ASEAN is projected to sustain a positive economic trajectory in the near term, with regional real gross domestic product (GDP) growth of 4.7% in 2024 and 4.8% for 2025. Meanwhile, the International Monetary Fund forecasts Malaysia’s growth to be 4.4% for both 2024 and 2025.
The United Nations Trade and Development’s 2024 World Investment Report shows that ASEAN continues to maintain strong foreign direct investment (FDI) growth. While global FDI flows declined by 2% in 2023, ASEAN has recorded FDI growth of 1.2% with Malaysia seeing a surge of 15.3% in foreign investments from 2022 to 2023. It is also welcome to note that Malaysia’s ranking in FDI size among the ASEAN countries has risen from sixth in 2020 to fourth in 2022.
Despite these favorable statistics, there is concern over the high debt-to-GDP ratios in the region. The ASEAN Secretariat had forecast interest payments for low-income nations to nearly double in 2024 and expects that the region’s fiscal policies will tighten throughout 2024 as countries seek to rein in debt levels, potentially resulting in higher taxes and reduced government spending.
Ensuring the sustainability of public finances has become more challenging due to the impact of the COVID-19 pandemic, geopolitical conflicts, and energy shocks. Interest rate increases implemented in 2022 have caused government debt service burdens in some countries to rise as existing low-cost debt matures, adding to fiscal pressures.
As a result, it is no surprise to observe a general trend of increasing taxes across ASEAN in recent years. Common measures include:
- Increase in consumption taxes. Indonesia and Singapore have increased the rates of their respective value added tax (VAT), and goods and services tax (GST). Indonesia increased its VAT rate from 10% to 11% in April 2022 and has plans to increase to 12% by 2025.
Singapore increased its GST from 7% to 8% in January 2023 and to 9% in January 2024. Vietnam and Philippines implemented higher excise taxes on certain goods, such as tobacco and alcohol. A few countries in the region, including Malaysia, have introduced tax on sugary drinks while others have initiated studies to do the same. - Tax on digital services. Indonesia, Malaysia, Singapore, and Vietnam have all introduced some form of services tax or GST on digital services.
- Digitalization of the tax administration. Malaysia, Indonesia, Vietnam and Singapore have all introduced e-Invoicing, with Thailand targeting to mandate e-Invoicing by 2028.
- Global minimum tax. Vietnam has implemented the Income Inclusion Rule and Qualified Domestic Minimum Top-up Tax in 2024, while Singapore and Malaysia will be introducing these i in 2025. Thailand and Indonesia are likely to implement global minimum tax in 2025 as well.
- Introduction of carbon tax. Singapore has introduced carbon tax, with Thailand and Indonesia likely to implement this in 2025. That said, the primary reasons for the introduction of carbon taxes are the reduction of carbon emissions and promoting sustainable development, not to increase tax revenue.
Notwithstanding the above measures, Malaysia, Indonesia, Thailand, Vietnam, Singapore and the Philippines continue to rely on fiscal incentives to attract FDIs.
Most, if not all, of these jurisdictions, have workstreams to explore and develop fiscal incentives that continue to be relevant and attractive to investors despite the introduction of global minimum tax.
In its 2024 Budget statement, Singapore announced the introduction of the Refundable Investment Credit scheme. This new tax credit is designed to incentivize businesses to undertake high-value and substantive economic activities in Singapore. This initiative aims to keep Singapore competitive and attract global investments by providing financial support for significant projects. It will be interesting to see how Malaysia’s tax incentive regime is refined in light of global and regional developments, such that the incentives remain relevant to investors and also benefit the country and the rakyat in a significant and measurable way.
Malaysia’s response to improve its fiscal position is aligned with the other ASEAN countries. However, its tax-to-GDP ratio is still below Singapore, Thailand, Vietnam, and the Philippines, though higher than Indonesia. Hence, there is pressure on Malaysia to increase its tax base. The question is what more can Malaysia do? As seen above, it has already triggered many levers to increase tax revenue.
Malaysia’s corporate tax rate is among the second highest in ASEAN. There is little room to increase it further and in fact, the expectation (or hope) from businesses is for a reduction. In terms of personal income tax, our highest band sits at 30%, which is higher than Singapore at 24%, and lower than the 35% in Indonesia, Philippines, Vietnam, and Thailand. Again, there is not much flexibility to use this lever to increase tax revenue, especially given the relatively low number of individuals in the highest income brackets.
The introduction of e-Invoicing is expected to increase tax revenue through increased transparency and disclosure, but this will be gradual as implementation is being carried out in phases.
The two other measures that have been considered to make a significant positive impact to our fiscal position is the withdrawal of subsidies, and the broadening of the consumption tax base.
We have seen the start of the former with utilities and diesel subsidies. The more challenging to execute would be the rationalization of petrol subsidies, which would have a significantly more widespread impact. The broadening of consumption taxes has been hotly debated, with many advocating for the return of GST. However, there are also concerns with the regressive nature of the tax and its impact to the B40 group.
Perhaps with the full-fledged implementation of e-Invoicing, the authorities will have the required data to provide targeted subsidies to the B40 group to ease the financial burdens that may arise from the withdrawal of subsidies, or introduction of additional taxes. In the meantime, we may see another round of expansion of the sales and service tax (SST).
Could the introduction of dividend withholding tax be on the cards? Indonesia, Philippines and Thailand, have withholding tax on the distribution of dividends, but Singapore and Vietnam do not. In the near term, dividend withholding tax is probably not the answer given Malaysia’s aspiration to be the preferred destination for the setting up of regional and global hubs.
