Is digitalisation support on the cards for local mid-tier companies?

PWC Fung Mei Lin: Malaysian mid-tier companies should generate value add using the tax incentives proposed in Budget 2021.

IN recent years, the national budget has focused on small and medium enterprises (SMEs), especially in providing support for their digitalisation journey.

However, there is another category of companies i.e. the mid-tier companies, that is sometimes overlooked, and this extends beyond the manufacturers and service-based mid-tier companies.

Malaysia External Trade Development Corp (Matrade) defines mid-tier companies as companies with annual revenues between RM50mil and RM500mil in the manufacturing sector and between RM20mil and RM500mil in other sectors, placing them in the category above SMEs whose annual revenues are below these thresholds.

A glance at the list of participants of the Matrade Mid-Tier Ramp Up Programme shows an impressive range of companies that include listed companies and family businesses.

Despite being 1% of all Malaysian firms, mid-tier companies collectively contribute no less than 30% of the country’s gross domestic product (GDP). In their eagerness to grow, many mid-tier companies in emerging markets like Malaysia focus primarily on top-line growth or country-specific comparative advantages (like being low-cost), and often neglect to build the foundations for future success.

Typically, they initially benefit from being first movers in their home markets; they eventually have to play catch-up with more experienced multinational corporations in global markets.

Multinationals are often seen as formidable competitors with their established brand names, capabilities and access to efficient financial and labour markets.

More importantly, these multinationals have the use of technologies that they have developed over time. While there are various ways in which Malaysian mid-tier companies can grow, undeniably, most of these paths involve technology as a key enabler to assist with that growth.

For example, a Malaysian mid-tier company could adopt an automated storage and retrieval system (ASRS) for its warehouse so that it can obtain real-time inventory information at the push of a button – anytime, anywhere – in reducing inventory wastage or over-buying.

Technology is no longer a nice-to-have but a must-have for businesses in Malaysia in the wake of the Covid-19 pandemic. The world of tax needs to keep pace with business and its technology.

This can perhaps be a consideration for the upcoming Budget 2021, with the possibility of expanding tax incentives to encourage the take-up of digitalisation to all Malaysian mid-tier companies, irrespective of whether they are manufacturers, distributors or service-based companies.

This is where the tax incentives can come in (as a bonus) to lighten the burden of all Malaysian mid-tier companies. In return, Malaysian mid-tier companies should generate value add using the tax incentives proposed in Budget 2021. Here are some suggestions to be considered:

> Use collaborative technology platforms to transfer knowledge and information

Grant tax incentives to all Malaysian mid-tier companies that install and use collaborative technology such as project management systems (on-premise or SaaS, web or cloud-hosted) or enterprise resource planning software.

Malaysian mid-tier companies should find this particularly useful as many of them are starting to find that their various stand-alone systems are not as real-time as they would like them to be. Most times, what is holding them back is the cost of investment and the extent of change that their employees will need to adapt to.

The tax incentive in a form similar to the investment tax allowance should be in place over several years subject to an investment cap and provisions for review by an authorised body or peer to keep these efforts on track.

> Reward digital transformation

Making digital transformation work is easier said than done. Where Malaysian mid-tier companies can successfully adopt technology (such as automation and artificial intelligence) to achieve efficiencies – either through reduced headcount, better yields, quicker turnaround time or more accurate information – they should be rewarded with a tax credit similar to the current automation capital allowance. Where there is relevant operating expenditure, to allow special or double deductions.

> Have a robust business, digital and owner strategy

In achieving successful digital transformation, having a digital strategy is important. However, the digital strategy must fit the company’s overall business and owner strategy, and many mid-tier companies can benefit from coaching to help meet their long-term goals.

Where mid-tier companies have embarked on strategy development programmes with credible external consultants, additional tax deductions should be given for that expenditure, to encourage all local mid-tier companies to take that initiative.

At Malaysia’s current state of development, adding labour and capital is no longer sufficient to maintain growth for Malaysian mid-tier companies, let alone to ensure that its benefits are shared equitably.

It will bode well for Budget 2021 to have tax relief or incentives that are linked to the use of technology for business growth so that local mid-tier companies, be they in manufacturing, distributive trade or services, can generate cash flow and allow them to fit this into their long-term strategy for expansion.

Fung Mei Lin is Entrepreneurial and Private Business Lead Partner, PwC Malaysia. Views expressed here are the writer’s own.

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