Malaysia can’t afford corporate tax cut right now, says Zafrul

Malaysia can’t afford a cut in corporate tax, which is currently at 24%, unless the country’s tax base is broadened and the country maintains a stronger-than-average growth trajectory, Finance Minister Tengku Zafrul Aziz says.

“If you look at the corporate income tax, it does represent a big chunk of the federal government’s revenue of approximately 32.8% including petroleum income tax, and given the widening fiscal deficit which is expected to be around 6.5% this year due to the pandemic.

“(Hence) Malaysia, I believe, is not in the position at this stage to afford a tax rate cut as one of the problems has been in our narrow tax base.

“Until we can broaden our tax base and maintain a stronger-than-average growth trajectory – then we can consider a cut in corporate tax rate,” he said in an interview with Singapore’s Straits Times titled “Beyond the Pandemic: Malaysia’s Way Forward”.

However, given that the global trend is favouring lower corporate tax, Malaysia in the future might need to at some point review its corporate structure to realign with the broader economic growth in the medium term, he said when asked if Malaysia would consider cutting its corporate tax to 15% over the next three to five years.

Malaysia’s corporate tax is among the highest in Asean. Singapore has the lowest at 17%, while Vietnam, Thailand and Cambodia are at 20% and Indonesia at 22%.

“Having said that, lower corporate tax is not the only component to attract foreign direct investments (FDIs),” Zafrul said.

“There are other key factors such as good infrastructure, human resources, and clear regulations.”

In a recently released pre-budget statement, the finance ministry said that the government was considering measures to increase tax revenue through increased tax compliance and to address the issue of revenue leakage, especially involving the smuggling of high-duty goods estimated at RM5 billion per annum.

In the pre-budget statement, the ministry said among the recommendations in the study was the implementation of a special voluntary disclosure programme for indirect taxes administered by the customs department.

It also said the government was aware that a conducive investment environment, whether for foreign or domestic investments, encompasses many aspects including economic and political stability, consistent and transparent policies, an efficient labour market and level of infrastructure facilities, a sound government structure, strong legal framework and decent quality of life in Malaysia.

“Fiscal incentives, including taxes, are one of the many factors that can attract investment. They can play an important role as a strategic policy tool in order to drive investments in Malaysia.”

As for addressing the high revenue leakage, the ministry in the 17-page document said the multi-agency working group, chaired by the ministry to formulate strategies to curb smuggling activities, had been further strengthened by the participation of the Malaysian Anti-Corruption Commission and the National Financial Crime Prevention Centre.

On investor confidence and FDIs, Zafrul said these had been severely affected due to the Covid-19 pandemic and to some extent the domestic political situation.

“But despite all this, we have recorded a much better investment inflow, especially when it comes to FDIs in the first half of 2021 as compared to the first half of 2020.

“So if you look at our vaccination rate and as more economic sectors open up, we are expecting improved investment outlook generally.”

He said Malaysia remains a preferred investment destination due to its well developed investment ecosystem.

“What is equally important is the direct domestic investment (DDI), which we continue to emphasise,” he added.

On other developments, he said the government would not tap the national reserves to fund the upcoming budget.

Asked if Malaysia would allow a bigger role for the private sector for infrastructure financing, he said it was the right time to revive more public-private sector partnerships, citing the 5G infrastructure project.

“Other infrastructure projects that may require private sector participation will be the railway projects that were recently announced.”

On political stability, he said the Malaysian Family concept introduced by Prime Minister Ismail Sabri Yaakob was focused on continuity and particularly on the challenges of Covid-19.

“Political leaders must strive for political stability. As we know, political turbulence is too costly for our economy and impacts investor confidence in the short, medium and long term.

“More importantly, we must also regain the confidence of Malaysians in the government’s exit strategy. We must work together as the Malaysian Family,” he said.

He said he was optimistic that together with politicians from the opposition, the nation’s recovery would be supported and a more resilient and sustainable future built for all.

“For us at the finance ministry, just like Budget 2021, we will strive to consult with as many parties as possible in preparing for Budget 2022. In fact, we’ve started the stakeholder engagement.

“We will look at how to get feedback which we can include in our recovery resilient reformed budget.

“I’m optimistic that a safe passage for Budget 2022 will be created and the government given ample space and support to navigate this tough terrain in the short to medium term, accommodating economic recovery,” he said.