THE Finance Bill 2021 that was tabled for the first reading in Parliament on Tuesday has far-reaching implications.
Besides clarifying, the bill reveals a burdensome increase in taxes not only for large companies (classified as prosperous without regard to the shareholder base), but also impacts ordinary residents of the country.
Firstly, the tax on foreign-sourced income is stated as 3% on gross, and is effective from January 1 to June 30 next year.
At first, the reaction is: “Oh okay, it is only for six months.” But on further reflection, you see the horror, the abandonment of the territorial scope of taxation to one that includes both territorial- and remittance-based taxation.
That is almost a world income scope taxation basis, with remittance of income into Malaysia being necessary. It’s mostly countries that provide a comprehensive set of social welfare benefits that tax residents on a world income scope.
This benefit of exemption on foreign-sourced income has been there since 2004. To chop that critical tax provision without any warning is, perhaps, indicative of a desperate government.
We have long tried to compete with Singapore and Hong Kong by keeping our taxes close, and along the same footing, as these Asian Tigers. However, we will now have to dismantle any pretence and yield that we can’t compete with Singapore and Hong Kong.
In the news is also the buoyancy of the Indonesia and Vietnam economies. Where Malaysia is heading is no more than a guess.
Secondly, the 3% tax on gross is a humble start to not spook the nation. Section 3 of the Income Tax Act 1967 gives the scope of taxation to be both the income derived or accrued in Malaysia for each year of assessment, as well as income received in Malaysia from outside Malaysia.
So, after June 30, the 3% tax falls off and the current Section 3 takes over.
Next, under Para 28, Schedule 6 of the Income Tax Act, exempting foreign-sourced income has been amended to allow exemption only to non-residents. Residents who have income received from overseas will now have to pay tax on it.
Penny-wise, pound-foolish?
With the exemption since 2004 gone, residents now face the hassle of filing and claiming foreign tax credit with all the necessary documentation. Is it a case of penny-wise, pound-foolish? Many experts think that with double tax agreements, there might only be a small increase in revenue.
Malaysia has double tax treaty arrangements with many countries (76 at the last count). So, while Parliament refuses to discuss the Pandora Papers involving prominent Malaysians, ordinary people must now report on their meagre adventures in foreign investments, not forgetting all major funds invested heavily overseas.
My view is that it is not too late for our MPs to reject the introduction of this new tax. What would be the consequences? Ordinary people will join the corrupt elites and keep their money secret overseas. And, it is hoped, not with migration in view.
Meanwhile, there are numerous other tax increases. Contract notes have a 50% increase in stamp duty with no limit on the amount.
Non-individual unit holders receiving interest from retail money-market funds will now pay tax at 24%.
Agents and distributors will now have a 2% withholding tax imposed on them if they receive more than RM100,000 in payments.
There will be great interest in Budget 2022, as it seems to cut across the whole fabric of Malaysian taxation.
The 33% increase in tax rate for all companies with chargeable income above RM100 million may impact less than 300 companies, but this will lead to an even more unfavourable outlook on Malaysia’s economic management. The word “austerity drive” never came up. Instead, we had the largest budget in history. – The Vibes, November 12, 2021
KP Bose Dasan is a chartered financial consultant with Taxvantage Management. He holds a Bachelor of Economics (Hons) from Universiti Malaya and a Master of Business Administration from Cranfield University
