment of monthly tax instalments by a
company, limited liability partnership, trust body or co-operative society has been extended from the 10th to the 15th of the month. The same changes have been introduced in the PITA.
Tax Incentives
Investment Account Platform – A new Investment Account Platform (“IAP”) involving
funding based on syariah principles will be introduced in 2015. The IAP serves as a platform to attract investors to invest in entrepreneurs and Small and Medium Enterprises (“SMEs”). To promote investments in the IAP, individual investors will be given an income tax exemption on profits earned from qualifying investments made through the IAP for 3 consecutive years starting from the first year profit is earned. This incentive will be effective from 1 September 2015 (expected date of operation of the IAP) to 31 August 2018. The other criteria include the requirements that:
o The investment must be made for a period of 3 years starting from the operation date of the IAP; and
o The investment must be made in SMEs and venture companies owned by Malaysian or locally incorporated companies carrying out investment activities in Malaysia.
Private Healthcare – To promote Malaysia as a health care hub, the existing incentive (i.e. an exemption on income equal to an Investment Tax Allowance of 100% of qualifying capital expenditure incurred for 5 years) which was due to expire on 31 December 2014 will be extended to applications submitted to the Malaysian Investment Development Authority (“MIDA”) by 31 December 2017. The private healthcare centres must be licensed by the Ministry of Health and registered with the Malaysian Healthcare Travel Council. Further, to qualify for this incentive, at least 5% of the total patients must be made up of “healthcare travellers” who are:
o ‘Malaysia My Second Home’ participants and their dependents; o Expatriates holding Malaysian work permits and their dependents; or o Non-Malaysian citizens.
Economic Corridors - The areas within the Economic corridors which enjoy special incentive packages will be widened to encompass more rural areas. These areas have not been identified as yet.
Industrial Area Management – A 100% income tax exemption for 5 years will be accorded to companies which manage, maintain and upgrade industrial estates in less developed areas. The same activities which are carried out in other areas will be given a reduced 70% income tax exemption for 5 years. The details of this incentive will be announced in due course.
Principal Hubs - Customised incentives for Principal Hubs will be introduced early 2015 to attract MNCs to set up their global operational centres in Malaysia. At present, we already have the Operational Headquarters incentive, the International Procurement Centre incentive, the Regional Distribution Centre incentive, the Treasury Management Centre incentive, etc. It will be interesting to see how the Principal Hub incentive varies from these existing incentives, and whether it would be better to rationalise all these incentives into a single simplified incentive to attract global operational centres to Malaysia.
Personal Income Tax
Personal Reliefs - With effect from YA 2015, the following personal reliefs are increased:
Personal Relief Existing (RM) Proposed (RM)
Medical expenses for the taxpayer, his/her spouse and children suffering from serious diseases
5,000 6,000
Maintenance costs of an unmarried child who is physically or mentally disabled
5,000 6,000
Cost of supporting equipment for a disabled taxpayer, his/her spouse, children or parents
Computation of chargeable income - Effective from the YA 2015, income derived from the withdrawal of a deferred annuity or a private retirement scheme which has been subject to withholding tax will be excluded from the determination of chargeable income.
Interest on loans to relatives - Section 29 of the ITA is amended to tax interest derived by an individual on loans to relatives when the interest is due to be paid.
Bantuan Rakyat 1Malaysia (“BR1M”) – BRIM handouts continue to be increased year
on year with the following increase proposed for 2015:
Eligible recipients Existing BRIM
amount (RM)
Proposed BRIM amount (RM) Households with monthly incomes not
exceeding RM3,000
650 950
Households with monthly incomes between RM3,000 to RM4,000
450 750
Single individuals aged 21 and above with monthly incomes not exceeding RM2,000
300 350
Election not to submit a tax return for employment income – When this election was introduced in the YA 2014 under Section 77C of the ITA, this only applied to individuals employed by the same employer for at least one year. With effect from the YA 2015, this restriction has now been removed and the election will be applicable regardless of the period of employment with an employer.
Real Property Gains Tax (“RPGT”)
Self Assessment – The plan unveiled by the Inland Revenue Board (IRB) last year to introduce self-assessment for RPGT has been included in the Budget proposals and will be implemented from 2016. It is hoped that the self-assessment provisions will be carefully thought out, and that the initial consultation initiated by the IRB with the professional bodies will continue before the changes are made to the RPGT Act, 1976. Retention sum on disposal - With effect from 1 January 2015, where a chargeable asset
is disposed of, and the consideration consists wholly or partly of money, the acquirer will now be required to retain 3% (instead of the previous 2%) of the total value of the consideration or the money, whichever is the less.
Gifts of property between spouses, parents and children and grandparents and grandchildren – At present for RPGT purposes, such gift transactions are treated as no gain/no loss transactions and the recipient is deemed to acquire the property at the donor’s acquisition price where the property is transferred within five years of acquisition. The Budget proposals amend the relevant provisions to take account of donors who are not citizens or permanent residents.
Stamp duty
To encourage home ownership, the present 50% stamp duty exemption on instruments of transfer and loan agreements has been extended as follows:
o To sales and purchase agreements executed between 1 January 2015 to 31 December 2016; and
o For the purchase of first residential property at a price not exceeding RM500,000. Goods and Services Tax
The basket of items that will be excluded from GST is expanded to include various other basic food products including, fruit, white bread, wholemeal bread, coffee powder, etc. as well as ‘National Essential Medicines’ covering almost 2,900 medicine brands, reading materials, newspapers, the first 300 units of electricity consumption, RON 95 petrol, diesel and LPG. It is hoped that the relevant gazette orders for zero-rated and exempt supplies will be released as soon as possible to enable taxpayers to prepare for GST and implement their systems accordingly.
Others
Some changes (related mainly to deductions) were also introduced for the insurance and takaful sectors which have not been included here as their application is limited only to these industries. The other measure to note is that the maximum fines for the following offences under the ITA will be increased from RM2,000 to RM20,000 (upon prosecution and conviction):
Late or non-submission of tax returns pursuant to Sections 77 and 77A and for failure to give notice of an individual’s chargeability to tax pursuant to Section 77(3);
Leaving Malaysia without settlement of outstanding taxes; and
Offences under Section 120 e.g. failure to furnish documents requested by the IRB, failure by an employer to submit information pertaining to the employees pursuant to Section 83 (i.e. Form E, Form EA, etc), failure to deduct monthly tax deductions, failure to submit tax estimates as required under Section 107C, etc.
Conclusion
The budget proposals overall are somewhat conservative without bold measures to address for example the high debt at both public and private levels. As an open economy with high exports, the Malaysian economy will not be insulated from the external environment where a number of economies, especially those in the Eurozone remain weak. Furthermore, several of these measures are short-term and may not arguably fix the longer term weaknesses which may hold the nation back, for instance the weaknesses in the education system which must be overcome to move towards a developed nation. With the introduction of GST, it is hoped that in the longer term, the tax rates will continue to be gradually lowered and that the tax incentive framework will be reviewed holistically and simplified to make Malaysia more competitive regionally.
TAXAND MALAYSIA in collaboration with the Malaysian International Chamber of Commerce and Industry will hold its 2015 Annual Budget Seminar on Monday, 27 October 2014 at the Maya Hotel, Jalan Ampang, Kuala Lumpur. Please contact [email protected] for details.
