SCS Global Consulting (M) Sdn Bhd tax partner Harvindar Singh
BUDGET 2025 is to be tabled in Parliament on Oct 18, marking the last budget for the 12th Malaysia Plan (2021 to 2025). It would be interesting to see the fresh economic plan and impetus that would be introduced to enhance the country’s competitiveness and future viability.
The Malaysian economy has been performing beyond expectations. A resilient private consumption, robust investment and a rebound in exports have driven real gross domestic product (GDP) growth which grew by an average of 5.1% per annum in the first half of 2024.
The Prime Minister says that under the Madani government, the inflation rate is holding steady at 2%, while some food sectors have seen inflation at 3% to 3.5%. The labour market conditions have stabled somewhat with unemployment rate steadying at 3.3% since the fourth quarter of 2023.It is believed that the economy will stay on track with stable growth, and strong progressive policies and reforms as well as effective execution are needed to ensure sustainable economic growth, amid a myriad of domestic and external risks.
Concerns about recessionary fears in the US economy and the US Presidential election in November could cause significant economic and market uncertainties. China’s recovery remains a bumpy one due to the depressed property sector and the ongoing trade tariffs war between China and the United States and Europe, which is likely to deepen post the US Presidential election.
Against the above backdrop, the budget would ideally be a blend of measures to ensure sustainable economic growth with fiscal stability, driving inbound investment and supporting national development.
The budget will lay out initiatives to tackle the cost of living issue and carrying on business, supporting green economy, wage-enhancement and skills development, fostering investment through reducing bureaucracy and strategic investment funds, and strategic budgetary allocations for key sectors (affordable public housing, public transport and infrastructure, ports, roads, healthcare, education and training and digital infrastructure).
There continue to be calls for the introduction of a consumption tax in the vein of the goods and services tax or GST, with enhancements where necessary.
As the 16th General Election is to be held by February 2028, there would be sufficient time to manage adverse reactions through public forums and educating the public.It is envisaged that the e-invoicing system could play a key role in the implementation of this consumption or transaction tax in time to come.
Rising expenses
Rising cost of living, transportation, utilities and other expenses have placed considerable financial burdens on the low and middle-income households.
There could be further targeted tax relief and rebate measures for tax payers and households to cope with immediate financial pressures. It is timely to consider an increase in personal tax relief to say RM11,000 to RM12,000 from the current amount of RM9,000 (the last revision was done in 2010).
Budget 2025 will formalise the implementation of a global minimum tax rate (GMT) of 15%. This is to align with international taxation standards in curbing tax base erosion activities and transferring profits to countries with low tax rates.
In Budget 2024, the government announced that GMT rules will be implemented in Malaysia in 2025. Countries like the UK have already implemented these rules in 2024. To put the impact of the decision to introduce GMT rules in Malaysia in 2025 instead of 2024 in its perspective, let’s consider the following scenario.
Assuming a UK holding company has a Malaysian subsidiary that has been enjoying a tax incentive in Malaysia, resulting in the Malaysian subsidiary’s effective tax rate being 7% in 2024 (the prescribed corporate tax rate in Malaysia being 24%).
Top-up tax
Since the Malaysian subsidiary’s effective tax rate is 7%, there needs to be a top-up tax of 8% to be in line with the GMT rate of 15%. The first right of imposing the additional tax of 8% should be Malaysia’s since the income is earned here, but since the GMT rules are not applicable in 2024 in Malaysia, the UK holding company will need to include it as part of its income in the UK under the income inclusion rules and pay the top-up tax in the UK.
This ensures that global companies will need to pay a minimum of 15% for its subsidiaries or group companies that might have been established in low tax paying countries or tax havens.
Unfortunately for the Malaysian government, the top-up tax in the above scenario will enrich the UK government’s coffers instead of ours. Therefore, it is imperative that the GMT rules are implemented as soon as possible in Malaysia, as inevitable as they are.
Incentivising sustainability
The budget is expected to incentivise sustainability by offering tax benefits like deductions or accelerated depreciation for companies investing in renewable energy, electric vehicles, and other green technologies. Additionally, a carbon tax framework, including emissions trading scheme may be announced.
The government has been urged to expand digital grant incentives for businesses, particularly small and medium enterprises in the upcoming budget to accelerate the adoption of emerging technologies.
The government should maintain its efforts to accelerate the uptake of information and communication technology.
Harvindar Singh is tax partner at SCS Global Consulting (M) Sdn Bhd. The views expressed here are the writer’s own.
