The Budget 2019 drew high attention from society and businesses due to it being the first Budget prepared by the new Government of Malaysia under the cloud of financial tightness, impact on revenue after GST abolishment, cost cutting without creating burden for people, etc. Before the tabling of the Budget, the Prime Minister and Finance Minister had mentioned that this Budget may need people to make sacrifices and new taxes could be be implemented. Many of us initially expected a painful Budget.
However, after it was disclosed, despite some new taxes like excise duty on Sugar Sweetened Beverages, Tax on Outbound Traveller via flight and review of Real Property Gain Tax on property sold of more than 5 years, there was no real tax measures that will have substantial negative impact to businesses.
Nevertheless, some of the tax changes will have implications for the long term and it is worth taking a few minutes to get some understanding about them.
1) Special Voluntary Disclosure Program
Effective 3 November 2018 to 30 June 2019, a period of amnesty is made for those unreported income or taxpayers that have under-reported their income in the past years or any tax evasion activities. If they voluntarily report these incomes to the Lembaga Hasil Dalam Negeri within the period, the standard minimum penalty of 45% can be reduced to 10% if disclosure is done by 31 March 2019 and 15% if the disclosure is done after 31 March 2019 but on or before 30 June 2019. It is applicable not only for income tax but Real Property Gain Tax and Stamp Duty as well.
This kind of program is not new to the world as it has been implemented by other countries before like Indonesia. It’s definitely a measure to increase tax revenue.
The penalty after the amnesty period will be increased to 80% minimum and up to 300% maximum. This has raised some concerns that if the current minimum 45% penalty to be increased to 80% which will be applied across the board, it may have implications, in the case of tax audit, if the issue is not under-declared income, it is a technical issue of grey areas in some laws and different interpretation between taxpayer and authority. For this kind of scenario to be subjected to a minimum 80% penalty which means it will be treated as intentional tax evasion is unfair.
2) Reduction of SME tax rate by 1%
The current 18% tax rate on the first RM500,000 chargeable income for SME companies will be reduced to 17% effective from Year of Assessment 2019. This beyond expectations, although the maximum savings effect is RM5,000 which is good news for SMEs.
3) Restriction on Unabsorbed Business Tax Losses and Unutilised Capital Allowance to be Carried Forward
The new amendments will be effective Year of Assessment 2019 where the unabsorbed business tax losses and unutilised capital allowance will only be allowed to be carried forward consecutively for seven years. This is to minimise the revenue loss of the Government in the sense that a business that continues to be loss making is unrealistic. To avoid falling into this trap, those businesses that continue making losses for some years must take some action to turnaround the business.
4) Restrictions on Unutilised Reinvestment Allowance (RA), Unutilised Investment Tax Allowances (ITA) and Unabsorbed Pioneer Losses to be Carried Forward
The restriction is the same as allowing the unutilised RA and ITA after expiry of the qualifying period and unabsorbed Pioneer losses after the pioneer period, will only be carried forward for seven consecutive Years of Assessment.
All these tax incentives are to encourage businesses to promote their business activities or products and reinvestment in manufacturing facilities for qualifying projects like expansion, diversifications and automation. Additional capital allowances are given for tax relief or, a tax holiday period is given.
With the new amendments for restriction, it may create some concerns to businesses that intend to invest in the promoted activities or qualifying manufacturing projects as they may need to ensure the business shall generate enough profit to fully utilise the additional allowances that are given. In contrast, there is no tax benefits to do so.
5) Review of Real Property Gain Tax (RPGT) Rate
The RPGT Rate for all categories of taxpayer that disposes of the property which has been owned for more than five years will be increased by 5%.
This impacts on long term property investments – the property that was acquired many years ago and to be disposed with substantial increase in value.
6)Service Tax imposed on Imported Services
Currently services offered by foreign service providers are not subject to service tax. To provide a fair business environment to the domestic service providers, service tax on imported services will be implemented in two stages:
- Effective 1 January 2019
- Prescribed Business to Business (B2B) services will be subjected to services tax.
- Effective 1 January 2020
- Service tax will widen the scope to cover Business to Consumer (B2C) services which includes all online services provided by foreign service providers. All foreign service providers that supply services to Malaysia with annual turnover that exceeds RM500,000 will be required to register for service tax in Malaysia.
However, it is unclear on the tax treatment on those online B2B services in 2019.
7)Expansion of the Derivation Income from Malaysia
Under the current tax legislations, income derived from Malaysia is subject to tax in Malaysia including any income which is not attributable to operations outside Malaysia, would be deemed to be derived from Malaysia. The income derived from the source outside Malaysia would be exempt from tax except for banking, insurance, air and sea transporting industries.
There is a proposed amendment to the Income Tax Act 1967, Section 12 (3) and 12 (4) to further expand the scope of derivation of income from Malaysia if the income is attributable to a place of business in Malaysia. The place of business includes:
- A place of management
- A branch
- An office
- A factory
- A workshop
- A warehouse
- A building site, or a construction, an installation or assembly project
- A farm or plantation; and
- A mine, an oil or gas well, a quarry or any other place of extraction of natural resources
A person shall be deemed to have a place of business in Malaysia if that person:
- Carries on supervisory activities in connection with a building or work site or a construction, an installation or an assembly project; or
- Has another person acting on his behalf who:
- Habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification;
- Habitually maintains a stock of goods or merchandise in that place of business from which such person delivers goods or merchandise; or
- Regularly fills orders on his behalf
The above amendments will further provide certainty on criteria in determining the operations attributable to a place in Malaysia which will be subjected to tax in Malaysia.
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