Global Minimum Tax - How a Fairer Global System will Impact Malaysia

The G7 summit that saw top leaders and finance ministers from seven rich nations meet in the United Kingdom has recently concluded on June 13 with much media attention worldwide. In the closing communique, the general focus was on democratic values, climate change and environmental protection, network security infrastructure and countermeasures against the Covid-19 pandemic. Many were not aware of a paragraph that touched upon advocating for freer and fairer trade, a more flexible global economy and a fairer global tax system. Let’s dive deeper into the fairer global tax system and how will it impact Malaysia and our economy.

Leaders of the G7 group of nations had unanimously agreed to endorse a global minimum corporate tax of at least 15% for multinational companies (MNC), especially tech giants, to pay more to governments that have been hard-hit by the pandemic. This is to prevent MNC from evading tax obligations by moving to countries with lower tax rates. The G7 also pledged to ensure that this minimum corporate tax rate is as high as possible in the coming months.

The global minimum corporate tax rate means that a company that pays lower taxes in a particular country will have to pay up the tax difference to its home government. This US-led proposal is mainly aimed at establishing a globally consistent minimum corporate tax rate as well as changing the rules on company effective rate of tax payment and investment countries. The framework of the new tax system requires them to pay taxes wherever they provide services and products, not limited to where profits are accrued. For now, this global minimum tax rate will only be levied on the largest 100 and most profitable companies in the world and among the main targets are tech giants such as Amazon, Facebook, Google and Microsoft.

However, once this new tax system is officially rolled out, no one can rule out the possibility of it expanding and covering more companies, increasing tax rates and lowering tax thresholds in the future. This means that for many countries that have been long competing in attracting foreign investment through lower tax rates, such an era is over. Similarly for Malaysia, this will be a big impact on its efforts to attract foreign investment. 

At present, Malaysia’s corporate tax rate of 24% and SMEs at 17% are not too low compared with other countries in the region. However, to encourage foreign businessmen to invest in Malaysia, the government has introduced a variety of tax incentives over the years, such as the Pioneer Status (PS), Investment Tax Allowance (ITA) and various other tax incentives as announced in the Budget 2021. To place Malaysia as the forefront destination for regional investment centre, the government announced between 0% and 10% tax rates for a period of up to 10 years for companies in technology transformation-related services, foreign companies relocating their operations to Malaysia and companies manufacturing pharmaceutical products including vaccines, the extension of the Principal Hub incentive application period and the introduction of the Global Trading Centre incentive.

The old practice of using tax incentives to attract foreign investment has been generally regarded as “harmful tax competition”. However, it is not really an attraction whether or not foreign investment come to Malaysia, especially now. During and after the pandemic, our business ecological environment and companies’ operation practices have seen tremendous changes. Moving forward, we should focus more on re-examining the advantages we have, maintaining or strengthening them while adding new leads to further attract good foreign investment.

Despite Malaysia ranking among the best in the world - 12th in 2020 - for ease of doing business, the figures alone, however, do not truly reflect the real situation on the ground. Ever since the pandemic started, the government’s disorderly response and frequent U-turn in policies have caused a confidence deficit among investors. When the industrial economy transformation took place in the 1980s, we took pride in our abundant natural resources, sufficient and relatively inexpensive human capital with sound infrastructure. These advantages have been our selling points to attract foreign investment. However, as time passes and with the vigorous development of neighbouring countries to catch up, Malaysia is gradually losing out.

Take human capital as an example. The misconception of relating jobs deemed 3D (dirty, difficult, and dangerous) with foreign workers are still prevalent, that many would rather be unemployed than taking these jobs. In recent years, the frequent flip-flops and rigorous changes in the government’s foreign labour policies have shunned foreign investors. This situation will further aggravate when the Regional Comprehensive Economic Partnership (RCEP) - a free trade agreement between the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam - is implemented. This is because labour-intensive industries will gradually flow to countries with lower labour costs, such as Vietnam, Cambodia and Indonesia; while Malaysia and Thailand will gradually move their focus on high-tech industries - while our human capital’s capability in these fields remains a question. Our graduates, especially those from public universities, have been lacking in soft skills such as language proficiency and communication skills. We have heard this for years and yet the government has not come up with effective and in-depth strategies to address it - leaving Malaysia in a lurch, where its cheap labour appear matchless with Indonesia, Vietnam and Cambodia, while its skilled workers and talents trail behind Singapore and China.

Further, policy coordination between the federal government and state governments and local councils is another setback. In many cases, federal policies are unable to roll out effectively at the local level. This, at times, is further compounded by the bureaucratic administration of the Little Napoleons, putting unnecessary demands and creating difficulties in various ways, scaring off both foreign and domestic investors. The different land policies in different states also bring inconvenience and trouble to investors. Besides, the comprehensiveness of our overall business environment, including the robustness of our logistics network and financial system, is also a pivotal factor to investor confidence. Last year, a large number of containers were stuck in Port Klang for nearly a month. The backlog incurred losses to the merchants, causing some of them to switch to the Port of Singapore. Such human error and oversight have repeatedly hurt Malaysia in its efforts to attract foreign investment.

Our government needs to replan its strategies with new practices, new models and new methods to attract high-quality foreign investment. A business-friendly environment is urgently necessary to better assist investors to boost their confidence to come to Malaysia. For example, in the recently announced National Recovery Plan, the absence of any strategic implementation and support in the roadmap would render it meaningless, reducing it to a mere timetable. A deeply comprehensive and effective policy with greater foresight should be formulated to effectively control the pandemic in the next six months, and subsequently embark on attracting more domestic and foreign investments in the shortest time, increasing job opportunities and exports to give a much needed strong boost to our economy and speed up recovery.

this article is published on The Star "Insights" on 9th July 2021

written by: Koong Lin Loong

• Managing Partner, Reanda LLKG International
• National Council Member cum Chairman of SMEs Committee, The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM)