most of Countries, particularly emerging markets, have used tax incentives to attract foreign direct investment. Even developed economies like Europe and the US provide incentives to attract investment by providing tax exemptions or cash grants.
Emerging markets do not have the capacity to provide grants and are limited to providing tax breaks. Being in a competitive world, Malaysia cannot avoid providing tax incentives as our neighbors also compete for the same investments by providing similar or better incentives.
When investors decide on Malaysia, they base their decision on several factors. Essentially, tax incentives are one of the key factors that they will compare with our neighbors.
Since capital is mobile, Malaysian private investors will also pay attention to the availability of incentives, although they are likely to be biased towards Malaysia as they have their home in Malaysia and are based here. However, in maximizing returns on capital, whether they are foreign investors or local investors, the importance given to the sentimentality of their home base is negligible as they are looking for maximum returns for their shareholders and stakeholders.
government concern
However, the government is always concerned about the potential loss of taxes due to the availability of incentives as it will have a negative impact on the federal budget. The concern may be legitimate, but it becomes meaningless when they are willing to understand that, in the long run, there will be a payout that will more than make up for the taxes foregone.
This will come in the form of providing new jobs, which will have a multiplier effect on the economy due to increased consumer spending. The entire supply chain that will support the new investment (e.g. local suppliers through logistics, materials, consumables, professional and financial services, etc.) will be an additional contribution to the economy.
incentives bring additional taxes
There is no loss to the country due to tax exemption on new investments. Sometimes, there will be additional taxes that will exceed the incentives given to the investor.
Everyone associated with the investor will pay tax. Employees, suppliers, professional advisors and service providers, financial institutions providing financial products will pay their share of tax when there is a transaction with a new investor.
Profit exceeds tax loss
It is important for executives to conduct proper cost benefit analysis. The benefits should not only include taxes collected from employees and suppliers, but also consider the multiplier effect on the economy through additional spending by all stakeholders involved or linked to the new investment.
A good example of a non-tax benefit, which is rarely considered, is investment located in remote areas that brings new infrastructure that will also benefit the community at large in the area that would otherwise not have been received. . The social and economic impact of that infrastructure should not be ignored.
Another important impact of the new investment is skill upgradation of the workforce.
Incentives are also extremely useful to reduce financial risks for local companies investing in new technology and products, which will make them more competitive and dynamic, especially in a rapidly changing world. This will also encourage innovation, especially if incentives are provided for research and development activities.
A proper cost benefit analysis taking into account quantitative and qualitative factors should be considered and, in many cases, will show that providing benefits and attracting investment will more than offset the tax forgiven.
It must be remembered that attracting such investment is an additional addition to the economy that did not exist earlier and, therefore, does not cause any loss to the government.
This article is contributed by SM Thanneeramalai, Managing Director of Thannees Tax Consulting Services Sdn Bhd (www.thannees.com).
