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INTERNATIONAL ISLAMIC ECONOMIC SYSTEM CONFERENCE (I-iECONS 2021)
Covid-19 Pandemic and Responses of Taxation Systems
Suhaila Abdul Hamid
Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Bandar Baru Nilai, 71800 Nilai, Negeri Sembilan Malaysia
Tel: +606 7986313 E-mail: [email protected]
Abstract
The World Health Organization (WHO) has declared covid-19 as a pandemic in March 2020. In the same month, Malaysia, implemented the 1st Movement Control Order (MCO) throughout the country to mitigate the pandemic from spreading in the community. Almost at the same time, the Malaysian Government introduced stimulus packages to mitigate the pandemic, strengthening the economy and assist the public. Indeed, in this time of crisis, tax authorities in many parts of the world play a critical role to support the economy and the public. Tax incentives have been introduced to supplement these policies. This paper reviews the tax policies in the form of tax incentives and administration offered by tax authorities in Malaysia from the end of 2019 until 31 December 2020. The reviews indicate some short-term, medium-term and long-term approaches in assisting the economy and the public in this covid-19 pandemic. The findings are useful to enhance the knowledge of the public and academicians as well as provides an insight into the approaches taken by the tax authorities in this country in supporting the economy and the public during this covid-19 pandemic. The review provides room for future studies to examine the impact of tax policy measures on different types of taxpayers. Future studies should also compare the tax measures employed by other countries so that a more meaningful assistance could be formulated to help the taxpayers in Malaysia.
Keywords: Covid-19; tax policy; content analysis
1. Introduction
Countries throughout the world are still fighting the Covid-19 which has caused devastating effect not only to the health system and well-being of the people but also to the economy. This is because, to combat the spread of the virus, many countries around the world have responded to the Covid-19 pandemic with lockdowns, restriction on economic activities and movements of their people. These actions have caused the economy to slow down. For instance, Malaysia started the first Movement Control Order (MCO) in March 2020 and since then, a few more MCOs were implemented. It was estimated that in year 2020, Malaysian economy lost around RM2 billion each day while the MCO was in effect (Ministry of Finance, 2021).
As at to date, the Malaysian Government has introduced seven economic stimulus packages to help the people and reestablish the economy which is badly affected. Starting with Economic Stimulus Package in February 2020, followed by PRIHATIN in March 2020, PRIHATIN SME+, PENJANA, KITA PRIHATIN in April, June and September 2020 respectively, PEMERKASA and PEMULIH, the latest stimulus package which was announced on 28 June 2021. In 2020 itself, the total stimulus packages worth RM305 billion or 21% of Malaysian gross domestic product (GDP).
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During economic uncertainties, tax policy has important roles in alleviating and responding to the negative consequences of measures taken to address the crisis. The roles of tax policy will evolve accordingly in different phases of recovery (Collier et al, 2020). Basically, this paper attempts to answer the question of “How does tax policy in Malaysia respond to the Covid-19 pandemic?”. To answer this question, this paper highlights the tax policies implemented by the Malaysian Government from the end of 2019 when Covid-19 started to emerge until end of December 2020.
2. Tax Policy During Crisis
Prior literature in taxation has recommended several characteristics of a good tax system in normal circumstances. Kassipillai (2019) listed five characteristics of a good tax system which are equitable tax burden, minimizing economic distortion, easy to understand tax law, low compliance cost and provide adequate revenue to the government. Political influences, practical limitations and policy intent are also relevant in explaining a good tax system (Musgrave & Musgrave, 1989).
Political influence refers to the policy process adopted during an emergency, for example it raised the question of whether to fund or provide incentives for risk mitigation activities. It also influences judgments over the choice of immediate tax relief measures of how to fund and rebuild the economy and affected people. Considerations for the risk of tax avoidance, tax evasion, and costs of tax compliance are some of the practical limitations in ensuring a good tax system is still in place during disasters. Settings in a normal condition to comply with the tax laws may not work during an emergency such as strict record-keeping requirement of supporting documents to apply for tax exemptions. Abdul Hamid (2014) in a series of interviews with tax agents in Malaysia for instance, found out that complying with the tax law is situational. The study found that during bad times such as floods, tax agents may apply different judgment in complying with the tax law. For instance, in a normal situation, taxpayers need to provide supporting documents to apply for tax deductions and exemptions. However, the supporting documents may have been damaged or drifted away in floods and as a result, it becomes more challenging for tax agents to assist their clients in complying with the tax laws.
Policy intent explains the purpose of including a particular tax in a tax system, whether a particular tax, falls under revenue or corrective taxes (Palmer, 2014). Revenue taxes are by nature require a long-term approach to raise them since they are used to fund preventative activities and restore public finances (Bird & Zolt, 2003). Corrective taxes are used for risk reduction purpose or economic redevelopment. They are designed to pursue social or economic outcomes by promoting or discouraging behaviour which are usually in the forms of tax incentives (Palmer, 2014).
While both taxes have different roles in a tax system, in exceptional situations such as economic adversity during Covid-19 pandemic, both taxes are still important in policy considerations. The key question is whether Malaysia follows a standard tax policy principle when responding to the current Covid-19 pandemic, for example, or there is a need for a different tax policy to address the economic adversities due to Covid-19 pandemic. While there is limited literature addressing the issue of tax and disasters, literature in public finance suggests that in unusual conditions such as financial crisis, tax policies may depart from the standard policy. This is because, financial crisis requires more time to restore than a conventional recession and therefore a different tax policy should be applied (Schick, 2012). Following this proposition, considering that Covid-19 pandemic is an unexpected and unusual situation to happen not only in Malaysia but throughout the world, there is a possibility for a different tax policy to be applied to address the economic adversity.
3. Methodology
In this study, the content analysis approached was employed to analyze the tax policies implemented by the Malaysian Government from the end of 2019 when the pandemic became a serious threat to the country until 31 December 2020. The sources of the data were obtained from speech of the Prime Minister and relevant documents issued by the Treasury Department Ministry of Finance as well as published in the social media.
157 4. Results and Discussions
The impact of Covid-19 pandemic to date is huge and affects many aspects of human life. It does not cause only mental and health issues but also the economic well-being of the people and the country. The MCOs and the many restrictions to flatten the Covid-19 curve has side effects to the Malaysian economy. It was estimated that the GDP contracted by 8.3% in the first half of 2020 as consequences to the many restrictions which impact the economic activities (Ministry of Finance, 2021). Against the backdrop of many unknowns and uncertainties, the Malaysian Government has embarked into 6R strategy comprising six different stages of recovery plans which are Resolve, Resilient, Restart, Recovery, Revitalize and Reform. To date, the tax system has also followed the stages of the recovery which is consistent with the findings by Collier et. al (2020). According to Collier et al., (2020), in the Phase 1 where short-term measures are being introduced in many countries around the world, the tax system will introduce measures to reduce the cash flow burden of the people, exempt taxpayers from paying their usual tax commitment and relaxed certain tax provisions. The economic stimulus packages established from this 6R strategy have incorporated all types of people to help them cope with the pandemic. To encourage stable economic environment, the economic stimulus packages offered tax incentives based on different categories of economic entities.
4.1 Personal Income Tax
A special tax relief up to RM1,000 is given to individuals on domestic travel expenses incurred from 1 March 2020 to 31 December 2021. In addition to that any early withdrawals of contributions of up to RM1,500 from Account B of Private Retirement Scheme from 30 April 2020 to 31 December 2020 would be exempted from withholding tax. An income tax exemption of up to RM5,000 will be given to employees who receive a handphone, notebook or tablet from their employer effective from 1 July 2020. The income tax relief on fees paid to childcare centres or kindergartens will be increased from RM2,000 to RM3,000 for year of assessment (YA) 2020 and YA 2021. Individuals who purchase a handphone, notebook or tablet will be given a special tax relief of up to RM2,500 effective 1 June 2020 (KPMG, 2021).
The tax incentives given by the government to individuals could reduce the cashflow burden for those affected and at the same time helping business operators to sustain from the pandemic. For example, during the time when people were allowed to cross state border, the relief of RM1,000 encouraged people to go for holiday and directly helped the tourism business which is badly affected. Due to the pandemic, online classes and work from home is already a norm which require students and workers to have access to smartphones, notebook, tablet etc. The exemption of RM5,000 will reduce the tax burden of the employee if they receive handphone, notebook or tablet from employer which in normal condition, those will be subject to tax as they are part of employment income under Section 13(1)(b) benefit-in-kind. In addition to that, the increase exemption of childcare fees paid to kindergartens to RM3,000 will help to increase the tax savings especially during this period when many employees have to face salary cut.
Parents who had to buy handphone, notebook or tablet for their children learning process would also enjoy lesser tax liability since they can claim the special tax relief. This would also help business owners who sell those gadgets and keep the economy moving. Due to Covid-19 pandemic, it has transformed the digital economy earlier than expected and it is estimated that the economic value of digital-related business would grow to RM222 billion in 2030 from RM31 billion in 2019 (Ministry of Finance, 2021). While the amount of tax collected from personal income tax could be lower than the previous years, since people have lost their jobs, accept reduced amount of salary and some tax incentives are given, it is still considered as a win-win situation because the tax incentives help to reduce the people’s burden and help people to have buying power to stimulate the economy. Table 1 below summarizes the tax incentives as on 31 December 2020 for personal income tax.
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Table 1. Summary of Covid-19 Related Tax Incentives for Personal Income Tax
Item Remarks
Special relief for domestic travel expenses between 1 March 2020 to 31
December 2021 RM1,000
Early withdrawals from EPF up to RM1,500 from 30 April 2020 to 31
December 2020 No withholding tax
Tax exemption for employee upon receiving handphone, tablet or notebook
from employer effective on 1 July 2020 RM,5000
Increase of income tax relief on fees paid to childcare centre or kindergarten
for YA 2020 and YA 2021 RM3,000
Special relief for purchase of handphone, notebook or tablet effective 1 June
2020 RM2,500
4.2 Tax Incentives for Business
To assist the business owners, the following tax incentives were started to be offered in 2020 which may to a certain extent extended to year 2021. In Malaysia, generally companies are required to submit their tax estimates a month before they start their new accounting period and revise the instalment amount twice during the period which is in the 6th and the 9th month. Due to the pandemic, companies are allowed to do revision to their tax estimates in the month of their 3rd instalment payment if the 3rd instalment payment falls in 2020. This will help the companies to better project their cashflow and at the same time comply with the tax law.
As for the capital allowance, the accelerated capital allowance will be given for qualifying capital expenditure incurred on machinery and equipment including Information and Communication Technology Equipment from 1 March 2020 to 31 December 2021 where the annual allowance will be increased to 40% from the current rates which range from 10% to 20%, and with initial allowance of 20%. A tax deduction in the form of capital allowance will be given for expenses incurred on disposable or non-disposable personal protective equipment or other relevant equipment. The increase to 40% for accelerated capital allowance could help manufacturing industry in saving their tax by increasing the capital allowance deduction and thus reducing the amount of statutory income.
A tax deduction of up to RM 300,000 will be given for expenses incurred on renovation and refurbishment of business premises from 1 March 2020 to 31 December 2021. As for pre-commencement expenses, a double deduction will be given on pre-commencement expenses incurred by International Shipping Companies for setting up regional offices in Malaysia provided that the application should be made to Malaysian Investment Development Authority not later than 31 December 2021.
Since funding is a critical issue during this pandemic, to encourage donations, contributions in cash or in-kind to fight against the COVID-19 outbreak, are allowed as tax deductions. In addition to that, accrued interest income of financial institutions from loans or financing involved with the moratorium from 1 April 2020 to 30 September 2020 would only be taxable upon receipt or when it becomes receivable on or after 1 October 2020. To support SMEs, tax rebate of up to RM20,000 for the first 3 Years of Assessments will be given to an SME established and in operation between 1 July 2020 and 31 December 2021.
In order to attract foreign direct investment into Malaysia, foreign companies which relocate their business operations into Malaysia and have made new investments in the manufacturing industry will be taxed at a rate of 0%
for the following periods:
a) 10 years for capital investment between RM300 million to RM500 million
b) 15 years for capital investment above RM500 million provided that the companies relocate and commence their operations within 1 year from the date of approval and the committed capital investment is made within 3 years.
This is effective to applications made from 1 July 2020 to 31 December 2021. To further strengthening the manufacturing industries in Malaysia during this challenging time, an existing company in Malaysia will be granted a 100% investment tax allowance for a period of 5 years if it relocates its overseas manufacturing facilities back into Malaysia where the application should be made from 1 July 2020 to 31 December 2021. A special reinvestment
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allowance (RA) will be granted for companies whose RA period has expired for qualifying expenditure incurred by companies engaging in manufacturing and selected agriculture activities from YA 2020 to YA 2022. The tax incentives in the form of investment tax allowance and special RA will help the companies to strengthen their capital investment and in the long run may increase the productivity of the companies. This is because for instance, reinvestment allowance is given on qualifying project that fulfills the requirement of diversifying, automation and modernizing the production line.
A further tax deduction will be given to employers who adopt flexible work arrangements effective 1 July 2020.
In Malaysia, apart from companies are required to submit their estimation of tax payable one month before they commence their operation in the new basis year, they are also required to obey the monthly payment installment scheme based on the estimation that they submitted to the Malaysian Inland Revenue Board (MIRB). They have to pay in the second month of their operation in the new basis period. To help the industry and since tourism industry is one of the badly affected industry during the pandemic, thus, an automatic deferment of Monthly Tax Installment Payments (CP204) has been granted for a period of 9 Months from 1 April 2020 to 31 December 2020 for tourism Industry. The deferment of the Monthly Installment Payment will help to ease the cashflow burden of tourism operators. Table 2 below summarizes the tax incentives given to companies or business owners.
Table 2. Summary of Covid-19 Related Tax Incentives for Business
Item Remarks
Revision of tax estimates 3rd month instead of 6 & 9 months only
Increase of accelerated capital allowance to IT equipment Initial allowance 20%, annual allowance 40%
Disposable or non-disposable PPE and relevant equipment Capital allowance Renovation and refurbishment of business premises from 1 March 2020 to
31 December 202 Deduction up to RM300,000
Pre-commencement expenses incurred by International Shipping Companies for setting up regional offices in Malaysia provided that the application made to Malaysian Investment Development Authority not later than 31 December 2021
Double deduction
Donations, contributions in cash or in-kind to fight against the COVID-19
outbreak Allowed as tax deductions
Accrued interest income of financial institutions from loans or financing
involved with the moratorium from 1 April 2020 to 30 September 2020 Would only be taxable upon receipt or when it becomes receivable on or after 1 October 2020.
SME established and in operation between 1 July 2020 and 31 December 2021.
Tax rebate of up to RM20,000 for the first 3 Years of Assessments.
Foreign companies that relocate their business operations into Malaysia and have made new investments in the manufacturing industry, have made applications from 11 July 2020 to 31 December 2021
Will be taxed at a rate of 0% for the following periods:
a) 10 years for capital investment between RM300 million to RM500 million
b) 15 years for capital investment above RM500 million provided that the companies relocate and commence their operations within 1 year from the date of approval and the committed capital investment is made within 3 years.
Existing company in Malaysia if it relocates its overseas manufacturing facilities back into Malaysia and the application is made from 1 July 2020 to 31 December 2021
100% investment tax allowance for a period of 5 years
Companies engaging in manufacturing and selected agriculture activities whose Reinvestment Allowance period has expired
A special reinvestment allowance (RA) for qualifying expenditure incurred from YA 2020 to YA 2022
Employers who adopt flexible work arrangements effective 1 July 2020 Tax deduction
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Tourism Industry Automatic deferment of Monthly Tax
Installment Payments (CP204) for a period of 9 Months from 1 April 2020 to 31 December 2020
Under the Recovery Plan, in 2020, the government also provided the following tax incentives to boost the economic activities. RM0.6b for tax relief for COVID-19 related expenses to encourage businesses to adapt to new norms and follow the standard operating procedures. To ease financial stress on businesses through remissions of penalties related to late tax payments, an allocation of RM2.4 billion is given. RM0.897b for tax incentives for purchase of passenger cars to stimulate the automotive sector and provide financial relief to car buyers. To attract foreign companies to relocate their business into Malaysia and to reduce the risk of re-shoring, a tax incentive of RM0.05b is given to them. Finally, an amount of RM1.8b for tax incentives to support the tourism sector during the COVID-19 period is also provided (Baker McKenzie, 2020).
In addition to that, some tax incentives are also given in the form of Stamp Duty. Stamp duty is exempted on loan or financing instrument related to restructuring or rescheduling of a business loan or financing between a borrower and a financial institution which is executed from 1 March 2020 to 31 December 2020. This is subject to the existing agreement has been duly stamped and the application is submitted with a letter of offer from the financial institution. In the case of mergers and acquisitions which are taking place between 1 July 2020 and 30 June 2021 by SMEs, the stamp duty will also be exempted. An exemption is also given on loan agreements and instruments of transfer relating to the purchase of residential property under the Home Ownership Campaign 2020/2021. The value of the property is more than RM300,000 but not more than RM2.5 million and the transaction is between an individual named in a sale and purchase agreement and a qualifying party.
Full exemption on loan agreements and exemption is limited to the first RM1 million of the house price and 3%
stamp duty will be imposed on the price exceeding RM1 million for instruments of transfer. Under the Real Property Gains Tax (RPGT), disposal of residential property with a maximum of 3 units by an individual from 1 June 2020 to 31 December 2021 would be exempted from RPGT.
Table 3. Tax Incentives for Stamp Duty and Real Property Gains Tax
Item Remarks
Loan or financing instrument for restructuring or rescheduling a business loan or financing between a borrower and a financial institution executed from 1 March 2020 to 31 December 2020
Provided the existing agreement has been duly stamped and the application is submitted with a letter to the financial institution.
Exempted
Mergers and acquisition performed from 1 July 2020 to 30 June 2021 by
SME Exempted
Loan agreement and instruments of transfer for purchasing residential property valued more than RM300,000 but less than RM2.5 Million between an individual named in an S&P with a qualifying party under the Home Ownership Campaign 2020/21.
Full exemption on loan agreement which is limited to the first RM1 Million of the house price.
3% stamp duty on price exceeding RM1 Million for instruments of transfer.
Disposal of residential property under the RPGT with a maximum of 3 units
by an individual from 1 June 2020 until 31 December 2021. Exempted
There are also tax incentives given for indirect tax and other miscellaneous taxes. For instance, service tax exemptions are given to hotel and other similar establishments for taxable services provided from 1 March 2020 to 30 June 2021. Subject to conditions, import duty and sales tax exemption on equipment and machines are given to port operators if an application is submitted from 1 April 2020 to 31 March 2023. In addition to that, there is also an expansion to the scope of the value-added activities permitted in the Licensed Manufacturing Warehouse and the
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Free Industrial Zone. The new scope includes supply chain management, strategic procurement operation and total support solutions effective from 1 April 2020. The government also reviewed the conditions to purchase duty free goods from duty free shops at international airports in Malaysia by persons entering Malaysia effective from 1 April 2020. A sales tax exemption of 100% and 50% are given for the purchase of locally assembled cars and imported passenger cars respectively from 15 June 2020 to 31 December 2020 to stimulate the automobile industry. To encourage the tourism activities, accommodation premise operators are exempted from charging Tourism Tax from 1 July 2020 to 30 June 2021.
To support the Palm oil industry, full export duty exemption is provided to crude palm oil, crude palm kernel oil and refined bleached deodorized palm kernel oil from 1 July 2020 to 31 December 2020. Since the pandemic, requires people to follow the SOP and the new norms, acquisition from local registered manufacturers and importation of face masks (under certain tariff codes) are exempted from Import Duty and Sales Tax from 23 March 2020 and 1 July 2020, depending on the tariff code of the masks. Subject to certain requirements, acquisition from local registered manufacturers and importation of prescribed taxable personal protective equipment and consumables to be contributed to the Ministry of Health are exempted from Import Duty and Sales Tax.
Furthermore, since sanitizer is nowadays essential item, to ensure that the supply of sanitizers can easily be accessed and affordable by the public, the manufacturers of hand sanitizer (under tariff code 3808.94.9000) are eligible for Import Duty, Excise Duty and Sales Tax exemptions on the raw materials (undenatured ethyl alcohol and denatured ethyl alcohol) where application should be submitted to the Ministry of Finance.
5. Conclusion
This paper attempts to review and discuss how the taxation system in Malaysia responds to the Covid-19 pandemic during 2020. The World Health Organization (WHO) has declared covid-19 as a pandemic in March 2020 and in the same month, Malaysia implemented the 1st Movement Control Order (MCO) throughout the country to mitigate the pandemic from spreading in the community. Almost at the same time, the Malaysian Government also introduced stimulus packages to mitigate the pandemic, strengthening the economy and assist the public.
Similar to other tax systems in many parts of the world, the tax system in Malaysia plays a critical role to support the economy and the public. Tax incentives have been introduced to supplement these policies. The reviews indicate the approaches taken by the Malaysian tax authorities encompasses some short-term, medium-term and long-term approaches in assisting the economy and the public in this covid-19 pandemic. From temporal policy to assist in alleviating pressure on the cash flow to ensuring sustainability for the taxpayers in the future.
Based on the tax incentives given, we can conclude that the Malaysian government has attempted to incorporate all categories of economic entities to come out from this economic adversity. While it seems that the tax incentives are mostly focused on the short term and medium- term approaches, the process of recovery may take longer and the impact from these tax incentives may only appear after a few years. Interestingly, tourism sector which is badly affected by the pandemic has received significant amount of tax incentives from the government.
At the time the paper is being authored, the Covid-19 pandemic has not shown any signs to slow down. In fact, the number of cases in Malaysia, has reached on average more than 5,000 cases of positive covid-19 per day. While it is challenging for the tax authorities to find a balance between ensuring sufficient tax money going into the Government coffers and giving tax incentives to taxpayers, the tax authorities should also evaluate the incentives given so that it will give maximum benefits to the correct taxpayers. For example, while many businesses suffer from the pandemic, there are businesses which gain from the situation. The Ministry of Finance reported that online and digital-based business indicate an encouraging performance during this pandemic. This suggests that a more focused tax incentive policy should be offered rather than a general policy that applies to all.
The findings are useful to enhance the knowledge of the public and academicians as well as provides an insight into the approaches taken by the tax authorities in this country in supporting the economy and the public during this covid-19 pandemic. The review provides room for future studies to examine the impact of tax policy measures on different types of taxpayers. Future studies should also compare the tax measures employed by other countries so that a more meaningful assistance could be formulated to help the taxpayers in Malaysia.
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