Country report Malaysia

Economic overview

The Malaysian Minister of Finance, Datuk Seri Tengku Zafrul Tengku Abdul Aziz, presented the budget for 2022 in Parliament in November 2021, the first of the government led by Ismail Sabri, which rests on three main pillars: Strengthening Recovery, Building Resilience and Driving reforms. The total allocation of €69.2 billion, the highest ever in Malaysian ringgit (332.1 billion), includes €48.6 billion for operating expenses, €15.8 billion for development expenditure and 4.8 billion for the Covid-19 fund.

2021, according to the Minister, was supposed to be the year of economic recovery, but due to the worsening of the pandemic, which led the previous government to impose new and stringent lockdowns, it has delayed the recovery path. Only thanks to the strong acceleration of the vaccine program, he continued, has the country managed to overcome the emergency phase and can look optimistically at development prospects in the coming months.

Minister Aziz then underlined how, in addition to the resources allocated by the 2020 and 2021 budgets, the previous Governments, to limit the most harmful consequences of the Covid-19 emergency, have disbursed additional appropriations, through 8 separate packages of measures, for a total 530 billion Ringgit (110.4 billion Euros at current exchange rates), which have allowed the country to significantly mitigate the negative effects on the productive fabric, employment and the most vulnerable population, at the same time supporting growth in 2021, which however it did not go beyond 3.1% due to the lockdowns imposed during the year. A growth rate of between 5.5 and 6.5 percent is expected in 2022, provided there is an effective and lasting containment of the infections, the effectiveness of the vaccine program and a general improvement in the international situation.

Despite the slowdown in the recovery, the budget does not give up on expansionary fiscal policies, in a crucial phase of the restart of the economy, without, however, introducing significant new taxes. In 2022, however, the public deficit is expected to be 6% of GDP, an improvement on the 6.5% recorded in 2021. In the medium term, the target remains that of gradually bringing the deficit to 3%. The public debt ceiling, already raised from 60 to 65 percent of GDP, will be maintained at least until the end of 2022.

Overall revenues for 2022 are expected to increase by 5.9% to a total amount of €48.8 billion, of which €35.7 billion in tax revenues. Revenues related to oil exploitation are expected to reach 9.1 billion, half of which represented by dividends from the national utility Petronas.

Among the main innovations in terms of taxation, the budget introduces, only for next year, a “prosperity tax” to be paid by companies whose turnover exceeds 100 million Ringgit (almost 21 million Euros), which will be subject to a tax of 33% (against the 24% charged to the remaining companies). New taxes are also envisaged on the delivery services of goods purchased online and on low-cost products (under 500 Ringgit, approximately 105 Euros) from abroad.

The declared objective of the maneuver is to support a recovery for the benefit of all socio-economic segments of the country. To do this, the Government undertakes to adopt the necessary measures to ensure the “resilience” of the production system and the strengthening of the health and prevention system (6.7 billion Euros are assigned to the Ministry of Health – behind only the Ministry of Education in terms of endowment granted to a single Dicastery). In parallel, programs and tools will be adopted which will define the development path towards the new frontiers of the digital age, of innovation and advanced technologies applied to all sectors of the economy, and towards the full achievement of sustainability objectives, in line with the provisions of the 12th Malaysia Plan.

Main sectors of economy

In the last thirty years, Malaysia has experienced a very strong economic development, transforming itself from a developing country into one of the richest countries in Southeast Asia, no longer dependent only on the production and export of raw materials.

With the New Economic Policy (NPE), Malaysia has become a world leader in the production of electronic components and the first country in Southeast Asia for the assembly and export of motor vehicles. The services, tourism and finance sectors have also benefited significantly. But while the NPE has made possible great developments, the issue of inequality in the distribution of wealth still remains, and many farmers in Peninsular Malaysia, as well as the indigenous people of Sabah and Sarawak, are still dependent on subsistence farming. To solve this serious problem, steps have been taken by the NPE, whose objectives are economic growth, the eradication of poverty and, above all, the transformation of Malaysia into a highly industrialized nation by 2020.

Malaysia’s economy boasts two absolute and well-established world records: that of the production of rubber, the annual volume of which approaches half of the total world volume, and that of the production of tin, also almost half of the world total. The exploitation of the oil fields of Sarawak and Sabah has allowed the energy self-sufficiency of the country (logically in relation to its limited industrial development). The general framework of the Malaysian economy does not go beyond the limits of a fundamental backwardness that has dragged on since the colonial era and which is based on the absence of a real industrial sector and on the control that foreign capital exercises over the main sectors of production and commerce. Among the most productive activities we recall the cultivation, especially that of rice, followed by cassava, corn, potatoes and sweet potatoes, tropical fruits, especially pineapples, coffee, cocoa, peanuts, coconut palms, palm trees oil, pepper and other spices.

Taxation for businesses in Malaysia 

In Malaysia also, the fundamental concept on which the tax regime is based is given by the Tax Residence.

Tax law considers a resident of Malaysia to be someone who:

He has been in the territory for more than 182 consecutive days;

Even though he has not had a stay of more than 182 days, he has stayed in the country for more than this period in the year preceding the reference year;

He was in Malaysia for at least 90 days, even if he had been in the country for the same period of time for 3 out of the 4 years immediately preceding the reference year.

The fiscal residence, therefore, determines the income tax libellus.

Taxation of Legal Persons

The income produced by legal persons, without distinction between residents and non-residents, is subject to a tax of 28%.

The same tax rate applies to a branch of a

foreign company or a company incorporated in Malaysia but controlled by a foreign company.

Exceptions are companies involved in the extraction and processing of oil to which the so-called petroleum tax. Tax at a rate of 40%.

Companies whose management and control takes place within the country are considered resident in Malaysia.

Income remitted to Malaysia by companies treated as resident companies is not subject to taxation, except for those arising from banking, insurance, aviation and shipping activities.

Interest paid in Malaysia by a credit institution to a non-resident company is also exempt from taxation.

Taxation of Royalty and Interest

Royalties paid to non-resident companies and individuals are subject to a 10% withholding tax. While the interest paid to these entities is taxed at

15%.

Tax deductions are envisaged for all expenses strictly related to corporate activity and the production of income, while tax deductibility is not envisaged for write-downs and depreciations, for company tax, for investments outside the characteristic management, and obviously for all private expenses.

Investing in Malesia

Financial and insurance activities

In recent years, the efforts of the Malaysian authorities have focused on enhancing the country as a logistic and operational center of South-East Asia, in an attempt to induce companies – and above all large multinationals – to establish their regional offices in Malaysia, thanks to progressive liberalisations, especially in the services market, and the offer of tax incentives and reliefs (it should be underlined, in this regard, that there are no restrictions on the repatriation of profits by foreign companies). These measures have attracted foreign investment in the financial and insurance sector, which continues to offer significant business opportunities.

Electricity, gas, steam and air conditioning (also from renewable sources)

The energy sector is of great importance, with regard to which the country is decisively pursuing a policy more oriented towards the use of renewables (a sector where Made in Italy boasts world leadership). As part of the ‘stimulus packages’ adopted in recent years to deal with the Covid-19 emergency, the new government has accelerated the implementation of projects entrusted to state-controlled companies.

Buildings

There are many infrastructure projects already started or to be started that can offer business opportunities to companies. These include the Pan Borneo Highway (the new highway that will connect the states of Sabah and Sarawak in Borneo); the Central Spine Road (the 325 km highway in the center of Peninsular Malaysia which will connect the towns of Kuala Pilah and Kuala Krai); the Rapid Transit System between Johor Baru (the capital of the state located at the southern end of Peninsular Malaysia) and Singapore; the East Coast Rail Link project (part of the Belt & Road Initiative); the West Coast Highway (the highway that will connect the states of Selangor and Perak); the “Mass Rapid Transit 3”, a subway under construction in greater Kuala Lumpur; the “Klang Valley Double-Tracking Project” to upgrade railway infrastructure and services, to be implemented in the area that includes the Malaysian capital and most important port, Port Klang; the “Electrified Double-Tracking Project” railway line doubling project between the city of Gemas and the city of Johor Baru.

Coke and products deriving from petroleum refining

Historically the driving force of the Malaysian economy originates from hydrocarbons. The country is the second largest oil producer in the region, with 650,000 barrels per day, and the third largest producer of liquefied natural gas in the world with 78.4 billion cubic meters per year. It is also strategically positioned between the most important energy trading routes. Collectively, oil & gas accounts for 15% of Malaysian GDP, and offers significant opportunities in the upstream, downstream and petrochemical industries.

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