Foreign direct investments (FDI) flows into Asia have rapidly increased over the last two decades, with its share of world FDI inflows rising from 5.3% to 21.4%.
This trend is expected to continue and it is important for Malaysia to capture a fair share of these investments, particularly in view of competition from countries such as China, India and Singapore. Thailand and lately Vietnam are also increasingly popular investment destinations.
Budget 2008 contains several interesting proposals which continue to promote a conducive investment environment:
cut in the headline corporate tax rate to 25% from 2009;
introduction of the single-tier corporate tax system and exemption of dividend income; and
the upcoming launch of the East Coast Economic Region, the Sabah Corridor and Sarawak Corridor.
Corporate tax cut
The corporate sector was pleasantly surprised with a further reduction in corporate tax rate to 25% in the year of assessment (YA) 2009, on the back of tax cuts announced at the last Budget (which brought corporate tax rates down from 28% to 27% for YA2007 and 26% for YA2008).
The tax rate cut is in line with international trends, especially in developing countries, as can be seen across several major Asian capital importing countries (see table). It appears that Malaysia, China, Thailand, Vietnam and selected companies in Indonesia may have the same tax rate of 25% in the near future.
Malaysia Budget 2008It is also interesting to observe that announcements for the reduction in corporate tax rate are being made up to two years ahead of time. This is expected to facilitate investment planning, giving ample time for investors to evaluate Malaysia’s competitiveness as an investment destination.
This is particularly important for those ventures which do not qualify for tax incentives or those ventures which are expected to enjoy a limited tax incentive period, since tax is a major cost of investment.
Single-tier income tax system
Another major tax proposal in Budget 2008 is the introduction of the single-tier income tax system, moving away from the imputation system presently in place.
The single-tier system will remove the dividend franking requirement for Malaysian companies, i.e. Malaysian companies are no longer required to deduct tax on dividends paid to shareholders. The corporate tax paid on a company’s profits will be a final tax and dividends distributed to shareholders will be exempted from tax.
One advantage of the single-tier system is that it facilitates the repatriation of non-taxable profits to the investor. Malaysian companies will hence be able to distribute dividends from capital gains (which are not taxable), whereas under the present system, the distribution of these gains would be impeded. Similarly, this new system will also benefit companies which have been profitable but which need not pay taxes, for example, due to the availability of capital allowances.
The single-tier system will also alleviate certain administrative procedures presently needed by companies to track dividend franking credits (or more technically, section 108 credits). The same can be said from the Inland Revenue’s perspective, as there will be less need for tax audits in this area, and to administer refunds that can arise under the present system.
It would be incomplete not to mention that the single-tier system may have unexpected effects on certain classes of Malaysian investors.
Under the new single-tier system, higher-income Malaysian individuals (i.e. those with marginal tax rates of more than 25%) would benefit – dividends received by an individual under the single-tier system would be tax exempted, whereas under the imputation system, these individuals (assuming they are taxed at the top marginal tax rate) would effectively have to pay a 3% “top-up” tax.
This result is expected to be temporary, amid wide speculation that the personal income tax rate will soon be reduced to be in line with the corporate tax rate. For the lower income Malaysian individuals and perhaps tax exempt bodies, the single-tier system would effectively eliminate tax refunds in respect of dividends, in cases where the recipient’s marginal tax rate is lower than 25%.
Economic development regions
Apart from the tax measures highlighted above, the Prime Minister also announced the upcoming launches of the East Coast Economic Region, the Sabah Corridor and the Sarawak Corridor.
This rounds up the economic corridor development initiatives in the 9th Malaysia Plan, following closely behind the Iskandar Development Region (IDR) and the Northern Corridor Economic Region (NCER).
The concept of a regional development area is attractive because it draws players within the same industry which have some affinity to locate together. A successful example is the Silicon Valley, being the region of choice for American-based IT companies, and similarly, Bangalore for India-based IT companies.
The development blueprint for these regions recognises the competitive advantage of each area, and the Government has concentrated its efforts in developing infrastructure that will draw a critical mass of players in targeted industries to locate in that particular region.
To complement this, it is expected that new incentive packages will be introduced to further entice investors, together with enhancements in the public delivery system to ensure a smooth and facilitative framework for investors.
These Budget proposals are expected to have a positive effect on investment activity in Malaysia. Malaysia is presently ranked 6th in Asia and 26th globally by the World Economic Forum’s Global Competitiveness Index for 2006-2007, and overall, these measures should improve Malaysia’s competitiveness and attractiveness as an investment destination.
This trend is expected to continue and it is important for Malaysia to capture a fair share of these investments, particularly in view of competition from countries such as China, India and Singapore. Thailand and lately Vietnam are also increasingly popular investment destinations.
Budget 2008 contains several interesting proposals which continue to promote a conducive investment environment:
cut in the headline corporate tax rate to 25% from 2009;
introduction of the single-tier corporate tax system and exemption of dividend income; and
the upcoming launch of the East Coast Economic Region, the Sabah Corridor and Sarawak Corridor.
Corporate tax cut
The corporate sector was pleasantly surprised with a further reduction in corporate tax rate to 25% in the year of assessment (YA) 2009, on the back of tax cuts announced at the last Budget (which brought corporate tax rates down from 28% to 27% for YA2007 and 26% for YA2008).
The tax rate cut is in line with international trends, especially in developing countries, as can be seen across several major Asian capital importing countries (see table). It appears that Malaysia, China, Thailand, Vietnam and selected companies in Indonesia may have the same tax rate of 25% in the near future.
Malaysia Budget 2008It is also interesting to observe that announcements for the reduction in corporate tax rate are being made up to two years ahead of time. This is expected to facilitate investment planning, giving ample time for investors to evaluate Malaysia’s competitiveness as an investment destination.
This is particularly important for those ventures which do not qualify for tax incentives or those ventures which are expected to enjoy a limited tax incentive period, since tax is a major cost of investment.
Single-tier income tax system
Another major tax proposal in Budget 2008 is the introduction of the single-tier income tax system, moving away from the imputation system presently in place.
The single-tier system will remove the dividend franking requirement for Malaysian companies, i.e. Malaysian companies are no longer required to deduct tax on dividends paid to shareholders. The corporate tax paid on a company’s profits will be a final tax and dividends distributed to shareholders will be exempted from tax.
One advantage of the single-tier system is that it facilitates the repatriation of non-taxable profits to the investor. Malaysian companies will hence be able to distribute dividends from capital gains (which are not taxable), whereas under the present system, the distribution of these gains would be impeded. Similarly, this new system will also benefit companies which have been profitable but which need not pay taxes, for example, due to the availability of capital allowances.
The single-tier system will also alleviate certain administrative procedures presently needed by companies to track dividend franking credits (or more technically, section 108 credits). The same can be said from the Inland Revenue’s perspective, as there will be less need for tax audits in this area, and to administer refunds that can arise under the present system.
It would be incomplete not to mention that the single-tier system may have unexpected effects on certain classes of Malaysian investors.
Under the new single-tier system, higher-income Malaysian individuals (i.e. those with marginal tax rates of more than 25%) would benefit – dividends received by an individual under the single-tier system would be tax exempted, whereas under the imputation system, these individuals (assuming they are taxed at the top marginal tax rate) would effectively have to pay a 3% “top-up” tax.
This result is expected to be temporary, amid wide speculation that the personal income tax rate will soon be reduced to be in line with the corporate tax rate. For the lower income Malaysian individuals and perhaps tax exempt bodies, the single-tier system would effectively eliminate tax refunds in respect of dividends, in cases where the recipient’s marginal tax rate is lower than 25%.
Economic development regions
Apart from the tax measures highlighted above, the Prime Minister also announced the upcoming launches of the East Coast Economic Region, the Sabah Corridor and the Sarawak Corridor.
This rounds up the economic corridor development initiatives in the 9th Malaysia Plan, following closely behind the Iskandar Development Region (IDR) and the Northern Corridor Economic Region (NCER).
The concept of a regional development area is attractive because it draws players within the same industry which have some affinity to locate together. A successful example is the Silicon Valley, being the region of choice for American-based IT companies, and similarly, Bangalore for India-based IT companies.
The development blueprint for these regions recognises the competitive advantage of each area, and the Government has concentrated its efforts in developing infrastructure that will draw a critical mass of players in targeted industries to locate in that particular region.
To complement this, it is expected that new incentive packages will be introduced to further entice investors, together with enhancements in the public delivery system to ensure a smooth and facilitative framework for investors.
These Budget proposals are expected to have a positive effect on investment activity in Malaysia. Malaysia is presently ranked 6th in Asia and 26th globally by the World Economic Forum’s Global Competitiveness Index for 2006-2007, and overall, these measures should improve Malaysia’s competitiveness and attractiveness as an investment destination.
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