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Budget Highlights 2012

BUDGET 2012 – NATIONAL TRANSFORMATION POLICY: WELFARE FOR THE RAKYAT, WELL-BEING OF THE NATION

The 2012 Budget emphasizes the Government’s efforts in addressing inflation as well as focusing on the well-being of the rakyat, especially the lower-income group and those in the rural areas. 

The highlights of the 2012 Budget are summarized in the ensuing paragraphs:

-          Revising Real Property Gains Tax Rates;

-          Compensation for Late Refund of Income Tax;

-          Tax Incentives;

-          Enhancement of Retirement Scheme;

-          Changes of Employees Provident Fund (EPF).

We have summarized the key amendments outlined in the 2012 Budget into the following broad categories: 


Income Tax – Changes Affecting Individual

1.    Returning Expert Programme

·         Employment income of an individual approved by the Ministry of Finance (MOF) under the Returning Expert Programme be taxed at a flat rate of 15% for 5 consecutive years of assessment;

·         There are certain condition need to be satisfied for this programme:

- The internship programme is for full time undergraduate students from the Public / Private Higher Educational Institutions;

- The internship programme is for a minimum period of 10 weeks with a monthly allowance of not less than RM500; 

·         Effective YA 2012

2.      Tax Treatment for Private Retirement Scheme (PRS)

·         An Additional tax relief up to RM3,000 on contributions made to the PRS approved by the Securities Commission;

·         The current tax relief of RM1,000 on annuity premium (a component of the current tax relief on EPF contribution and life insurance premium) is removed and incorporated as part of the proposed RM3,000 relief for contributions to PRS;

·         Withdrawal of contribution from PRS prior to maturity period or attaining mandatory retirement age is taxable;

·         Effective YA 2012 to YA 2021

3.       Employees Provident Fund (EPF) Contributions

3.1   Withdrawal of EPF Savings by Expatriate

·         Expatriate contributing to EPF be allowed to withdraw EPF savings to purchase a house in Malaysia.

3.2    Employers’ EPF contribution increased to 13%

·         Employers’ contribution be increased from 12% to 13% for contributors who earn RM5,000 or below.

 

Income Tax – Changes Affecting Companies and Unincorporated Businesses

 

1.       Double Deduction on Expenses Incurred on Structured Internship Programme

·         Double deduction be given on expenses incurred by companies that participate in the structured internship programme implemented by the Ministry of Higher Education (MOHE) in collaboration with Talent Corporation Malaysia Berhad (TalentCorp) which includes technical, communication and business skills;

·         Qualifying criteria of the internship programme;

- For full time undergraduate students from the public/private higher educational institutions;

- For a minimum period of 10 weeks with a monthly allowance of not less than RM500

·         Effective YA 2012 to YA 2016  

2.       Double Deduction for Scholarships

·         Double deduction be given to companies awarding scholarships to Malaysian students pursuing diploma and bachelor’s
degree in local institutions of higher learning registered with the MOHE;

·         Conditions;

- Must be full time student;

- Have no sources of income;

- Total monthly income of parents or guardian does not exceed RM500

·         Effective YA 2012 to YA 2016   

3.       Double Deduction on Expenses Incurred to Participate in Career Fairs Abroad

·         Double deduction be given on expenses incurred by companies in participating in career fairs abroad that are endorsed by
TalentCorp;

·         Effective YA 2012 to YA 2016

4.       Tax Deduction on Franchise Fee

·         Tax deduction be given on franchise fee incurred on local franchise brands;

·         Effective YA 2012 

5.       Tax Treatment for PRS

·         Tax exemption be given on income received by PRS fund;

·         Tax deduction of up to 19% of employees remuneration be given on contributions (including contributions to EPF and approved scheme under Section 150 of the ITA 1967) made by employers for employees to PRS.

6.       Effective YA 2012  Time Bar for Tax Audit

·         The time frame for tax audits performed by the DGIR be reduced from 6 years to 5 years after the expiration of a YA;

·         Effective YA 2013 

7.       Financial Contribution Made to Registered Primary and Secondary Schools and Registered Places of Worship

·         Tax deduction be given on financial contributions made to registered primary and secondary schools as well as registered places of worship;

·         The effective date of this proposal is unknown, pending the gazette of the relevant legislation. 

8.       Duty to Furnish Particular of Payments Made to an Agent, etc

·         It is proposed that every company must prepare and provide to each of its agents, dealers or distributors, who receives payment (whether in monetary form or otherwise) arising from sales, transactions or schemes, a prescribed form containing particulars of payment, name and address of the agent, dealer or distributor and other particulars which may be required by the Director General of the IRB. The prescribed form must be provided on or before 31 March of the following year. The company must retain the prescribed form in its safe custody and make it really available to the IRB upon request;

·         Effective YA 2012  

9.       Review of the Definitions of Contract R&D Company and R&D Company

·         Double deduction be given on payments made for the use of the service of a contract research and development company or a research and development company that fulfills the conditions specified by the relevant.

10.   Tax Deductions Not Allowed

·         Sections 39(1)(f), (i) and (j) of the Income Tax Act 1967 (ITA) disallows the deduction of interest, royalty, contract payment, technical services and other gains or profits derived from Malaysia if the related withholding taxes have not been withheld and remitted to the Director General (DG);

·         It is proposed that from 1 January 2012, this disallowance will not apply to persons enjoying income tax exemption under Section 127(3)(b) or 127(3A) of the ITA or under the Promotions of Investment Act 1986.    

11.   Rationalisation of Tax Incentive for shipping Companies

·         In line with the rationalization of tax incentive for Malaysian resident shipping companies, effective from YA 2012, the income tax exemption for these companies will be reduced from 100% to 70% of statutory income. The balance of 30% is taxed;

·         Furthermore:

- The income derived from each Malaysian ship shall be treated as income from a separate and distinct business source;

- The current year adjusted loss of each business source may not be set off against the balance of 30% for a YA;

- Any unabsorbed losses from prior years can only be used to set off against the exempt income of the same business source;

- Statutory income from a non-tax exempt business source shall be deemed to be the total income of shipping company;

·         Transitional provisions have been put into place to dictate the treatment of unabsorbed losses and capital allowances from prior years.  

 

Tax Incentives

 

1.       New Tax Incentive for Private Schools

Currently, income tax exemption and various tax incentives have been given to Non Profit Oriented Private, International and Expatriate Schools.

To encourage the involvement of the private sector in educational services, it is proposed that the following incentives be given:

·         Profit Oriented Private and International Schools

      - Income tax exemption of 70% for a period of 5 years;

      - Double deduction for overseas promotional expenses from year of assessment 2012;

·         Profit Oriented Private Schools

      - Investment Tax Allowance of 100% on qualifying capital expenditure for 5 years to be      s     set-off against 70% of statutory income. 

2.       New Tax Incentives for New 4 and 5 Stars Hotels in Peninsular Malaysia

·         The following tax incentives be given to investors undertaking new investments in 4 and 5 stars hotels in Peninsular Malaysia;

- Pioneer Status (PS) with income tax exemption of 70% of statutory income for a period of 5 years; or

- Investment Tax Allowance (ITA) of 60% on the qualifying expenditure incurred within a period of 5 years to be set off against 70% of the statutory income for each YA;

·         Effective for applications received by MIDA from 8 October 2011 until 31 December 2013.

3.       New Tax Incentives for Providers of Industrial Design Services (IDS) in Malaysia

To promote creativity, innovation and modern technology involving local designers, IDS providers will be eligible for pioneer status with income tax exemption of 70% on statutory income for 5 years.

IDS providers must meet the following criteria:

·          New service providers to employ at least 50% Malaysian designers;

·         Existing IDS providers undertaking expansion and non-IDS providers which would be carrying out industrial design activities:

- Upgrading the design facilities by increasing the capital investment of at least 50%;

- Employ an additional 50% qualified Malaysian designer.

The IDS providers and the Malaysian designers must be registered with the Malaysia Design Council and the IDS services
must be provided to non-related companies. Furthermore, the IDS provided must be for the purpose of mass production.    

4.       New Tax Incentives for Treasury Management Centre(TMC)

To develop Malaysia as a competitive financial centre in this region and to attract multinational corporations to choose Malaysia to
locate their TMC (a centre that provides financial and fund management services to a group of related companies within or outside
the country), it is proposed that the following incentives be given:

·         70 % tax exemption on statutory income from the following qualifying treasury services rendered by the TMC to its related
companies for 5 years:

- All fee income and management income from provision of qualifying services* to related companies in Malaysia and overseas;

- Interest income received from lending to related companies in Malaysia and overseas;

- Interest income and gains received from placement of funds with licensed onshore banks or short term investment (onshore
and offshore) as part of managing surplus funds within the group;

- Foreign exchange gains from managing risks for the group; and

- Guarantee fees

·         Withholding tax exemption on interest payments on borrowings (funds used in conducting qualifying TMC activities);

·         Stamps duty exemption on loan and service agreements executed by TMC in Malaysia for qualifying TMC activities;

·         Expatriates working in a TMC are taxed only on the portion of their chargeable income attributable to the number of days
they are in Malaysia.  

* Qualifying services include:

·           Cash management;

·           Current account management;

·           Financial and debt management;

·           Investment services;

·           Financial risk management;

·           Corporate and financial advisory services.

Applications to be received by MIDA from 8 October 2011 until 31 December 2016

5.       New Tax Incentives for Kuala Lumpur International Financial District (KLIFD)

The KLIFD is a proposed joint property development comprising office towers for finance and banking, residences and
retail spaces between 1Malaysia Development Berhad and the Mubadala Development Company on a plot of land covering
34.4 hectares near Jalan Tun Razak, Kuala Lumpur.

To accelerate the development of the KLIFD, it is proposed that the following incentives be given:

·         Income tax exemption of 100% for 10 years and stamp duty exemption on loan and service agreements for KLIFD status
companies;

·         Industrial building allowance and accelerated capital allowance for KLIFD Marquee Status Companies;

·         Income tax exemption for 70% for 5 years for property developers in KLIFD.

6.       Amendments to the Reinvestment Allowance Incentive

The following amendments are being proposed:

·         In line with the phasing out of the special promoted areas under the Promotion of Investment Act 1986, the preferential
treatment (i.e. Sabah, Sarawak, Labuan, Perlis, Kelantan, Terengganu, Pahang and Mersing) will not be applicable for the
reinvestment allowance incentive effective from YA 2012;

·         For purpose of clarity, the term “factory” is now specifically defined as the floor areas of a building or an extension of a
building which is used for the purpose of a qualifying project to install or place plant and machinery as well as storage area
for raw materials and goods must not exceed 10% of the total area of the building or extension.   

7.       Extension of Tax Incentive for Real Estate Investment Trusts (REITs)

Dividends received from REITs listed on the Bursa Malaysia by:    

·         Foreign institutional investors (pension funds and collective investment funds);

·         Non-corporate investors (resident & non-resident individuals and other local entities);

are currently subject to a final withholding tax at 10%. This incentive is now extended for another 5 years from 1 January
2012 to 31 December 2016. 

8.       Extension of Exemption Period on Income from the Trading of Non-Ringgit Sukuk

The following income from the issuance and trading of non-Ringgit sukuk originating from Malaysia are currently tax exempt:

·         Fees received by qualified institutions in undertaking the arrangement, underwriting and distribution of such sukuk;

·         Profits of qualified institutions received from the trading of such sukuk.

These sukuk must be approved by the Securities Commission or the Labuan Financial Services Authority.

To promote the issuance and trading of such sukuk, it is proposed that the existing tax incentives be extended for another 3
years, i.e. from YA 2012 to YA 2014  

 

Real Property Gains Tax

1.       Review of Real Property Gains Tax (RPGT)

Currently the RPGT imposed at the effective rate of 5% for disposals of real property within 5 years from acquisition date
has not been effective in curbing speculative activities in real property.

To ensure that the lower and middle income groups are able to own affordably priced houses, it is proposed that the
effective RPGT rates be reviewed as follows, for disposals of real properties from 1 January 2012:

Holding period

 

Proposed RPGT Rates

Companies

Individuals

Up to 2 years

10%

10%

Exceeding 2 until 5 years

5%

5%

Exceeding 5 years

0%

0%

 

Indirect Taxes

 

1.       Extension of Import Duty and Excise Duty Exemption for New CBU Hybrid and Electric Cars

·         The 100% exemption of import duty and excise duty given to franchise holders of new completely-build-up (CBU) hybrid
cars and electric cars be extended until 31st December 2013, if certain conditions are fulfilled;

·         Effective for applications made to the MOF from January 2012 until 31 December 2013.

2.    Additional Indirect Tax and Other Incentives for Individual Owners of Budget Taxis and Hire Cars

Currently owners of budget taxis and hire cars enjoy the following incentives:

·         100% excise duty exemption on purchase of new locally manufactured cars used as budget taxis;

·         100% excise duty exemption on purchase of new locally assembled cars used as hire cars;

·         Road tax at RM 20 per year.

Excise duty based on the current value of the car shall be paid when the car is sold or the ownership is transferred.

To assist individual owners of budget taxis and hire cars, the following has been proposed:

                        Effective 8 October 2011:

·         100% sales tax exemption on purchase of new locally manufactured cars used as budget taxis and hire cars;

·         Exemption of excise duty and sales tax on sale or change of ownership of budget taxis and hire cars after seven years
of registration.
Effective 1 January 2012

·         Road tax on budget taxis and hire cars to be abolished

Effective from 1 January 2012 until 31 December 2013:

·         Interest rate subsidy of 2% per annum for 2 years on full loans for financing the purchase of new locally manufactured
cars used as budget taxis and hire cars;

·         Assistance of RM3,000 for replacement of budget taxis and hire aged more than seven years but less than 10 years;

·         For budget taxis and hire cars aged 10 years and above, an assistance of RM1,000 will be given.

 

Stamp Duty & Others

 

1.       Stamp Duty Exemption for Loan Agreements under Skim Perumahan Rakyat 1 Malaysia (PR1MA)

·         In order to provide the middle income group access to quality and comfortable residential properties, full exemption
on stamp duty is given for loan agreements for residential properties valued up to RM300,000 and purchased under PR1MA.
This exemption is applicable for sale and purchase agreements executed from 1 January to 31 December 2016.

2.       Stamp Duty Exemption for Micro Finance and Professional Services Fund

·         In order to reduce the cost of doing business for micro enterprises and SMEs, and to assist professional groups to establish
firms in rural areas, it is proposed that 100% stamp duty exemption be given on loan agreements up to RM50,000 under the
Micro Financial Scheme or the Professional Services Fund.

·         This is effective for instruments executed from 1 January 2012   

3.        Liberalisation of Foreign Equity Participation in Selected Subsectors

·         Foreign ownership in selected subsectors, including private hospitals services, medical and dental specialist services, architectural,
engineering, accounting and taxation, legal services, courier services, education and training services and telecommunication
services, be allowed up to 100%. 

4.       Enhancing Administration System and Tax Compliance

In line with technological advancement and usage of various electronic devices, it is proposed that from YA 2012:

·          Individual taxpayers are allowed to furnish tax returns through e-Filing via mobile devices;

·         Information on total income, PBC deductions, EPF contributions, insurance and zakat will be pre-filled by IRB for salaried
taxpayers using the e-Filing system. Such information must be submitted by their employers to IRB.    

5.       Compensation for Late Refund of Income Tax

·         To ensure taxpayers are accorded equitable treatment and to enhance tax administration efficiency, a new Section 111D
had been introduced whereby taxpayers would be entitled to compensation of 2% on the amount of tax refunded late
by the DG with effect from YA 2013, provided the taxpayers have filed the income tax returns before the expiry of the
stipulated filing deadlines;

·         The amount of compensation is determined in accordance with the following formula:

(A * B * 2%) / C

Where,  A  is the amount refunded under section 111 for a year of assessment

B  is the number of days beginning from the first day after the period specified:

 - 90 days from the due date for e-Filing,

- 120 days from the due date for manual tax filing.

C  is the number of days in a year;

·         Taxpayers that are appealing against the assessment or entailed to Section 110 refund will not be entitled to the compensation.
It the compensation is wrongly paid or ought not to have been paid to the taxpayer, the taxpayer is required to repay that
amount to the DG together with a penalty of 10% on the amount which ought not to have been paid.
  

6.       Advance Payment by Installments

It is proposed that where:

·         A taxpayer is late in submitting his tax return; or

·         The DG has reason to believe that a taxpayer has made an incorrect return by omitting or understating any income or
giving incorrect information in relation to any matter affecting his own chargeability to tax,

the DG may direct that taxpayer to make installment payments (via a prescribed form) on account of tax which may be
payable by that taxpayer before issuing an assessment or composite assessment.

The taxpayer may apply to the DG to vary the amount of tax or number of installments within 30 days after the service of
the direction.

This direction shall cease when an assessment or composite assessment is made.              

7.       Accessibility to Computerised Data

·         A new Section 80(1B) of the ITA 1967 be introduced to allow the DGIR to have access to computerised data whether stored
in a computer or otherwise, be provided with the necessary password, encryption code, decryption code, software or
hardware and other means required to enable the comprehension of the computerised data;

·         Effective 1  January 2012