Two Major Changes are:

The abolishment of the imputation system and the implementation of single-tier system of taxation for dividends, impacting both the Inland Revenue Board (IRB) and the taxpayer. Present:

• Company income tax is based on the full imputation system where tax is imposed at the company level and at the shareholder level on dividends. The tax imposed at the shareholder level will take into account the tax paid by the company.

• The imputation system involves significant administrative cost to ensure compliance. At the company level, there is compliance on keeping track of tax paid, determining the tax rate and the amount of dividend paid.

• At the IRB level, there is work to verify the vouchers and process the refund since the imputation system lends itself to abuse and fraud by the creation of false dividend vouchers.

• The imputation system also tends to distort corporate tax structure since the tax-exempt dividend in cases where companies enjoy tax exemption can only be enjoyed by two tiers – the subsequent tiers being subject to tax.

• Furthermore, a company with insufficient tax credit will be constrained not to declare the maximum dividend.

Moving forward:

• The introduction of the one-tier system makes it more convenient administratively.

• It also made those companies without any credit balance to move into the single-tier system immediately while those with balance are given six years to move into the said system.

Tax Incentives For Corporate Small & Medium

• The Government had been very supportive of the small and medium enterprises (SMEs) by granting special two-tier tax rates, of which the first RM500,000 of chargeable income is taxed at a lower rate of 20%.

Moving forward:

• The Budget now offers SMEs at the initial stage of their operation to be exempted from submitting their tax estimates of tax payable as well as installment payments.

• The full income tax payment would need to be made only at the point of submission of the income tax returns, which is seven months from the date of the closing of accounts.

• The facility is given effective from year of assessment 2008 for two years of assessment beginning from the date of commencement of operation.

• This is a welcome move as it is normal for businesses to face cashflow constraints at the initial stage due to business teething stage and the difficulty in securing loans for lack of a track record.

However, this does not include companies with bigger paid-up capital that does not fall within the definition of SMEs.

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