IPP levy revised

Nov / Dec 2008

Malaysia has reversed its decision to impose a windfall profit levy on independent power producers (IPPs), which would have eroded their ability to service debt and raise new financing. Instead, IPPs will make a one-time one-off payment equivalent to a year's windfall tax payment. In June, Malaysia had announced that a levy of 30% on return on assets would be charged effective 1 July for IPPs with ROAs in excess of 9% for each financial year.

The negotiations of power purchase agreements have also been suspended, lessening the pressure on IPPs to accept less favourable terms. IPPs had been told that they would be exempted from the levy if they renegotiated their PPAs with national electricity utility Tenaga Nasional Berhad.

IFRS convergence by 2012

Nov / Dec 2008

Malaysia has set 1 January 2012 as the deadline for full convergence with International Financial Reporting Standards (IFRS) which will be applicable to all entities other than private entities. Approximately one thousand public-listed companies and 20,000 subsidiary and associate companies will be affected by full IFRS compliance.

All of the current Financial Reporting Standards (FRSs) issued by the Malaysian Accounting Standards Board (MASB) are already compliant with IFRS. Malaysia has had a comparatively easy journey towards convergence since it has been incorporating the provisions of international accounting standards into local accounting standards since 1978, said MASB chairman Dato' Zainal Abidin Putih.

In the interim, the MASB will adopt another two standards in the phased changeover to full convergence: IAS 39 or FRS 139, Financial Instruments: Recognition and Measurement and IAS 41, Agriculture. Although FRS 139 has been issued since 2006, the effective date of the standard is 1 January 2010, which will hopefully provide sufficient time for companies to prepare for the transition to fair value accounting. IAS 41 is also anticipated to have a tremendous impact on Malaysian companies, particularly plantation companies, given that Malaysia is still the world's largest palm oil producer and the third-largest rubber producer.

The phased changeover is designed to support companies in the transition to IFRS. 'Staged implementation would ease the burden of a big bang in the year 2012. Since FRS 139 is an important standard in the FRS series with linkages to many other standards and interpretations, deferring FRS 139 to 2012 would mean delaying a host of other standards related to FRS 139,' said Dato' Zainal, explaining the significance of the chosen dates.

Under Malaysia's two-tier reporting system, private entities can either opt to adopt the FRSs or continue to apply Private Entity Reporting Standards (PERs), the version of IASs issued up until 2003. PERs have proven to be a practical reporting alternative for non-public enterprises, catering to the specific needs of stakeholders who are typically owner-managers.

Caring budget increases deficit

Nov / Dec 2008

In August, Malaysia unveiled a 'people-friendly' budget from a caring government that aims to soften the burden of inflation mostly stemming from sharp hikes in the prices of fuel and food, but will also sharply increase the budget deficit. The 2008 budget deficit is projected to reach 4.8% of GDP, beyond the 3.1% forecast earlier, and should be reduced to 3.6% by 2009. GDP growth is expected to remain stable at about 5.7% for 2008.

Highlights include reducing Income tax by a percentage point for middle and high-income earners, making certain prerequisites and benefits-in-kind tax-deductible for employees, and increasing tax rebates to eliminate about 100,000 taxpayers from the tax net. The government also expanded the scope of the social safety net, increasing the number of households eligible for welfare from 54,000 to 110,000 and the number of eligible senior citizens from 14,000 to 40,000, and allocating half a billion ringgit for this purpose.

To remedy the budget deficit, many tax experts polled in media said that Malaysia needs to broaden its tax base to cut its traditional dependence on petroleum revenues and taxes. Currently, about 40-50% of the government's revenue is derived from petroleum, which might not be sustainable once the country becomes a net oil importer, unless new sources are discovered. Perhaps it would be timely to relook at the goods and services tax (GST) which was scheduled to take effect in January 2007 but was shelved in 2006 due to political and inflationary factors.