Effective enforcement vital as govt expects higher tax collection

Budget 2022 introduces tax on foreign-sourced income and a one-off windfall tax

by S BIRRUNTHA & ANIS HAZIM / graphic by MZUKRI MOHAMAD

THE government should look at “better taxes” and more effective enforcement, as opposed to focusing on having “more taxes” to support the economy during the post-pandemic recovery, said Centre for Market Education CEO Dr Carmelo Ferlito.

“In my opinion, the right way to go ahead is to not work on more and more taxes, but on better taxes and better enforcement.

“The government will need a more radical tax reform and, to keep Malaysia competitive, it cannot be based on more taxes,” he told The Malaysian Reserve yesterday.

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz announced last Friday that foreign-sourced income received in Malaysia will be taxed effective Jan 1, 2022.

Additionally, low-value goods (below RM500) imported from abroad that are sold online and brought into the country through airmail will be subjected to sales tax.

A service tax will be imposed on goods delivery services provided by delivery service providers including e-commerce platforms.

All companies vying for government contracts must obtain a Tax Compliance Certificate issued by the Inland Revenue Board Malaysia beginning Jan 1, 2023.

The government also announced a one-off additional company income tax under Budget 2022, whereby earnings above the RM100 million mark will be taxed at a rate of 33%, instead of 24% for the first RM100 million. The one-off tax, named “Cukai Makmur” (Prosperity Tax) is expected to be imposed in assessment year 2022.

Commenting on the windfall tax, Ferlito said he is not totally opposed to it but it needs to be done at certain important conditions to be effective.

“First of all, it has to be clear the temporary nature of the measure. The government needs to clearly commit to the temporary nature of the measure.”

Ferlito added that the government should look at the utilisation of funds collected through the windfall tax, as it is extremely crucial for the economic recovery moving forward.

“In particular, I would like to see those funds used for strengthening the healthcare system,” he noted.

Under Budget 2022, the government also plans to legislate a Fiscal Responsibility Act to improve accountability and transparency in the country’s fiscal management as a way to ensure fiscal sustainability and to support macroeconomics stability. Tengku Zafrul noted that the bill is expected to be ready next year.

Deloitte Malaysia tax leader Sim Kwang Gek highlighted that Budget 2022 expects an increase in tax collection by 5.9% on the back of a better economic outlook.

Corporate tax collection is expected to increase by 8.1% to RM65.5 billion, which is higher than pre-pandemic numbers in 2019. Sim noted that this looks optimistic, but remains challenging if businesses are still trying to bounce back from Covid-19.

“The introduction of the one-off tax on companies that make super profits and taxation on foreign-sourced income may provide some cushion, but I also expect tax audits to be intensified to meet the collection target.

“From a tax reform perspective, the taxation on foreign-sourced income is a significant change and it will increase the tax bill of companies with overseas operations,” he said in a statement.

Sim stressed that more details should be provided in the Finance Bill in this regard and he also hopes that there are special circumstances available for companies to continue to enjoy exemption on such income.

Meanwhile, KPMG Malaysia head of tax Tai Lai Kok said the one-off tax on large corporate taxpayers for the year of assessment 2022 should not result in a significant change in mood for investors and businesses alike.

“That said, it is absolutely critical that the government keeps to its word that it is really a ‘one-off tax’ during this time of need,” Tai said.

While the first RM100 million will still be taxed at the standard 24% tax rate, any excess will be taxed at a rate of 33%.

“The very high threshold set for this tax to apply — ie RM100 million in chargeable income — is unlikely to affect most Malaysian companies and thus, will be applauded by the Malaysian public in general.”

Meanwhile, Federation of Malaysian Manufacturers (FMM) president Tan Sri Soh Thian Lai believes that imposing the prosperity tax on companies that made extraordinary profits during the pandemic period will send a wrong signal to investors both local and foreign.

“While FMM welcomes the announcement on the special voluntary disclosure programme for indirect taxes and the tax deduction for expenses incurred for booster vaccination both for individuals and companies, we are disappointed with the introduction of the one-off Prosperity Tax on companies that generated high income,” he said in a post-budget reaction.

FMM is also requesting for a moratorium on an additional excise tax on premix beverage. “Further clarification is also needed with regard to the products in scope for the taxation,” Soh noted.

PwC Malaysia tax leader Jagdev Singh observed that given the challenging circumstances, Budget 2022 turns to measures other than Goods and Services Tax and Capital Gains Tax to expand the tax base.

In terms of increasing compliance, Jagdev noted that tax amnesty programme had been introduced in previous budgets, with the last significant one revealed in Budget 2019 for direct taxes.

“To ensure this amnesty programme achieves the desired outcome, it will be good to see the government complement this with active measures to identify potential ‘highrisk’ taxpayers and to encourage them to come forward to self-declare.”