(Pre-Budget 2002 Commentary) Budget 2002 - Should be business friendly to boost the economy

 

12 October 2001

Undoubtedly, the challenges in the 21st century are imposing sophisticated information technologies, advanced research and development capabilities, and high intellectual or rather “brain power” related industries. Whilst the developed countries are busy in tougher stance to tackle the tax issue on e-business, let us over here routinely look into our own fundamentals.

Business entertainment

Business entertainment expense was disallowed since the Year of Assessment 1989. Since then, we have not heard of anything regarding a possible revision. The earlier perception of disallowing the expense was perhaps due to the so called “business ethics” and the element of operational abuse. Taxpayers are perceived to have a chance of putting in personal dining claims as business deductions and this is difficult to audit.

However, will this measure deter the incurrence of such expense? If asked, some would say not at all. If the measure cannot achieve its intended effect, why not just disallow it? If not by 100%, maybe a quantum out of the percentage of sales, for example, something similar to the restriction on donations by corporate bodies. This will definitely be a big moral boost to the business community, especially for the large corporations. Furthermore, the impact on the Government coffers will be minimal assuming a restriction formula is carefully designed.

Bonus restriction

Talking about imposition of restriction, bonus restriction was re-implemented in 1998 whereby employers are not given a reduction if the bonus paid exceeds two months of the salary paid to the employee. We firmly believe that it is an opportune time to remove the bonus restriction. Bonus is additional remuneration that is normally tied up with productivity and output. It is a motivational payment. It is a payment that shows all the hard work during the year has paid off. If the Government is campaigning to improve efficiency and the calling back of qualified workers as proposed in the 2001 budget, this restriction is certainly not in conjunction with those proposals.

Furthermore, the increase in spending as a result of increase in bonus will tend to stimulate the economy. Any revenue loss to the Government could be recovered by way of indirect taxes and the impact of net revenue loss could therefore be very negligible.

More reliance on indirect taxes

The Government should place more focus on indirect taxes than direct taxes. The indirect taxes have added advantage of imposing a tax only on those who enjoy the benefit of the goods or service, it is thereby more equitable than direct taxes. Furthermore, it has deterrent effect in respect of the consumption of certain goods, e.g. the high taxes on cigarettes and liquor.

However, the structure of the present consumption taxes contains several weaknesses that make it inefficient. The sales tax and services tax seem to work too independently even though they are both governed under the same authority, i.e. The Royal Malaysian Customs and Excise Department. The Government has since many years ago intended to integrate and restructure the existing sales and services taxes into a consolidated tax. It has even been proposed in the tabling of 1993 Budget that a Sales and Service Tax (SST) be introduced to help overcome weaknesses such as transfer pricing, bias toward imports, etc.

Also, the indirect taxes are fancy in setting threshold as guide for taxability. In fact, having any form of threshold has always been a problem to tax administration as this will tend to give room for abuse. If we may borrow an idea from Korea, for example, a system is in place where every enterprise pays tax. The smaller enterprise may pay lower tax but they do not enjoy any credit for their input accordingly. The authorities should seriously look into reviewing the legislation for the sake of implementation or practical aspects. Any amendments made should be transparent enough for the taxpayers to understand.

Lower corporate tax rate

We have not seen corporate tax rate falling since year of assessment 1998. It has been five years since then. In fact, our current tax regime is one of the most harmonious one in the region. We have a range of tax incentives, open market economy and proactive fiscal incentives. Nevertheless, we cannot be complacent of our position simply because our corporate income tax rate is still relatively high in the region.

Compared to Singapore 24.5% from year of assessment 2001 (or effectively 24.1% as the first S$52,500 of the chargeable income is exempted from tax), we are about 4% higher than them. Compared to Hong Kong 16%, Vietnam 24% and Taiwan 25%, our tax rate is not encouraging. We acknowledge that the Government is concerned about the impact of revenue collection if there is a reduction in tax rate, and that the Government is still very careful in addressing the issue, especially when the global economy is still uncertain.

However, in the past recession period, statistics have shown that there was improvement of revenue received by the Federal Government from corporations despite reduction in corporate tax rate. Thus, a reduction in corporate tax rate is not that bad after all, because it will attract new investments as the rate of investments return increases. Furthermore, leaving more money in the hands of corporations will fuel business expansion, encourage spending and hence, accelerate economic growth. As mentioned, whilst a reduction in corporate tax rate translates lesser tax due, it will eventually increase the overall tax base as the Government may recover from indirect taxes collection should the latter be implemented efficiently.

We are in deficit of four years running and there is a need maybe for an expansionary budget. In view of the impending globalisation, it would be appropriate if the Government could reduce the rate to a more realistic level, say 26%.

With the implementation of self-assessment system by the Inland Revenue Board, tax compliance will improve considerable (this is the effect in countries that have introduced self-assessment). This should, then offset any anticipated revenue loss arising from a lower tax rate.

Operational headquarters (OHQ)

Malaysia is aspiring to be a major player in the global financial market, and be a competitive force in the Asia Pacific region. In the context of a knowledge-based economy, it is wise and appropriate for the Government to re-look into the current available incentives for OHQs, to lure the multinational companies to establish their OHQs in Malaysia. Currently, the offered incentives are such as special corporate tax rate of 10% on profits derived from the provision of ‘qualified services' and full tax exemption. Alternatively, some of the restrictive conditions could be relaxed to make OHQ in Malaysia more attractive to the multinationals.

For example, the Government could review the paid up capital (RM500,000) and the total business spending requirement (RM1.5m) presently in force.

In Singapore, knowing that it is popular for Asian regional headquarters, it offers several attractive tax incentives schemes for headquarters, including the Operational Headquarters (OHQ), Business Headquarters (BHQ), and Global Headquarters (GHQ). Similar to Malaysia, there are incentives such as concessionary tax rate, pioneer services status, full and partial exemption from withholding taxes, etc., but to more extensive basis.

In Malaysia in the long run, it is envisaged that by providing more attractive package and incentives, the government will assist in developing a pool of technical experts in the management of financial and corporate services through setting ups of OHQs.

Conclusion

Tax issues in the area of e-commerce are very complicated and very much still at its infancy stage in Malaysia at the moment. As part of the proposal for Budget 2002, the Government should not emphasize only on new e-economy matters, but should also give attention to upgrading and improving the current tax structure to bring about a more business friendly tax system.