(slightly belated but… ) Budget 2022 was one of the more highly anticipated as it may be the last budget of the current government prior to the national elections next year and also to determine the allocation of funds towards economic recovery.
Whilst some of the measures were expected i.e. “windfall taxes” and the extension of the voluntary to indirect taxes, some measures were a little unexpected such as the introduction of world-wide income tax. This post highlights some of the key areas to look out in Budget 2022.
- Introduction of Prosperity Tax (Cukai Makmur)
Presumably inspired by the large amount of taxes generated by certain industries during the Covid-19 pandemic, the government seek to introduce a 33% income tax rate levied on taxable profits earned by companies above RM 100 million.
Currently, companies taxed under the Income Tax Act 1967 are taxed at a rate of 24%.
The new tax will see companies making extraordinary profits to be taxed at a higher rate.
Comments: Whilst the intention of the tax seems to be to equalize wealth within certain industries during certain times, the outcome maybe less desirable as it is unsure whether the taxes received from extraordinary profits will be diverted to industries more adversely affected (i.e. the tourism industry in this Covid season).
Furthermore, the imposition of the prosperity tax may see very profitable companies to not want to conduct business in Malaysia or set up an regional office in Malaysia due to the higher tax rate than the countries around it. In view that the expected revenue generated from this prosperity tax is RM8.5 billion, it is unlikely that Multinational Corporations or even Malaysian Corporations would sit still without taking corresponding efforts to, perhaps, divert resources to countries around the region.
- Implementation of income tax on income derived from foreign sources but received in Malaysia
Under Section 3 of the Income Tax Act 1967, only income derived in Malaysia will be taxed in Malaysia, “income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia”.
In other words, only income which accrued in and derived from Malaysia will be taxed in Malaysia. The few exceptions are the banking, insurance, air transport or shipping industries.
This new tax may see companies who derive income from other countries to be taxed in Malaysia, subject to the application of the Double Taxation Agreement.
Comments: Similarly, the implementation of bringing to tax foreign sources of income may cause possibly hostile relationships with foreign countries as it appears to bring to tax income earned by companies resident in Malaysia but generated the revenue from foreign countries.
Whilst companies may have the Double Taxation Agreement to shield them from possibly double taxation, the new tax will have its share of complications without adequate drafting and guidelines in place, such as the implementation of withholding tax previously which had a lifeline of less than 2 years.
- Elimination of Real Property Gains Tax from 6th year onwards
At present, disposal of real property from the 5th year onwards is subjected to a real property gains tax of approximately 5%.
The elimination of the 5% real property gains tax may encourage property owners to dispose of their properties after 6 years from the date of acquisition. Taxpayers should be wary of the possible existence of badges of trade which may see the profit generated from disposal of real property to income tax instead.
- Special Voluntary Disclosure Programme for Indirect Taxes
The Special Voluntary Disclosure Programme was previously only limited to income tax matters. The programme was able to generate revenue amounting to approximately RM 8 billion. The extension of the programme to indirect taxes may encourage taxpayers to revisit their tax affairs to benefit from the lower tax rate.
However, the programme recently came under scrutiny as there were alleged tax audits conducted by the IRB on taxpayers on years of assessment which were covered during the programme.
Assurance would be required to be made in order to ensure that taxpayer’s legitimate expectation that their voluntary disclosure would not form as admission of liability or opening the gates to more tax audits.
- Extension of tax reliefs for individuals
Budget 2022 had also extended various of the additional tax reliefs for individuals introduced in previous years and introduced some new ones. Amongst others:
- Tax relief for individuals and tax deduction for employers on costs associated with taking self-purchased booster vaccines;
- Tax relief for full medical check-up expenses;
- Tax relief of up to RM2,500 for the purchase of mobile phones, computers and tablets is extended until 31 December 2022; and
- Tax relief for up-skilling and self-enhancement course fees of up to RM 2,000.
Without looking at the Finance Bill 2021, the Budget 2022 appears to take too drastic actions too fast. The implementation of a world-wide based income tax is especially precarious as Malaysia had always practiced territorial income tax since her inception. It is also particularly sensitive as it may affect bilateral relationships with other countries if the determination of taxation is not done properly.