MALAYSIA offers a variety of incentives, including incentives that are granted through income relief or as allowances.
There are specific criteria and rules for dealing with tax incentives.
For example, if incentives are granted through allowances, unused allowances can be carried forward indefinitely to use for future statutory income, with the exception of certain incentives such as reinvestment and investment allowances for approved service projects, which are subject to a seven year limit.
Tax incentives have historically been useful to some extent in attracting FDI to Malaysia.
As the country continues to develop and focus on certain high quality sectors, new incentives that are formulated are usually tailored to those specific industries that match Malaysia’s investment aspirations.
As a result of further examination and discussion at the Organization for Economic Co-operation and Development (OECD) level on the system of tax breaks and incentives and the abuses associated with it, Malaysia has taken some first steps and changed the legislation regarding tax incentives:
> Remove the ring fence functions
> Exclude intellectual property income from incentives and
> Define the essential requirements for the activities.
Factors Attracting Foreign Direct Investment
Based on studies conducted on the main factors influencing location decisions for foreign investment, the main factors are market size and real income, skill level in hospitality, availability of infrastructure and other resources that enable efficient specialization of production as well as the trade policy and political and macroeconomic stability of the host country.
The control of public finances is also identified as a key element that helps to stabilize tax laws and thus increase the security of tax treatment and increase the stability and risk in the economy as a whole.
In addition, the location of FDI can be influenced by various government incentives to attract multinational companies, such as: B. reduced corporate tax rates, financial incentives such as grants and preferential loans for multinational companies, and other incentives such as market preferences and monopoly rights.
However, the survey analysis shows that host country taxation and international investment incentives in general only play a limited role in determining the international pattern of FDI.
Transparency, simplicity, stability and security in the application of the tax law and in tax administration are often categorized by investors as special tax incentives. Many overseas investors in Malaysia are frustrated when they receive tax incentives from the Malaysian Investment Development Authority (Mida) but face challenges with the tax authorities regarding the incentives claimed.
For the government, the associated costs of tax incentives can be broken down into four main categories:
1. Surrender of income
Losses in tax revenue from tax incentives result mainly from the lost revenue that would otherwise have been obtained from the activities carried out and the loss of income from investors and activities that wrongly claim incentives (abuse by taxpayers) or income from affiliated taxable companies to qualified Businesses are relocating for cheap tax treatments.
2. Cost of resource allocation:
When tax incentives distort investment decisions between sectors or activities rather than correcting market failures.
3. Enforcement and compliance costs
These costs increase with the complexity of the tax system and the system of tax incentives (in terms of qualification and reporting requirements).
There are growing concerns that tax laws have not kept pace with global business integration and the rise of the digital economy. The G20 urged the OECD to review and recommend specific action plans to address concerns about potential international tax avoidance mechanisms used by multinational corporations to reduce their tax burdens.
This led to the OECD’s Action Plan on Ground Erosion and Profit Shifting (BEPS), which set out 15 specific action plans setting out the recommendations and measures that can be implemented to prevent inappropriate profit shifting to low-tax or non-tax areas.
Key initiatives of the BEPS project include addressing the tax challenges of the digital economy, hybrid instruments, tax breaks and incentive schemes, potential contract abuse, artificially avoiding permanent establishment status, and a variety of transfer pricing considerations.
In terms of tax incentives, the BEPS Action Plan focuses on the use of preferential decisions and grants, and specifically on whether the tax benefits correlate with substance requirements.
As it is, Malaysia’s tax incentives are generally tied to substantial substance requirements in Malaysia
Although there will be some variation depending on the incentive, in general a company must meet the following substance requirements:
> Have a sufficient number of full-time employees in Malaysia to carry out the qualifying job; and
> You must have a reasonable amount of annual operating expenses in Malaysia to carry out the Skilled Activity or make a reasonable investment in property, plant and equipment in Malaysia to carry out the Skilled Activity.
If a new qualifying activity is approved after October 16, 2017, that company must meet the requirements as of December 31, 2008 in relation to the new activity.
Companies eligible for an incentive after October 16, 2017 must meet the Essential Activity Requirements by December 31, 2008.
The government is currently conducting a comprehensive study of the existing structure of tax incentives in order to create a competitive, transparent and more attractive framework for tax incentives.
Harvindar Singh is a tax partner at SCS Global Consulting (M) Sdn Bhd. The views expressed here are those of the author.