2012 BUDGET HIGHLIGHTS 7 October 2011

Executive Summary
Double deduction is given on expenses incurred in implementing structured internship programmes, in participating in approved overseas career fairs and in awarding scholarships to Malaysian students. Tax deduction is given on franchise fees paid for local franchise brands. Late tax refunds by the Inland Revenue Board are subject to compensation of 2%. Tax audit time bar is reduced from 6 years to 5 years from the date of assessment except for cases of false declaration, wilful late payment and negligence. Records shall continue to be kept for 7 years. Tax deduction is given for expenses incurred on the issuance of Islamic securities based on the Wakalah principle approved by Securities Commission (SC) or Labuan Financial Services Authority (LFSA). Existing tax exemptions for the issuance and trading of non-Ringgit Malaysia sukuks originating from Malaysia are extended to Year of Assessment (YA) 2014. 70% tax exemption on statutory income for 5 years is given to an approved Treasury Management Centre providing qualifying treasury services to its related companies. 100% income tax exemption for 10 years for Kuala Lumpur International Financial District status companies. Pioneer status or investment tax allowance is accorded to investors undertaking new investments in 4 and 5 star hotels in Peninsular Malaysia, providers of industrial design services and private schools and international schools registered with the Ministry of Education. Extension of 100% import duty and excise duty exemption for new completely-built-up hybrid and electric cars to 31 December 2013. Tax exemption under Section 54A of the Income Tax Act, 1967 (the Act) for shipping companies is reduced from 100% to 70% of statutory income. Tax relief of up to RM3,000 for contributions by individuals to SC approved Private Retirement Schemes. Real Property Gains Tax at the revised rate of 10% is imposed on disposals within 2 years of acquisition. 100% stamp duty exemption is given on loan agreements for the purchase of residential properties priced up to RM300,000 under the Skim Perumahan Rakyat 1Malaysia.

2012 BUDGET HIGHLIGHTS 7 October 2011

Overview and Commentary

The Prime Minister, YAB Dato Sri Mohd. Najib Tun Abdul Razak, tabled the 2012 Budget on Friday, 7 October 2011. The theme of the 2012 Budget National Transformation Policy: Welfare for the Rakyat, Well-Being of the Nation, reflects the Governments focus on enhancing the welfare of the rakyat and the journey to become a developed and high-income nation. For the 2012 Budget, an amount of RM181.6 billion has been allocated for operating expenditure whilst for development expenditure, the amount allocated is RM51.2 billion. On the revenue side, the Federal Government is expected to generate an amount of RM186.9 billion. Taking into account, the estimated revenue and expenditure, the Federal Government deficit in 2012 is expected to improve to 4.7% of GDP compared with 5.4% in 2011. To further support economic growth, the Government will implement a Special Stimulus Package through Private Financing Initiatives. In 2012, total projects amounting to RM6 billion will be implemented through the Special Stimulus Package and several public projects will be implemented to stimulate the economy and enhance the well-being of the rakyat. The five main focus areas of the Budget are: Accelerating investment; Generating human capital excellence, creativity and innovation; Rural transformation programme; Strengthening the civil service; and Easing inflation and enhancing the well-being of the rakyat.

The following are some of the more notable proposed changes in the 2012 Budget: Real Property Gains Tax (RPGT) In order to curb speculative activities, the RPGT rate has been revised such that chargeable assets disposed of within a period of 2 years from acquisition will be subject to RPGT at the rate of 10% whilst disposals within 2-5 years will be subject to RPGT at the rate of 5%. Disposals of assets held after 5 years remain exempt from RPGT. This is effective for disposal of properties commencing from 1 January 2012. Compensation for Late Refund of Income Tax by the Inland Revenue Board (IRB) As a measure to improve efficiency and to expedite the repayment of tax overpaid by taxpayers, it has been proposed that with effect from YA 2013, taxpayers will be given compensation of 2% on the amount of tax refunded late by the IRB. Development of the Kuala Lumpur International Financial District (KLIFD) To accelerate the development of the KLIFD, the Government has proposed a range of tax incentives including income tax exemptions for property developers in KLIFD as well as companies with KLIFD status.

2012 BUDGET HIGHLIGHTS 7 October 2011

Tax Incentive for Treasury Management Centre (TMC) To supplement the Governments efforts to develop Malaysia as a competitive financial centre in the region, a range of tax incentives including 70% tax exemption on statutory income and withholding tax exemption on interest have been proposed to encourage the establishment of TMC in Malaysia. This is effective for applications received by the Malaysian Investment Development Authority (MIDA) from 8 October 2011 until 31 December 2016.

The other key changes are outlined in the following pages.

Khoo Chin Guan Executive Director Head of Tax KPMG Tax Services Sdn Bhd

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT CORPORATE TAX Internship Programme

BUDGET PROPOSALS

Currently, expenses incurred by a company that provides practical training including an internship programme are eligible for a tax deduction. To encourage further companies participation in internship programmes, it is proposed that a double deduction be given on expenses incurred by companies that implement the structured internship programme (which includes technical, communication and business skills) that is jointly developed by the Ministry of Higher Education and Talent Corporation Malaysia Berhad. The qualifying criteria are, amongst other things, as follows: i. ii. The internship programme is for full time undergraduate students from the Public/Private Higher Educational Institutions; and The internship programme is for a minimum period of 10 weeks with a monthly allowance of at least RM500.

The proposal is effective from YA 2012 to YA 2016. Scholarship Awards At present, scholarships paid by companies directly to students qualify for single tax deductions. To encourage further the development of human capital, it is proposed that companies providing scholarships directly to students be given double deductions provided:i. the course of study must lead to a diploma, or degree or the equivalent of a diploma or degree undertaken at a higher educational institution established or registered under the laws regulating such establishment or registration in Malaysia or authorised by any order made under the Universities and University Colleges Act, 1971; the scholarships are granted to full-time students enrolled in the above local institutions of higher learning; the student has no means of his own; and the total monthly income of the parents or guardians of the student does not exceed RM5,000.

ii. iii. iv.

The scholarship is limited to payments required by such higher educational institution relating to the course of study and educational aids, as well as reasonable cost of living expenses during the students period of study at the higher educational institution.

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT

BUDGET PROPOSALS The proposal is effective from YA 2012 to YA 2016.

Career Fairs Abroad

The private sector is recognised as being a key contributor towards strengthening the development of highly-skilled human capital. To support this endeavour, it is proposed that expenses incurred by companies for participating in career fairs abroad that are endorsed by Talent Corporation Malaysia Berhad, be given a double tax deduction. The proposal is effective from YA 2012 to YA 2016.

Franchise Fees

To develop further a local product brand for domestic and international markets, it is proposed that a tax deduction be given on franchise fees paid for local franchise brands. The proposal is effective from YA 2012.

Time Bar for Audit

Based on the current Tax Audit Framework, a tax audit may cover a period of one to three YAs. However, the audit may be extended up to 6 YAs. It is proposed that the time bar for tax audits be reduced from 6 to 5 years. However, the proposal will not alter the requirement to keep records for 7 years from the end of the year to which any income from the business relates and for the purposes of ascertaining a persons chargeable income and tax payable. Notwithstanding the above, the Finance Bill does not contain a provision amending the limitation period in the Act. It therefore remains to be seen what the intention of this proposal is. The proposal is effective from YA 2013.

Payment to 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 readily available to the IRB upon request. The proposal is effective from 1 January 2012.

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT Insurance Companies - Losses

BUDGET PROPOSALS It is proposed that only the adjusted loss from a life fund for a YA is allowed to be deducted against the statutory income of the life fund of the insurer for subsequent YAs until it is fully utilized. Prior to the above proposed amendment, any unabsorbed business loss from the business of a life fund and other business of an insurer are allowed to be set-off against the statutory income of the life fund of the insurer. It is also proposed that the adjusted loss from the business of a life fund of an insurer for a YA is not allowed to be deducted against the aggregate of statutory income from other sources other than the life fund for the relevant YA. Any unabsorbed business loss from sources other than a life fund for the relevant YA are not allowed to be deducted against the statutory income of the life fund of that insurer for subsequent YAs. The proposal is effective from YA 2012.

CAPITAL MARKETS Real Estate Investment Trusts (REITs) Currently, income of a REIT which is exempt under Section 61A of the Act and distributed to unit holders is subject to the following final withholding tax: i. foreign institutional investors which include pension funds and collective investment schemes at the rate of 10% from 1 January 2009 to 31 December 2011; non-corporate investors which include resident individuals, non-resident individuals and other local non-corporate entities at the rate of 10% from 1 January 2009 to 31 December 2011; and nonresident companies at the rate of 25%.

ii.

iii.

To promote further the development of REITs in Malaysia, it is proposed that the concessionary tax treatment in paragraphs (i) and (ii) above be extended for another 5 years from 1 January 2012 to 31 December 2016. Islamic Securities To promote the growth of the Islamic capital market and to strengthen Malaysias position as the leader in the global sukuk market, it is proposed that a tax deduction be given on expenses incurred on the issuance of Islamic securities based on the Wakalah principle. The issuance of such sukuk must be approved by the SC or LFSA. The proposal is effective from YA 2012 to YA 2015.

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT Trading of NonRinggit Sukuks

BUDGET PROPOSALS Currently a tax exemption is given on the following from YA 2009 to YA 2011: i. income received by qualified institutions or persons in undertaking activities related to the arranging, underwriting and distribution of nonringgit sukuk originating from Malaysia; and income of qualified institutions received from the trading of non-ringgit sukuk originating from Malaysia.

ii.

To promote further Malaysia as an international hub for Islamic bond markets, it is proposed that the above tax exemptions be extended for another 3 years from YA 2012 to YA 2014. Treasury Management Centre TMC is a centre that provides financial and fund management services to a group of related companies within or outside the country. To develop Malaysia as a competitive financial centre in this region and to promote the establishment of TMCs in Malaysia, it is proposed that a TMC in Malaysia be given the following incentive package:i. 70% tax exemption on the statutory income arising from the qualifying services rendered by the TMC to its related companies for a period of 5 years; exemption from withholding tax on interest payments on borrowings by the TMC to overseas banks and related companies, provided the funds raised are used for the conduct of qualifying services; full exemption from stamp duty on all loan agreements and service agreements executed by the TMC in Malaysia for qualifying services; and expatriates working in the TMC are taxed only on the portion of their chargeable income attributable to the number of days they are in Malaysia.

ii.

iii.

iv.

The qualifying services of a TMC include cash management, current account management, financial and debt management, investment services, financial risk management, and corporate and financial advisory services. The proposal is effective for applications received by MIDA from 8 October 2011 until 31 December 2016.

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT TAX INCENTIVES New 4 and 5 Star Hotels

BUDGET PROPOSALS

Presently, tax incentives are given to new 4 and 5 star hotels in Sabah and Sarawak only. To continuously encourage the development of new 4 and 5 star hotels and to provide better accommodation facilities to attract highspending tourists, it is proposed that the following tax incentives be given to investors undertaking new investments in such hotels in Peninsular Malaysia:i. ii. Pioneer Status with income tax exemption of 70% of statutory income for 5 years; or Investment Tax allowance of 60% on the qualifying capital expenditure incurred within a period of 5 years and to be set-off against 70% of the statutory income for each YA

The proposal is effective for applications received by MIDA from 8 October 2011 until 31 December 2013. Hybrid and Electric Cars To support further Malaysias commitment to the reduction of carbon monoxide emissions, it is proposed that the full exemption of import duty and excise duty for new completely built-up (CBU) hybrid cars and electric cars be extended for another two years. The aforementioned is subject to certain criteria and conditions set for hybrid cars and electric cars. The proposal is effective for applications received by the Ministry of Finance (MOF) from 1 January 2012 until 31 December 2013. Industrial Design Services Currently, there is no tax incentive for providers of industrial design services. As a means to encourage creativity and innovation in industrial designing with the aim of improving productivity, quality and product competitiveness, it is proposed that providers of industrial design services be given Pioneer Status with income tax exemption of 70% on statutory income for 5 years, provided the following criteria are met:i. ii. new service providers who employ at least 50% Malaysian designers; or existing industrial design service providers undertaking expansion and non-industrial design service providers which would be carrying out industrial design activities: a. upgrade the design facilities by increasing the capital investment of at least 50%; and

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT b.

BUDGET PROPOSALS employ an additional 50% qualified Malaysian designers.

In addition, the above incentive is subject to the following conditions: i. ii. industrial design service providers and Malaysian designers must be registered with the Malaysia Design Council; industrial design service providers must be incorporated under the Companies Act 1965 or registered under the Business Registration Act 1956 and shall provide industrial design services to non-related companies; and industrial design services provided are meant for the purpose of mass production.

iii.

The proposal is effective for applications received by MIDA from 8 October 2011 until 31 December 2016. Shipping Companies Presently, the statutory income of a resident person who carries on the business of transporting passengers or cargo by sea on a Malaysian ship or letting out on charter a Malaysian ship owned by him on a voyage or time charter basis is wholly exempt from tax. It is proposed that the statutory income of that person from each Malaysian ship is to be treated as income from a separate business source and the income tax exemption is reduced from 100% to 70% of the statutory income. The balance of 30% of the statutory income is deemed to be the total income of that person and is subject to tax. Any adjusted loss for a YA in respect of a source consisting of a Malaysian ship shall not be deductible in arriving at the total income of that person for that YA and shall be carried forward to reduce the exempt statutory income of that person from the same source in the subsequent YAs, until the adjusted loss is fully utilised. A Malaysian ship means a sea-going ship registered as such under the Merchant Shipping Ordinance 1952, other than a ferry, barge, tug-boat, supply vessel, crew boat, lighter, dredger, fishing boat or other similar vessel. The proposal is effective from YA 2012. Private Schools To encourage further the involvement of the private sector in providing quality educational services, it is proposed that tax incentive be given to private schools and international schools registered and fulfilling the requirements stipulated by the Ministry of Education as follows: i. Profit Oriented Private Schools

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT

BUDGET PROPOSALS income tax exemption of 70% for a period of 5 years; or Investment Tax Allowance (ITA) of 100 % on the qualifying capital expenditure incurred within a period of 5 years. The allowance claimed is eligible to be set-off against 70% of the statutory income for each YA.

ii.

Profit Oriented International Schools income tax exemption of 70% for a period of 5 years;

iii.

Profit Oriented Private Schools and International Schools a. b. import duty and sales tax exemption for educational equipment; and double deduction for overseas promotional expenses.

The proposals are effective as follows: i. Profit Oriented Private Schools ii. for applications received by MIDA from 8 October 2011 until 31 December 2015.

Profit Oriented International Schools for applications received by MIDA from 8 October 2011 until 31 December 2015.

iii.

Profit Oriented Private Schools and International Schools a. b. for applications received by MIDA from 8 October 2011; and from YA 2012.

Kuala Lumpur International Financial District

Kuala Lumpur International Financial District (KLIFD) sits on 75 acres of land situated in between Jalan Tun Razak, Jalan Sultan Ismail and the Putrajaya elevated highway, which is strategically located at the southern tip of Kuala Lumpur city. To achieve the KLIFDs aspiration as a global financial city of choice and to attract leading financial organisations to operate in the KLIFD, the following incentive package is proposed: i. ii. iii. 100% income tax exemption for a period of 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; and 70% income tax exemption for a period of 5 years for property

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT developers in KLIFD.

BUDGET PROPOSALS

Currently, details of the application process have not been released. Reinvestment Allowance i. Currently, reinvestment allowance of 60% of capital expenditure incurred for a qualifying project can be utilised against 100% of statutory income for each YA provided that the qualifying project has achieved the level of productivity as prescribed by the Minister or is located within the promoted areas such as Sabah, Sarawak, Labuan, Eastern Corridor of Peninsular Malaysia and other areas determined by the Minister. It is proposed that the utilisation of reinvestment allowance against 100% of statutory income be limited to only qualifying projects which have achieved the level of productivity as prescribed by the Minister. Thus, companies within the abovementioned promoted areas which have incurred capital expenditure on qualifying projects can now only utilise the reinvestment allowance against 70% of their statutory income with the new amendment. ii. Currently, there is no definition of factory in Schedule 7A of the Act. It is now proposed that the definition of factory be included in Schedule 7A of the Act. A factory is defined as the portion of the floor areas of a building or an extension of a building used for the purposes of qualifying project to place or install plant or machinery or to store any raw material, goods and/or materials manufactured provided that the storage of raw material, goods and/or materials does not exceed one-tenth of the total floor areas of that building or extension of the building. It may be difficult in practice to ascertain the floor areas for the purpose of this definition especially where the floor areas used as storage are not clearly designated due to the constant movement of these items. Measures have also been proposed to deny the taxpayer the ability to claim reinvestment allowances when the taxpayer has been granted investment tax allowance or investment tax credit. The proposal is effective from YA 2012.

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT INDIRECT TAX Budget Taxis and Hire Cars

BUDGET PROPOSALS

Currently, owners of budget taxis and hire cars are given 100% excise duty exemption on the purchase of new locally manufactured cars used as budget taxis and new locally assembled cars used as hire cars. Excise duty is payable based on the value when the car is sold or the ownership is transferred. Road tax on these cars is at RM20 per annum. To assist individual budget taxi and hire car owners in lowering their cost of operations and to improve services, it is proposed that the following be given: i. ii. iii. iv. 100% sales tax exemption on the purchase of new locally manufactured cars used as budget taxis or hire cars; excise duty and sales tax exemptions when budget taxis or hire cars are sold or the ownership is transferred after 7 years of registration; road tax on budget taxis and hire cars to be abolished; 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; and assistance of RM3,000 for replacement of budget taxis and hire cars aged more than 7 years but less than 10 years and assistance of RM1,000 for budget taxis and hire cars aged more than 10 years and above. This assistance is granted for the purchase of new locally made cars.

v.

The proposals for (i) and (ii) are effective from 8 October 2011. Proposal (iii) is effective from 1 January 2012. Proposals (iv) and (v) are effective from 1 January 2012 to 31 December 2013. PERSONAL TAX Enhancing Tax Compliance To enhance further the e-Filing system for salaried taxpayers, it is proposed that information such as total income, Monthly Tax Deductions (MTD) and employees contribution to the Employees Provident Fund (EPF) be prefilled by the IRB based on information provided by employers. This should reduce the time spent by individuals in completing their e-Filing. The proposal is effective from YA 2012. Retirement Schemes To promote sufficient savings of individuals upon attaining retirement age, it is proposed that for resident individuals: i. a separate tax relief of RM3,000 be given for contributions made to

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT

BUDGET PROPOSALS Private Retirement Schemes (PRS) approved by the SC and for deferred annuity premium. the existing tax relief on EPF contributions and life insurance of up to RM6,000 will not include premiums for deferred annuity.

ii.

The proposal is effective from YA 2012 to 2021. The following have also been proposed: i. contributions by employers to PRS will be deductible up to 19% of employees remuneration which include contributions to EPF and other approved schemes. ii. tax exemption is granted on income received by a PRS fund. iii. withdrawals of contributions from PRS by an individual prior to maturity or prior to attaining the mandatory retirement age are taxable.

Returning Expert Programme

It is proposed that the employment income of an approved individual under the Returning Expert Programme will be taxed at the flat rate of 15% for a specified period. This is one of the tax benefits offered to returning experts with the view to attract, facilitate and retain aspiring Malaysian returnees. Based on TalentCorps website, the individuals could opt to be taxed under the scale rates instead of 15% and the specified period is 5 years. The proposal is effective from YA 2012.

MISCELLANEOUS Review of Real Property Gains Tax To curb speculative activities in the real property market so as to ensure that the low and middle income groups are able to own houses at affordable prices, it is proposed that the RPGT rates on gains arising from the disposal of residential and commercial properties be reviewed as follows: i. ii. 10% tax where the property has been held for up to 2 years; 5% tax where the property has been held for more than 2 years and up to 5 years; and iii. 0% tax where the property has been held for more than 5 years. The proposal is effective for disposals from 1 January 2012 onwards. Stamp Duty on Loans To increase ownership by the middle income group of residential properties and to reduce the cost of doing business for micro enterprises and small and medium enterprises (SMEs), it is proposed that a 100% stamp duty exemption be given on the following instruments:i. loan agreements for the purchase of residential properties priced up to

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT

BUDGET PROPOSALS RM300,000, under the Skim Perumahan Rakyat 1Malaysia; loan agreements entered into between micro enterprises and SMEs with any banking and financial institution for loans up to RM50,000 under the Micro Financing Scheme; and loan agreements entered into between any professionals and Bank Simpanan Nasional for loans up to RM50,000 under the Professional Services Fund.

ii.

iii.

With respect to item i, the proposal is effective for sale and purchase agreements executed between 1 January 2012 to 31 December 2016. With respect to items ii and iii, the proposal is effective for agreements executed from 1 January 2012. Compensation For Late Refunds Currently, taxpayers who are late in paying their taxes are subject to penalties. However, no compensation is given to the taxpayer if the IRB is late in refunding any tax overpaid. In order to ensure that taxpayers are accorded equitable treatment and to enhance efficiency in the tax administration, it is proposed that taxpayers be given compensation of 2% per annum on the amount of tax refunded late by the IRB. A refund is considered late if it is made after :i. ii. 90 days from the due date for e-filing; or 120 days from the due date for manual tax filing

The compensation of 2% is to be paid based on the following formula: A x B x 2% C

Where A is the amount refunded under Section 111 for a YA; B is the number of days beginning from the first day after the period of :i. 90 days from the due date for e-filing; or ii. 120 days from the due date for manual tax filing, until the day that amount is made to a person; and C is the number of days in a year. Where the refund ought not to have been made by reason of an incorrect return or incorrect information as furnished by the taxpayer, a 10% penalty

2012 BUDGET HIGHLIGHTS 7 October 2011

SUBJECT

BUDGET PROPOSALS would apply on the amount wrongly refunded. The above compensation shall not apply if the taxpayer fails to furnish the tax return in accordance with the Act, if the excess payment is due to tax set off under Section 110 or the assessment is under appeal. The proposal is effective from YA 2013.

Power of Access

To allow the IRB to have a wider scope of review in carrying out tax audits and investigations, it is proposed that the Director General be empowered to have access to computerised data stored in a computer including being provided with the necessary password, encryption code, decryption code, software or hardware and any other means required to enable comprehension of the computerised data. The proposal is effective from 1 January 2012. In addition it is also proposed that the existing provision of the Act covering the power to call for information be extended. The Director General is to be empowered to request any person to provide any information or document under his control or possession within or outside the territorial jurisdiction of Malaysia. Further, the Director General is given the power to wholly or partly disregard any information or particulars produced after the expiry of the time specified in a notice issued by them. The information or particulars disregarded shall not be used to dispute the assessment made under the Act including in any proceeding before the SC or court. The proposals are effective on the coming into operation of the Finance Act.

Advance Instalments of Tax

It is proposed that the Director General may direct a person to make payments by instalments for a YA on account of tax which may be payable where the person fails to furnish a return under the Act or he has reason to believe that the person has submitted an incorrect return by omitting or understating any income or gives incorrect information in regards to his chargeability to tax. The direction may be issued to the person before the making of an assessment or composite assessment under the Act. The person can apply to the Director General for a variation of the amount or number of instalments within 30 days after the service of such direction. The proposal is effective on the coming into operation of the Finance Act.

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