Above For centuries, it has proved to be an effective tool to influence taxation behavior. This can be seen in personal relief as an effective “carrot” to promote reading habits or to save in SSPN.
Over the years, Malaysian tax policy makers have also used taxation as a tool to encourage ESG adoption among industry players.
Carrot
One of the examples of a carrot that encourages ESG -friendly practice in Malaysia is dual cuts for the remuneration of disabled workers. This means that employers appointing disabled workers are given tax deduction to double the remuneration paid.
It is said that the remuneration is RM4,000, the employer gets a tax deduction of RM8,000 and, at a tax rate of 24%, the tax savings are RM1,920. In other words, about half (48% accurate) of remuneration is ‘subsidy’ through tax forgiveness by the government.
Double cuts for remuneration of disabled workers were introduced in 1982 – ESG well before emerging as a bust. Nevertheless, even today, we can become a witness to encouragement as we are effective in affecting the corporations to hire more inclusive fashion to the souls of ‘S’ in social factors.
In these years, the recruitment has expanded tax incentive to promote the DEI agenda, including dual cuts for the remuneration of senior citizens, east-doses, parole, supervised individuals and pre-drag dependents. Similarly, there are tax incentives to encourage women returning to work after career break.
As an early ‘E’ of ESG, there are many tax incentives and reliefs to promote environmentally friendly behavior such as solar panels, EV vehicles, carbon capture, use and storage (CCUS) and even domestic uses Food waste manure machines for.
The ‘G’ letter that represents the government, tax deduction up to RM50,000 for the costs related to the corporate governance framework (TCGF). The limit of this deduction is shared with some expenses, namely the cost of ESG reporting, the cost of e-invoicing implementation and the cost of preparation of transfer pricing documentation.
The incentives and reliefs listed above can be dubbed as ‘carrots’ to promote ESG-friendly behavior.
Rods
Incentives and reliefs are not just tax equipment that can be used to affect behavior. Tax policy can be deployed as a ‘carrot’ to encourage some desired behavior or ‘stick’ to discourage some desired behavior or some unwanted behavior.
Even when used as a ‘stick’, taxation is not as rigid as non-rigorous measures. Saying this simply, discourage tariffs free-business, but are less harmful than a complete business ban such as an ambargo or approval.
Another important example will be the case of plastic. After extensive awareness on single-use plastic environmental damage, many courts such as European Union and UK have implemented Plastic Packaging Tax (PPT) in recent years. PPT recycling helps to close the price arbitration between plastic and virgin plastic (pre -expensive, and does not apply to PPT packaging that uses 30% recycled plastic).
PPT is important in affecting the behavior of the industry, but of course the use in packaging is less strict than the complete restriction of virgin plastic – as proposed by the European Union by 2030.
One can argue that where a complete restriction of something is considered, a tax remedy should be at least one preamble (if there is no option) for such action. Taxation, very at least, is an important step stone (in many cases, only taxation can achieve the desired behavior).
For the case of Malaysia, we have neither a ban on plastic packaging nor a PPT as it is a well -established practice to offer carrots before reaching the sticks. In this regard, Malaysia is currently offering tax incentives for AI-operated reverse-vending machines to promote recycled plastic use. It remains to be seen whether carrots are enough to move the needle in this case.
For decades, Malaysia has excise duty on motor vehicles (especially using combustion engines). This policy is directly associated with the ‘E’ element, but the ‘S’ element is also present in view of the general spirit to connect the overall way. [un]Employment level within a country/region with motor vehicle assembly plants.
Excise duty on tobacco and alcohol products aim to discourage unhealthy consumption of these products – and is directly associated with the ‘S’ element. Recently, Chinese sweet drinks (SSB) are added to the list of goods under excise duty.
Subsequently, there is a plan to implement carbon tax for iron, steel and energy sectors effective from 2026. The exact date is not clear, but it is estimated to be in line with the CBAM of the European Union which will be effectively 1 January 2026.
The sequence is getting correct
To achieve the ESG goal within any nation or organization, I would argue that the sequence is paramount. First, awareness (along with framework). Second, offer carrots (eg encouragement) to encourage adoption. Third, apply sticks (eg new taxes) to encourage late adopters. And finally, a complete restriction where there should be suitable (limited cases where damage is extreme).
The sequence above, both 2 and the third stages includes a fiscal measure such as tax encouragement or new tax.
Taking me on a holistic approach
It is important for the taxation policy not to be seen as a pure fiscal measure, but is also an important tool for ESG-Adoption to prepare the industry and the public.
It is useful to prevent any tax revenue from ESG-operated taxes that avoid unstable results that triggers taxation in the first place to promote the reasons. Ideally, the ultimate goal of starting the ESG-driven tax should be collected by achieving ESG-expiration.
For example, excise duty from SSB should be spent to spread awareness about the dangers of excessive sugar intake. Therefore, as society attains awareness and readiness, tax loss will not be seen as a loss of tax revenue, but the reduction in the revenue placed which corresponds to the needs of low cost on the same reason.
Such approaches also include potentially legislative changes because the requirements of the current legal framework are requirements for all tax revenue to be in federal consolidated funds, and since then the expenditure is based on the discretion exercised during the budgetary process.
ESG-run initiatives are not only fiscal policies, but important measures that encourage players of the industry and publicly publicly adopting permanent practices. A harmonious and transparent structure is necessary to achieve the desired result.
Again Kanna Tratax SDN BHD Executive Director, APAC International Tax Lead of WTS Global, Chairman of CTIM’s Technical Committee on Tax Policy, ESG Task Force of ACCA and members of the expert panel, and members of the International Fiscal Association for Malaysia. The views expressed are their own.
