Budget 2020 has largely focused on reviewing the prevailing tax rates, tax administrative provisions and tax incentives. However, the government also took the opportunity during the 2020 Budget Speech to reiterate and perhaps to reassure the nation that the short-lived goods and services tax (GST), which has now been repealed and replaced by a sales tax and service tax regime, will not be reintroduced.
Whilst the budgetary proposals surprisingly include the reduction of certain penalties under the Income Tax Act 1967 (ITA), this was partially offset by the increase in tax rates for real property gains tax (RPGT) and stamp duty.
Some of the Budget 2020 highlights and amendments proposed vide the Finance Bill 2019 are discussed below. Unless otherwise stated, the proposed amendments discussed below, when passed by Parliament, would take effect from year of assessment (YA) 2020.
Tax Incentives, Deductions, Relief and Allowances
Income tax exemption for a 10-year period will be available to companies which invest in selected knowledge-based services in the electrical and electronics industry. A special investment tax allowance will also be available to encourage further reinvestments in Malaysia by companies operating in this industry that have exhausted their reinvestment allowance incentive.
Apart from the above, accelerated capital allowance and capital allowance in respect of automation equipment will be extended to YA 2023 for the manufacturing sector. The allowance will be applicable to the first 2 million ringgit ($482,789) and 4 million ringgit respectively incurred on qualifying capital expenditure. This incentive will also be extended to the services sector on the first 2 million ringgit incurred on qualifying capital expenditure incurred from YA 2020 to YA 2023.
New tax incentives will also be available for the arts and tourism sector to promote Visit Malaysia Year 2020, as well as for the renewable energy sector.
With effect from January 1, 2020, the special allowance available for SMEs for small value assets under Paragraph 19A of Schedule 3 to the ITA, will be increased whereby assets valued at 2,000 ringgit (previously 1,300 ringgit) each will still qualify as “small value assets.” In tandem with that, the total amount of the qualifying plant expenditure eligible for the special allowance will be increased to 20,000 ringgit from 13,000 ringgit.
Under section 44(6) of the ITA, tax deductions can be claimed on gifts of money made to approved institutions or funds, among others, subject to a maximum limit. It is proposed that the existing cap, which is applicable to persons other than companies, be increased from 7% to 10% of such person’s aggregate income.
Income Tax Rates
Companies that are tax-resident and incorporated in Malaysia and have a paid-up capital in respect of ordinary shares of 2.5 million ringgit or less at the beginning of the basis period for a year of assessment (SMEs) are presently able to avail themselves of a reduced tax rate of 17% (SME rate) on chargeable income not exceeding 500,000 ringgit. Chargeable income exceeding the 500,000 ringgit threshold is taxed at the prevailing corporate tax rate of 24%. If the Budget proposal is passed, the SME rate will apply to chargeable income not exceeding 600,000 ringgit.
Apart from the existing criteria to enjoy the SME rate (which includes certain shareholding conditions) as set out under paragraph 2B of Schedule 1 to the ITA, it has been proposed that SMEs will only be able to enjoy the SME rate if their gross income from business sources does not exceed 50 million ringgit in a basis period. Similar amendments have been proposed for limited liability partnerships.
As for individuals, with effect from January 1, 2020, nonresidents will be taxed at a flat rate of 30% (current 28%) whilst tax-resident individuals will be taxed at a rate of 30% on their chargeable income in excess of 2 million ringgit.
Licensing of Tax Agents
In a surprising move, from January 1, 2021, approvals (including renewals therefor) required for tax agents to practice as such will be issued by the Director General of Inland Revenue (DGIR). Such approvals and renewals previously came under the purview of the Minister of Finance.
The tax agent may, within one month from the date of notification of the DGIR’s revocation of approval or refusal to renew the approval (as the case may be), appeal in writing to the Minister of Finance whose decision shall be final. It is unclear as to the rationale for this proposal although it undeniably gives the DGIR unduly wide powers over tax agents.
Tax returns submitted by taxpayers may be amended in accordance with section 77B of the ITA. However, a penalty of 10% of the tax or additional tax payable may be imposed if the amended return is submitted within 60 days after the due date for submission. Presently, a further penalty of 5% is payable thereafter but this will be abolished with effect from January 1, 2020.
Similarly, the additional 5% penalty which is imposed upon taxpayers for late payment of their taxes will be abolished with effect from January 1, 2020 so that taxpayers will only be subject to a maximum penalty of 10% on late payment of their taxes and the additional 5% penalty will not be imposed even if the tax is paid after 60 days from the due date.
Filing of Tax Appeals
Under the ITA and the Petroleum (Income Tax) Act 1967 (PITA), taxpayers may file an appeal against any assessment or additional assessment within 30 days from the receipt of the same. In the event the 30-day period is not complied with, an extension of time (EOT) may be sought from the DGIR at any time to lodge the appeal after the 30-day period. However, it has now been proposed that the right to seek an EOT be curtailed by restricting applications for EOT to those made within seven years from the expiration of the 30-day period.
Stamp duty is levied on specified “instruments” and for loan agreements denominated in a foreign currency falling under item 27(a)(ii) of the First Schedule to the Stamp Act 1949, the maximum stamp duty payable will be increased from 500 ringgit to 2,000 ringgit with effect from January 1, 2020.
Real Property Gains Tax Rates
The Real Property Gains Tax (RPGT) rates will be revised upon the coming into operation of the Finance Act 2019.
Other RPGT amendments include the proposal to amend section 21B(1A) of the Real Property Gains Tax Act 1976. Presently, under section 21B(1A), an acquirer of a chargeable asset (i.e. the purchaser) is required to retain and remit to the DGIR the whole amount of the consideration for the chargeable asset or a sum not exceeding 7% of the total value of the consideration (whichever is the less), if the disposer of the asset (i.e. the seller) is neither a citizen nor a permanent resident of Malaysia. It is proposed that the provisions of this section be extended to situations where the disposer is a company that is not incorporated in Malaysia.
In addition, with effect from October 12, 2019, the market value as at January 1, 2013, will be deemed to be the acquisition price of the chargeable asset, including real property, where such chargeable asset was acquired by a Malaysian citizen or permanent resident prior to January 1, 2013.
An exemption from sales tax will be available under the new “Approved Major Exporter Scheme” (Scheme). Pursuant to the Scheme, which is intended for goods which are exported from Malaysia or transported to the “designated areas” or “special areas,” a full exemption from sales tax would be available to qualifying persons, that is traders and manufacturers, on the taxable goods such as raw materials, components, packing and packaging materials, that are imported into Malaysia, transported from designated areas or special areas or purchased from a registered manufacturer, subject to the prescribed conditions. Applications must be made to the Director General of Customs & Excise for approval.
If passed in Parliament, this provision will come into operation on a date to be appointed by the Minister of Finance.
Tax Appeal Tribunal
From 2021, the Special Commissioners of Income Tax (SCIT), which hears appeals on direct tax matters, will be merged with the Customs Appeal Tribunal (CAT), which hears appeals on indirect tax matters. As such, the new Tax Appeal Tribunal will adjudicate upon all tax-related appeals which had hitherto been dealt with by SCIT or CAT. Whilst SCIT and CAT are not that dissimilar in their functions, there exist differences in their procedure and composition, among other things. At this juncture, it is still unclear as to which model will be adopted by the new tribunal.
The 2020 Budget and the Financial Bill 2019 contain far fewer proposals as compared to the 2019 Budget and the Finance Act 2018, the latter having resulted in substantive tax amendments to the transfer pricing regulations, curtailment of unutilized losses and capital and other allowances, the implementation of service tax on “digital services” provided by foreign service providers, among others.
As the government continues to review and reform the existing tax system, businesses should continue to monitor developments in this area.
Irene Yong is a Tax Partner at Shearn Delamore & Co, Malaysia.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.