Malaysia's current corporate tax rate of 29% will be reduced to 26% in 2008 and 25% in 2009. In an increasingly competitive environment for attracting foreign direct investment, this is seen as a significant measure. The reduction in taxes will lead to increased retained earnings for companies, allowing those funds to be invested in research and development and capacity expansion, thus growing the economy.
In addition to the corporate tax reduction, there will also be an introduction of a single-tier tax system, whereby only profits are taxed and dividend payments are exempted. By simplifying the tax system, the hope is that burdensome administrative and compliance costs will be reduced, particularly for small- and medium-sized enterprises (SMEs).
Because SMEs are a vital contributor to Malaysia's economy, they will now be allowed to make income tax payments seven months after their accounts have been closed. This will help relieve cash flow constraints in the early stages of operations and further encourage their growth and formation.
Overall, SMEs represent 99.2% of all Malaysian companies, account for 65.1% of the country's total workforce and contribute 47.3% to the gross domestic product. While this contribution is greater than their counterparts in the Philippines (32%), and Thailand (38.9%), it is less than many of the more industrialised nations Malaysia is benchmarking itself against, such as South Korea (50%), Japan (55.3%) and Germany (57%).
Mohd. Najib Hj. Abdullah, group managing director of Malaysian Industrial Development Finance, a full service bank originally established to promote the development of the nation's industrial sector by providing financing for manufacturing-based SMEs, told OBG, "Malaysia wants its SMEs' contribution to the economy to be greater than its present base. If you look at Japan and Taiwan for example, SMEs play a major role in the development and advancement of the economy, particularly in exports."
Aside from tax relief, other budget initiatives the business community is applauding are measures being taken to increase the supply of skilled labour in the workforce. Malaysia faces a shortage of qualified human capital across multiple sectors. With higher salaries offered in Singapore and the Middle East, many of the country's top bankers, engineers and information and communications technology (ICT) professionals are plying their trade abroad.
In particular, Malaysia suffers from a shortage of skilled ICT professionals and needs to attract knowledge workers from overseas. Malaysia has been losing out to countries such as Singapore, China and Hong Kong in this area, as each offers quicker application processes and allowances for long-term permanent residence visas. The budget includes a mandate for the Immigration Department to shorten the processing period for the issuance of work permits for skilled workers from 14 to seven days. A new category of visa that offers a longer period of validity for business travellers will also be made available. Finally, effective January 2008, multiple-entry visas will be available for Chinese and Indian nationals.
Wong Siew Hai, chairman of the Malaysian American Electronics Industry, an organisation representing 17 US-based companies involved in electronics manufacturing in Malaysia, told OBG, "Singapore, Korea and Taiwan all offer hassle-free permanent residence to knowledge workers and now even China offers it. Not only does it address the short-term resource gap by increasing the pool of talented labour but, long term, it results in invaluable knowledge transfer."
Another measure aimed at fulfilling the objective of moving Malaysia up the value chain and transforming the country into a knowledge-based economy is the exemption on duties and sales tax on broadband equipment and consumer access devices. Additionally, to improve the national broadband infrastructure, last-mile network facilities providers will be granted investment allowances of 100% on capital expenditures incurred for broadband equipment until end of 2010.
At present, household broadband penetration for Malaysia is at 12%, versus 54.8% for neighbouring Singapore. The target, by 2010, is to increase the figure to 50% and the above two measures should increase the accessibility and affordability for broadband connection across the country.
Finally, in order to encourage more merger and acquisition (M&A) activity among publicly listed companies, a stamp duty exemption on M&A transactions will be extended until the end of 2010. Key sectors in Malaysia's economy, such as banking, insurance and plantations are considered over-saturated and it is hoped that M&A activity will consolidate the sectors, making Malaysia more globally competitive with the presence of fewer, stronger players in each.
Overall, the business community in Malaysia has expressed its approval for the 2008 budget, indicating that the new measures should provide an impetus for growth and greater levels of foreign investment into a number of key sectors.