Malaysia recently observed its highest gross domestic product (GDP) growth since Q4 of 2022, with a 5.9% year-on-year expansion in Q2 of 2024. It is crucial to maintain the momentum and encourage further sustainable economic growth. Taxation policies play a vital role in encouraging investments, incentivizing businesses, promoting innovation and raising revenue to fund infrastructure, innovation, education and other key initiatives, all of which will spur the nation forward. As such, taxation policies should reflect the country’s economic state to drive the necessary economic boost to elevate Malaysia’s standing on the global scale and help Malaysia achieve its economic goals.
The emerging trends affecting businesses globally, such as technological developments, geopolitical developments, industry requirements, talent supply and social obligations are all factors that influence or contribute to the development of taxation policy. This helps shape the desired outcomes for the nation.
1. Improvement in employment rates
There are many studies that highlight how economic growth tends to be positively associated with employment and the interdependence of the two. In other words, high employment rates support economic growth. High employment rates lead to a boost in consumption and demand due to the availability of more disposable income, driving economic expansion, which in turn further boosts employment. The issue of income inequality may also be addressed through business efforts to increase and create high-value job opportunities. Tax incentives put in place to encourage business investments can lead to the creation of more job openings, hence, encouraging high employment.
Further, tax deductions or reliefs granted for training expenditure or skills development will further boost capabailities and support the development of knowledge and skills for industries and businesses and also allow Malaysians to gain the skills and knowledge to increase their income earning capacity.
2. Higher productivity
Upskilling and continuous learning are important for workers to stay up to date with the latest industry requirements and global developments, particularly in technology. This increases labor productivity and maximizes the utilization of the country’s available talents. Taxation policies set up to encourage further investments for greater productivity, such as training programs to upskill or reskill workers and upgrading existing equipment to maximize productivity, will lead to better business performance and boost the economy. Workers will be able to complete tasks more efficiently, using fewer resources. One example of a tax incentive related to this is the Reinvesment Allowance (RA), designed to encourage manufacturing firms to reinvest in projects for expansion, automation or modernization of their manufacturing activities, or in diversifying manufacturing activities. An increase in knowledge and applicable skills can lead to sustainable GDP growth while also improving the marketability of the nation’s talents. Studies support the link between labor productivity and worker wellbeing, further endorsing the implementation of continuous learning and training, alongside frequent upgrades to plant and machinery to add.
3. Incentives in crucial economic sectors
In any country, specific sectors are identified as growth or focus sectors. These sectors contribute to the country’s stable economic performance, even during times of financial instability or uncertainty. For example, Malaysia is the second largest producer of palm oil in the world and is among the largest automotives producers in Asia Other sectors that contribute to the nation’s economy include the manufacturing and services sector, electrical and electronics, tourism, and oil and gas. To promote economic growth and stability, even in adverse times, taxation policies have been developed to support these essential sectors. Specific sectors are eligible for certain tax incentives, including double tax deductions on expenditure, additional allowances and tax exemptions. These measures are designed to encourage continued business activity and sustain the country and its economy during challenging periods.
4. Attracting foreign investments
Tax incentives are a powerful fiscal tool, but they must be designed such that they are relevant to the industry sectors being promoted, benefit the nation, support domestic industries and increase the nation’s competitiveness on the regional and global stage. Incentives should be regularly reviewed to ensure they continue to meet the desired objectives. Incentives which are outdated, or which provide a lopsided benefit to taxpayers should be identified and phased out, so that resources can be directed to supporting the truly deserving investors.
The tax incentives offered to foreign investors aim to maintain the competitiveness in the nation’s investment environment. This encourages foreign multinational corporations to invest in Malaysia. Foreign investments help promote economic growth by introducing new jobs and opportunities for employment, bringing in new technology and ideas, and encouraging innovation through healthy competition. These changes will stimulate economic growth through the transfer of human capital and technological advancements. According to EY’s Attractiveness Survey for Financial Services, the UK attracted 108 financial services projects in 2023, creating 5,019 jobs. Foreign investments have proven to be an effective catalyst in boosting the country's economy. All this will improve the economy and the spillover effects will result in better revenue collections.
