Melvyn Seah provides a summary of the salient points of the 2012 Budget
On 7 October 2011, the Prime Minister and Finance Minister of Malaysia, Dato’ Sri Mohd Najib Tun Abdul Razak, tabled to the nation the Government’s proposed budget for the Year 2012. The theme of the 2012 Budget was “National Transformation Policy: Welfare for the Rakyat, Well-Being of the Nation”.
The 2012 Budget focuses primarily on five areas, namely:
1. Accelerating Investment;
2. Generating Human Capital Excellence, Creativity and Innovation;
3. Rural Transformation Programme;
4 Strengthening the Civil Service; and
5. Easing Inflation and Enhancing the Well-Being of the Rakyat.
Amounts of RM181.6 billion and RM51.2 billion will be allocated for operating expenditure and development expenditure respectively. Against that, the Government expects to generate RM186.9 million in revenue in the Year 2012. With the implementation of the 2012 Budget, the Prime Minister estimates that the government deficit will improve from 5.4% of the Gross Domestic Product (GDP) of the country to 4.7% of GDP in 2012.
To further boost economic growth in Malaysia, the Government has drawn up several proposals targeted at attracting foreign investment and improving the physical and economic infrastructure of Malaysia to make it a more vibrant and attractive choice for investors. Some of the key proposals affecting corporations and businesses are set out below.
ACCELERATING ECONOMIC DEVELOPMENT
The Government has allocated RM20 billion under the public-private partnerships Facilitation Fund to assist the private sector to develop projects with strategic value.
A further sum of RM978 million is provided to accelerate the development of the five regional corridors in Malaysia. Among the projects to be implemented are the construction of a coastal highway in the Iskandar Development Region, a heritage tourism project in the Northern Corridor, an agropolitan scheme in the East Coast Economic Region, a palm oil industrial cluster project in the Sabah Development Corridor and a water supply project in the Sarawak Corridor of Renewable Energy.
KUALA LUMPUR INTERNATIONAL FINANCIAL DISTRICT
The Kuala Lumpur International Financial District ("KLIFD") forms part of the Government's aim to transform Kuala Lumpur into an international hub for banking and finance and related professional services.
The following incentives are proposed to accelerate the development of KLIFD:
1. KLIFD status companies will be given 100% income tax exemption for 10 years and stamp duty exemption on loan and services agreements;
2. KLIFD Marque Status Companies will be given industrial building allowance and accelerated capital allowance; and
3. Property developers in KLIFD will be given income tax exemption of 70% for 5 years.
LIBERALIZATION OF THE SERVICES SECTOR
With the aim of improving Malaysia’s competitiveness in an already weakened global economy, the Government proposes to further liberalize the services sector. Seventeen service sub-sectors will be liberalised in phases in 2012. These sub-sectors include private hospital services, medical and dental specialist services, architectural, engineering, accounting and taxation services, legal services, education and training services and telecommunication services.
The Prime Minister stated that up to 100% foreign equity ownership will be allowed in selected sub-sectors but did not identify the sub-sectors that will be fully liberalized.
TREASURY MANAGEMENT OPERATIONS
The Prime Minister has proposed several incentives in the 2012 Budget in order to attract multi-national corporations to establish their Treasury Management Centre ("TMC") in Malaysia. A TMC provides financial and fund management services to a group of related companies within or outside the country.
The proposed incentives to attract the establishment of TMCs by multi-national corporations include a 70% tax exemption on statutory income for a period of 5 years. Statutory income comprises all fee income and management income from providing qualifying services to related companies within or outside Malaysia, interest income from related companies within or outside of Malaysia, foreign exchange gains from managing risks for the group and guarantee fees.
In addition, interest payments on borrowings by TMCs to overseas banks and related companies will be exempted from withholding tax. Full exemption from stamp duty will be given on all loan agreements and service agreements executed by TMC in Malaysia for qualifying activities. Expatriates working in a TMC will only be taxed on the portion of their chargeable income attributable to the number of days they are in Malaysia.
The qualifying services of a TMC are cash management, current account management, financing and debt management, investment services, financial risk management and corporate and financial advisory services. Applications for the establishment of TMCs received by the Malaysian Industrial Development Authority (MIDA) from 8 October 2011 to 31 December 2016 will enjoy the above benefits.
An extension of the tax exemption period for years of assessment 2012 to 2014 will be given for activities relating to the issuance and trading of non-ringgit sukuk (Islamic bonds) on the following types of income:
1. Fees received by qualified institutions in undertaking activities related to arranging, underwriting and distribution of non-ringgit sukuk originating from Malaysia; and
2. Profits of qualified institutions received from the trading of non-ringgit sukuk originating from Malaysia.
The existing tax exemption for expenses incurred on the issuance of Islamic securities under the principles of Mudharabah, Musyarakah, Ijarah, Istisna’, Murabahah and Bai Bithamin Ajil based on Tawarru, will be extended to securities issued under the Wakalah principle which are approved by the Securities Commission or the Labuan Financial Services Authority.
THE LOSERS OF THE 2012 BUDGET: INSURANCE AND SHIPPING COMPANIES
Government assistance towards the insurance and shipping companies will be diminished following the 2012 Budget.
The allowable deductions for the purposes of income tax computation for insurance companies will be reduced. Currently, an unabsorbed business loss of an insurer is allowed to be set off against the statutory income for the year of assessment.
However, from 2012, the Government proposes that only the adjusted loss from a life fund for a year of assessment is allowed to be deducted against the statutory income of the life fund of the insurer for subsequent years of assessment until it is fully utilized. Also, any adjusted loss or unabsorbed business loss apart from those accruing from the business of a life fund of an insurer is not allowed to be deducted against the aggregate statutory income for the year or subsequent years of assessment.
Income tax exemption for shipping companies will be reduced from 100% to 70% of statutory income following the implementation of the 2012 Budget. The income derived from each Malaysian ship will be treated as income from a separate and distinct business source.
Real Property Gains Tax (RPGT)
With the aim of curbing real estate speculative activities and to relieve pressure on the prices of real estate, the Government proposes to implement the following increases in RPGT. Companies and individuals disposing property within 2 years of ownership will be subject to RPGT of 10% while a disposal between 2 to 5 years will be subject to RPGT of 5%. Any disposal after 5 years will not be subject to RPGT.
Presently, the time bar for a tax audit is 6 years from the date on which the tax assessment is made. In order to enhance investor confidence and to increase certainty in the cost of doing business, the Government proposes to reduce the time bar for a tax audit to 5 years from the date of the tax assessment being made. This will not be applicable for cases of false declaration, wilful late payment and negligence and will not alter the requirement to keep records for 7 years in accordance with sections 82 and 82A of the Income Tax Act 1967. This proposal will come into effect from the year of assessment 2013.
Late Refund of Income Tax
A compensation of 2% per annum on the amount of income tax refunded late will be imposed on the Inland Revenue Board (IRB). The calculation for late payment will commence 1 day after 90 days from the due date for e-filing or after 120 days from the due date of manual tax filing. This proposal will be effective from the year of assessment 2013.
The 2012 Budget includes many initiatives by the Government to boost investor confidence and enhance the efficacy of doing business in Malaysia. In the light of the economic uncertainty during such economically trying times, such initiatives seek to enhance the attractiveness of Malaysia as an investment hub.