Malaysia: Tax policy plays major role in fiscal stimulus

Study: Tax measures represent 56% of the net effect

GOVERNMENTS around the world have introduced fiscal stimulus to counter the worldwide slowdown in growth.

The recent International Monetary Fund’s March 2009 World Economic Outlook (WEO) report has revised its projected world economic growth from 0.5% (January 2009 WEO update) to -1.3% for 2009, despite the determined and seemingly synchronised policy actions taken by governments around the world since the end of 2008.

In Malaysia, the Government has already announced two stimulus packages worth about RM67bil in November 2008 and in March 2009, on top of the National Budget 2009 allocation of RM206bil, announced in August 2008.

Most observers agree that these are not the last of the stimulus efforts that we will see before the global economy again finds firm footing.

Yet, many governments are already contending with increasing deficits as they launch these spending measures.

Inevitably governments will need to consider appropriate unwinding strategies to ensure a sustainable recovery over the long term.

It is therefore vital that businesses and tax functions actively assess and prepare for the changes that are taking place in these times.

As tax is one of the largest items on the income statement, stimulus policy measures or changes can present significant opportunities for cashflow improvement and enhanced earnings per share (EPS).

How well each company manages the challenges and opportunities in this volatile environment will undoubtedly shape its future direction and performance.

Ernst & Young recently completed a study entitled Worldwide fiscal stimulus – tax policy plays a major role: A guide to understanding opportunities and challenges in 24 key jurisdictions on the types of tax measures that have been implemented in 24 countries.

The study found strong emerging themes in the types of tax measures that have been used by various governments, for example there is an increasing use of accelerated tax depreciation programmes, carry-back provisions for losses, adjustments to tax rates, indirect tax changes and tax breaks for individuals. Tax measures play an important role in fiscal policies and, according to the Organisation for Economic Co-operation and Development’s (OECD) Economic Outlook – Interim Report of March 31, 2009, tax measures represent 56% of the net effect fiscal stimulus on average among the OECD countries.

The recent tax measures, estimated at about RM3bil, adopted by the Malaysian Government under the second stimulus package, in March 2009 are consistent with this trend. The tax measures represented about 5% of the total RM60bil package, and included several non-conventional tax measures:

·The introduction of a broad-based carry-back of losses for 2009 and 2010, limited to RM100,000. This would potentially result in a reduced tax liability or a tax refund and would make cash available to businesses. This measure is appealing to governments because it focuses benefits on companies that have had a history of profitability.

· Accelerated capital allowance (full claim within two years) for plant and machinery and renovation and refurbishment expenditure incurred between March 10, 2009 and Dec 31, 2010. Although the renovation and refurbishment claim is capped at RM100,000, this is notable since such expenditure does not usually qualify.

· Double deduction for employers for remuneration paid to retrenched workers hired between March 10, 2009 and Dec 31, 2010, and limited to 12 months remuneration per employee.

· For individuals, a tax deduction on interest expenses on housing loans of up to RM10,000 for three years, and increasing the tax exemption on retrenchment benefits from RM6,000 to RM10,000 per year of service. These are in addition to the various tax reliefs for benefits-in-kind and perquisites promised in Budget 2009.

· Exemption of levy payments to the Human Resource Development Fund for six months for employers in the textile, electrical and electronics industries from Feb 1, 2009, and reduction of the levy payment rate from 1% to 0.5% for all employers for two years from April 1, 2009.

· Increase in the levy threshold of the windfall profit levy on oil palm fruit to RM2,500 per tonne for Peninsular Malaysia and RM3,000 per tonne for Sabah and Sarawak.

The Government also recently announced the deferral of the thin capitalisation rules which was introduced from Jan 1, 2009. This a positive move consistent with the trend of helping businesses ease their tax burden in these difficult times.

The Ernst & Young study found that governments use tax measures to benefit targeted groups. Likewise in Malaysia, the measures have targeted particular sectors, for example, housing, manufacturing and oil palm industries. The study also found that governments impose limitations in order to control the cost of the stimulus package, especially in the current environment of falling tax revenues. For example, in Britain, the carry-back period was extended from one year to three years but subject to a cap of £50,000, and in the United States and Japan the carry-back incentive was targeted at small and medium-scale enterprises. Similarly, the Malaysian measures also contain conditions.

Malaysia has not cut corporate tax rates, but perhaps this is understandable; rates have already dropped from 28% to 25% over the last three years. More importantly, there is a need to balance this with the Government’s ability to fund such a broad-based measure. It is estimated that a 1% reduction would cost about RM1bil, and unless the Government finds an alternative source of revenue, such as the goods and services tax at some appropriate time, the tax cut may not be entirely feasible.

Kenneth Lim

The writer is the National Director of Tax, Ernst & Young Tax Consultants Sdn. Bhd. The views expressed above are his own and do not necessarily represent the views of Ernst & Young.

Source: The Star Online June 24, 2009