Speaking at a dialogue organised by the Institute for Democracy and Economic Affairs (IDEAS), Carmelo Ferlito said although Malaysia had a more “oppressive” tax system compared with Singapore and Hong Kong, its tax system was much better than most European Union countries.
“In Italy, the personal income tax ranges from 23-44% while the goods and services tax (GST) rate is 25%,” said the Italian scholar.
“When you take into account the various taxes and compliance cost for business, the corporate fiscal burden for a company is 68% of a company’s gross profits,” said Ferlito, who is a senior fellow at IDEAS.
In comparison, the maximum income tax rate in Malaysia is 28%, while the GST rate is 6%.
Malaysia, Ferlito said, was in good standing because of the country’s political stability, incentives for the manufacturing, agriculture and biotech industries, good infrastructure and its strategic location.
He added that in Malaysia, companies could be incorporated in just a few days and for a lower cost compared with European countries, such as Italy, where the process could take up to two years.
“In Malaysia, shares of a foreign subsidiary can be 100% owned by foreigners, unlike in the Philippines and Indonesia.
“Malaysia also offers a 10-year tax holiday for companies which set up a principal hub in Malaysia for the region.”
However, Ferlito noted that, on the downside, Malaysia had a long history of government intervention in business and said government involvement in business was not good.
Recently, prominent economics professor at Universiti Malaya Edmund Terence Gomez also noted that control of Malaysia’s corporate sector was concentrated in the hands of the government, particularly the finance minister.
He reached this conclusion after researching the control and ownership of seven federal government-linked investment companies (GLICs), namely Minister of Finance Inc, Khazanah Nasional Bhd, Permodalan Nasional Bhd, Employees’ Provident Fund, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji and Kumpulan Wang Persaraan.
According to Gomez, these seven GLICs control 35 of the top 100 listed companies in the country.
Ferlito added that the federal government – like other governments around the world – is operating in constant deficit spending, with government spending higher than the tax revenue.
“This means government debt is rising but in the long run someone has to pay for it. It might not be the government of the day, so the burden will have to be shouldered by the next generation.”
Last year, Prime Minister Najib Razak said that as of June 2016, the national debt stood at RM655.7 billion, or 53% of the country’s gross domestic product (GDP).
IDEAS had previously urged the government to come up with a plan to reduce the national debt and to keep the public informed of its progress.
“Malaysia has some really favourable conditions which make it good for investments, like a reasonable tax system and incentives.
“But it is worrying that it is following many of the bad practices of European countries, like adding more regulations and increasing government spending,” Ferlito said.
He said the government should reduce its involvement in business, noting that in European countries, most of the airlines are owned by governments.
The role of state as entrepreneur, Ferlito added, systematically distorts the operation of market forces and should be reduced.
He added that Putrajaya should also avoid price control mechanisms, which gives a distorted picture of information on market preferences and that without such controls the price mechanism could operate freely.
“Excessive profiteering shouldn’t be a concern. Who can actually decide the ‘right’ amount of profit a business makes?
“Control should be in the hands of the consumer.
“If consumers find certain prices to be too high, they can refuse to buy and force the supplier to review their prices.”
Similarly, in the case of cartels, Ferlito said they actually flourished under government regulation but not in a free market where there was always a possibility of new players entering “the game” and making cartels aware of the competition.
According to Ferlito, even indirect taxation, or the so called “sin tax” on goods such as cigarettes and alcohol, will not necessarily see the government earning the revenue it may be hoping for.
He said excessive taxation could lead to what he called the “black market revenge”, where the sale of contraband or illicit goods would increase. This could see the government earn lower revenues from taxes on legal cigarettes and alcohol.
In March, Deputy Health Minister Dr Hilmi Yahaya announced a 27% increase in price as one of the measures the government was taking to get more Malaysians to quit smoking, but IDEAS then pointed out that such a move would boost the illegal cigarette trade industry.
IDEAS CEO Wan Saiful Wan Jan said then that one out of every two packs sold in Malaysia was illegal and that between 2003 and 2013, the illegal tobacco market grew by 46%, parallel to increases in tobacco taxes.