2017 Budget: Embracing the digital revolution

  • Business
  • Sunday, 23 Oct 2016

Malaysia Tax Leader of Ernst & Young Tax Consultants Sdn. Bhd, Amarjeet Singh.

IN THE words of Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, we stand on the brink of a technological revolution that will fundamentally alter the way we live, work and relate to one another. 

In its scale, scope and complexity, this transformation will be unlike anything humankind has experienced before.  

Every day, we see the emergence of new technologies. Unprecedented and simultaneous advances in artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3D printing and others are redefining industries and blurring traditional boundaries. 

The digital future and digital disruptions present challenges to businesses and governments today; but at the same time, they also present opportunities. 

Drawing from the Budget 2017 proposals unveiled last week and the concerted efforts and plans spearheaded by the Malaysia Digital Economy Corporation (MDEC), it is exciting to see Malaysia taking the right steps to not only embrace this megatrend, but also take strategic steps to leverage the myriad of opportunities to be a leader in this space on the global front.  

In the Budget 2017 announcement, we heard the introduction of the world’s first digital free trade zone and digital hubs. There is no information yet on the digital free trade zone and we eagerly await more details. 

At the St. Petersburg International Economic Forum in June 2016, Alibaba’s Group Executive Chairman, Jack Ma, urged for digital free trade zones to be established so that small and medium enterprises (SMEs) can also participate in world trade (as such zones will have the effect of reducing various entry barriers for SMEs). 

It was mentioned during the Budget speech that SMEs comprise 97% of businesses in Malaysia. 

Hence a digital free trade zone can potentially achieve at least two key benefits - anchoring global e-trade activities in Malaysia, and at the same time, boosting local SMEs’ ability to compete internationally.   

The Budget 2017 proposals on a digital economy build on various digital inclusivity initiatives launched by MDEC such as the eRezeki programme (designed to encourage financial independence amongst B40 households); the eUsahawan programme (upskilling through the curriculum of Technical and Vocational Education and Training (TVET) institutions); the integration of computational thinking and computer science into formal school curriculum; as well as other technology-related education and extra-curricular programmes at schools, with the main objective of developing the local talent pool.    

We now need to ensure the implementation is well thought through and carried out correctly, effectively and efficiently. 

There is always the risk that policies get lost in implementation, as we need to involve and rely on a diverse group to implement them.
In this case, it encompasses the whole spectrum of the economy. It is not only challenging to bring together these diverse groups, the task is made even more complex as each stakeholder is driven by its respective needs, objectives and targets. 

Hence, it is crucial that we consider the various physical, commercial and people infrastructure elements required to achieve the digital strategy in a holistic manner.

Furthermore, we need to recognize that this is a very unique industry and conventional practice may not be applicable.  

As a tax practitioner, I have to emphasize the need to consider the taxation aspects of the digital strategy. 

We must consider whether the current tax laws are fair to these digital businesses and technology companies / start-ups when compared to the traditional brick and mortar businesses.  

As an example, today, brick and mortar companies enjoy capital allowances and in some cases, investment tax allowances, on capital expenditure spend (e.g. plant and machinery, equipment). 

Technology start-ups, on the other hand, spend mainly on talent and operating expenditure during the incubation stage, and their most significant assets are intangibles (e.g. intellectual property). 

Whilst some of these may be revenue in nature and hence eligible for a tax deduction, many could be viewed as non-deductible capital costs. 
However, Malaysian tax laws today do not allow capital allowances on intangibles except under very limited circumstances.  

A more holistic review of the existing tax laws, including income tax and Goods and Services Tax (GST), would be required to ensure clarity on the tax treatment of the digital economy and transactions, as well as to enhance the legislation to take into account how these new digital businesses operate.

In parallel, perhaps more measures can be introduced to encourage public-private collaboration, for example, by incentivizing “adopt-a-school” initiatives and attracting the right experts (e.g. teachers/educators) to build the necessary digital talent. 

Building and developing digital talent is a critical component to the successful implementation of the digital strategy. 

The establishment of the Collection Intelligence Arrangement (CIA), comprising the Companies Commission of Malaysia and the two tax authorities (Inland Revenue Board and Royal Malaysian Customs Department) is a clear indication that the tax enforcement agencies are looking to use the digital revolution to their advantage. 

We can expect the authorities to not just share information, but also deploy big data analytics in compliance and audit initiatives, including uncovering complex business relationships, potential aggressive tax positions and to detect fraud and unintended errors. 

I believe that the CIA will be a game-changer for tax enforcement efforts and will be a powerful tool in the Government’s arsenal to combat tax evasion. 

On the business front, conventional businesses should consider what investments may be needed to respond to the new digital era and how best to leverage the opportunities made available through the digital economy. 

Taking the time to understand these issues and explore forward-looking solutions today may help manage the risk of conventional businesses being made obsolete by rapid technological changes. 

It is not just a matter of survival by remaining relevant in today’s world; it is a matter of being bold enough to secure first-mover advantage and benefits and seizing the future.  

Amarjeet Singh is the Malaysia Tax Leader of Ernst & Young Tax Consultants Sdn. Bhd. The views reflected above are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

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