Business

Wednesday October 14, 2009

Is our personal tax system geared to attract and retain talent?

This is the second of a series of articles by PricewaterhouseCoopers which appear on Mondays and Wednesdays leading up to Budget 2010. By SAKAYA JOHNS RANI


By SAKAYA JOHNS RANI

AS Malaysia strives towards becoming a high performance culture nation and given the cross-border mobilisation of talent, we are inevitably increasing our dependency on very mobile skilled and highly paid workers. Hence, the burning question – is our current personal tax legislation encouraging performance and sufficient to retain and attract talent?

Let’s take a look at the two most common concerns for many high performing employees – effective tax rates and tax efficient incentives.

Effective tax rates

Malaysia still fares well as a lucrative location for employees (see table) from the effective tax rates perspective but there is still a wide gap compared with Singapore and Hong Kong. Hence, does this give us sufficient competitive advantage in building high performance?

While the majority of our tax payers (earning less than RM45,000 per annum) enjoy tax exemption, the middle to senior management (earning RM120,000 and above per annum) suffer the maximum tax rate of 27% (see table) and are often caught in the “middle-income trap” of high taxes and high cost of living.

This same group is highly susceptible to global recruitment and contributing to the country’s leaking talent pipeline.

Despite the government’s efforts to enhance tax reliefs, the effect of such measures is minimum and the various changes in recent years (for example, books and computer purchase, sporting equipment, etc) have not significantly reduced the final tax liability.

The World Bank has categorised Malaysia as an “upper middle income” country based on gross national income per capita.

As a progressive country, shouldn’t we challenge ourselves to a more robust tax system?

Instead of taxpayers scrambling for books receipts and other relief claims during the last week of tax filing, our personal tax system should be simplified by reducing tax claims and adopting lower effective tax rates.

This would eliminate the time spent on trivial claims of relief and enable the tax authorities to focus on more strategic audit matters.

A simple system that I envisage would be limited to only personal relief (self, spouse, child and dependent parent) while the tax rates are aligned to those in lower tax regimes like Singapore and Hong Kong.

Besides simplifying the personal tax system, let us also look at steps that would further enhance Malaysia’s tax efficiency.

Tax efficient incentives

Equity income

In January 2006, the taxing point for equity income was moved from grant to exercise, thus increasing the tax burden to taxpayers.

Although this move is aligned to global practices, many developed countries have since recognised the role of equity-based income in promoting performance and provided additional tax exemptions.

In Singapore, 50% of taxable income arising from certain qualified employee share plans is exempted from tax, or enjoys preferential lower tax rate while other countries have provided similar tax incentives for qualified equity plans.

We could adopt a more holistic view on the role of equity income as an engine of growth and consider some of the tax incentives made available in the more developed tax regimes.

Bonus and long-term incentives

Currently, these major performance reward tools are fully taxable in Malaysia.

To spur the economic growth and encourage a performance-oriented culture, a preferential tax rate on these reward tools would increase the efficiency and competitiveness of our tax regime which, in turn, will enhance our people’s high-income earning capabilities.

Pension fund

Generally, private sector employees depend on the Employees Provident Fund (EPF) savings as their retirement guarantees.

With the average Malaysian’s life expectancy increasing, tax exempt employer contributions should not be restricted to contributions to the EPF but extended to private pension funds.

Individuals (including the self-employed) can then have access to a larger pool of tax efficient funds for their retirement.

Additionally, it will be welcoming if the approval process for foreign pension funds is simplified to enable employers’ contribution to foreign pension funds for expatriates working in Malaysia to enjoy the same treatment as contributions to EPF.

Currently, contributions to non-approved foreign pension funds are taxable in the hands of the employees upon receipt and not tax deductible to the employer, hence resulting in a lose-lose situation.

Retrenchment benefits

During the March 2009 mini-budget, the tax exempt amount was raised from RM6,000 to RM10,000 for employees who were retrenched from July 1, 2008.

In reality, we do not have any unemployment benefits or safety net in the event of retrenchment. Hence, it is worthwhile to consider repealing Section 13(1)(e) of the Income Tax Act that taxes retrenchment/termination payments.

Countries like Singapore and Britain treat such payments more favourably.

Healthcare

Private sector employees generally do not enjoy any healthcare benefits post-retirement compared with their public service peers.

If a certain percentage of tax collected from the taxpayers were allocated for redemption of their healthcare needs post-retirement, it would create greater ownership by tax payers on their tax compliance.

They would then see more tangible benefits arising from their tax contributions during their working years.

Some of these unconventional thoughts with rakyat as the focus, if adopted by Malaysia, could well differentiate us from our neighbours in the region.

l Sakaya Johns Rani is senior executive director of PricewaterhouseCoopers International Assignment Services Sdn Bhd.

  • E-mail this story
  • Print this story