ON the issue of attracting foreign direct investments, we listen in to a conversation between a foreign investor and a Malaysian tax consultant, which typically goes like this:
What is the tax rate of the country?
Twenty-eight per cent.
Looking beyond the glossy trade investment brochures, can you tell me about the real tax rate?
You mean the non-deductible expenses?
Yes and similar issues.
The tax consultant will then launch into a tirade of grievances including some of the following:
There is no tax deduction for entertainment expenditure. Worse, genuine marketing incentives such as certain free gifts, incentive trips and sponsorships are disallowed. Such expenses are considered to be entertainment although they do not prima facie appear to be so; entertainment is the “provision of food, drink, recreation or hospitality”.
A company therefore has to plan its marketing carefully since some of these expenses are not tax efficient. If these expenses are denied deduction, the real tax rate is effectively a little higher.
If you are into services, you will find that the Malaysian tax system does not particularly favour service businesses. Other than the double deduction for promotion of export of services and the allowance for export of certain services, there are no tax incentives.
Unless of course, you get MSC (Multimedia Super Corridor) status, in which case you can enjoy 100% tax exemption.
But be careful, the pioneer status can be a black hole.
Because, while profits are allowed full exemption, losses are not allowed to be carried forward to the post-pioneer period. Such a taxpayer will therefore be in a worse position compared with one without pioneer status.
Is the government doing anything about it?
Not that we are aware of.
The tax system actually has an inbuilt bias towards manufacturing businesses because only industrial buildings qualify for tax depreciation. The list of qualifying buildings has increased over the years but it does not include buildings used for showrooms, offices and certain workshops.
As such, when one incurs costs relating to renovation of offices, tax depreciation will similarly not be allowed.
Isn't this a bit archaic?
It sure looks like, and the government should make a change if it wishes to be more successful in promoting service businesses.
In our view, services is really the business of the future for Malaysia due to our higher wage rates. Encouragement should therefore be given in more ways, including full deduction for all genuine business expenses and depreciation.
After all, the low wage countries are going to dominate the manufacturing sector and we have to move into services or higher tech manufacturing, both of which require more brain power.
And one of the ways to attract good talent is to pay well and provide them a conducive work environment. But this will be more difficult if renovations are not allowed tax depreciation. So, we think that the tax system should be changed to accommodate this by broadening the concept of industrial buildings to embrace buildings used for services.
Alternatively, they should abolish the concept of industrial buildings and adopt a new concept of qualifying buildings.
Along the same thinking, the government should consider providing incentives to attract high-value added services arising from the outsourcing strategy of multinationals such as “shared services”.
You see this in call centres, centralised accounting departments, data processing centres, etc. Most of these businesses will not be eligible for MSC status and therefore have to pay full taxes unless they are eligible for the operational headquarters (OHQ) incentive.
Therefore, there is a significant potential for Malaysia to tap into this market to expand the service sector. A suggestion may be to allow a concessionary rate of tax for these shared services businesses.
In our planning, we also consider the tax burden of our expatriate staff. How do your tax rates compare with those in Singapore?
The top rate is not very different but our tax bands are very narrow, which means that most highly paid staff reach the top rate very early. Typically, the tax burden in Singapore of these staff is only about half of that in Malaysia.
However, if your business enjoys the OHQ incentive, the tax will be based on the days that he is in Malaysia. Generally, most expatriates will not enjoy this concession.
To attract talent, I think, over the longer term, the government should reduce individual tax rates to be competitive regionally.
By the way, what business are you in?
High tech manufacturing and support services. I may be able to use the incentives mentioned.
What is your overall opinion anyway?
I think the overall package is good but if the government can iron out the kinks and beef up its incentives, it will be even more attractive.
Will you invest in Malaysia?
The decision rests with the board of directors back home but I will convey my opinions to them.
·Poon Yew Hoe is a council member of the Malaysian Institute of Certified Public Accountants (MICPA) and tax partner of Horwath KL Office