Taxes need to be introduced carefully

"The only thing that the CGT and inheritance tax have in common is that they are both taxes – but they are not comparable in this context," says Soh of KPMG Malaysia.

BELOW are excerpts of Q&A with PwC Malaysia tax partner Lavindran Sandragasu, KPMG Malaysia head of tax Soh Lian Seng and Deloitte Malaysia country tax leader Sim Kwang Gek on the newly proposed capital gains tax or CGT.

StarBizWeek: Is the proposal to have a CGT on the sale of private companies the best solution for a government looking to raise tax receipts? In your opinion, are other options more damaging, for example, a CGT on stock market share sales and/or inheritance tax?

Lavindran: The way to look at introducing a new tax is from the perspective of, among others, ease of taxation and collection, target group, size of receipt and whether it is friendly to commerce/business. This is a tax that has been discussed for many years, so it is not new to the business community.

The other taxes such as the goods and services tax (GST), CGT on stock market transactions, or inheritance tax are designed for targeted objectives.

These objectives serve a bigger purpose focusing on the financial stability of the country. Some of these taxes like the GST need to be introduced carefully so as to not burden the public unreasonably, taking into account the implications of inflationary pressures, for instance, in the current economic climate.

Taking the stock market as an example, the volatility of trading in the stock market is not ideal in terms of transaction value. Hence, the introduction of the CGT here may not be effective. Additionally, it may result in a dampening effect on the stock market.

Soh: The only thing that the CGT and inheritance tax have in common is that they are both taxes – but they are not comparable in this context.

The standard rate for the inheritance tax in some countries can be significant, as high as up to 40%. An inheritance tax is payment of tax on estates, while the CGT is payment of tax on profits. Both bring their own implications and impact.

SBW: What is your suggestion in terms of the tax rate for the CGT on the sale of private company shares?

Sim: A number of countries in the region such as Indonesia, Thailand, the Philippines and Vietnam do subject capital gains to tax, and these gains are treated as part of ordinary income that is subjected to prevailing income tax rates.

The income tax rates in these countries vary, depending on whether the seller is a corporate entity or an individual.

In Vietnam, corporates are subjected to 20% income tax on the gains arising from the disposal of shares, while individuals are taxed 0.1% on the sales proceeds or 20% on the gain, depending on the tax residency of the individuals and type of companies.

For corporates in Indonesia, the gains from the sale of unlisted shares are subjected to a corporate income tax rate of 22%. For resident individuals, the income tax rate ranges between 5% and 35%, depending on the taxable income bracket.

The sale of shares on the Indonesian stock exchange is subjected to a 0.1% final tax on the transaction value. In the Philippines, corporates and individuals are subjected to 15% on the gains arising from the sale of unlisted shares.

The Prime Minister has mentioned that the government is considering a low rate as a start should the CGT be implemented here.

Soh: I would like to see the rate introduced as low as a 5% fixed rate, but we must also consider the following in the proposed legislation:

> A mechanism to determine the capital gain amount. It remains to be seen how the capital gains amount would be determined, ie, the basis of the valuation of shares disposed, availability of any allowable deductions, determination of valuation of shares acquired and shares on hand.

It is important to note that in the past internal restructurings, many transactions would have been executed at nominal sums, which would not have taken into account the actual value of the shares at that point in time. If such value is ignored for the CGT purposes, the potential gains subjected to the CGT may be unreasonably high.

Where shares are held on a long-term basis, it is hoped that the capital gains amount will be adjusted for inflation such that only “real gains” are subjected to the CGT.

> The availability of capital losses. Under the corporate income tax regime, business losses are generally available to be set off against income and any excess losses can be carried forward for future utilisation. In view of this, it is only fair that should capital gains be subjected to the CGT, any capital loss arising from the disposal of unlisted shares should also be available to be utilised to offset future capital gains.

> Grandfathering provisions. Grandfathering provisions should be considered to limit the tax cost for bona fide investors who have been holding on to their investments for a long period of time. Ideally, all shareholdings acquired prior to the introduction of the tax should be exempted from the CGT.

Alternatively, it may be practical to provide for the “acquisition date” of shares to be no earlier than a particular recent date, eg, Jan 1, 2020, and the acquisition price to be based on the value of shares at that date rather than at the original cost.

> Disposal. The concept of “disposal” would need to be defined as a CGT applied on transfers that do not generate any cash – for example, “share for share swaps” – may impose a burden on companies’ cash flow.

SBW: Do you have some global data on the CGT of private and public company share sales, or perhaps, could you give us some examples?

Lavindran: As far as Malaysia is concerned, the potential deal value in 2021 focusing on private equity and venture capital is around US$1.1bil (RM4.93bil), according to Statista.

This could potentially be higher in 2022. This does not include other potential private sales of equity. Globally, potential deal value from private equity is approximately US$2.4 trillion (RM10.75 trillion) based on data from Refinitiv, Dealogic and PwC’s analysis.