Corporate tax incentive to promote investments in startups
Double tax deductions to encourage homegrown tech adoption
THE Technopreneurs Association of Malaysia (TeAM) has proposed corporate and double tax deduction incentives, as well as other measures, that it believes would help fuel the startup and entrepreneurial ecosystem in the country.
The association has been discussing two of the proposals for some time: A corporate tax incentive and a review of Malaysia’s bankruptcy laws.
It has prepared a set of policy recommendations for the Government to consider for the national budget or Budget 2015, which will be unveiled by Prime Minister Najib Tun Razak, also the Finance Minister, in Parliament on Oct 10.
In a policy paper TeAM shared with Digital News Asia (DNA), the association said that its recommendations were based on discussions with its members as well as ecosystem stakeholders.
TeAM said it believes that these policies would significantly enhance the position of Malaysia as a hub for entrepreneurship in South-East Asia; assist in the further development of entrepreneurial ventures; and make Malaysia a preferred destination for entrepreneurs and investors.
It made three proposals, under three principles: Ensuring funding for growth; support for market access; and removing barriers to entrepreneurship.
Funding: Corporate Investment Tax Incentive
Currently, the primary source of venture funding comes from the Government, which has already declared it is scaling back and has been urging the private sector to take on a more proactive role.
Unfortunately, not many have stepped to the plate, and there are only nine venture capital (VC) firms in the country. The situation is even more desperate when one looks at the funding needs of the ecosystem over the next five years.
Based on a survey with 200 entrepreneurs conducted jointly with Universiti Tun Abdul Razak (UniRazak), TeAM estimates that the funding needs of these 200 startups in 2013 was RM295 million.
The association believes that there are at least 5,000 tech companies in Malaysia from the startup to expansion phase, but even if only looking at 2,000 companies, RM2.95 billion worth of funding would have been needed in 2013.
Over the next five years, based on 2,000 companies only, funding needs would be about RM18 billion, which cannot be provided by VC firms or angel investors. [RM1 = US$0.31]
To plug this gap and encourage more private sector participation, TeAM is proposing tax deductions for corporations that invest in technology-related businesses; or which invest in registered VC funds that themselves invest in technology-related businesses.
The deduction will be from the adjusted income of the corporation, equivalent to the value of the investment made in the investee company or VC fund, with a maximum investment of RM20 million per year or 5% of annual turnover, whichever is higher.
TeAM’s Policy Institute (TeAM-PI) director Dr V. Sivapalan acknowledged he does not know of any other country or jurisdiction which has introduced such an incentive.
“Most jurisdictions have focused on angel incentives. We may actually be one of the first in the world, if not the first,” he told DNA via email.
When asked how much in funding this would open up to the ecosystem, Sivapalan said that in the first year the incentive is approved – whether as part of Budget 2015 to be announced next week, or next year – the association is targeting to get five corporations to start investing at least RM20 million each.
“That alone would add RM100 million to the ecosystem,” he said. “We think the savvier tech companies will see the value in investing, and we hope the first five will come from this category.”
“The main challenge will be in getting the ‘old economy’ companies to start investing. The other challenge is their ability to actually make investments even if they wanted to.
“That’s why we have included the second criterion that even if they invest in a VC fund that makes the investments for them, that will also qualify,” he said.
TeAM is also banking on the VCs themselves to leverage on this tax incentive to get more corporations to invest in their funds.
“This will do two things for us: Firstly, it would mean more people engaging with corporations to take up this incentive; and secondly, it will help corporations that don’t have investment skills to invest via these VCs,” said Sivapalan.
TeAM said it has already spoken to three public-listed companies which have indicated that they would invest if such an incentive were available. How will TeAM, or the Government, reach out to others?
Sivapalan (pic) said the plan is to get a few of the larger companies, starting with the tech companies, interested first.
“Once some of them start to do this, we believe it will be easier for others to do the same,” he said.
To reach out to others, TeAM will work with associations such as the Malaysian Venture Capital & Private Equity Association (MVCA), and various government agencies such as SME Corp, Multimedia Development Corp, Securities Commission Malaysia (SC), and Cradle Fund, an agency under the Ministry of Finance.
“We know the SC likes this incentive and while we have not discussed this with it, we believe it will support us in reaching out as it will be a good fit with its crowdfunding initiative to create additional sources of funds for entrepreneurs,” Sivapalan said.
In August, the SC published a consultation paper seeking public feedback on its proposed regulatory framework for equity crowdfunding (ECF), a new form of fundraising that allows startups or other smaller enterprises to obtain capital through small equity investments from relatively large numbers of investors, using online portals to publicise and facilitate such offers to crowd investors.
The framework was revised a month later after public feedback, and ECF is expected to roll out some time next year.
“Cradle Fund has agreed in principle to be the approval and management office for this incentive, just as it is for the Angel Tax Incentive,” Sivapalan said.
The Angel Tax Incentive was first announced in Budget 2013, and officially rolled out in April, 2013. It allows a deduction equal to the amount of investment made by an angel investor in a venture company to be set off against all his income.
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