While Malaysia's economy has shown resilience in recent months, evidenced by the strengthening ringgit against the US dollar, 2025 Budget presents a delicate balancing act for the government.
It is commendable that Malaysia achieved a fiscal deficit target of 5 per cent of gross domestic product (GDP) or RM91.4 billion in 2023, which is lower than the 5.6 per cent or RM99.5 billion recorded in 2022, according to the Finance Ministry. The momentum must continue.
Mid-tier companies, often the unsung heroes of the Malaysian economy, deserve particular attention in this budget. They are vital contributors to the economy. They provide jobs, drive innovation and facilitate export diversification, and operate at a more advanced level than micro, small and medium enterprises (MSMEs), even though the latter forms the foundation of our economy.
The Malaysia External Trade Development Corporation (MATRADE) defines mid-tier companies as follows:
(a) Manufacturing sector: Companies with annual revenues between RM50 million and RM500 million
(b) Services and other sectors: Companies with annual revenues between RM20 million and RM500 million
Securities Commission's 5-year Roadmap, which is aimed at better positioning the capital market as an attractive and robust source of financing for MSMEs and mid-tier companies, estimates about 8,500 mid-tier companies in the country, accounting for around 36 per cent of GDP and 16 per cent of the workforce. This is sizeable in terms of impact and clout, building a case for focused attention and support for mid-tier companies to ensure their continued effective contribution to Malaysia and beyond.
To support mid-tier companies in becoming regional champions, it would be worthwhile for 2025 Budget to prioritise the following areas:
Regional services tax incentives:
The government has consistently encouraged Malaysian companies to expand internationally. We acknowledge that the Malaysian Investment Development Authority (MIDA) is collaborating with the Ministry of Finance to review regional services tax incentives, such as the Principal Hub and Regional Distribution Centre. However, an official announcement on this matter is still pending.
We hope that the updated regional services tax incentive will continue to be investor friendly; more so to Malaysian mid-tier companies. At the initial stages of expansion overseas, there will be significant investment involved from Malaysian mid-tier companies and they will need time and a strong financial ability to increase their overseas investments.
Hence, the criteria for Malaysian mid-tier companies to enjoy this tax incentive should be differentiated. For example, there should be less stringent criteria for Malaysian mid-tier companies in terms of timing, and they should be no less impactful compared to foreign direct investments that are able to easily fulfil the criteria in Malaysia on day one.
Automation Capital Allowance (ACA) tax incentive:
The IRB published the updated ACA tax incentive in June 2024 which expands the scope to include both manufacturing and services sectors, with requirements for machinery, equipment, software or systems to have elements of Industry 4.0. They also increased the threshold to RM10 million which is much welcomed.
Quite a number of mid-tier companies would be taking their first step in integrating their various functions from standalone computer systems, into a centralised integrated system so that management would have real-time data access on their entire business performance for better business decision making.
It also allows them to automate routine tasks so that their employees are free to focus on more value-added functions. From the updated ACA guidelines, it is not very clear that such investments qualify for the tax incentive.
It would be timely to have a review of the above to allow a one-time tax deduction or special capital allowance. This would encourage more Malaysian mid-tier companies to carry out that one-time effort in integrating their various systems and functions to be in a better position to compete internationally with multinational corporations.
By implementing these measures, 2025 Budget can create a more favourable environment for mid-tier companies, enabling them to thrive and contribute to Malaysia's economic growth. Supporting mid-tier companies is a strategic move that can significantly boost the Malaysian economy if executed effectively, while striking a balance between fiscal responsibility and economic development.
Additionally, focusing on ensuring tax compliance from all taxpayers, including addressing recalcitrant ones, can enhance revenue collection and fairness.
Fung Mei Lin is a tax partner and entrepreneurial and private business leader at the PwC Malaysia.