Securing Tax Benefits

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Malaysia’s revised Budget 2023 was re-tabled in the Parliament on 24 February 2023 with a refreshed focus on spurring economic growth and growing investments, in addition to protecting the people.
For example, the revised Budget proposed tax savings for individuals in the M40 income group and reduced tax rate for the first RM150,000 chargeable income for micro, medium, and small enterprises.
However, these raise further questions on whether taxpayers would be driven to manage earnings to secure these tax benefits and maybe more.
The act of managing earnings also referred to as ‘earnings management’ can be described as influencing earnings downwards through aggressive tax planning to reduce the amount of tax payable.
Malaysia boasts a wide range of tax incentives in the form of income exemptions and allowances as stated in the Income Tax Act 1967 and Promotion of Investment Act 1986.
For example, companies that produce a promoted product or engage in a promoted activity may be eligible for either Pioneer Status or Investment Tax Allowance, and the benefits that come along with it.
Individuals in Malaysia can enjoy tax benefits in the form of rebates, deductions, and tax reliefs such as medical insurance for self, children’s education insurance, and purchase of personal computer, smartphone, or tablet.
Companies in Malaysia are generally taxed at the corporate tax rate of 24 per cent, with the total tax payable being subject to the paid-up ordinary share capital.
A resident company with paid-up capital that is lesser or equal to RM2.5 million and gross business income not exceeding RM50 million would be subject to a corporate rate of 15 per cent on the first RM150,000 of taxable income, and subsequently 17 per cent on the amount in excess of RM150,000 up to a maximum of RM600,000.
For these companies, anything more than RM600,000 of taxable income is subsequently taxed at 24 per cent. On the other hand, a resident company with paid-up capital that exceeds RM2.5 million is liable to a flat tax rate of 24 per cent on the taxable income.
Individuals with a taxable income of between RM50,001 and RM70,000 enjoy a reduction in tax from 13 per cent to 11 per cent according to the revised budget. Moreover, those with taxable income within the RM70,001 to RM100,000 bracket also enjoy reduced tax from 21 per cent to 19 per cent.
Therefore, bearing in mind these new tax concessions, will managing earnings to fall within the preferred income bracket be effective in helping individuals and companies enjoy the tax benefits?
The answer is YES but from a critical angle, this would also depend on the extent the individuals and companies are willing to go to manage earnings and reduce tax payable as there exists a thin line between aggressive tax planning, tax avoidance, and tax evasion.
For example, a company with paid-up capital above RM2.5 million would be motivated to reduce its taxable income through deferred tax and managing its deductible expenses such as employees’ petrol and mileage, commission for sales, utilities, phone and internet costs.
Alternatively, individuals with a taxable income above RM100,000, for example, would endeavor to reduce the future taxable income within the bracket of RM70,001 to RM100,000 by managing their earnings through allowable deductions to enjoy the 19 per cent tax rate.
Even though Malaysia has stepped into the endemic stage of COVID-19 c, individuals and businesses alike are still reeling from the adverse financial repercussions of the pandemic and continue to fight to keep their heads floating above water.
According to the Asian Development Bank’s Governance Brief 2021, Malaysia’s tax revenue declined by 38.1 per cent between April to June 2020 compared to the same period in 2019.
The reduction was attributed to a drop in direct tax collection of 40.8 per cent from corporate income tax and petroleum tax, and a decline in sales and services taxes due to a drop in the tax base in the form of business profits and individual incomes.
Thus, it comes as no surprise that individuals and companies would willingly jump on the bandwagon and perhaps not even think twice before resorting to managing earnings to earn tax benefits and reduce their tax liability.
The possible reality would be that individuals and companies have decided to err on the side of caution and take advantage of the tax benefits through earnings management.
This is done to reduce their financial burden and save cash on their end for what seems like a rainy day that has transcended into a long-term storm that may slowly show signs of receding in the distant future.

About the authors: Associate Professor Dr Nor Shaipah Abdul Wahab is an Associate Professor and Head of School for the School of Accounting & Finance, Faculty of Business and Law, Taylor’s University while Dr Premagowrie Sivanandan is a Senior Lecturer and Head of Department for the School of Accounting & Finance, Faculty of Business and Law, Taylor’s University. This is an opinion column. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of this publication.

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