Are we ready for new taxes?

Budget 2023 was re-tabled last Friday, ending speculations on whether Goods and Services Tax (GST) will be reintroduced. For now, GST will have to take a back seat. Meanwhile, to broaden the tax base in Malaysia, several types of tax are being considered:

Capital Gains Tax (CGT)
CGT is a tax on capital gains, which are profits realised from the sale of a non-inventory asset. The most common capital gains come from the sale of stocks, bonds, precious metals, and real properties. Not all countries implement CGT and most have different rates of taxation for individuals and corporations.

Malaysia does not have CGT, with the exception of the Real Property Gains Tax (RPGT). RPGT is tax imposed on gains arising from the disposal of real property located in Malaysia and shares in a Real Property Company (RPC). Essentially, an RPC is a land-rich company. Apart from the RPGT, gains from a transaction of a capital nature are not within the income tax net.

Budget 2023 indicates a possible introduction of CGT on disposal of unlisted shares with effect from year 2024, albeit at a low rate. We are optimistic on the government’s careful approach in formulating the mechanism for CGT. A thorough cost-benefit analysis of CGT is crucial to maintain Malaysia’s competitiveness as a place to do business.

Arguably, a CGT regime may promote equity. Malaysia’s existing tax structure base is already narrow as it is reliant on Corporate Income Tax (CIT), personal income tax, petroleum income tax, and sale and service tax. Taxing capital gains would broaden the tax base. In recent years, petroleum income tax has also seen a slight drop, largely due to oil price volatility. The current absence of CGT creates opportunities for aggressive tax planning and avoidance. CGT is important when it comes to taxation on intangibles and other digital assets in the future.

Conversely, raising the taxation of capital gains is likely to increase effective tax rates on certain investments, potentially reducing levels of investment. This is likely to have a negative impact on productivity and economic growth. The extension of CGT will increase compliance and administration costs to both taxpayers and authorities. The administrative complexity of a broad-based CGT should not be underestimated. A CGT regime is often perceived by taxpayers as being unfair or unreasonable, causing an adverse reaction among those impacted. The revenue volatility from taxing capital gains will also pose challenges for fiscal management. The direct macroeconomic impact of this will be counter-cyclical, with tax revenue increasing as asset prices rise and decreasing as asset prices fall. Introducing new taxes or expanding the scope of existing ones may make doing business in Malaysia more expensive. While there may be a long-term gain in tax revenue, the mid to long term risk is that businesses may move out of the country, which will eventually result in an overall reduction in tax revenue.

CGT should thus be implemented gradually by way of a lower rate and limited scope. This is to avoid causing a major shock to the market, which may portray Malaysia negatively to businesses. This is consistent with plans outlined in Budget 2023. In cases of genuine group restructuring, we are hopeful that there will be exemptions available, similar to other countries in the region.

Luxury Goods Tax (LGT)
Taxing vanity seems to be trending. This year, the LGT will be introduced with a minimum value that varies with the type of luxury goods purchased (e.g. luxury branded watches and branded fashion goods). LGT is not new, having been implemented by several countries using various mechanisms.

However, it is crucial to define the meaning of luxury goods. We do not think that the LGT will alter the spending behavior of the rich, who will likely continue to purchase what they want. One potential issue is the rise of the black market. As LGT increases the cost of luxury goods, some individuals may be inclined to purchase luxury goods at lower prices from the black market. This would in turn erode the tax base. While the LGT gives rise to additional taxes, let us be mindful that tourism industry must be protected. In short, a mechanism for tourist refund should be considered.

The Global Minimum Tax (GMT)
The GMT represents a seismic shift in the tax world, as it is arguably the largest tax reform in history. Under the GMT regime, large multinational corporations (MNCs) with consolidated group revenues of at least €750 million will be subject to a minimum tax rate of 15% in each of the jurisdiction where they operate. The 15% threshold is measured using a unique effective tax rate (ETR) that is calculated on a jurisdictional basis and requires a plethora of complex adjustments. If the MNC Group’s ETR in a jurisdiction is below 15%, top-up taxes may arise. This heralds a new dawn in taxation despite its complexity – one which jurisdictions are rapidly embracing, especially since this raises additional tax revenue.

The GMT is not intended to broaden Malaysia’s tax base. Instead, it is a defensive measure to ensure that the country’s tax rights are not ceded to other countries. Whilst GMT and QDMTT were not specifically mentioned in the Budget Speech and its appendices, Malaysia’s direction on this tax reform is stated in the Budget Touchpoints. There remains a lingering question about its timing: 2024 or 2025? Will Malaysia emulate Hong Kong and Singapore, in choosing 2025 to begin? Herein lies the balancing act for Malaysia, as we manage the cost of ceding taxing rights to early adopters such as European Union, as well as providing more time to taxpayers to navigate this complex tax regime. Regardless, the GMT is inexorable, and affected taxpayers must act now to assess its implications. Come what may, for large Malaysian-based headquartered groups and other MNCs, there is much to consider and prepare for. The time to act is now.

Other measures to increase tax collection
Following successful implementations in the past, tax amnesty will be reintroduced from 1 June 2023 to 31 May 2024. This is an opportunity for affected taxpayers to rectify and tidy up their tax affairs. A complete waiver of penalty is definitely welcome. As always, taxpayers would need assurance that the same item will not be reaudited. Budget 2023 has also proposed an excise duty to be imposed on liquid or gel products containing nicotine, commonly used in electronic cigarettes or vape. Half of this collected duties will be channeled to upgrade existing health services.

There were some expectations for a more holistic tax reform in Budget 2023. However, formulating tax reforms takes time and the measures proposed above are a good starting point. While all taxes are controversial, the question is which one is more contentious. That being said, we feel that all roads will lead to GST and we trust that the Government of the day will not abandon the idea. Nonetheless, the reintroduction of GST will require massive political will."

The views and opinions expressed in this article are those of Tan Hooi Beng, Deputy Tax Leader of Deloitte Malaysia and Chew Chen Wah, Senior Associate of Deloitte Malaysia.

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