2010 MALAYSIAN BUDGET HIGHLIGHTS

The Budget proposals for 2010 were tabled in Parliament on 23 October 2009 by the Prime
Minister, with a clear emphasis that the Budget would form “the foundation for the
development of the new economic model” to steer Malaysia to becoming a more advanced
economy premised on “innovation, creativity and high-value added activities”. Several
measures have already been introduced in this vein, such as the 1Malaysia concept, National
Key Result Areas (NKRAs), Key Performance Indicators for the civil service, the
liberalisation of the services sector, etc. The Budget strategies focus on the following:

Driving the Nation towards a High-Income Economy;

Ensuring Holistic and Sustainable Development, and

Focusing on the Well-being of the Rakyat

The Government hopes to achieve the above based on an allocation of RM191.5 billion, of
which 72.2% is intended for operating expenditure and 27.8% for development expenditure.
Federal Government revenues are estimated to decline in 2010 to RM148.4 billion from
RM162.1 billion in 2009, and the deficit of 7.4% of Gross Domestic Product (GDP) in 2009
is expected to improve to 5.6% in 2010. The focus on reducing the budget deficit is clearly a
strategy in the right direction, but poses a significant challenge for the Government,
particularly with the expected reduction in revenue in 2010. The allocation for operating
expenditure will have to be closely monitored to ensure that money is well-spent. To this
end, taxpayers would expect transparency, efficiency and productivity on the part of the
Government. The continued focus on the private sector and foreign investment to spearhead
growth is a move that is necessary for progression to an advanced economy.

As expected, there were no significant corporate tax measures, but the much discussed Goods
and Services Tax (GST) remains an uncertainty pending the Government’s review of the
social impact of the implementation of GST. Clearly, the introduction of GST would impose
some hardship on a large segment of the ‘rakyat’ who are not currently taxpayers in view of
their income brackets. On the flip side however, a well-thought out GST which provides the
appropriate exemptions and zero-rated supplies and services, would be the answer to the
Government’s much needed source of revenue.

The Real Property Gains Tax (RPGT) proposals concerning a 5% flat rate RPGT have caused
some confusion as the proposed changes to the RPGT Act, 1976 as provided in Finance
(No.2) Bill 2009 suggest the previous scale rates of RPGT would continue to apply with the
lowest rate now being 5%. The changes to the Petroleum Income Tax Act, 1967 (PITA)
streamlines the basis of assessment of tax for the upstream oil and gas sector with that under
the Income Tax Act, 1967 (ITA). On the personal tax front, the reduction in the personal tax
rates while small, is nonetheless welcomed. We set out below the tax highlights of the 2010
Budget.
Corporate Tax & Incentives

Health Tourism

The current incentive granting a 50% tax exemption on the statutory income of healthcare
service providers in respect of the value of increased exports will be increased to 100%
(subject to 70% of statutory income). This enhanced incentive will apply to the provision of
healthcare services to foreign clients for the years of assessment 2010 to 2014. Health
tourism is an area of growth which the Government is rightly seeking to expand and
capitalise on.

Small and Medium Enterprises (SMEs)

In the hope of encouraging innovation and developing a more advanced economy, a

deduction will be given to SMEs in respect of costs incurred in relation to the registration of
patents and trademarks in Malaysia. While this is welcomed, it is unfortunate that companies
which fall out of the prescribed definitions of SMEs who would arguably be in the forefront
of such developments will not get relief for such costs.

‘Green’ Incentives

Further to the launch of the Green Building Index (GBI) in May this year, incentives will
now be given to owners/buyers of buildings with GBI certificates. An owner of a building
who incurs capital expenditure to obtain a GBI certificate will be granted an allowance equal
to 100% of the capital expenditure incurred which may be offset against 100% of its statutory
income. Buyers of buildings and residential properties which have GBI certificates will be
entitled to stamp duty exemptions in respect of the additional costs incurred to obtain the
GBI certificate. It is unclear at this stage as to how the mechanics of this exemption will
operate, but this will presumably require the developers to indicate the additional costs
incurred to obtain the GBI certificates. These incentives will apply in relation to costs
incurred/buildings purchased between 24 October 2009 to 31 December 2014.

Incentives for Forest Plantations, Consolidation of the Management of Smallholdings and

Idle Land and Strategic Knowledge Intensive Activities

To ensure that companies currently entitled to the incentives in respect of the above activities
seek to utilise the incentives, a time-frame of up to 31 December 2011 has been imposed for
the submission of applications for these incentives

Islamic Financial Sector

The Islamic financial sector continues to enjoy incentives to further stimulate the growth of
this sector in line with the Malaysia International Islamic Financial Centre (MIFC) initiative.
To this end, the time frame for several of the existing incentives has been extended to 31
December 2015, including the stamp duty exemption on approved Islamic financial
instruments, the deduction for the costs of issuance of approved Islamic securities, the double
deduction for expenses incurred in promoting Malaysia as an MIFC, the deduction for pre-
commencement expenditure incurred in relation to the costs of establishing an Islamic stock-
broking firm, etc. The time-frame extension also applies to the repatriation of profits from
newly established overseas branches and subsidiaries of banking institutions and this
incentive will also be expanded to insurance and Takaful companies. Further, the current
exemption from tax on interest or discounts paid to individuals, unit trusts and closed-end
funds in respect of debentures approved by the SC, is also extended to profits from Islamic
securities approved by the SC.

The Budget proposals in relation to Islamic financing seek to encompass Labuan to some
extent. The tax treatment for Special Purpose Vehicles (SPVs) established under the
Companies Act, 1965 for the purpose of issuing approved Islamic securities has been
extended to SPVs established under the Offshore Companies Act, 1990 which elect to be
taxed under the ITA, effective from the year of assessment 2010. The tax treatment accorded
to such SPVs essentially involves these entities being construed as ‘see through’ entities for
tax purposes whereby the company establishing the SPV is taxed on the income of the SPV
and is entitled to a deduction for expenses incurred by the SPV. In a further move to
encourage the use of Labuan, the tax exemption currently granted on the profits from the
issuance of non-Ringgit sukuk approved by the SC will now be extended to non-Ringgit
sukuk approved by the Labuan Offshore Financial Services Authority (LOFSA) from the
year of assessment 2010. Additionally, the deduction for the costs of issuance of Islamic
securities approved by the SC will also be extended to such securities approved by LOFSA.

Personal Tax

Reduction in Tax Rate

The top rate of tax of 27% for individuals has been reduced to 26% for chargeable income in
excess of RM100,000. (A corresponding reduction in tax rates has also been announced for
co-operative societies)

Reliefs

Personal relief for individuals has been increased from RM8,000 to RM9,000 resulting in
a maximum tax saving of RM260 for taxpayers in the top bracket.

Relief will be granted for up to RM500 per year in respect of broadband subscription
fees for the years of assessment 2010 to 2012

An additional relief of RM1,000 will be granted in respect of any payment of a premium
for deferred annuity contracted on or after 1 January 2010, subject to a RM7,000 cap on
the deduction for the aggregate of the deferred annuity premium, EPF and life insurance
premiums.

Knowledge Workers in Iskandar Malaysia

Approved Malaysian and foreign ‘knowledge workers’ in Iskandar Malaysia (in Johor) will
be entitled to be taxed at a reduced tax rate of 15%. Such individuals will not therefore be
subject to the normal personal tax scale rates of taxation. Such ‘knowledge workers’ will be
required to work in qualifying sectors which are the drivers of Iskandar Malaysia, including
healthcare services, educational services, creative industries, financial advisory and
consulting services, green technology, biotechnology etc. It is interesting to note that the
proposed amendment to the Finance Bill to allow for the 15% tax rate does not refer to
Iskandar Malaysia only and instead refers to ‘specified areas’. It is therefore plausible that
the reduced tax rates may be extended to apply to knowledge workers in the other designated
‘corridors’, in the future.
Tax Administration

A few administration changes have been introduced, such as the amendment to Section 83 of
the ITA with regard to employers’ filing obligations in relation to Forms E and EA, thereby
removing the need for annual gazette orders in this regard, as well as the tightening up of
some penalty provisions.

Real Property Gains Tax (RPGT)

The RPGT exemption granted with effect from 1 April 2007 is over from 1 January 2010 and
a few changes have been proposed to the RPGT Act. As mentioned above, based on the
Finance (No.2) Bill 2009, the proposed changes to the RPGT Act, 1976 appear to result in a
harsher RPGT regime than we previously had. Previously, gains from the disposal of real
property by individuals were subject to scale rates depending on the period of ownership, and
after a 5 year ownership period, such gains were not taxable. The Bill indicates that the
existing scale rates will continue to apply and that disposals from the fifth year will now be
subject to RPGT at 5%. However, the Second Minister of Finance has since indicated that
the intention of the proposals is merely to introduce a 5% flat rate of RPGT regardless of the
period of ownership, and that this change will be enacted via a separate gazette order which
is expected to take effect from 1 January 2010. It is hoped that this important issue will be
clarified with some certainty in the next few days. Further, the collection mechanism for
RPGT will include the requirement for the acquirer to withhold and pay 2% of the sales
consideration to the IRB. There may well be instances where 2% of the sales consideration
may exceed the tax payable on the gain. In such situations, the time-frame within which the
IRB refunds the difference will obviously be of significance to taxpayers.

Additionally, it is noted that the proposed amendments to the RPGT Act provide that there
will no longer be any relief for interest costs in respect of borrowings used to finance the
acquisition of such investment properties. (Previously, such costs were allowed provided the
costs were not deductible for income tax purposes). However, the relief for losses arising
from the disposal of real property has been simplified and the exemptions for one principal
private residence, and transfers between spouses, etc. remain.

Effectively, the resurfacing of RPGT will only have a real impact on serious property
investors, but the changes (which require some clarification) are unlikely to discourage
investment in property, given that Malaysia’s property prices are amongst the most
competitive in the region. RPGT is therefore unlikely to dampen the recovery of the property
sector and will contribute a source of much needed revenue to the Government, albeit a small
amount.

Petroleum Income Tax

Changes have been proposed to the PITA to tax profits from the upstream oil and gas sector
on a self-assessment and current year basis, rather than on a preceding year basis. As a
result, players in this sector will experience some cash-flow difficulties in settling two years
taxes (i.e. for the financial years 2009 and 2010) in the year of assessment 2010. To alleviate
these difficulties, a five year instalment plan will be given for the settlement of taxes in
respect of the financial year 2009.
Indirect Tax

The only proposal with respect to indirect tax relates to the imposition of a service tax on
credit cards and charge cards effective from 1 January 2010. In a move that is unlikely to be
popular with banks and financial institutions which regularly offer ‘free credit cards’,
principal cards will be subject to service tax of RM50, and supplementary cards will be
subject to service tax of RM25.

Conclusion

The above provides a snap-shot of the key tax proposals arising in the 2010 Budget. From a
tax perspective alone, the Budget proposals are not particularly exciting, but the broader
Budget strategies and allocations are the key drivers towards the foundation of the 10th
Malaysia Plan and towards the move to a more advanced economy. The focus on developing
human capital, stimulating the agricultural sector, the eradication of poverty, enhancing the
tourism and services sectors, and Islamic financial sector, awareness of environmental issues,
innovation and the inclusive approach to development are all positive steps. The
Government’s real challenge lies in the implementation of its policies and the manner in
which the Budget allocations are spent to ensure that the budget deficit continues to decline
without impacting the overall economic growth.

TAXAND MALAYSIA in collaboration with the Malaysian International Chamber of Commerce

and Industry will hold its 2010 Budget Seminar on Tuesday, 3 November 2009 at the Maya Hotel,
Jalan Ampang, Kuala Lumpur. Please contact [email protected] for details