Budget 2015: TeAM proposes tax incentives to fuel ecosystem: Page 2 of 2
By A. Asohan October 3, 2014
Market Access: Double Tax Deduction
Entrepreneurs in Malaysia have often lamented the fact that potential customers in Malaysia are reluctant to buy homegrown technology products or services.
Many startups had to venture overseas to find success, including telecoms software maker Aexio, electrical engineering computer-aided design developer Radica Software, and bioinformatics specialist iGene.
TeAM is proposing a double tax deduction incentive (DTDI) for companies that adopt Malaysian-made technology, including software subscription services.
The incentive would be open to all companies registered or incorporated in Malaysia, including multinationals.
The deduction will be from the adjusted income of the purchasing corporation and does not apply to hardware unless said hardware involves ‘substantial’ IP that belongs to a Malaysian company.
The company producing or selling the technology must own the intellectual property (IP) to it, and this excludes licensed foreign technology. The IP owner must also be Malaysian-registered company with a minimum 51% local shareholding.
TeAM is recommending that companies already registered under the following agencies or initiatives automatically qualify: MSC Malaysia Status; Cradle Fund recipients, Bionexus Status, SME Corp 1Innocert, GreenTech Corp certified, AIM/ Platcom certified, and any other Malaysian ministry or government agency programme that certifies the company as a producer and owner of technology IP.
TeAM noted that the Malaysian Government already offers a slew of double-tax deduction incentives in other areas:
But won’t some people see this as a form of protectionism?
“We don’t think it is protectionism because what companies need is some form of incentive to promote the uptake of local technologies,” said Sivapalan.
“Where there is an equally good local technology, this incentive will help. Many of the large foreign players have huge marketing and PR (public relations) budgets that local players don’t have, hence there is unfair competition anyway.
“Like most such incentives, there will probably be some sort of timeframe after which the incentive can be removed, says perhaps 10 years. When local players catch up with the size and financial muscle of foreign players, then the incentive can be removed so that everyone can then compete on a level playing field,” he argued.
Removing barriers: Bankruptcy laws
TeAM, through the TeAM-PI, has been urging for a review of Malaysia’s bankruptcy laws since last year. It is proposing that Malaysia amend its bankruptcy laws to allow for an automatic discharge after three years.
Currently, there is no provision for an automatic discharge – which essentially means that risk-taking is discouraged and failure is punished severely.
TeAM is proposing that the bankruptcy laws in Malaysia follow more entrepreneurial economies such Australia, Holland, New Zealand, the United Kingdom and the United States, and change its bankruptcy period to a maximum of three years, followed by an automatic discharge.
For bankruptcy cases where the principal amount owed is below RM100,000, it is proposing a maximum period of two years followed by an automatic discharge.
Short-term pain, long-term gain
The Malaysian Government has been on a rationalisation programme over the last few years, cutting back on many subsidies, and is introducing a Goods and Services Tax (GST) next year to help it manage its ballooning national debt of above 50% of the country’s gross domestic product (GDP).
Asking the Government to take hits on tax revenues may be an exercise in futility, but TeAM’s argument is that the long-term benefits, which include greater tax income from eventually successful companies, outweigh the short-term losses.
“The amount spent on local technologies is quite minuscule currently, so we don’t think the impact will be big,” Sivapalan said of the double tax deduction.
“Another argument is that even with the double tax deduction, the cost of local technologies and the amount spent and deducted as an expense will actually be smaller than if the customer bought foreign technology.
“Two things will happen if this incentive is given: Firstly, the buyer will actually save money because local technology is usually far cheaper than foreign ones, hence their profits will be higher and therefore the tax department will actually collect more taxes from the buyer.
“Secondly, the nation will save on profits being repatriated to the foreign company’s home office, and also on transfer pricing for foreign technologies that often lead to low taxes being paid by foreign companies anyway,” he added.
Many entrepreneurs have also complained that the Malaysian economy is dominated by huge government-linked companies (GLCs) which make it hard for startups to break through. Can anything be done to level this playing field?
“If the double tax benefits mean more revenue for the companies, then this will give the smaller companies an opportunity to grow bigger,” said Sivapalan.
“This might mean that eventually, we will have more small and medium enterprises (SMEs) becoming medium and larger companies that will not only compete with GLCs, but can also be more effective in exporting their products and services abroad.
“A stronger balance sheet and higher profits will enable SMEs to do more research and development, and to also scale their business both within Malaysia and abroad.
“In fact more revenue will also mean less dependence on other sources of funding, and this can only be good for the ecosystem,” he added.
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