One-time windfall tax to be levied on fossil fuel companies for 2022
Malaysia’s Budget 2023 presented by the Finance Minister on 7 October 2022 includes a broad range of tax proposals that take into account challenges to the global economy, as well as concrete steps to address sustainability and climate change (click here for a full analysis of the Budget by BDO Malaysia). It should be noted that the Malaysian Parliament was dissolved on 10 October 2022 to make way for Malaysia’s 15th General Election (GE15) to be held on 19 November 2022. As such, the Budget may see some adjustments as it will have to be re-tabled in Parliament after the GE15.
The following highlights the key tax measures in the Budget that would affect businesses.
Updates on Pillar 2 of Global Anti-Base Erosion Model Rules
The government announced that it will implement the global minimum effective tax rate as recommended by the OECD. The rules are aimed at ensuring multinational enterprises with revenues above EUR 750 million pay at least a minimum level of tax of 15% wherever they operate. The government will also introduce a qualified domestic minimum top-up tax upon completion of a detailed study. These rules are expected to be implemented in 2024, with the goal of broadening the country’s tax base, while remaining competitive in attracting foreign direct investment.
Review of corporate income tax rate for micro, small and medium enterprises (MSMEs)
To increase MSME competitiveness, the Budget proposes reducing the income tax rate for MSMEs as follows:
MSMEs are companies with paid-up capital in respect of ordinary shares of not more than MYR 2.5 million and limited liability partnerships with a capital contribution of not more than MYR 2.5 million and whose annual gross income from business sources is not more than MYR 50 million.
This proposal would be effective from year of assessment (YA) 2023.
Extension of carry forward period of unabsorbed business losses for selected industries
The Budget proposes that companies in sectors that have a long development period, such as forest plantations and hydroelectric projects, be allowed to carry forward unabsorbed business losses for a period of 20 years instead of the current 10 years.
The effective date of this proposal has not been announced.
Capital allowance claim for intangible assets
The definition of “plant” in Schedule 3 of the Income Tax Act, 1967 (ITA) excludes buildings, intangible assets or any assets used and that function as a place within which a business is carried on. The Budget proposes that intangible assets such as software be considered as plant for which a capital allowance is claimed under Schedule 3 of the ITA.
The effective date of this proposal has not been announced.
Reinvestment allowance (RA) incentive for hotel and selected tourism projects
Currently, the RA under the ITA is provided only for manufacturing and select agricultural activities. The Budget proposes that the allowance be extended to include hotel and selected tourism projects relating to the renovation, expansion or modernisation of the following:
- One- to five-star hotels registered with the Ministry of Tourism, Art and Culture (MOTAC); and
- Selected tourism projects, specifically, theme parks and convention centres with capacity for at least 3,000 participants and registered with MOTAC.
The RA is given at 60% on qualifying capital expenditure for five consecutive YAs and may be set off against 70% of statutory income.
This proposal, which is aimed at reviving the tourism sector that was severely affected by the COVID-19 pandemic, would be effective for YA 2023 to YA 2027.
Extension of tax incentive for angel investors
Currently, a tax incentive in the form of an income tax exemption equivalent to the amount of the investment made is available to “angel” investors who invest in an investee company in the form of ordinary shares. The incentive is for applications received by the Ministry of Finance through 31 December 2023.
To attract more angel investors that contribute to economic activities through capital funding in investee companies, the Budget proposes that the incentive be extended to applications received by the Ministry of Finance from 1 January 2024 to 31 December 2026.
Extension of tax incentive for export of private healthcare services
Under current rules, companies that provide private healthcare services are eligible for an income tax exemption equal to 100% of the increased value in exports of services, which can be set off against 70% of the statutory income derived from the export of healthcare services to foreign healthcare travellers, either from Malaysia or abroad.
To promote the export of private healthcare services and to position Malaysia as a health tourism hub, the Budget proposes that the existing income tax exemption be extended for another three years from YA 2023 through YA 2025.
The Budget also includes a number of tax incentives, including several environmental tax incentives.
- Rental of electric vehicles: Currently, companies that rent non-commercial motor vehicles are given a tax deduction of up to MYR 50,000 or MYR100,000, depending on the cost of the motor vehicle. To encourage the utilization of low-carbon vehicles, the Budget proposes that a tax deduction of up to MYR 300,000 be allowed for the rental of electric vehicles. The proposal would be effective from YA 2023 to YA 2025.
- Carbon capture and storage (CCS): To achieve its “Low Carbon Nation Aspiration” plan by 2040, the Budget proposes that tax incentives be given as follows:
- Companies undertaking CCS in-house activity:
- Investment tax allowance of 100% of qualifying capital expenditure for 10 years that can be used to set off against up to 100% of statutory income;
- Full import duty and sales tax exemption on the purchase of equipment for CCS technology from 1 January 2023 until 31 December 2027; and
- Tax deduction for allowable pre-commencement expenses within five years prior to the date operations commence.
- Companies providing CCS services:
- Either an investment tax allowance of 100% of qualifying capital expenditure for 10 years, which could be used to offset up to 100% of statutory income or a 10-year tax exemption of 70% on statutory income; and
- Full import duty and sales tax exemption on the purchase of equipment for CCS technology from 1 January 2023 until 31 December 2027.
- Companies engaging CCS services:
- Tax deduction of fees incurred for use of CCS services for YA 2023 to YA 2027.
The incentives for companies undertaking in-house CCS activity and providing CCS services would be available for applications received by the Ministry of Finance from 1 January 2023 to 31 December 2027.
- Manufacturer of electric vehicle (EV) charging equipment
- To attract immediate high value investment in the manufacturing of EV charging equipment, the Budget proposes that manufacturers of such equipment be provided the following incentives:
- Income tax exemption of 100% on statutory income from YA 2023 to YA 2032; or
- Investment tax allowance of 100% for five years, set-off against 100% of statutory income for each YA.
This incentive would apply to applications received by the Malaysia Investment Development Authority (MIDA) from 8 October 2022 until 31 December 2025.
- Aerospace industry
- New and existing aerospace companies in Malaysia undertaking high-value activities such as manufacturing or assembly of systems, devices, parts or components and maintenance, repair and overhaul for aircraft (MRO), systems, devices, parts or components and engineering & design/services related are afforded the following tax incentives:
- New companies: Income tax exemption of 70% to 100% for a period between five and 10 years or an investment tax allowance of 60% to 100% for a period of five years, set off against 70% to 100% of statutory income for each YA.
- Existing companies: Investment tax allowance of 60% to 100% for five years, set off against 70% to 100% of statutory income for each YA.
It is proposed that the tax incentive for the aerospace industry be extended for three years. This would apply to applications received by MIDA from 1 January 2023 until 31 December 2025. The proposal aims to transform Malaysia into a key player in the aerospace industry in line with the 12th Malaysia Plan.
- Intellectual property (IP) development: Companies that undertake research and development (R&D) for promoted products and develop IP in Malaysia are given income tax exemption of 100% for up to 10 years. To encourage more R&D activities and IP registration in Malaysia, the Budget proposes that the tax incentive for IP development be extended for three years for applications received by MIDA from 1 January 2023 until 31 December 2025.