The economic and tax outlook of Malaysia in 2013

Amidst the China’s economy is slowing down, Euro is in trouble, US recovery is fading, the 2013 economic outlook of Asian region overall does not appear bright, although it does not appear as bleak as the European and American ones. 

The Malaysian economy is overall optimistic and is expecting a moderate growth between 4.5% and 5.5% in 2013. Even though oil export revenue is projected to decrease this year and hence by extension, the government’s revenue; the government which is keeping a tight rein on its expenditure, expects fiscal deficit to be reduced to 4% of GDP in 2013 from 4.5% in 2012.

Per capita income now stood at RM31,000 (RM3.05 = USD1) but rising household debt may indicate problem blooming. Inflation is manageable at about 1.7% and our banking system is strong. We do have a strong international reserve of RM432.2 billion. 

The government is focusing on domestic demand although exports are rebounding. We also look forward to our Economic Transformation Program projects to sustain growth. As long as the Malaysian economy is being kept sustainable and dynamic, 2013 outlook is overall a positive one!

The Arrival of GST 

The implementation of Goods & Services Tax (GST) to replace our existing Sales & Services Tax has become stale news since its maiden proposal during the 2005 Budget speech on 10 Sept 2004. Subsequent Budgets came and gone without seeing the affirmative sight of its implementation. 

The idea of implementing GST in Malaysia is mooted in order to broaden the tax base and increase the tax revenue. The proposed GST rate is speculated to be at 4% which will be lower than that of the prevailing Sales & Services Tax. The GST Bill was drafted and so were the supporting the Price Control and Anti– Profiteering Bills. 

The imposition mechanism and scope of GST, assessment and recovery, offences and penalties as well as the transitional provisions etc have been in place; so is the implementation agency, the Royal Customs of Malaysia, which will be incurring some RM222 million on its computerisation and operational costs . However, the Government said they wanted more time to gather public feedback, create more awareness among the public and allow companies more time to get ready. 

Will 2013 see the official announcement of the arrival of GST? The majority of the nation thinks so, especially if the ruling political party, Barisan National, were to win the forthcoming election. If this is the case, Malaysian businesses should not expect to be given a longer period of more than 12 months to get themselves ready for the new tax regime since ample warning of its arrival has been given quite some while ago. 

Tax Evaders Go to Jail 

The Chief Executive Officer (CEO) of the Inland Revenue Board of Malaysia (IRBM), Tan Sri Dr. Mohd Shukor Mahfar made a pledge last year that the tax dodgers who have been getting away with civil suits and warnings will face criminal charges effective this year. 

“Each year, some 20% of the country’s individual and companies taxpayers fail to submit their tax returns, thus putting themselves high on the IRBM’s suspicion list. Such taxpayers run the risks of being investigated and those found guilty of tax evasion will be facing jail time!” said the CEO, during a press conference at the last year’s National Tax Seminar. 

Under the local Income Tax Act 1967 (the Act), tax evaders and anyone who assists other to evade tax can face a fine of up to RM20k or an imprisonment of not exceeding 3 years or both, plus a special penalty of treble the amount of tax which has been undercharged. 

Although there are these provisions under the Act, the IRBM has hardly enforced them. In so far on the cases investigated by them since 2004, only 69 cases were taken criminal action against them, the rest were taken civil action. However such civil suits do not deter some taxpayers from being repeat offenders. Hence is about time for the IRBM to address tax evasion issues more aggressively in line with many other countries which were already implementing such similar measures. Hopefully such stringent actions will encourage higher rate of tax compliance in our country. 

Taxation of E-commerce 

E-commerce is electronic commerce, it is the buying and selling of products or services over electronic systems such as the Internet and other computer networks. Thus, e-commerce ignores distance, national boundaries and time differences. E-commerce presents a major challenge for tax administrations, given the often multi-jurisdictional nature of the transactions and the potential anonymity of the parties. E-commerce makes it easier for enterprises to move their business operations across national boundaries and to shift income to lower tax jurisdictions. 

E-commerce directly challenges existing tax principles that were by and large conceived in an era that could not have foreseen the technological advances of the present. Many countries have commissioned studies and stated their positions on the taxation of e-commerce. The Organisation for Economic Development and Co-operation (“OECD”) has played an important role in fostering a constructive dialogue among its member countries and between businesses and government. The Technical Advisory Group (“TAG”) of the OECD has already released draft comments on treaty characterisation of digital transactions and on the definition of “permanent establishment”. 

There are many problems such as “who”, “what”, “where” and “how” need to be tackled by the local tax authorities in order to have a slice of the taxation cake of these borderless transactions. Taxpayers may disappear in cyberspace, reliable records and books may be difficult to obtain, and taxing points and audit trails may become obscure. Other problems such as characterisation of income nature, “Is it a payment of sale or loyalty? Will it subject to income tax or withholding tax and also Goods & Services Tax?”, “Which country has the jurisdiction right to tax the income?” and etc. The IRBM must be clear in their rights & stance and communicate them clearly to the e-commerce players to ensure effective taxation of this electronic commerce in our country. 

With the abovementioned economic outlook and aspiring tax challenges, let us embrace 2013 with the right attitude for a successful and an abundant year!