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Malaysia To Cut Corporate Tax

by Mary Swire,, Hong Kong

11 September 2007

As expected, Malaysian Prime Minister Abdullah Ahmad Badawi announced another 1% cut in the rate of corporate tax in the Malaysian government budget last Friday. In addition, he announced a slew of other tax measures designed to boost investment, notably in the area of Islamic finance.

In July, Second Finance Minister Nor Mohamed Yakcop revealed that the government would press ahead with its corporate tax cutting programme, shaving an additional percentage point off of the rate in 2009 to 25%, a pledge that Abdullah duly delivered on in his budget speech. This continues a rolling programme of corporate tax cuts announced last year by the Prime Minister, which has seen the rate fall by 1% to 27% this year, and will bring about a further 1% cut next year.

Abdullah also announced a generous package of tax breaks for the investment industry in an attempt to consolidate and build upon Malaysia's position as one of the leading centres for Islamic finance. As a result of the budget measures, fund management companies will be given income tax exemption on all fees received for Islamic fund management activities until the 2016 year of assessment. Furthermore, the government's pension scheme, the Employment Provident Fund (EPF), will channel about 7 billion ringgit (US$2 billion) to be managed by Islamic fund management companies. Also, these companies will be permitted to be 100% foreign-owned, and will be able to invest all their assets overseas.

To increase the flow of investments from the key Islamic finance markets, the government intends to issue three new stockbroking licenses to companies that can source investment funds from Arab countries and tap the estimated $4 trillion in cash held by investors in the Middle East.

Other tax cut measures announced included a 50% stamp duty exemption on the purchase of a house worth less than 250,000 ringgit (US$72,000).

However, the Prime Minister disappointed individual taxpayers who were hoping for a cut in the 28% top rate of income tax by leaving income taxes on hold. This surprised analysts, who expected Abdullah to include such a populist measure in the budget ahead of impending elections, which could be held at the end of this year, or early next year.

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