Here’s my attempt to string together a few selected Malaysian Budget 2016 announcements for SMEs and start-ups (mainly manufacturing, agriculture & technology) to chew on.
More labour costs: Increased Minimum Wage
Firstly, for the bad news. Businesses can expect their labour costs to increase since the minimum monthly wage will be increased from RM900 to RM1000 per person (in West Malaysia). No guarantees on any increase in productivity, it’s just inflation.
Special Reinvestment Allowance
A ‘Special Reinvestment Allowance (RA)’ was announced for ‘qualifying capital expenditures’ for the purpose of expansion, modernization, automation and diversification over the next 3 years. The rate of RA is 60% of the qualifying capital expenditure and will be set off against 70% of statutory income or possibly 100% of statutory income where the company achieves a targeted productivity. For businesses undertaking manufacturing activities and selected agriculture activities, check before incurring major capital expenditure whether it can be regarded as ‘qualifying capital expenditure’, and you could save your business some tax in the long run.
Double Deduction for Research and Development Projects
For the SME or IT/tech-related start up, a useful area to explore is the double deduction available for Research & Development projects approved by the Inland Revenue Board (“IRB”). An SME could claim double deduction of up to RM50,000 spent on R&D project non-capital expenditure, and effectively shave up to a maximum of RM100,000 off its taxable income each year. Be sure to consider how the IRB defines ‘research’ and ‘research in IT & Software’, identify the type of expenditure that qualifies, and finally learn about the procedure & approvals needed to benefit from this scheme. More information can be obtained in IRB’s Public Ruling 5 of 2004 and its addendums.
Tax Exemptions for Exports
The journey towards a high income nation requires both people and businesses to scale the value-ladder. In line with this aspiration, companies that export agricultural produce, manufactured goods and even services are given income tax exemptions of 10% or 15% of the value of the increased exports, provided the goods exported attain a certain value added threshold in the process. ‘Value of increased exports’ means the difference of the value of the qualifying goods or services exported in the basis period and that of the immediately preceding basis period. The Budget 2016 lowers the threshold needed for an export to qualify, as follows:
- Income tax exemption of 10% of the value of the increased exports, provided that the goods exported attain at least 20% value added (reduced from the previous 30%); and
- Income tax exemption of 15% of the value of increased exports provided that the goods exported attain at least 40% value added (reduced from the previous 50%).
The above income tax exemption is restricted to 70% of the statutory income. Also do bear in mind certain export related expenditures may enjoy double deduction. The weaker Ringgit could mean that our exports could sell for a relatively ‘higher’ Ringgit equivalent price, making it easier to hit the value-added threshold. Also, exports of goods and services are GST zero-rated, which means that input tax credit can still be claimed on expenditure incurred.
GST collection amounted to a whopping RM21 billion more than the collection under the Sales and Service Tax system last year. GST is after-all a tax on consumption, not businesses. This money is coming from the consuming public.
Start a business today. Undertake some R&D. Re-invest into capital. Add value. Export. Claim input GST. Pay less taxes.
About the Author: Shawn Ho is a partner of Donovan & Ho. He is experienced in corporate matters such as acquisitions, cross-border transactions, restructuring exercises, sale of businesses, joint venture arrangements, shareholder agreements, and franchise businesses. His background in tax advisory has enabled him to assist several multi-national companies achieve considerable tax-savings through cross-border tax planning, implementing tax-efficient structures using Labuan companies, and incorporate tax advice into commercial transactions.