Gan Pei Tze and Lee Boon Siew, partner and senior manager at PwC Taxation Services respectively, analyze the economic consequences post COVID-19 crisis. According to their studies, the decline of the Malaysian export market along with the constant fluctuating domestic economy met by social distancing norms will indeed impact the growth curve and profitability of Malaysian companies.
Prior to this, Bank Negara Malaysia had already foreseen the Malaysian economic growth rate at 4.3% for the fiscal year 2019. However, their revised report stated GDP growth between -2.0% and +0.5% for the fiscal year 2020. Adding up to this, The International Monetary Fund had to bear a resemblance to the current “Great Lockdown” to “Great Depression” of the year 1930 along with the reduction of the global economy by 3%.
Consequently, Tze and Siew from PwC Taxation Services Malaysia further avow to the stimulus packages, yet the need for company structuralization is to be mandated. This company restructuring policy will not only sustain and promote cash flow in the short run, but it will also strengthen profitability by optimizing capital return in the long term. To achieve these goals, financial restructuring should either show improvement in enterprise value and/or consider operational restructuring to boost the current business model as well as enhance its viability.
However, restructuring has its own consequences. It might lead to unwilling adverse tax outcomes. But, if a few of these outcomes are alleviated by specific tax improvements by the government, then it can supplement the falling economy.
Capital base and debt
Costs that are included in debt such as guarantee fees or advisers fees are not generally tax-deductible unless they conform to the Islamic standards. A transition in this policy by uplifting tax deduction regardless of the type of debts will help companies in adjusting their finances as well as reaffirming their capital base.
Restructuring of debt
Furthermore, additional expenses included in debts such as the renegotiation of debt with lenders asks for debt conversion or rescheduling fee, which should now be regarded in a special deduction clause.
Create a uniformed corporate structure
Looking at the current scenario, Malaysian tax authorities should promote flexibility by providing help to companies in their restructuring. For instance, the legacy corporate structure comprises of distinct legal bodies that might need to be reviewed in order to alleviate cost inefficiencies by withdrawing duplication, standardizing economies of scale and decreasing administrative costs.
One way to achieve this goal is by aligning tax treatment to the corporate merger framework. This framework is entitled under the Companies Act 2016 along with court consent to confirm that tax neutrality is attained in such a way that the transferee company is viewed to step into the transferor(s) shoes in terms of tax measures and making sure that no sale has occurred.
Non-core business disposal
Here companies focus on selecting their core competencies and unlatch their profits by disposing of non-core businesses and assets. However, the integrity of such capital profits should be secured and not be revoked by the Malaysian tax authorities. Along with this, RPGT, applied to profits emerging from selling real property in Malaysia should be uplifted by completely exempting this order or by reducing tax rates for a specific time.
Terminating unprofitable business
Any type of penalty involved in one-off expenses including termination that is considered tax-deductible should be permitted for a specific time frame. Furthermore, trade debts should also be included in the closure. The Malaysian tax authorities are needed to be a little flexible in their documentation related to a tax deduction.
On the contrary, taxes that cannot be revoked or cannot be exempted or those are tax-deductible should be permitted in promoting the measures defined by companies to enhance their business viability.
Tze, Siew, and the PwC Taxation Services Malaysia stated that the country can come out of this pandemic by uniting. They are of the view that some tax standards can even result in a transient decline in tax collection but its positive significance cannot be neglected. It will prove to be beneficial for companies to restructure in the falling economy and aid in its augmentation in the long run.