With much fanfare, the Budget 2019 (themed “Credible Malaysia, Dynamic Economy, Prosperous Rakyat” was tabled early November 2019. For business owners and startups, this is no doubt a highly anticipated (or feared) event, and before the dust settles, we summarize how the Budget 2019 could affect your business.
Corporate tax rates for SME
Despite the removal of GST, the lowering of corporate taxes will be a welcome for profitable small medium enterprises and startups alike. The Budget 2019 proposed a reduction of from 18% to 17% the first RM500,000 chargeable income for SMEs. The corporate tax rate for chargeable income exceeding RM500,000 remains at 24%. To qualify for the “SME” tax rate of 17%, do bear in mind that the business entity must be a company or limited liability partnership with a paid-up capital that does not exceed RM2.5 million AND is not part of a group of companies containing a company that exceeds that threshold. Companies will also be able to carry forward their unabsorbed losses, unutilised allowances for a maximum of 7 years.
Service Tax for online service providers and imported services
However, businesses which rely heavily on online services or incur hefty online ad-spend such as Facebook and Google Ads by “larger online services providers” should brace themselves for additional costs in the form of digital taxes / fees. To level the playing field for services supplied by local and foreign service providers, imported online services will be required to register with Royal Malaysian Customs and charge and remit Service Tax. The Ministry of Finance has clarified that this measure will be carried out in stages, and there will be threshold to ensure smaller companies are exempted, but it is unclear at this point what the threshold will be.
On a broader note, service tax on imported services by businesses (B2B) could be implemented as early as 1 January 2019, while B2C imported services will only be affected in 1 January 2020.
Service Tax Exemption for Business-to-Business(“B2B”) Services
The current tax regime exempts service tax for certain types of services provided between companies within a group provided that the same services are not provided to other companies outside of the group. To combat the rising costs of doing business, the Government has expanded the exemption to specific B2B services provided by registered activities will be exempted.
For businesses operating from Labuan entities, the Budget 2019 has removed the tax ceiling of RM20,000 under the Labuan Business Activity Tax Act 1990 but has retained the 3% income tax rate. Furthermore, Labuan International Business and Financial Centre (“Labuan IBFC”) activities will now be subject to substantive conditions determined by a committee. Income from intellectual property assets held by Labuan entities will be subject to the income tax rate under the Income Tax Act 1967 (ie, at 17% or 24%).
Furthermore, the restriction on transactions to be conducted in Ringgit Malaysia and transactions between Labuan entities and Malaysian residents have been removed.
Bringing the “Fun” in Fundraising
The government will be introducing guidelines in early 2019 to establish regulations for Digital Coin and Token Exchanges. Lawyers and businesses alike may finally have clarity on the legality of Initial Coin Offerings and the regulatory regime surrounding crypto-currencies.
I4.0 and the rise of the machines
Industry 4.0 (or i4.0) is used to describe broadly Internet of Things-driven (“IoT”) technologies and advanced automation. The government has its sights on further driving the growth of i4.0 players in Malaysia, introducing a myriad of measures including tax deductions for company-provided scholarships for technical and vocational training, and expenses in carrying out training programmes for students in engineering and technology.
Disposals of real property
Corporates will feel the pinch of the increase in the ‘residual rate’ for Real Property Gains Tax to 10% (increased from 5%), for the disposal of properties that have been held more than 5 years.