According to a recent report based on the opinions of the country tax leader of a firm that provides audit and related services, Budget 2019 is expected to be a tough one.
With global economic uncertainties, Budget 2019 needs to be well crafted to meet its objectives of reducing the nation’s debt while ensuring that the country remains resilient and competitive.
With regards to technology, the government may consider a form of digital tax in view of technological developments, where businesses can be carried out virtually anywhere without the need to have a physical presence.
Some countries like South Korea, Japan, New Zealand and Australia have set rules requiring overseas online suppliers to register for value-added tax (VAT) or GST.
In this year’s budget, Singapore introduced an overseas vendor registration system where overseas suppliers and electronic marketplace operators who offer digital services to Singapore consumers will be required to register for GST with the Singapore tax authorities with effect from 1 January 2020.
Meanwhile, India introduced an equalisation levy on online advertising revenue earned in the country by non-resident e-commerce companies.
The European Union is also in the midst of deliberating its digital tax proposals, which may potentially include an interim measure of a tax based on turnover for digital transactions while working towards a long-term objective of a digital taxable presence or permanent establishment framework.
In Budget 2017, efforts were made to capture digital transactions into the tax net by expanding withholding tax on royalties to include payments to non-residents for the use of the software.
However, there were arguments on the differing interpretations of “royalty” taken by foreign jurisdictions resulting in potential double taxation.
The expert argues that perhaps a more effective way would be to introduce a form of digital tax (say, service tax) on overseas suppliers of digital services where such foreign companies are required to register for service tax and charge service tax on such services.
This not only helps in revenue contribution but creates a level playing field between local and foreign companies.
The mechanism in which how new taxes can be implemented with ease and the impact on the growth of the economy should be studied. It is also important that the introduction of any new taxes are as practicable as possible to ensure that businesses have adequate time to prepare and consider the implications.
In view of Malaysia’s fiscal situation, it is clear that private investments will be key in directing growth.
Report by the Malaysian Investment Development Authority (MIDA) indicate that the country is facing stiff competition from other countries where foreign direct investments (FDIs) are concerned. Thus, a lower tax rate would encourage domestic companies to expand their business locally rather than seek alternative locations overseas that will eventually lead to a loss of revenue for Malaysia.
The expert noted that she welcomed International Trade and Industry Minister’s proposal to have a single investment promotional agency to approve investments, perks and benefits for both local and foreign investors.
Currently, there are too many government agencies overseeing tax incentives in specific economic areas. For example, Malaysia Digital Economy Corporation for companies in the information technology/ shared services centre sector and the Halal Development Corporation for halal investments and so on.
She proposed that the management of tax incentives in Malaysia be under the umbrella of MIDA, which will lead and administer the tax incentive framework in Malaysia.
Sub-agencies that specialise in specific sectors can be formed under MIDA and these sub-agencies can form part of the committee evaluating and approving tax incentive applications, giving MIDA a holistic view of Malaysia’s tax incentives regime and will enable it to formulate effective policies for the country as a whole.
From the investors’ perspective, having a one go-to government agency avoids confusion and simplifies compliance process and allow for easier tech collaboration and innovation among other things.
The expert noted that the road to formulating strategies to stimulate economic growth will be tough but she looks forward to 2 November 2018 when the Budget 2019 is announced.