By SEAH SIEW YUN To keep pace with the increasing demands and complexities in the globalisation arena, business laws are being reviewed and tax systems reformed.

FROM the old way of allowing the deduction of revenue expenses while capital expenses are added to tax, investors are now looking at a more sensible, tax-friendly system.

Under the conventional way of taxing a business, there must be an intimate connection or nexus between the expenditure incurred and the gross income earned to justify a tax claim.

For the tax authorities in Malaysia, it is just not enough for the expenses to be incurred for the purpose of the business. To successfully make a claim for expenditure, it must also be convincingly established that the expenditure was incurred in the production of income.

The Malaysian law on expenditure deduction has been in place for a long time. The original law was a colonial legacy enshrined in Section 14 of the Income Tax Ordinance, 1947 and later replicated in Section 33 of the Income Tax Act 1967 (as amended). That means it has been in the books for almost 60 years.

While business ventures have shifted from being local to global, encountering issues like cross border transactions and tax risk management, our deduction provisions have not been changed to suit the changes.

Why are only income-producing expenses deductible?

Seah Siew Yun

It is the view of tax pundits that our current deduction provision is unduly restrictive and not keeping up with the times. Contemporary business environment demands more aggressive approaches in allowing tax deductions.

For example, expenses in complying with corporate laws such as secretarial and filing fees, tax compliance and the related expenses are not allowed. Professional fees paid to tax consultants are deemed not incurred in the production of gross income. Businessmen, however, will tell you that these are not fancy expenses but expenses incurred in the course of carrying on a business.

In a litigation-conscious business environment, complex business rules/regulations, and financing options require the support of professionals like lawyers, accountants and financial advisors to protect the corporation from being sued for one reason or another, or simply to comply with government regulations.

Tax laws would indeed be business friendly if such expenditure incurred in the course of carrying on a business, rather than expenditure incurred in the production of gross income, are allowed a tax deduction, in line for example, with more advanced countries like Britain and Australia.

Others are moving from the conventional way

In Britain, expenditure is allowed if it is incurred wholly and exclusively for the purpose of the trade (in Malaysia, it must be for the production of gross income).

In Australia, deductions are given if the expenditure was incurred in gaining or producing the assessable income or incurred in carrying on a business to gain or produce the assessable income. In fact, the rules in Australia allow the taxpayer to decide whether the expenditure incurred is dictated by the business ends.

Tax reform should review the current restrictive approach to tax deduction, with regard to the commercial realities of doing business and the need to make Malaysia more competitive in the global arena for doing business. Something new, is what all are hoping for.

China makes 2007 an important year of tax reform where the new Unified Enterprise Income Tax (UEIT) law unifies the two existing sets of income tax laws applicable to foreign and domestic enterprises. Though the revamp does not bring much cross border effect to our tax laws, it shows many countries are adjusting and reforming their tax laws.

Japan, in its 2007 tax reform, allows relief on the acquisition of owner-occupied residential property where a loan deduction is available to individual taxpayers with annual taxable income of 30mil yen or less on loans taken for the purchase of property used for such purpose in 2007 or 2008. The deduction is given notwithstanding that it is not incurred in the production of income.

The Japan government has also made a commitment in promoting barrier-free housing. It provides tax breaks for those who renovate their homes for the purpose of reducing barriers such as widening walkways or corridors; fitting railings; and levelling floors.

Once deemed capital in nature, these expenses are now allowed a deduction. The modern tax concept should look at whether expenditure is based on needs rather than conventionally defining it as revenue or capital expenditure.

To support business at initial start-up stage

In a competitive environment, it pays to carefully study the business opportunities available before one starts a business.

Such study would include arranging for business space or office, market research, networking for potential clients, getting the right outfit, getting professional assistance and so on.

All these will cost a bundle but are unfortunately deemed as initial costs or capital under our current tax laws.

Deduction on “start-up costs” must be fairly given to a business that has just commenced. New ventures have to incur much capital expenditure whilst they are not yet in the position to produce income.

This deduction will be akin to capital allowances that are given for qualifying capital expenditure incurred on plant and machinery for use in the business.

The idea of allowing expenditure incurred before the commencement of a business is nothing new as advanced countries have deemed such expenses as necessary and relevant in the context of making future profits.

Currently, our laws provide several categories of expenditure considered capital or disallowable under the existing laws but allow deductions under various rules.

For example, deduction of pre-commencement business training expenses, deduction for the cost of acquiring proprietary rights, and restructuring of equity capital. However, these deductions are attached to restrictive conditions.

In this context, the Government should consider allowing a deduction for “small business start-up costs” by way of a fixed sum deduction or amortising such expenses over a period. Enterprises with small profits can enjoy reduced tax rate at a lower flat rate. This should provide the necessary incentive and impetus for the starting of a small business.

Our wish to see new tax changes

The objective of any tax reform should be making our economy more competitive. We wish to see more changes and revamps in tax laws that can position us to better compete with countries that are ahead with attractive tax systems.