Budget 2015 Malaysia - EY - United States

Volume 2 - Issue 1- 30 October 2014

Budget 2015 Malaysia

Budget 2015 Theme Balancing economic development and well-being of the rakyat.

Did you know? 1

Budget allocation

RM b

Budget 2015 sets an annual development plan and is part of Malaysia’s National Development Strategy (MyNDS) for the 11th Malaysia Plan, focused on: 1. 2. 3. 4. 5.

High-impact projects Low-cost programmes Efficient and rapid implementation Collaboration Sustainability

7

CAGR 2010-2015f: 7%

2

Government revenue

RM b CAGR 2010-2015f: 7%

main strategies in balancing between Malaysia’s capital and people’s economy

1

Strengthening economic growth

2

Enhancing fiscal governance

3

Developing human capital and entrepreneurship

4

Advancing bumiputera agenda

3

Budget deficit

% of GDP

4

Government debt/GDP ratio %

5

Upholding role of women

6

Developing national youth transformation program

7

Prioritizing well-being of the rakyat

5

Operating and development expenditure

Operating

Development

RM b

RM b CAGR 2010-2015f: 8%

Notes: • e = estimate • f = forecast Sources: • World Bank data - Malaysia • Bank Negara Malaysia (BNM) annual reports • Budget speeches from 2010 to 2015 • Ministry of Finance’s (MoF) economic reports

Take 5 - Budget 2015 Malaysia

CAGR 2010-2015f: -0.31%

Operating

Development

2

Economic directions Malaysia’s economic growth accelerated, driven by higher exports and strong private investments:

%

Real GDP vs. CPI GDP: 5-6%*

CPI: 4-5%*

Malaysia’s real GDP is expected to register growth of 5% to 6% in 2015, driven by resilient domestic demand and an improving external environment. Malaysia’s CPI is expected to increase slightly by 1% with the implementation of GST and the phasing-out of fuel subsidies.

*2015

Trade (goods and services) RM b Export: 787.2*

Import: 713.1*

Total trade is expected to sustain above the RM1.5 trillion mark. While exports and imports have been increasing steadily, the trade balance remains in surplus. China continues to be Malaysia’s largest trading partner and ASEAN, Singapore and EU are key regional trading partners.

*2015

Net international reserves RM b

2014: 422.3*

0

Malaysia’s net international reserves position remained strong supported by current account surplus. As at 15 September 2014, the total reserves are adequate to finance 8.9 months of retained imports and are 3.2 times the short-term external debt.

*as at 15/09/2014

Growth by sectors Services and manufacturing continue to be the major contributors to Malaysia’s economic growth. In 2015, all sectors are expected to record positive growth. Construction growth is still buoyant, driven by residential and nonresidential sub-sectors. With the completion of a number of new deepwater oil and gas facilities, production for the mining sector is anticipated to increase.

Sources: • Bank Negara Malaysia (BNM) annual reports • Ministry of Finance’s (MoF) economic reports


3

Sectoral highlights Financial services Investment Account Platform

Exchange traded bond and sukuk

A new Shariah compliant investment product: • Provides opportunities to investors in financing entrepreneurial activities and developing viable SMEs • Platform to attract institutional and individual investors including high net worth individuals to invest in the Islamic financial market • To promote IAP, the Government proposes individual investors be given income tax exemption on profits earned from qualifying investments for three consecutive years. • Tax exemption shall only be accorded for three consecutive years starting from the first year profit is earned. • The investment is made for a period of three years starting from the operation date of IAP. • Tax incentives shall only be accorded for investment activities in Malaysia, in venture companies owned by Malaysian or locally incorporated companies. • Tax exemption shall only be accorded for investments made in SMEs (as per latest definition issued by SME Corporation Malaysia) and venture companies in any sectors.

Proposes that Malaysian Government Securities and Government Investment Issues be listed and traded in Exchange Traded Bond and Sukuk (ETBS)

Sukuk issuance To expand the sukuk market at the international level, proposes that deduction on the expenses incurred for the issuance of sukuk under the principles of Ijarah and Wakalah be extended for another three years. Effective date – from year of assessment 2016 to year of assessment 2018

Shipping insurance Establish Protection and Indemnity (P&I) Club under EXIM Bank to assist owners of cargo ships with gross tonnage not exceeding 300 tonnes. The Club offers third-party liability protection at reasonable premiums.

IAP scheduled to be effective from 1 September 2015 to 31 August 2018.

Oil and gas Infrastructure - PIPC Pengerang Integrated Petroleum Complex (PIPC, RM69b) that includes the Refinery and Petrochemical Industry Development (RAPID)

Sources: • Budget speech, 2015 • Ministry of Finance’s (MOF) - The 2015 Budget


4

Sectoral highlights Hospitality, property and infrastructure Property Real property gains tax (RPGT) The sum to be retained by the acquirer of real property on the acquisition of the property is to be increased to 3% of the total consideration (from 2% of the total consideration). Where a donor disposes of an asset by way of gift to a recipient, the disposal shall be deemed to be a disposal at the market value of the asset. Where the donor and recipient are husband and wife, parent and child or grandparent and grandchild: • T  he donor shall be deemed to have received no gain and suffered no loss on the disposal and the recipient shall be deemed to have acquired the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor. • In the case of a donor who is not a citizen or permanent resident, the recipient shall be deemed to have acquired the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor; and

•

In the case of a donor who is a citizen or permanent resident and the gift is made within five years after the date of acquisition by the donor, the recipient shall be deemed to have acquired the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor.

Introduction of self assessment system for Real Property Gains Tax with effect from 2016 Stamp duty - purchase of first residential property To reduce the cost of ownership of the first residential property, it is proposed that 50% stamp duty exemption on instrument of transfer and loan agreement be extended to the purchase of the first residential property priced not exceeding RM500,000. Stamp duty exemption is only eligible for Malaysians who have never owned a residential property. For sale and purchase agreement executed from 1 January 2015 to 31 December 2016

Infrastructure Proposed road and rail projects include: • Pan-Borneo Highway (Sarawak and Sabah) – RM27b • Second MRT line (Selayang to Putrajaya) – RM23b • LRT 3 Project (link Bandar Utama to Shah Alam and Klang) – RM9b • Sungai Besi – Ulu Klang Expressway (SUKE) – RM5.3b • West Coast Expressway (from Taiping to Banting) – RM5b • Damansara – Shah Alam Highway (DASH) – RM4.2b • Eastern Klang Valley Expressway (EKVE) – RM1.6b • East Coast railway line upgrade (Gemas to Tumpat) – RM150m Proposed telecommunication projects: • New telecommunication towers (1,000) and undersea cables – RM2.7b (over next three years)

Tourism Year of Festivals 2015 With 2015 tourism campaign plans for Malaysia – Year of Festivals, and the targeting of 29.4 million tourist arrivals with expected income of RM89b, RM316m has been allocated for various programmes under the Ministry of Tourism and Culture.

Proposed water-related projects include: • Formulation of a National Water Blueprint • Holistic management of rivers • Construction and improvement of water treatment plants • Diversification of water supply sources - groundwater exploration and reuse of treated water for industries and agriculture and expanding use of storm water retainer system • Construction of Air Langat 2 water treatment plant to address water shortage in Klang Valley (RM3b) Electric vehicles • Sustainable Mobility Fund to develop the electric vehicle manufacturing industry, e.g. electric buses (RM70m under SME bank)

Tax incentive for medical tourism New companies and existing companies engaged in expansion, modernization and refurbishment of private healthcare facilities, with at least 5% healthcare travellers in their total number of patients, to be given exemption on income equivalent to Investment Tax Allowance of 100% of qualifying capital expenditure incurred for a period of five years. Effective date – for applications received by MIDA from 1 January 2015 to 31 December 2017



5

Sectoral highlights Other programmes

SMEs

Establishment of Principal Hubs

SME assistance schemes

Customized incentives for Principal Hubs to be introduced in 2015 to further encourage multinational companies to set up global operational centres in Malaysia.

•

•

Commercialization of innovation •

•

RM1.3b allocated to the Ministry of Science, Technology and Innovation to implement various programmes, including: • 360 high-impact innovative products to be commercialized within the next five years • Various high impact R&D&C programmes (RM290m) • Public Research Network (RM50m) • Strengthen Technology Commercialization Platform Programme (RM50m) Research Incentive Scheme for Enterprises (RISE) (RM10m): to encourage companies to set up research centres in high technology, ICT and knowledge-based industries

•

•

•

Services Guarantee Scheme (RM5b) – maximum financing of RM5m with 70% government guarantee; expected to benefit 4,000 SMEs Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN) funds (RM500m) to assist SMEs to kick-start and further expand their businesses Service Export Fund (SEF) (RM300m) to encourage SMEs to conduct market feasibility studies and understand export promotion to penetrate new markets Strengthening the Franchise Development Scheme under Ministry of Domestic Trade, Co-operatives and Consumerism in collaboration with the Malaysian Franchise Association (RM200m) SME Technology Penetration and Upgrading Programme and technology auditing to rebrand SIRIM

Others • •

•

SME Investment Partner – to accelerate participation of SMEs in economic activities Soft Loan Scheme for Automation and Modernization of SMEs (Malaysian Industrial Development Finance Berhad) to enhance the use of new technology, automation and innovation (RM80m) Business Accelerator Programme (SME Corp, RM10m)

Creative industry Digital Content Industry Fund Setting-up of the Digital Content Industry Fund (RM100m) under the Ministry of Communications and Multimedia to develop the creative industry such as animation, filming, designing and cultural heritage

Agriculture industry • •

Allocation of RM6b to the Ministry of Agriculture and agro-based industry to strengthen food supply chain Accelerate development of four new Integrated Agriculture Development Area for paddy cultivation in Rompin, Batang Lupar, Kota Belud and Pekan (RM100m)



6

Sectoral highlights Education and training Education initiatives

Tax incentive for scholarships

•

Double deduction to be given to encourage companies that provide scholarships in the field of vocational and technical training. Eligibility criteria for incentives are maintained.

• • • • •

•

•

Allocation of RM56b to Ministry of Education for various teaching and learning programmes Allocation of RM1.2b for vocational and technical transformation programmes and upgrade of colleges Allocation of RM250m for School Improvement Specialist Coaches and School Improvement Partners programmes RM100m to Ministry of Education for 10,000 placements in technical and vocational private colleges RM10m to expand 20 more Trust Schools Additional allocation of RM112m for MyBrain15 Programme (to produce 60,000 PhD holders by 2023) – currently for private sector but is proposed to be extended to civil servants and employees of statutory bodies who are keen to further their studies on a part-time basis in local higher learning institutions TalentCorp will provide RM30m for Industry Academia Collaboration programme – collaboration between universities, Government entities and industries to develop curriculum, internship programmes and industrial training Establishment of a Professional Accounting Centre in University Teknologi MARA in collaboration with Malaysian Institute of Accountants

Developing human capital and entrepreneurship • •

•

•

Double deduction incentives to companies conducting Skim Latihan 1Malaysia (SL1M) until 31 December 2020 Globally Recognised Industry and Professional Certificate Programme (1MalaysiaGRIP) – RM300m in matching grants between the Government and the Human Resource Development Fund to train 30,000 workers Double shift training capacity for full time programmes (176 courses) with high demand in the labour market • Students with Malaysia Skills Certificate (SKM) • University or college graduates • Semi-skilled industrial workers Position the country as a choice location for startups in the region – establishment of MaGIC • Paid-up capital for startups – RM75,000 • Eligible expatriate startup entrepreneurs will be given work pass for one year.

Effective date – from year of assessment 2015

Tax incentive for Structured Internship Programme To encourage companies to extend the Structured Internship Programme (SIP) to full-time students pursuing training at the vocational and diploma levels, it is proposed that expenses incurred in implementing the SIP programme for students in these courses be given double deduction. The eligibility criteria for students and conditions for the companies under the current SIP programme are to be maintained. Effective date – from year of assessment 2015

Tax incentive for training To support the Government’s effort to strengthen the development of human capital, it is proposed that further deduction be given on the training expenses incurred by companies for the employees to obtain industry-recognized certifications and professional qualifications such as in the field of accounting, finance and project management. Training programmes are those approved by agencies appointed by the Ministry of Finance. Effective date – from year of assessment 2015



7

Corporate tax highlights Proposed reductions in income tax rate for companies and cooperatives as follows:

Companies

Income tax shall be charged for a year of assessment on the chargeable income of: • A company • A trust body • An executor of an estate of a deceased individual who domiciled outside Malaysia at the time of his death • A receiver appointed by court • A limited liability partnership

Current (%)

Proposed (%)

25

24

Income tax shall be charged for a year of assessment on the chargeable income of a company resident and incorporated in Malaysia which has a paid-up capital in respect of ordinary shares of RM2.5m and less at the beginning of the basis period for a year of assessment at the following rates:

Rate of income tax Chargeable income for companies

RM

Current (%)

Proposed (%)

For every ringgit of the first

500,000

20

19

For every ringgit exceeding

500,000

25

24

Income tax shall be charged for a year of assessment upon the chargeable income of co-operatives at the following rates:

Rate of income tax Chargeable income for companies

RM

Current (%)

Proposed (%)

For every ringgit of the first

30,000

0

0

For every ringgit of the next

30,000

5

5


40,000

10

10


50,000

15

15


100,000

20

18


250,000

22

21


250,000

24

23


750,000

25

24

Incentive for industrial area management •

100% income tax exemption for 5 years to encourage the private sector to manage, maintain and upgrade industrial estates in less developed areas

•

70% income tax exemption for 5 years to the private sector to manage industrial estates in other areas

Capital allowance on automation of labour-intensive industries

Industry category

Capital allowance on automation expenses

Incentive period

High labour intensive industries (e.g. rubber products, plastics, wood, furniture and textiles)

200% on first RM4m expenditure incurred

2015 to 2017

Other industries

200% on first RM2m expenditure incurred

2015 to 2020



8

GST highlights

Exempt and zero-rated supplies The supply of goods and services determined as GST exempt and GST zero-rated includes the following:

GST zero-rated supplies Selected products and services

GST zero-rated supplies include selected products and services within the following sub-groups: • Food items (e.g. various types of meat, fruits, rice and noodles, herbs, sauces and preparations) • Medicines and medical gas • Port handling services • Financial services (include Syariah compliant): • Insurance and reinsurance

• • • • • •

Telecommunication services Inward remittance transactions Global hubbing services for international remittance Online services for newspapers Printed books, brochures, leaflets Newspapers, journals and periodicals

GST exempt supplies •

Financial services

• • •

Current account, savings deposit account or investment account Loan, advance or similar facility Hire-purchase, conditional sale, credit sale or lease agreement Exchange of currency or the transfer of ownership of any derivative relating to the exchange of currency

• • • • •

Private child care Pre-school, primary and secondary school education Tertiary education Canteen operator Course materials Excursions or field trips Provision of food

•

Education services

• • • • • • •

Healthcare services

Private healthcare services: • Medical, dental, nursing, midwifery, allied health, pharmacy and ambulance services • Related accommodation • Services for screening, diagnosis or treatment • Services for preventive or promotive health purposes • Services provided by any healthcare para-professionals

Transport services

Funeral services Others

•

• • •

•

• •

Bonds, debentures, notes Securities or derivatives relating to securities Debt securities Equity securities Futures contract or transfer of ownership of derivatives relating to commodities Life insurance or life reinsurance

Provision of accommodation (including cleaning, maintenance, electricity, gas and air condition) Transportation services Administrative services Examination services

Services for curing or alleviating any abnormal condition of the human body by the application of any apparatus, equipment, instrument or device or any other medical technology Food services Mortuary services

The transport of passengers: • Vehicle licensed by the Commercial Vehicle Licensing Board • A bus excluding a chartered bus • A taxi excluding a hire and drive car • Rail services • Ship or vessel licensed as passenger craft

Funeral services related to: • Ceremonial and tribute, disposition of remains or memorialization • Pre-need funeral plan programme, i.e. the reservation of columbarium or burial plot

• •

Tolled highways Land or buildings used for residential purposes

• •

Agricultural land and land for general use Child care services

Source: • Federal Government Gazette, Goods and Services Tax (Zero-Rated Supply) Order 2014 and Goods and Services Tax (Exempt Supply) Order 2014, 13 October 2014, Attorney General’s Chamber


9

GST business preparations Broadly, top management needs to set the strategic directions for the GST infrastructure set-up and enhancement of GST reporting.

Strategic direction

1

• Set the right tone • Formalize structure and organization • Implement systems and processes

2

Embed critical issues in business operations and processes • Services • Sales and marketing • Procurement • Human resource

3

• Accounts • Supply chain management • Legal

Implement GST infrastructure • Record-keeping • Systems and accounts • Internal controls

Understand and interpret •

•

•

Understand the implications in issuing the full or simplified tax invoices and the 21-days rule Analyze valuation issues on supply made for consideration in kind and open market value Understand the requirements to claim input tax credit

Review and action • •

• •

Review and perform transaction mapping Review and develop relevant documentation pertaining to “tax invoices” for supply of goods and/or services Review and select accounting systems Cost benefit analysis on the compliance cost that will be incurred

Engage and communicate •

• •

Engagement with Government via respective organizations / associations or business chambers Appoint senior team members to conduct staff training on GST Ensure that marketing personnel understand the basis for price displays

Sources: • Handbook for goods and services tax (GST) for businesses, MOF • EY analysis


10

GST business preparations

GST programmes and schemes Considerations to meet GST requirements •

Any need for change in the accounting period?

•

Any need to register individually or as a group?

•

Any need for separate records for different rates, bad debts?

•

What is the precise stage at which GST needs to be charged for each type of supply?

•

What are the implications of blocked inputs not claimable?

•

What are the input tax claims and capital goods adjustments for mixed suppliers?

•

What is the bad debt relief and the implications?

•

Depending on the taxation of stocks and capital goods under the sales tax regime and the transitional provisions for refund, do such purchases need to be advanced or delayed?

Checkpoints • Cashflow and transaction activities

• Cash registers or pointof-sales (POS)

• Contract obligations

• Pricing policies

• Credit terms to customers

• Procurement policies

• Gifts

• H and-holding Programme Designed to assist businesses in the transition from existing sales and service tax system to the GST system • Approved Trader Scheme (ATS) This scheme is provided to alleviate cash flow to the businesses. • Approved Toll Manufacturer Scheme (ATMS) This scheme is provided to disregard any supply made by the local toll manufacturers to the overseas clients. • Approved Jeweller Scheme (AJS) This scheme is to provide cash flow relief to jewellery manufacturers. • Warehousing Scheme This scheme is provided to disregard supplies within a warehouse before the duty point and the last supply is subject to GST. • Flat-Rate Scheme (FRS) This scheme is to allow certain category of approved sectors (e.g. farmers) to get some form of compensation of the GST paid on their inputs even though they are not GST registrants. • Tourist Refund Scheme This scheme allows tourists to claim GST paid on goods purchased and brought back to their respective countries by air mode only. • E-voucher for SMEs SMEs that purchase or upgrade their GST-compliant software from one of the software providers certified by the Royal Malaysian Customs Department (RMCD) will be given assistance in the form of ‘one-off’ grants whereby each eligible company will receive financial assistance to a maximum of RM1,000.

• Staff fringe benefits

Sources: • Handbook for goods and services tax (GST) for businesses, MOF • Malaysia Goods and Services Tax (GST), Royal Malaysian Customs Department website, October 2014 • EY analysis


11

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 Ernst & Young Advisory Services Sdn. Bhd. All Rights Reserved. APAC no. 07000294 ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com/my

Contacts Yeo Eng Ping Partner, Tax Leader Malaysia +603 7495 8214 [email protected]

Chow Sang Hoe Managing Partner, Advisory Malaysia +603 7495 8696 [email protected]

Anil Kumar Puri Partner, International Tax Services Malaysia +603 7495 8413 [email protected]

Azwan Baharuddin Business Development Leader Asia Pacific +603 7495 8750 [email protected]

Bernard Yap Partner, Indirect Tax Services Malaysia +603 7495 8291 [email protected]

For further information about EY Malaysia or our thought leadership, please visit: • Website: www.ey.com/my • Mobile app: EY Insights (available on iOS and Android devices)

Budget 2015 Malaysia - EY - United States

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