How tax tactics are shaping Malaysia’s future

BY LAM KWAI SOON

Igniting Innovation

In a bold move on September 1, 2023 – Malaysia turned a new page with the rollout of the New Industrial Master Plan 2030. It’s not just any plan; it’s a blueprint for transformation, aiming to propel Malaysia into a position of regional leadership through clever tax incentives and forward-looking policies. 

This ambitious move by the Malaysian Government emphasizes technological growth to secure Malaysia’s spot in the digital limelight, aiming to turn the country into a high-income nation by 2030 through smart innovation and sustainable, tech-driven growth strategies.

Malaysia is set on a path to enhance its economic prosperity and improve its citizens’ quality of life, setting a benchmark for how countries can embrace the future with open arms and visionary policies.

Malaysia’s Leap Towards a Digital Future

Malaysia is setting its sights high, aiming to leverage technology’s game-changing potential. The New Industrial Master Plan 2030 is the country’s roadmap to a future powered by sustainable growth, with artificial intelligence (AI), blockchain, and the Internet of Things (IoT) steering the ship. 

AI’s role in optimizing operations, blockchain’s potential in securing transparent transactions, and IoT’s capability in creating interconnected innovative systems are central to this vision, promising to transform everything from manufacturing to healthcare and urban management.

By weaving these technologies into its economic fabric, Malaysia is looking to spark more innovation, work smarter, and build a greener and more connected future.

Think of the New Industrial Master Plan 2030 as Malaysia’s guide to becoming a powerhouse in the digital world, equipped to take on the future with a strong, varied economy and a better life for everyone.

It’s all about setting new standards in using technology for growth that benefits us all, leading the charge in the region for a sustainable, tech-savvy future.

The Sparks of Innovation: Tax Incentives

Tax incentives crafted to boost corporate investment in research and development (R&D) and technology are at the heart of Malaysia’s strategy for tech supremacy. These aren’t just perks; they’re powerful tools designed to fuel technological breakthroughs and competitive prowess on the global stage.

Highlights include:

Double Deduction for R&D Expenditure: Encourages Malaysian companies to invest in research and development (R&D) by offering a tax deduction twice (200%) of their actual R&D spending.

This initiative aims to accelerate innovation and support Malaysia’s transformation into a knowledge-driven, high-income economy by 2030.

Pioneer Status and Investment Tax Allowance (ITA): Grants companies tax exemptions, while the ITA offers additional tax allowances on qualifying capital expenditures to stimulate industrial innovation and investment in Malaysia.

These incentives are designed to attract and encourage businesses to contribute to Malaysia’s goal of becoming a leading digital and high-income economy by fostering a climate of technological advancement and economic diversification.

Accelerated Capital Allowance (ACA): Accelerates the depreciation of investments in ICT equipment and automation, enabling Malaysian businesses to adopt digital technologies quickly.

This measure supports Malaysia’s strategic push towards becoming a tech-driven, high-income economy by making technological upgrades more financially viable for companies.

Smart Moves: Making the Most of Tax Incentives

While the incentives are tempting, companies must tread carefully, ensuring they stay compliant and strategic. This means keeping a tight ship on compliance and reporting, protecting intellectual property, nurturing talent, and weighing the broader impacts of their innovations.

Compliance and Reporting: Businesses availing tax incentives must comply with stringent reporting requirements, documenting R&D activities and expenditures to substantiate claims and avoid penalties.

Intellectual Property Protection: Safeguarding intellectual property (IP) becomes paramount with increased R&D investments, requiring businesses to develop robust IP protection strategies to maintain a competitive edge.

Skill Development and Talent Retention: Fostering a skilled workforce capable of driving innovation is crucial for sustained technological advancement, necessitating investment in talent development programs and retention strategies.

Sustainability and Social Impact: Businesses should consider the broader implications of their R&D initiatives, including environmental sustainability and social impact, to enhance brand reputation and unlock new market opportunities.

The tax incentives that the Malaysian Government offers do provide the accelerator factors in the following areas:

1. Stimulating Innovation: Tax incentives indirectly help in reducing costs and encourage companies to invest in research and development (R&D) and technological advancement. This can lead to the development of new products and services that drive economic growth.
2. Enhancing Competitiveness: Malaysia can enhance its competitiveness in the global market by giving incentives and other assistance for investment in innovation and technology. This can attract foreign direct investment (FDI), create jobs, and improve productivity.
3. Supporting Small and Medium Enterprises (SMEs): The main benefits to SMEs include accelerating the automation in their operational process and many of them still rely on low-cost foreign labourers that create other social problems in the long run. This can help SMEs to grow and compete more effectively.
4. Alignment with National Goals: These incentives can support Malaysia’s broader economic objectives, such as transitioning towards a knowledge-based economy and reducing dependency on traditional industries like manufacturing and high-value creation services industries.

However, besides the opportunity, there are some challenges that we shall take note:

1. Complexity of Compliance: The complexity of the application process can be challenging for businesses, particularly SMEs with limited resources. Other than that, the authority shall be well aware of the practicality of the business aspect while assessing the application. This complexity may deter some companies from taking advantage of the incentives.
2. Risk of Misuse: There is a risk that some companies may want to make use of the incentives for tax avoidance purposes and they are not genuine investments in innovation and technology. 
3. Lack of Awareness: Many businesses, especially SMEs, may not be aware of the availability or eligibility criteria for these incentives. They may also misunderstand that the incentives are hard to apply and get approval. This results in the incentives not giving the country the full effect of technological development.

Malaysia shall keep on reviewing their approach of offering incentives to achieve maximum effectiveness and studying other countries, especially the neighbouring countries in Southeast Asia their practices in this area to enhance our competitiveness.

1. Clarity and Transparency: Some jurisdictions have simple and transparent criteria for eligibility and compliance, which reduces ambiguity and provides transparency that encourages greater use of incentives.
2. Flexibility and Adaptability: Best practices often involve regular reviews and updates of incentive schemes to ensure their relevance and effectiveness in a rapidly evolving technological landscape. Malaysia may need to improve its agility in this regard.
3. Evaluation and Impact Assessment: Regular evaluations and impact assessments of incentive programs are essential to determine their effectiveness and make informed policy decisions. They are getting feedback from the businesses regarding the effectiveness of the incentives. Malaysia could benefit from strengthening its evaluation mechanisms.

Commentary

Tax incentives are widely used by governments worldwide to encourage investment in innovation and technology. However, it’s important to understand that their effectiveness depends on various factors beyond just tax breaks.

While these incentives primarily target tangible assets and innovation, it’s vital to recognize the critical role of nurturing talent resources, often referred to as the ‘software’ of innovation, in enhancing long-term competitiveness.

This underscores the need for a comprehensive policy approach that includes robust educational systems, conducive business environments, and supportive social welfare measures.

Talent development and innovation success require a sustained commitment to consistent, long-term policy frameworks.

Additionally, factors such as political stability, the efficiency of governmental agencies, and transparency in policy execution also play significant roles in fostering innovation.

A Path Forward

The role of tax incentives in driving technology and innovation is crucial as Malaysia marches toward digital autonomy and economic growth. These incentives spark investment in R&D and guide companies through digital transformation, aligning perfectly with Malaysia’s aspirations for 2030. 

But, navigating the tax landscape is vital to harnessing these advantages fully. As Malaysia advances toward the future, as painted in the New Industrial Master Plan 2030, the fusion of tax strategies and innovation will be a key force for tech progress and national development.

● Mr Lam Kwai Soon (Tax Managing Director, Cheng & Co Group)
Postgraduate Student, Swinburne University of Technology Sarawak Campus