BUDGET 2017 HIGHLIGHTS

CONTENTS Personal Tax Corporate Tax Tax Incentives Real Property Gains Tax Stamp Duty Tax Administration Goods & Services Tax (GST)

With the start of a new and exciting year, we thought it would be a good time to highlight some important changes in the 2017 Budget. To this end, our senior tax advisor, Mr. Alex Liew, has put together the following article for your perusal. As always, if you need any clarification or tax advice feel free to contact Mr. Alex Liew at 03-77271662 or alex@lyco.com.my.

Our Prime Minister and Minister of Finance, YAB Dato’ Seri Mohd Najib Tun Razak delivered the Budget 2017 on 21 October 2016 with the theme “Ensuring Unity And Economic Growth, Inclusive Prudent Spending, Wellbeing Of The Rakyat” to continuously implement various Rakyat-Centric programmes despite low crude oil prices, weakened currency and pessimistic economy outlook. The Government has introduced various measures and schemes to ensure we are still on track in achieving a developed nation status by bolstering the domestic economy.

We highlight the following important changes as follows:-

A.        PERSONAL TAX

A1.        Gross employment income for output tax borne by employer

In line with the introduction of Goods & Services Tax (GST) in year 2015, GST output tax borne by employer will constitute gross income from employment and shall be taxable on the employee.

The proposal is effective from Year of Assessment (YA) 2015

A2.        Tightening of husband / wife relief

The taxpayer would no longer be able to claim this relief if the spouse (other than a disabled spouse) has income derived from sources outside of Malaysia which exceed the relief amount.

The proposal is effective from YA 2017.

A3.        Tax relief for lifestyle

A new relief called lifestyle relief of up to RM2,500 is introduced which combines the existing tax relief for purchase of reading materials, computers and sports equipment. This new relief covers purchase of printed newspapers, smartphones and tables, internet subscriptions and gymnasium membership fees.

The proposal is effective from YA 2017.

 

A4.        Tax relief for fees paid to child care centres and kindergartens

Another new tax relief of up to RM1,000 is introduced for tax resident individuals who enrol their children aged up to six years old in child care centres or kindergartens registered with the Department of Social Welfare or the Ministry of Education. The relief can only be claimed by either parent of the children.

The proposal is effective from YA 2017.

A5.        Tax relief for the purchase of breastfeeding equipment

To support working mothers, a new tax relief of up to RM1,000 (claimed once every 2 years) will be provided for the purchase of breastfeeding equipment. The purchase can be made either in a complete set or separate parts consisting of breast pump (manual or electric), cooler bag, containers for collection and storage. This relief is privileged for women taxpayers who are tax residents with children up to two years old.

The proposal is effective from YA 2017.

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B.        CORPORATE TAX

B1.        Reduction in corporate income tax rate for small and medium enterprises (SMEs)

Corporate tax rate of Malaysian SMEs and limited liability partnership on chargeable income of up to RM500,000 will be reduced from 19% to 18% with effect from YA 2017.

B2.        Reduction of corporate income tax for increase in chargeable income

Proposal on the reduction of corporate income tax rate (currently at 24%) will be given based on the percentage of increase in the chargeable income, compared to the immediate preceding year of assessment:

% of Increase in Chargeable Income as Compared to the Immediate Preceding Year of Assessment	% Point of Reduction on Income Tax Rate	Income Tax Rate After Reduction (%)
Less than 5.00%	Nil	24
5% – 9.99%	1	23
10% – 14.99%	2	22
15% – 19.99%	3	21
20% and above	4	20

The reduced tax rates are applicable to the following persons:

• Companies
• Limited liability partnerships
• Trust bodies
• Executor of estate of an individual domiciled outside Malaysia at the time of death
• Receiver appointed by the court.

Statutory order will be gazetted to outline the criteria, mechanism of the tax reduction and etc.

The proposal is effective for YAs 2017 and 2018 only.

B3.        Expansion of the definition of Royalty

The existing definition of ‘royalty’ will be widened to include software, reception and transmission of visual images, sounds and use of radio frequency spectrum through communication mediums such as satellites, cable, fibre optic or similar technologies. Inclusion of software is a significant change as it alleviates the uncertainties as to whether such payment to non-resident is subject to withholding tax. However, this may result different view with the international tax position adopted by other countries in the double tax agreements.

The proposal is effective upon coming into operation of the Finance Act 2017.

B4.        Review of derivation of special classes of income

In a move to widen the tax base, payments to non-residents falling under Section 4A of the Income Tax Act 1967 (the Act) will be subject to withholding tax regardless of where the services are performed and will no longer be confined only to services performed in Malaysia:-

1. Services rendered by non-resident person or his employee in connection with the use of property or rights belonging to him, or the installation or operation of any plant, machinery or other apparatus purchased from him; and
2. Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme.

The proposal is effective upon coming into operation of the Finance Act 2017.

B5.        Redefinition of public entertainer

‘Public entertainer’ shall be redefined as follows:-

1. a compere, model, circus performer, lecturer, speaker, sportsperson, an artiste or individual exercising any profession, vocation or employment of a similar nature; or
2. an individual who uses his intellectual, artistic, musical, personal or physical skill or character in,

carrying out any activity in connection with any purpose through live, print, electronic, satellite, cable, fibre optic or other medium, for film or tape, or for television or broadcast.

The proposal is effective upon coming into operation of the Finance Act 2017.

B6.        New penalty section for making incorrect returns, information returns or reports

New penalties will be introduced to cover offences and penalties arising from furnishing an incorrect return, information return or report (by omitting information) or giving any incorrect information. Upon conviction, taxpayer would be liable to a fine of not less than RM20,000 and not more than RM100,000, or imprisonment for a term not exceeding 6 months, or both.

The proposal is effective upon coming into operation of the Finance Act 2017.

B7.        Industrial Building Allowance

Effective YA 2016, a taxpayer who owns and wholly uses the following buildings for the purpose of letting property (including business of letting of property) would not be entitled to industrial building allowance even if the building that is let out is used as industrial building:

1. Licensed private hospital, maternity home and nursing home;
2. Building used for research;
3. Building used for warehouse;
4. Building used for approved service project;
5. Hotel;
6. Airport;
7. Motor racing circuit;
8. Building used for living accommodation for employees employed in the business of manufacturing, hotel or tourism project, approved service project;
9. Building used for provision of child care facilities for individuals employed by the person for his business; or
10. School or educational institution.

The proposed amendment has been extended to include building used for industrial, technical or vocational training approved by the Minister.

In addition, new subparagraphs have been introduced to clarify the claim for industrial buildings as follows:-

Floor area of the building used for the purpose of letting	Expenditure that qualifies as industrial building
Less than 1/10 of the floor area of the whole building	The whole building qualifies as industrial building
More than 1/10 of the floor area of the whole building	The expenditure incurred on the floor area which is not used for the purpose of letting of property qualifies for industrial building allowance

The proposal is effective from YA 2016.

B8.        Increase in the tax deduction limit for sponsoring arts, cultural and heritage activities

The limit of tax deduction for a company that sponsors on arts, cultural and heritage activities (must be approved by the Ministry of Tourism and Culture) shall be increased from RM500,000 to RM700,000 per year, out of which the deduction allowed for sponsoring foreign activities be limited to RM300,000.

The proposal is effective from YA 2017.

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C.        TAX INCENTIVES

C1.         Extension of tax incentives for new four- and five-star hotels

The tax incentives for investments in new four and five-star hotels in Peninsular Malaysia, Sabah and Sarawak shall be extended for another 2 years from 31 December 2016:-

	Peninsular Malaysia	Sabah and Sarawak
Investment tax allowance	Allowance of 60% on qualifying capital expenditure for five years to be offset against 70% of statutory income	Allowance of 100% on qualifying capital expenditure for five years to be offset against 100% of statutory income
Pioneer status	Exemption of 70% of statutory income from qualifying activities for five years	Exemption of 100% of statutory income from qualifying activities for five years

 

The proposal is applicable to applications received by the Malaysian Investment Development Authority up to 31 December 2018.

C2.         Extension of tax incentive for anchor companies under the Vendor Development Programme (VDP)

To stimulate more competitive local vendors under the VDP (approved by the Ministry of International Trade and Industry), the following existing double deductions on qualifying operating expenses for anchor companies that implement VDP be extended up to year 2020:-

• activities in relation to product development
• activities in relation to capability improvement
• activities in relation to human capital

The proposal is effective for Memorandum of Understanding signed with the Ministry of International Trade and Industry from 1 January 2017 to 31 December 2020.

C3.         Expansion of Halal products eligible for incentive for Halal Industry Players

Incentives granted to Halal Industry Players operating in Halal Parks shall be extended to include the production of nutraceutical and probiotic products to the existing qualifying halal products as follows:-

1. specialty processed food;
2. pharmaceuticals, cosmetics and personal care;
3. livestock and meat products; and
4. halal ingredients.

 

The incentives granted are as follows:-

1. Full income tax exemption on qualifying capital expenditure for 10 years or income tax exemption on increase of export sales for 5 years;
2. Import duty exemption on raw materials used for the development and production of promoted halal products; and
3. Double deduction on expenses incurred in obtaining international quality standards certification such as HACCP, GMP Codex Alimentarius (food standards guidelines of FAO and WHO), Sanitation Standard Operating Procedures and regulations for compliance for export markets such as Food Traceability from farm to fork.

The proposal is applicable to applications received by Halal Development Corporation from 22 October 2016 onwards.

C4.         Tax incentive for the structured internship programme (SIP)

Double deduction on qualifying expenses incurred to implement SIP approved by Talent Corporation Malaysia Berhad for eligible Malaysian students shall be extended up to YA 2019. Also, the scope of SIP be also expanded to include full-time vocational courses (Malaysian Skills Certificate Level 3).

The proposal is effective from YA 2017 to YA 2019.

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D.        REAL PROPERTY GAINS TAX

D1.        Gift of chargeable asset

The no gain no loss provisions applicable to disposal of chargeable asset by way of gift between husband and wife, parent and child or grandparent and grandchild is now restricted to a donor who is a citizen. The donor who is a citizen will be deemed to have received no gain and no loss on the disposal and where the gift is made within 5 years after the date of acquisition by the donor, the recipient shall be deemed to acquire the asset at an acquisition price to equal to the acquisition price paid by the donor plus the permitted expenses by the donor.

The proposal is effective upon coming into operation of the Finance Act 2017.

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E.        STAMP DUTY

E1.         Purchase of first residential property

Effective from 1 January 2017 until 31 December 2018, first-time home buyers could enjoy 100% stamp duty exemption for residential property costing not more RM300,000. For residential property priced between RM300,001 and RM500,000, the stamp duty exemption will still be given but only in respect of the value of RM300,000. The remaining value will be subject to the stamp duty at the prevailing rate. For residential property costing more than RM500,000, there will not be any stamp duty exemption.

E2.         Transfer of real property valued more than RM1m

There will be an increase in the rate of stamp duty on instruments for the transfer of real property worth more than RM1 million. The rate will increase from 3% to 4% with effect from 1 January 2018. This proposed amendment was not mentioned in the Finance Bill 2016 but was mentioned in the 2017 Budget Speech, with the intention to enhance the Government’s commitment to long term fiscal policy.

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F.        TAX ADMINISTRATION

F1.         Establishment of the Collection Intelligence Arrangement (CIA)

It is proposed that CIA will be set up under the Ministry of Finance, which will involve the IRB, Royal Malaysian Customs Department and the Companies Commission of Malaysia. All these agencies will share data to enhance efficiency in tax collection and compliance. The establishment will also enable these agencies to tackle the taxation of the informal economy which can enhance tax revenue collection.

F2.         Filling of estimate or revised estimate of tax payable (“Form CP204 / CP204A”) by limited liability partnership, trust body or co-operative society via electronic medium

The mandatory requirement to furnish CP204 / CP204A via e-filing has been expanded to limited liability partnership, trust body or co-operative society. The proposal is in line with the Government’s objective to encourage more taxpayer to use electronic medium for submission of return forms.

The proposal is effective from YA 2019.

F3.         Revision of tax returns for events arising after submission of tax returns

Administrative procedures for revision of tax return as a result of the following events will be permitted:-

1. Tax exemptions, reliefs, remissions, allowances or deductions which is granted or approved only after submission of the tax returns
2. Deduction of expenses has not been claimed because the payment of withholding tax has not been made under the Act on the day the tax return was submitted

This applies to both situations where there is no chargeable income or excessive assessment.

The proposal is effective from 1 January 2017.

F4.         Expansion of scope of revision of tax returns in respect of error or mistake

Currently, taxpayers which have made an error or mistake in their tax returns for a YA are entitled to apply to revise their tax return by making an application to the IRB. However, taxpayers can do so only in cases where the error or mistake:-

1. Ultimately gave rise to a tax payable position for that YA; and
2. The tax payable for that YA has been paid

The scope of the revision shall now be expanded to include error or mistake which does not give rise to a tax payable position for that YA such as errors in computing unabsorbed losses or capital allowances of a loss making business.

The proposal is effective from 1 January 2017.

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G.        GOODS & SERVICES TAX (GST)

G1.        Widening of GST relief for disabled persons

GST relief for disabled persons will be more flexible as it will be given directly to the valid OKU card holders (previously only disabled person who is Private Charitable Entities’ member) on the purchase of approved equipment (more equipment are included) from the suppliers designated by the Social Welfare Department, with effect from 1 January 2017.

G2.        Change of GST time of supply for imported services

In order to give time to account for output tax and claiming of input tax, the time of supply for imported services shall be at the following dates whichever is the earlier:-

1. the date when payment is made by the recipient; or
2. the date when any invoice is received from the supplier who belongs in a country other than Malaysia or who carries on business outside Malaysia

The proposal is effective from 1 January 2017.

G3.        Increase in late GST payment penalties

The proposed amendment clarify the late payment penalties which will now only apply on the amount of tax unpaid and with the following new rates:-

No. days unpaid	Penalty rate (New)	Penalty rate (Old)
1 to 30 days	10%	5%
31 to 60 days	additional 15%	Additional 10%
61 to 90 days	additional 15%	Additional 10%

The proposal is effective from 1 January 2017.

G4.        Streamlining the GST treatment in Free Industrial Zones (FIZ) and Free Commercial Zones (FCZ)

To facilitate a more simplified GST treatment, the proposed amendments are as follows:-

GST is not chargeable on the supply and removal of goods made:

• within and between FCZ
• within and between FIZ, and
• between FCZ and FIZ.
• GST shall not be due and payable on the goods imported into FIZ.
• GST is suspended on the removal of goods from free zone to Designated Areas, i.e. Langkawi, Labuan and Tioman, etc.
• GST is suspended on the removal of goods from free zone to an approved warehouse under the Warehousing Scheme, vice versa.

However, the above treatments shall not be applicable on the following supplies:

• Goods as prescribed under the Free Zones (Exemption of Goods and Services) Order 1998
• Goods and services as prescribed under Goods and Services Tax (Imposition of Tax for Supplies in Respect of Designated Areas) Order 2014, and
• Any other goods prescribed by the Minister of Finance.

The proposals are effective from 1 January 2017.

G5.        Streamlining the GST treatment between imported and local goods under the Warehousing Scheme

In order to streamline the GST treatment, no GST shall be charged on goods from Licensed Manufacturing Warehouse, Excise Warehouse and FIZ that are deposited into and supplied within or between above warehouses under the Warehousing Scheme.

The proposal is effective from 1 January 2017.

G6.        New paragraph 8 added to Second Schedule of the GST Act 2014

It is proposed to include specific paragraph that, any supply of land by a developer or a land owner to the Federal Government, State Government, local authority or any other person in compliance with the law requirement for the purposes of providing public amenities and public utilities shall be treated as neither a supply of goods nor supply of services.

The proposal is effective from 1 January 2017.

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CONCLUSION

In conclusion, the Budget 2017 does provide some goodies to the Rakyat without imposing additional fiscal burden despite the pessimistic economy outlook. The Government is committed to achieve a developed nation country while taking care of the well-being of the Rakyat.

If you require further clarification, please do not hesitate to contact Mr Alex Liew at 03-77271662 or email to alex@lyco.com.my.

 

Relevant links and sources:-

Budget Speech and Appendix, Finance Bill 2016 at Inland Revenue Board Official Portal.

http://www.hasil.gov.my/bt_goindex.php?bt_kump=3&bt_skum=1&bt_posi=1&bt_unit=2&bt_sequ=1

Finance Act 2017 (if available) can be downloaded.

http://www.federalgazette.agc.gov.my/

Gazetted Amendments to GST Regulations 2014 (amendment 2016) can be downloaded.

http://gst.customs.gov.my/en/rg/Pages/rg_reg.aspx