Tabling his third budget as Prime Minister and Minister of Finance, Abdullah announced that the corporate tax rate will be cut to 27% next year, followed by an additional one-percentage-point cut in 2008.

"Although this measure will result in a significant reduction in revenue, the government is confident that it will have a positive overall effect on the economy," he stated.

Malaysia's corporate tax rate has remained static at 28% since 1998, as the government placed a higher priority on balancing its books. Although it is Asia's third largest economy, Malaysia's corporate tax rate compares unfavourably to other economic powers in the region, particularly Singapore and Hong Kong.

Besides the surprise corporate tax cut, Abdullah announced a number of other tax breaks designed to encourage investment in the private sector. These include incentives to promote growth in tourism, biotechnology, Islamic banking and real estate investment trusts (REITs). Islamic banks conducting business in foreign currencies will also be granted a ten-year tax holiday.

Abdullah plans to claw back some of the revenues lost through tax cuts by increasing 'sin taxes' on cigarettes and alcohol.