What we can learn from the initiatives of other countries, particularly tax measures

  • Nation
  • Monday, 09 Mar 2009

THE mini budget to be announced tomorrow comes at a time of difficult world economic conditions. Prospects for 2009 remain uncertain. Across the region, countries like China, Taiwan, Japan and Singapore face declining industrial production and exports. The offshoot is that jobs are at risk.

There are record job losses in the United States and rising unemployment rates in Europe, Japan and China. Governments around the world have taken unprecedented steps to stimulate their economies and recapitalise ailing financial institutions.

Closer to home, Malaysia’s economic statistics for the last quarter indicate declines in key areas such as exports, industrial production and manufacturing sales. It is reported that the mini budget will seek to facilitate commerce and preserve jobs with measures aimed at spending to spur economic growth, toeing a Keynesian line of thinking.

A number of other countries have also recently announced measures, hoping to spur their respective economies. Some commentators see tax measures playing a strategic role in averting a prolonged economic malaise.

This article will briefly examine some of the more recent key tax measures embraced by other countries with an attempt to map some of the initiatives of selected countries to the main challenges facing our nation. Perhaps we can gain some insights as to which levers of economic measures the government can pull to speed up our slowing economic train.

Saving jobs and re-skilling

Singapore recently introduced a “job credit” scheme that seeks to preserve jobs as much as possible in the downturn. The government will provide every employer with a cash grant to reduce their cost of employing Singaporean workers. Yes, it will cost the government money – about S$4.5bil.

This grant scheme is a temporary measure to help companies through the economic downturn and the government has chosen this path over the granting of corporate tax rebates. The thinking is that businesses should not cut jobs to save costs but reduce costs to save jobs. A cash top-up for low-income workers has also been introduced by the Singapore government.

To encourage re-skilling, measures have been taken to step up training across all levels of the workforce in Singapore by doubling the number of courses run by certain government institutions and increasing course subsidies.

In Malaysia, tax incentives could be extended to encourage the employment of retrenched workers in general, say, by way of double deduction on their salaries, for a certain time period or on the cost of retraining of workers. Germany introduced such a measure for certain sectors of employment.

Enhancing cashflow

During a recession, businesses are likely to make losses. Britain, which has carry-back of tax losses, has enhanced this facility by increasing the number of carry-back years but with a cap on the quantum of carry-back.

Some may say, a penny not paid in taxes, is a penny saved. A perennial favourite and easiest to implement (but at a cost to government coffers) is the reduction of taxes. A myriad of measures have been taken by other countries. Not only has the corporate tax rate in Singapore been reduced, a one-off income-tax rebate has also been introduced for resident individuals in the island state.

Similar tax reduction initiatives have been introduced in other countries.

Britain has deferred the initially planned increase in corporate tax rate while Germany has reduced its income tax rate. To improve the cashflow of corporations, acceleration of allowances is also a popular tax measure.

The reduction in the corporate tax rate may provide a further incentive for both local and foreign businesses to strengthen their operations and make strategic investments for the future.

An interesting observation that has emerged in this crisis is a “partnership” between the government and private businesses. In Britain, the tax authorities have allowed businesses in temporary financial difficulties to pay their tax bills on a timetable they can afford. This leniency is also seen in Singapore where taxpayers who have lost their jobs are allowed to re-work their tax instalment plans.

It is encouraging to observe that the Malaysian tax authorities are also looking to assist businessmen facing financial burden by allowing staggered income tax payments. One would hope this facility is extended to other taxes such as indirect taxes.

Positioning for the future

The Singapore government has simplified its tax framework, making it easier for companies to restructure and rationalise. This can be construed as a strategic tax measure for the longer term to strengthen businesses.

Each country will have its own strengths and industries which it wants to promote, maintain or enhance. This can be done through tax incentives.

For example, Australia is encouraging businesses to undertake research and development (R&D) activities and to innovate by giving tax incentives for their chosen areas of focus.

Countries, like companies, hope to be able to maintain superior performances once the clouds of crisis blow over, and as such need to build on their fundamentals now and for the future.

What can we surmise from these brief observations?

Ensuring employment and re-employment of the rakyat would be one of the more important areas of our government’s imperatives. Besides giving grants to businesses, giving tax incentives, say, by way of enhanced deductions, can serve as impetus for companies to keep in check the unemployment levels.

Enhancing cashflow and investments could be achieved through a reduction in tax rates, and introduction of carry-back of tax losses, as some countries have done. To lessen the tax burden, a more flexible approach by the tax authorities towards tax payment is necessary.

Lastly, even during tough economic times, certain countries still encourage businesses to innovate and invest for the future. The role of the government in assisting tax payers is key to ensuring businesses remain resilient in this storm and emerge stronger. The demand of having to manage government finances while promoting economic activity is not an easy task, and will require a fine balancing act. The announcement tomorrow carries much hope for all.

● Peter Wee is executive director, PricewaterhouseCoopers Taxation Services Sdn Bhd.

Note: A PwC seminar, Managing Taxes in Challenging Times, will cover highlights of tomorrow’s mini budget. It will be held on Thursday in Kuala Lumpur and on Friday in Johor Baru and Penang.

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