IN the Budget 2023 consultation session held last month, Prime Minister Datuk Seri Anwar Ibrahim indicated that the revised budget would focus on digital advancement, small and medium enterprises (SMEs) and green economy.
Green economy aims to strike a long-term balance between economic growth and environmental sustainability while promoting social equity.
Tax policy will play a critical role in the development of green economy.
We can certainly expect to see tax-related measures in Budget 2023 that will encourage growth and drive behavioural changes, generally using the carrot-and-stick approach, with “carrots” in the form of incentives, exemptions and reliefs and “sticks” by way of carbon or green taxes or carbon pricing tools.
Malaysia has a number of income tax incentives and other tax reliefs to encourage businesses to pivot towards green activities, including the green investment tax allowance which provides allowances on capital expenditure for qualifying projects or for the acquisition of certified products in the MyHijau directory, and green income tax exemption, i.e. full or partial tax holidays for qualifying activities.
A review should be performed to identify the gaps or practical issues in the incentive application, implementation and monitoring processes, as well as the efficacy and areas of improvement in current incentive schemes, through more detailed engagement with industry players.
Many of these incentives are available for applications received by the Malaysian Investment Development Authority up to Dec 31, 2023, but we would expect the timelines to be extended.
The scope of the covered activities could be extended to specifically include hydrogen and carbon capture, utilisation and storage as well as waste prevention projects.
In embracing green economy, the involvement or inclusion of SMEs is critical, given that the sector contributed to more than 37% of Malaysia’s gross domestic product in 2021 and is the largest employer category in Malaysia.
Apart from tax incentives, financial assistance such as grants would be helpful in supporting the sector in remaining competitive while undertaking green activities, or even enhancing the sector’s competitiveness by embracing environmentally friendly behaviour.
The low-carbon transition facility (LCTF) was introduced in 2022 and is open to SMEs committed to transforming toward low-carbon operations.
The LCTF can be used to fund activities such as improving energy efficiency, increasing the use of sustainable material for production and obtaining sustainability certification. It comprises an RM1bil allocation from Bank Negara, with matching financing by participating financial institutions (FIs) at a 5% capped rate.
It would be interesting to see the take-up rate on these facilities, particularly among the smaller SMEs.
We should also assess whether or how FIs have scaled their lending to be effective and how we can implement monitoring to ensure funds are used for the right purposes.
In line with the 12th Malaysia Plan, a feasibility study is underway on carbon pricing tools, i.e. carbon tax and emission trading schemes (ETS), with the aim of recommending a suitable carbon taxation system.
With 68 carbon pricing instruments in place around the world (according to the World Bank’s State and Trends of Carbon Pricing 2022 report) and the recently provisionally agreed European Union (EU) carbon border adjustment mechanism (CBAM) expected to begin operating in October 2023, it would be fair to say that the introduction of carbon tax, or some form of carbon pricing mechanism, would be imminent.
In principle, a carbon tax (i.e. at a fixed price per tonne of carbon emission) could be easier to implement compared to an ETS (i.e. a cap-and-trade system), though the introduction of any tax could be challenging for businesses given the current economic climate and outlook.
One option could be to start small by applying the carbon tax on heavy emitters above a certain emissions threshold and/or on a particular sector or activity and increase the scope coverage over time.
Singapore, for example, introduced carbon tax in January 2019 at the rate of S$5 (RM16.47) per tCO2, maintained the rate up to 2023, and subsequently raised the tax gradually, with a view to reach S$50-S$80 (RM164.69-RM263.50) per tCO2e by 2030.
Various jurisdictions in Asia have also introduced the ETS, including a national scheme in China and a sub-national scheme in Tokyo. In some other jurisdictions, there may be more than one carbon pricing instrument in operation.
Bursa Malaysia launched the bursa carbon exchange (BCX), the world’s first syariah-compliant voluntary carbon credit trading platform, in December 2022. BCX will enable companies to purchase and sell carbon credits from climate-friendly projects and solutions.
Other countries are also contemplating the introduction of similar voluntary carbon markets, and more guidance on the tax treatment of the related transactions should be made available at an international level to achieve tax certainty and consistency in treatment.
Non-EU exporters of certain products (including iron and steel, cement, fertilisers, aluminum, electricity, hydrogen and some downstream products) to the EU would need to take into account the newly provisionally agreed CBAM, under which a charge would be imposed on top of importation duties.
The charge embeds the price of carbon emissions (from the manufacturing site outside the EU) into the product price and thus levelling the playing field with a similar manufacturer within the EU.
The charge is effectively paid through the purchase of certificates which correspond to the number of emissions generated in the production of such goods.
Given the proposed transitional-period implementation date of Oct 1, 2023, and full implementation from 2026, the affected exporters should consider the impact on their businesses, which could potentially include added costs and reduced competitiveness, and take mitigation steps such as investments in emission reduction technologies.
With governments implementing or debating the implementation of carbon taxes and ETS, businesses are proactively starting to prepare by setting internal carbon prices to monitor their financial position and aid future investment decisions and determine their business strategies.
Businesses undertaking decarbonisation projects should explore the feasibility of generating and monetising carbon credits.
The tax implications of these new carbon credit transactions, such as the deductibility of costs incurred (such as the cost of purchasing carbon credits) and availability of tax depreciation on capital expenditure, would need to be considered.
In conclusion, tax is a fundamental policy tool in transitioning towards green economy. By adopting a green economy concept, Malaysia will be well positioned as a progressive nation that promotes long-term sustainable growth.
A well-thought-out strategy, coupled with discipline, is crucial for timely and seamless implementation.
Sharon Yong is partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
