by KISHENJEET DHILLON / pic by MUHD AMIN NAHARUL

IT WOULD seem that while a lot has been said regarding Malaysia’s fiscal discipline and how measures have been undertaken to curb unnecessary spending, the reality seems very different.

The government of the day has announced numerous packages to help not only alleviate the financial burden that is currently facing the bottom 40% group but also to help spur the economy.

The recognition by the Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz (picture) that Malaysia is similarly facing stagflation along with the rest of the world is indeed welcomed as it highlights the need to continue discussing how best the economy can be stimulated in light of increasing inflation. 

We have also seen the Federal Reserve in the US announce a surprise hike in interest rates of about 50bps, a move not seen in over two decades.

Given the inflationary pressures and sluggish economic growth, Malaysia’s position has seemed to be one to continue to financially support its populace through various means. 

With record high prices across the board, from fuel to wheat, primarily arising from the Ukraine-Russia conflict, one can only imagine how Malaysia, a highly subsidised economy, can continue along this path to fund the lifestyle of its population.

Time and again, myself and other commentators have rightfully pointed out that we need a rethink of our tax system. This is something that has been recognized by many quarters. 

Recently, economists and certain ex-government leaders have been clamoring for the government to seriously consider the re-implementation of the Goods and Services Tax (GST).

I had the esteemed privilege of working on the first round of implementation and am convinced that with proper operational procedures and better cash management on the part of the tax administrator, the system would be a great boost to Malaysia’s capability to face the current economic headwinds.

However, the mere re–implementation of the GST system is not sufficient. Any tax reform that is required to be undertaken within the country must take the shape of a comprehensive rethink of what the tax system is meant to accomplish. 

Amidst the backdrop of a changing global tax regime, old style low tax incentives might no longer be possible. Malaysia has even had to remove its long-standing exemption on foreign source income due to external pressures from the European Union, as a responsive measure to being included in the European Union’s grey list.

So, the question is simple — what can be done to improve things in Malaysia? I offer three holistic solutions as follows:

Reorienting the tax system to capture the untaxed

Few years ago, I covered the concept of taxing proceeds from social media. I believe it is time for the Malaysian government to consider some form of tax that is applicable to individuals or personalities who are profiting of social media platforms and perhaps under declaring their income.

For some youths and even seasoned industry veterans, platforms such as Instagram, TikTok and Twitch have become viable ways to earn a living. 

The catch for the government is that, much of these proceeds remain untaxed. Regular payments, subject to the typical rules under the Badges of Trade, should be considered and guidance should be issued to allow authorities to examine the income generation from social media platforms.

However, practical considerations such as whether the income is indeed derived from Malaysia remain valid as well as a reasonable threshold to safeguard early–stage entrepreneurs. 

As such, policy setters should consider things like geolocation of posting, frequency of payments received, the regularity of companies engaging the services of those on social media and their location as some points to ensure that the “value” that is being generated from the un-taxed market is captured from a tax perspective.

Focusing more on creating a robust transfer pricing regime

Coupled with any possible re-implementation of the GST system, tax policymakers may consider relooking at transfer pricing as a means for growing revenue. 

The Malaysian tax authorities have been slowly advancing the system towards maturity. However, there remains some doubt as to the circumstances in which taxpayers are required to prepare compliance related documentation and to what extent a transfer pricing analysis is required to be performed for each transaction. 

As such, it is incumbent on the authorities to consider crafting a robust transfer pricing regime for taxpayers to comply with and setting proper rules for yearly compliance without room for doubt. 

This will encourage taxpayers to take greater steps to comply with prevailing transfer pricing provisions. Amendments to transfer pricing practices and yearly disclosures will create greater transparency and drive higher revenue generation on the part of the revenue authority.

Streamlining incentives to match economic needs

Currently, Malaysia’s list of incentives remains hard to comply with. Authorities have often provided a long laundry list of requirements and even so, approvals are hard to come by or require much persuasion on the part of investors or local businesses. 

The reasons provided are often simple, commitments have been made at the global level to remove harmful tax practices so incentives must be airtight and provide a real, tangible effect to the economy.

Under the Frequently Asked Questions regarding the implementation of Pillar 1 and Pillar 2 released in October 2021, it specifically notes that while the global minimum tax would help put an end to tax havens and wasteful incentives, it will mean that developing countries can offer incentives that attract genuine, substantive foreign direct investment. 

As such, the Two-Pillar solution and commitments to the BEPS (base erosion and profit shifting) Inclusive Framework should not be used as a “catch-all” reason to reduce the usage of tax incentives. Rather, tax policy setters should show greater creativity in designing robust and relevant tax incentives to attract high value investments to the country.

A low-hanging fruit in my view is to work to turn Malaysia into an intangible asset development hub.

Given the favorable currency rates and high availability of talent, Malaysia seems ripe to be a centre of excellence in digital operations and would ideally be the next step in what was our shared services journey. 

Turning Malaysia into a digital hub for the region would be sensible. By offering effective incentives, for example commitments to transfer technology and re-train local staff in digital skills, coupled with a lower tax rate and low start-up capital requirements, we can move beyond restrictive requirements and encourage greater flexibility in attracting foreign direct investments in line with the real vision of the Two-Pillar solution. 

The above suggestions are merely made on the macro level. Of course, these are not guaranteed to create positive results overnight. But we have to do more to ensure that the country we so greatly love is able to continue to pay the bills. 

The spending of today should not burden the next generation. As we approach the end (hopefully) of the negative impacts of the Covid-19 pandemic, I would encourage tax policy setters to take a step back and see the entire forest, evaluate its health, and decide what is needed, not what is popular. 

I am certain that this approach will lead us to a better tomorrow.

Kishenjeet Dhillon is a tax-transfer pricing specialist and a part time researcher.

The opinions reflected above are made in a personal capacity and are not endorsed by any organization or association.