Lower corporate tax trend

By DANNY YAP

MANY economists expect Malaysian companies to enjoy lower corporate tax rates beyond 2008. 

Among the measures announced in Budget 2007 is the reduction of the corporate tax from 28% currently to 27% next year and to 26% the following year. 

CIMB Securities head of economic research Lee Heng Guie said the initial reduction in corporate tax rate of 1% in 2007 was considered small, but it was a good start. 

“We believe that corporate tax rate would go down further over the next few years,” he told StarBiz. 

Lee Heng Guie

Lee said the Government was taking measures to reform the tax structure to make it more efficient, while balancing the need to attract investors and control inflation. 

“A reduction in corporate tax rate is also necessary to attract investors to set their operations here as well as to make the country more competitive,” he said, adding that many countries, including Australia and Singapore, had also reduced their corporate tax rates.  

Malaysia's 28% corporate tax level has not changed since 1998.  

Lee said reforms to the current tax structure were also necessary to factor in impending changes to the taxation system like the implementation of the goods and services tax (GST).  

“The reforms to the tax structure will allow local companies to have extra funds to invest locally and abroad and increase private investment,” he said, noting that the reduction in corporate tax was in line with the Government's expansionary economic policy to boost growth.  

A Mayban Securities economist said the cut in corporate tax, while good for local companies, should also be prudently set by the Government in any given year to reflect the costs and gains of doing business and to ensure that tax rates did not unduly fuel inflation.  

“Any reduction should be adopted hand-in-hand with other fiscal incentives such as exemption on increased value-added products, availability of pioneer status and investment tax allowances,” he said. 

The economist said the Government had refrained from cutting taxes in the past two Budgets to reduce private sector spending.  

“But the economy is now in a better shape and it is time to spur growth, so it's important that corporations have sufficient funds to invest via reduced tax,” he said. 

Asked if a 1% reduction in corporate tax rate annually was sufficient to spur growth, he said: “It's not significant on a yearly basis. 

“There are some economists who believe the reduction in corporate tax should be higher on a yearly basis to be an effective incentive to drive growth.” 

However, he said, a 1% tax reduction may be significant for the companies. 

“It depends on the taxable earnings, the company's size or whether it is a loss-making company,” he added. 

Currently Malaysia's corporate tax rate is one of the lowest among Asian countries – lower than Thailand (30%), Australia (30%) and even India (33.6%) – but higher than Singapore (20%), Hong Kong (17.5%) and Taiwan (25%) (see table). 

On the impact to the stock market, a recent OSK Research report said the cut in corporate tax, though positive, would have a “nominal'' impact on the stock market. 

A senior tax consultant said the drop in corporate tax could provided an incentive for businesses to grow and thereby would increase tax receipts. 

He said that from 1998 to 2004, when the corporate tax rate fell, the Australian tax collections jumped from A$19bil to A$41bil. 

“The Government is like a partner to a business, but it does not share risks or losses. If the corporate tax rate is too high, it will discourage corporations from taking risks and seizing business opportunities. So it is important for a favourable corporate tax rate to be established,” he said. 

Asked what would be a favourable tax rate, he said: “It depends on a country's priority. The tax rate hinges on the objective of the Government in balancing funds from tax for social as well as economic needs of the particular country.”  

On the long-term impact of lower tax rate, he said it could lead to inflationary pressures if not handled properly by the Government. Inflation is currently around 4%. 

“With businesses having more money to spend, it increases the demand for products and services, which may push prices up. Continued price increases can lead to inflationary pressures,” he noted.