Budget 2014: Quantum leaps in enhancements to current tax incentives necessary

by **Cals** Tue 01 Oct 2013, 00:55

Published: Monday September 30, 2013 MYT 12:00:00 AM
Updated: Monday September 30, 2013 MYT 7:14:31 AM
Budget 2014: Quantum leaps in enhancements to current tax incentives necessary

MALAYSIA has been under the spotlight for some unflattering reasons of late.
“The country has no money la” is what you’ll probably hear the man on the street utter when you decide to strike a conversation on the country’s current state of affairs.
So what can the Government do about it? Cost cutting may come to mind, but remember that US President Barack Obama once said that cutting the deficit by gutting our investments in innovation and education is like making an overloaded airplane lighter by removing its engine. It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact.
Malaysians from every walk of life will gather in front of their televisions, radios and media devices in what is probably the most anticipated budget in recent times.
Except this time, Budget 2014 will be keenly followed by more than just Malaysians as Prime Minister Datuk Seri Najib Tun Razak does a balancing act between political and economic expediency.

The balancing act
All this excitement started with the downgrade of the country’s credit outlook from “stable” to “negative” by Fitch Ratings and Bank Negara’s downward revision of the gross domestic product forecast.
Analysts say that the recent reduction of the fuel subsidy is a positive step.
However, more is expected of the Government to address the fiscal deficit situation such as the introduction of the Goods and Services Tax and fiscal tightening measures like shelving low-priority and unproductive project spending.
Reforming the procurement system, and stemming of wastage and inefficiencies through increase in productivity have been suggested as possible solutions.
Coupled with the setting up of Agensi Inovasi Malaysia by the Government as part of a transformational journey to boost innovation in Malaysia, productivity and innovation will be the key drivers of the economy–necessary to attain sustainable growth and to support the country’s aspirations of becoming a high-income nation.
Struggling SMEs
There are a slew of tax incentives on offer which can help reduce a company’s effective tax rate to some degree.
The table sets out and broadly explains some of the tax incentives that are currently available in Malaysia.
Most of these tax incentives are aimed at attracting only well-established companies with areas of focus in high technology, biotechnology and information and communications technology, just to name a few.
As a large number of existing incentives are focused on large investments (which tend to come from multi-nationals), many small and medium enterprises (SMEs) may find it hard to qualify.
For example, most companies which have been awarded the Pioneer Status struggle or even fail to meet the value added benchmark or the managerial, technical and supervisory index which are a prerequisite for them to enjoy the concessionary tax rate.
There is very little available for the SMEs. We have seen some success stories where home-grown SMEs have made it big.
However, most SMEs struggle to grow due to lack of support and funds for them to move up the value chain.
SMEs form the backbone of the Malaysian economy and yet the tax incentives currently available are beyond their reach.
The net should be cast wider to include this group.

Enhancements
Quantum leaps in enhancements to the current tax incentives, both quantitative and qualitative are necessary if companies are to embrace productivity and innovation.
The current slew of tax incentives have been around for as long as I can remember and very little has changed.
In this day and age, where everything is as simple as a swipe of a tablet screen so should be the enhancements to our tax incentives.
In my view, the enhancements to the tax incentives should be structured yet simple and should appeal to the masses.
The tax payer should not be put through a lot of hassle to enjoy what should be a straight forward process so long as the claims are made with proper supporting documentation and are bona fide.
The ease at which tax incentives are claimable should act as an incentive in itself.
What I would like see introduced in Budget 2014?
The super deductions of 300% with a gradual increase to 400% on expenses incurred on certain categories of activities that promote productivity and innovation – for example, R&D, training, investments in automation and information technology equipment, acquisition of Intellectual Property rights and registration of patents, trademarks and designs.
Cash-constrained companies should also be given the option to convert their super deductions to a non-taxable cash pay-out.
From a qualitative perspective, guidelines should not be convoluted.
Take training – an accredited training provider should only be required for in-house training, but external training should not be subject to any restrictions.
To provide support for SMEs with cash flow needs, the Government should step in and provide a dollar-for-dollar matching cash grant to businesses that invest in specified productivity and innovation initiatives.
The Government should also consider providing corporate income tax rebates to all companies that commit a certain level of investment in productivity and innovation initiatives.
This would provide an impetus for companies and especially SMEs to aim for profitable growth as only businesses that are in a tax paying position will ultimately benefit from the tax rebate.
Championing productivity and innovation will not be possible if companies are also grappling with talent issues. The concept of flexible working arrangements (FWAs) is relatively new in Malaysia.
To encourage diversity and to encourage more women in the workforce, the Government should consider providing a one-time grant for companies to defray the developmental costs of implementing FWAs.
In addition, cash incentives should be introduced to motivate employers to support more employees on FWAs.

Action speaks louder than words
Ram Charan, the author of Profitable Growth is Everyone’s Business and What the CEO Wants You To Know commented that cost-cutting and productivity improvements alone will not be enough to generate the kind of performance that will satisfy stakeholders.
Eventually, lack of growth makes a business uncompetitive in the eyes of customers since without sustained revenue growth the ability to innovate declines and a company goes into a death spiral.
Whether we like it or not, reduction in government subsidies and broadening the tax base are inevitable to expedite fiscal reforms. The proposed initiatives, if introduced, should be considered an investment in the future of Malaysia. It would also help cushion the impact of the measures coming our way which are necessary to address the current deficit.

Benedict Francis is the executive director of PwC Taxation Services Sdn Bhd