By NICHOLAS CRIST

Whatever the contents, Budget 2008 will be delivered against the backdrop of the golden jubilee of independence. We should therefore be looking forward to a budget that complements a nation that is well into adulthood

Corporate tax

Tax cuts always catch the eye. In this regard, the Prime Minister indicated in his Budget 2007 speech that the corporate tax rate would be cut from 27% to 26% for Year of Assessment 2008.

This is in contrast to Singapore, whose corporate tax rate has recently been reduced to 18% and Hong Kong, which has a corporate tax rate of 17.5%. Therefore, on a regional basis, the Malaysian tax rate may seem relatively high.

However, in comparing the above rates, it is important to factor in the tax savings attributable to the various tax incentives offered under Malaysian law.

Consequently, companies, particularly those in the manufacturing sector, often have an effective tax rate that is significantly below 20%.

Nicholas Crist

In view of this, the Prime Minister in his Budget proposals, may choose to continue the trend of giving target specific fiscal stimuli.

In this respect, Budget 2008 could provide an opportunity to enhance Malaysia’s desire to be a regional service hub by expanding the scope of tax incentives available to the services sector.

Budget 2006 saw the introduction of a limited form of group relief for tax losses. However, there are a number of “carve-outs.”

In particular, companies enjoying certain tax incentives, including reinvestment allowance, are ineligible for group relief.

Furthermore, the amount of tax losses that can be surrendered is limited to 50%.

These requirements limit the effectiveness of group relief. Budget 2008 would provide an opportunity to re-evaluate these restrictions and to make group relief more widely available.

The removal of restrictions would be in line with the Government’s desire to simplify the tax system.

Reducing the cost of doing business

With regard to tax agent’s fees, there has been a concession granted by the Inland Revenue Board that a tax deduction is allowed for such expenses.

However, effective from 2006, tax agent fees and company secretarial fees are not allowed a tax deduction.

This has generated considerable dissatisfaction.

With the move to self-assessment and the yearly changes to the tax legislation, businesses (and taxpayers in general) are becoming more reliant on tax agents.

Similarly, with the increase in corporate governance, there is a greater need for company secretarial services. Hence, the decision to revoke the existing deduction concession seems to be unaligned with current business needs.

A commercial building amid houses in Puncak Setiawangsa, Kuala Lumpur. As Malaysia becomes more service-industry orientated, perhaps, it is time to consider extending the ambit of the class of buildings on which capital allowances can be claimed.

It is hoped that, in the context of reducing the cost of doing business, tax deductions for tax agent fees and company secretarial fees can be given a statutory footing.

Fiscal measures to reduce the cost of doing business need to be balanced against tax avoidance.

In line with this, Budget 2006 contained a provision to deny relief for unutilised tax losses and capital allowances unless the shareholders remain substantially the same.

On the face of it, this could be a draconian provision although it is tempered by the Finance Minister being able, in special circumstances, to grant an exemption.

In common with Malaysia, a number of countries have provisions that deny relief for tax losses and capital allowances where there is a change in ownership.

However, such tests not infrequently have a saving provision such that losses and capital allowances remain available, provided the same business is continued.

It is suggested that an amendment to Malaysia’s tax laws to introduce the same business test as a saving provision would be a welcome move.

This would give a greater degree of certainty to the business community and would alleviate the time that the Finance Ministry would otherwise have to spend processing requests for exemptions.

The property sector

Real property gains tax was effectively suspended from April 2007 and this has undoubtedly benefited the property sector.

Following on from this move, it is perhaps timely to review the rates of stamp duty.

Stamp duty can be as high as 3% on the purchase of land (and other assets) where the consideration exceeds RM500,000.

Hence, for many land transactions, stamp duty is a significant additional cost.

At present, only “industrial buildings” qualify for capital allowances. Such buildings are traditionally linked to manufacturing activities.

However, as the Malaysian economy develops, there is an increase in the number of purpose-built commercial properties that do not fall within the qualifying category of “industrial building”.

Some jurisdictions, for example Hong Kong, have taken a more liberal approach and have extended capital allowances to “commercial buildings”.

As Malaysia becomes more service industry orientated, perhaps, it is time to consider extending the ambit of the class of buildings on which capital allowances can be claimed.

The rakyat

Individuals may hope to celebrate the nation’s golden jubilee with the announcement of tax cuts.

Given the drop in the rate of corporate tax, there is now a disparity between this rate (27%) and the top rate of income tax for individuals (28%).

It is generally recognised that disparities between corporate and individual tax rates can have an undue influence on business decisions.

With the expected cut in corporate tax to 26% announced last year, it is respectively submitted that it is now time to review tax rates as well as the tax bands for individuals.

The handing down of Budget 2008 will be eagerly awaited. No doubt the budget proposals will continue to strengthen the nation as Malaysia moves forward from her golden jubilee.