Introduction

On October 23 2015 Prime Minister and Minister of Finance Dato' Sri Mohd Najib Tun Haji Abdul Razak unveiled the Malaysian budget for 2016. The budget seeks to promote the prosperity of the rakyat (ie, the people) and strike a balance between the capital economy and the 'people's economy' in order to create a competitive and progressive nation.

It focuses on five main priorities:

  • strengthening Malaysia's economic resilience;
  • increasing productivity, innovation and green technology;
  • empowering human capital;
  • advancing the Bumiputera agenda (ie, to increase the household income of indigineous people and their living standard); and
  • reducing the cost of living.

Personal income tax

Increase in individual income tax rates

Resident individuals in Malaysia are taxed at a graduated rate of between 0% and 25%. Non-resident individuals are taxed at a fixed rate of 25%.

It is proposed that, with effect from the 2016 assessment year, the income tax rate for:

  • the chargeable income bracket of between RM600,001 and RM1 million be increased to 26% (1% increase); and
  • the chargeable income bracket exceeding RM1 million be increased to 28% (3% increase).

It is also proposed that non-resident individuals be taxed at a fixed rate of 28% from the 2016 assessment year onwards.

Personal tax relief for SOCSO contributions

Employees receive no tax relief for Social Security Organisation (SOCSO) contributions. To encourage more employees to make voluntary SOCSO contributions, a personal income tax relief of up to RM250 per year is proposed for employee contributions from the 2016 assessment year onwards.

GST updates

Streamlining of zero-rated food products

The following food items are regarded as zero-rated supplies: lentils (dhal), vegetables, spices, sugar, noodle products and infant milk.

For the purposes of streamlining the goods and services tax (GST) treatment of food products belonging to the same category, it is proposed that zero-rated food items be expanded as follows from January 1 2016 onwards:

  • lentils/dhal – to include chickpeas, green and white beans and pigeon peas;
  • vegetables – to include lotus root and water chestnut;
  • spices – to include mustard seeds;
  • sugar – to include jaggery powder;
  • noodle products – to include mi kolok (dry); and
  • infant milk – to include organic and soya-based milk for infants and children.

Expansion of scope of zero-rated medicines

In order to ensure that consumers have access to quality medicines and drugs, the list of medicine under the Goods and Services Tax (Zero-rated Supply) Order 2014 is proposed to be expanded to include the following from January 1 2016 onwards:

  • all types of controlled drug in the Poison Groups A, B, C and D of the Poisons Act 1952;
  • over-the-counter medicines registered by the Drug Control Authority; and
  • drugs classified as medical devices under the National Essential Medicines List.

Exemption for air transport services in Sabah and Sarawak

Given that air transport is one of the main transport modes in Sabah and Sarawak, it is proposed that domestic air transport services for economy class passengers within and between Sabah, Sarawak and Labuan be treated as an exempt supply from January 1 2016 onwards.

Extension of Approved Trader Scheme to aerospace industry

Under the Approved Trader Scheme, GST is suspended on all goods imported in the course or furtherance of business by any persons approved under the scheme.

It is proposed that the list of persons that qualify for the scheme be extended to include companies undertaking aerospace maintenance, repair and overhaul activities from January 1 2016 onwards.

Relief on procurement of teaching materials and equipment

In order to streamline the GST relief provided to childcare centres, pre-schools, primary and secondary private schools and private higher educational institutions in respect of the procurement of teaching materials and equipment, it is proposed that the procurement of teaching materials and equipment by providers that conduct approved and accredited programmes under the National Skills Development Act 2006 be relieved from GST.

Relief on re-importation of goods

Goods that are exported temporarily for promotion, research or exhibition purposes are subject to GST on re-importation into Malaysia. Similarly, goods that are exported temporarily for rental and lease outside Malaysia are subject to GST at the standard rate of re-importation.

It is proposed that the re-importation of such goods be relieved from importation GST from January 1 2016 onwards.

Tax incentives

Tax incentive for ICABs

In order to incentivise accredited independent conformity assessment body (ICAB) companies that perform independent conformity assessment activities in the machinery and equipment, electrical and electronics, chemicals, aerospace, medical devices and fresh and processed foods sectors, the following tax incentives are proposed:

  • new ICAB companies – 100% income tax exemption for five years or a 60% investment tax allowance on qualifying capital expenditure for five years, which can be offset against 100% of the company's statutory income; and
  • existing ICAB companies – 60% investment tax allowance on qualifying capital expenditure for five years, which can be offset against 100% of the company's statutory income.

Qualifying independent conformity assessment activities include testing laboratories, calibration laboratories, certifications, inspections and "good laboratory practice". This incentive will apply to applications received by the Investment Development Authority from January 1 2016 to December 31 2018.

Extension of tax incentive for food production projects

Tax incentives are offered to attract investment in food production projects in Malaysia in the following categories:

  • companies investing in a subsidiary company which carries out newly approved food production projects – tax deduction equivalent to the amount of investment made in the subsidiary for the relevant year of assessment;
  • companies carrying out newly approved food production projects – 100% income tax exemption for 10 years; and
  • companies expanding approved food production projects – 100% income tax exemption for five years.

These incentives are available for applications received by the Ministry of Agriculture and Agro-Based Industry until December 31 2015.

To promote the development of agro-based industries in Malaysia further, it is proposed that the existing incentives be extended for another five years, to include all applications received by the Ministry of Agriculture and Agro-Based Industry from January 1 2016 to December 31 2020. The scope of approved food production projects will also be extended to include planting coconuts, mushrooms and cash crops, rearing deer, culturing seaweed, rearing honey bees and planting animal feed crops.

Double deduction for R&D projects

Companies can claim a double deduction for expenses incurred during research and development (R&D) projects pursuant to Section 34A of the Income Tax Act 1967, subject to Malaysian Inland Revenue Board (MIRB) approval.

To encourage companies with a paid-up capital of RM2.5 million or less to undertake R&D activities, it is proposed that such companies be eligible to claim an automatic double deduction for R&D project expenditures of up to RM50,000 for each year of assessment. However, qualifying companies must still submit an R&D project application to the MIRB. This incentive will be effective from the 2016 assessment year to the 2018 assessment year.

Extension of tax incentive period for REITs

Until December 31 2016 profits received by foreign institutional investors and non-corporate investors from real estate investment trusts (REITs) listed on Bursa Malaysia will be subject to a final withholding tax of 10%.

In conjunction with the government's effort to promote the development of REITs further and boost investments in the real estate sector, it is proposed that the tax incentive above be extended for another three years, until December 31 2019.

Introduction of special reinvestment allowance incentive

Companies which have incurred reinvestment costs for the purposes of expansion, modernisation, automation or diversification in the manufacturing industry, as well as selected agricultural activities, are eligible for the reinvestment allowance for 15 consecutive years. Under the reinvestment allowance incentive, 60% of the company's qualifying capital expenditure can be offset against 70% of its statutory income or, alternatively, against 100% of its statutory income, provided that the company meets the productivity level determined by the minister of finance in the relevant year of assessment.

To encourage companies which have exhausted their reinvestment allowances to reinvest, a special reinvestment allowance is proposed for reinvestments made in three years of assessment (ie, qualifying capital expenditure incurred from the 2016 assessment year through the 2018 assessment year).

Stamp duty

Extension of stamp duty exemption to revive abandoned housing projects

Until December 31 2015 the following stamp duty exemptions were available in order to revive housing projects which were certified by the Ministry of Housing and local government:

  • rescuing contractors – loan agreement instruments to finance the completion of abandoned housing projects and instruments of transfer of title for land and houses in abandoned housing projects; and
  • original purchasers – loan agreement instruments for additional financing and instruments of transfer of the house.

To encourage the completion of abandoned housing projects and alleviate the financial burden of affected house purchasers, it is proposed that the stamp duty exemption for both rescuing contractors and original house purchasers be extended for another two years, until December 31 2017.

Extension of stamp duty exemption on Sharia financing instruments

Consistent with the government's initiative to encourage Sharia-compliant financing, it is proposed that the 20% stamp duty exemption for Sharia financing instruments for home financing products (approved by the Sharia Advisory Council of the Bank Negara Malaysia or the Sharia Advisory Council of the Securities Commission Malaysia), which expired on December 31 2015, be extended for another two years, until December 31 2017.

Islamic finance incentives

Extension of tax incentive on issuance of SRI sukuks

Until the 2015 assessment year, a deduction was allowed in respect of expenses incurred on the issuance of sukuk bonds which complied with the requirements for sustainable and responsible investment (SRI) sukuks.

In order to promote the issuance of SRI sukuks, it is proposed that the tax deduction on the issuance costs of SRI sukuk approved or authorised by or lodged with the Securities Commission of Malaysia be extended for another five years, from the 2016 assessment year to the 2020 assessment year.

Extension of tax incentive on additional issuance costs of retail bonds and retail sukuk

The additional costs incurred pursuant to the issuance of retail bonds and retail sukuk (ie, professional fees for due diligence and preparation of prospectus, advertising costs for prospectus, Securities Commission and Bursa Malaysia fees and primary distribution fees) were subject to the following tax treatments between the 2012 assessment year and the 2015 assessment year:

  • double deduction on additional issuance costs for retail bonds; and
  • further deduction on additional issuance costs for retail sukuk.

To encourage private sector involvement in the capital markets, the following tax treatments for additional issuance costs relating to retail bonds and sukuk will be extended for another three years, from the 2016 assessment year to the 2018 assessment year:

  • double deduction on the additional issuance costs of retail bonds;
  • double deduction on additional issuance costs of sukuk under the principles of mudharabah (silent partnership enterprise), musyarakah (an investment partnership in which all partners are entitled to a share in the project's profits in a mutually agreed ratio), istisna' (a manufacturing contract), murabahah (mark-up sale) and bai' bithaman ajil (a sale and purchase contract for an asset which is paid in instalments within an agreed period. The selling price includes profit), based on tawarruq (monetisation); and
  • further deduction on additional issuance costs of sukuk under the principles of ijarah (lease) and wakalah (agency).

Extension of tax exemption on income from managing Sharia-compliant funds

Until the 2016 assessment year, companies which provide Sharia-compliant fund management services and are certified by the Securities Commission will be granted an exemption from income tax on the statutory income derived from providing fund management services to foreign investors and local investors in Malaysia, as well as to business trusts or REITs in Malaysia.

To further promote the business management activities of Sharia-compliant funds, it is proposed that this tax exemption be extended for another four years, from the 2017 assessment year to the 2020 assessment year.

For further information please contact Adeline Wong, Yvonne Beh, Tan Yi Lyn or Sarah Sheah at Wong & Partners by telephone (+60 3 2298 7888) or email (adeline.wong@wongpartners.com, yvonne.beh@wongpartners.com, yilyn.tan@wongpartners.com or sarah.sheah@wongpartners.com?). The Wong & Partners website can be accessed at www.wongpartners.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.