Malaysia Budget 2023

The Honourable Prime Minister of Malaysia, Datuk Seri Anwar Ibrahim, tabled the 2023 Budget of the MADANI Government in Parliament on 24 February 2023. While no specific proposals directly related to the financial services industry (FSI) were announced, there were several proposals that would have implications for the industry.

1. Implementation of a Global Minimum Tax (GMT)

The proposal that took centerstage is the introduction of the 15% GMT via application of the Qualified Domestic Minimum Top-Up Tax mechanism with effect from 2024. While this specific proposal was not mentioned in the Budget speech, it was clearly stated in the “Touchpoints” section published on the Budget 2023 website. This makes Malaysia the second country in the Association of Southeast Asian Nations (ASEAN) region to commit to implementing GMT by 2024 after Indonesia.

At a glance, this may not appear to impact the banking sector directly because Malaysian banks are generally taxed at 24% prevailing corporate tax rate. However, the jurisdictional effective tax rate should still be assessed particularly for FSI groups that have entities that enjoy tax incentives (i.e., principal hub, Islamic fund management, Multimedia Super Corridor status, etc.), or entities with operations in Labuan, as this can have a direct impact on the jurisdictional effective tax rate. We also should not take this lightly as there are adjustments that must be considered in determining the jurisdictional effective tax rate.

Life insurance companies and reinsurance companies that are currently taxed at 8% on life fund and reinsurance fund sources should also consider their exposure to GMT on a country level in Malaysia. Unit trust funds generally have an effective tax rate below 15%. However, they would not be exposed to GMT provided they are not consolidated into corporate groups that fall under the GMT scope.

2. Proposal on Capital Gains Tax (CGT) on gains arising from disposal of unlisted shares

Another announcement of note was the proposed introduction of CGT on gains from disposal of unlisted shares by companies in 2024. The Prime Minister shared that this would be considered carefully after consultation with relevant parties. The interaction of this proposed CGT for shares that falls within the meaning of “real property company” shares under the Real Property Gains Tax (RPGT) Act remains to be seen. While it is unlikely that the same transaction would be taxed under two different laws, the law which would take precedence has to be considered. One possibility is that the RPGT Act could be repealed and its provisions consolidated into the Income Tax Act together with the proposed CGT law to fully align both revenue and capital gains under a single piece of uniform legislation.

The proposed CGT would definitely impact the Malaysian mergers and acquisitions environment with a new cost for sellers. Transactions that straddle the implementation date in future should consider flexibility in the pricing mechanism to factor in this cost. Corporate restructuring exercises undertaken prior to initial public offerings (e.g., consolidation of operating entities under a listing vehicle) would potentially be impacted as well. The Government could consider targeted exclusions or exemptions for specific situations to facilitate listing exercises in order not to deter private companies from seeking listing.

It is worth mentioning that across the ASEAN region, most member countries already tax capital gains, with the exception of Singapore and Malaysia. Unless Singapore follows suit with a similar approach to CGT, it could be the only ASEAN country that does not tax capital gains in the region, making it an attractive holding company jurisdiction from the tax perspective.

Assuming the Labuan tax regime remains constant when CGT is introduced, depending on the operation of the CGT legislation, it may be more tax efficient to have a Labuan holding company instead of a Malaysian onshore holding company. Labuan does not impose tax on gains from disposal of shares if such gains are from a “Labuan non-trading activity” by virtue of Section 9 of the Labuan Business Activity Tax Act. The Labuan holding company must still meet substance requirements by having full time employees in Labuan and meeting a minimum amount of operating expenditure.

3. Incentives to support electric vehicle industry

As part of its commitment to a greener Malaysia, the Prime Minister also announced several incentives to support the growth of the electric vehicle industry in Malaysia applicable to manufacturers, lessors, and consumers. This is a welcoming news to leasing companies and automobile financing companies that provides operating lease and rental options to customers. The proposed increased limit for tax deductions on rentals paid on non-commercial electric vehicles to RM300,000 (compared to the cap of RM50,000 or RM100,000 for non-commercial non-electrical vehicles) clearly makes non-commercial electric vehicles a more tax efficient option to rent or lease rather than having ownership. Perhaps the Government can also consider applying the same limit to capital allowance claims for non-commercial electric vehicles to give equal tax benefit to owners. Otherwise, consumers seeking electric vehicles may seek leasing or rental options over hire purchase and direct ownership.

4. Extension of stamp duty exemptions

As the country continues to recover from the pandemic, the proposed 2-year extension of stamp duty exemptions on the restructuring of loan and financing agreements between borrowers with financial institutions is very much welcome. This would continue to encourage businesses and consumers to consider restructuring their facilities with financial institutions to alleviate the adverse impact of the pandemic on their income streams.

5. Reintroduction of Voluntary Disclosure Program

The reintroduction of the voluntary disclosure program with full penalty amnesty is a positive step to foster cooperative compliance and consistent with the objectives of the Inland Revenue Board’s pilot Tax Corporate Governance Framework program. The offer to waive all penalties for taxpayers that come forward to resolve ambiguous tax positions is aimed to foster greater trust and better communication between taxpayer and tax authority. Financial institutions are particularly sensitive to penalties and this amnesty program would accelerate the settlement of tax disputes for a win-win outcome.

In summary, the proposals are holistic and seek to address the many areas the Government has promised to tackle in a bid to steer the country towards economic recovery. Some of these proposals reflect a gradual shift in Malaysia’s approach to taxation and is a positive step forward.

For further information, please contact Mark Chan.