Professional services hub - A new driver of exports

THE government is currently struggling to cope with the twin problems of a high debt load of RM1.22 trillion as at April 2024 and a budget deficit of about RM90bil per year.

The deficit is partly due to the low tax collections, which according to CEIC Data, Malaysia’s tax to gross domestic product (GDP) ratio is 11.3% as at March 2024, which is lower than many other countries in the region.

In recent years, the government has attempted to increase tax collections by introducing new taxes such as foreign source income tax, capital gains tax and low value goods tax, as well as expanding the tax base by increasing the service tax rate to 8% and expanding the list of taxable services liable to service tax.

Additionally, the government is trying to plug the leakage of tax in the shadow economy by introducing e-invoicing in phases which started from Aug 1, 2024.

To overcome these challenges, the government has to be thrifty while pandering to the needs of the country. Lavish giveaways in the form of tax cuts, tax incentives and grants may be limited.

The shortage of skilled labour is another major challenge that the government has to pay attention to partly due to emigration of Malaysians to foreign countries.

It will be a boon to the economy if Malaysians can stay in Malaysia, earn in Malaysia and spend in Malaysia instead of selling their services overseas.

Aside from widening the tax base, it could consider tapping into other industries to increase domestic and foreign direct investments.

One option is to turn the country into a professional services hub.

Setting the standards

In addition to the corridors which are economic zones suitable for certain industries like export-oriented manufacturing industries, and cyber centres for information technology (IT) services in the past, the government can consider to promote Malaysia as a country with the necessary human resources, information and computer technology infrastructure and government support to attract local and foreign investment in the areas of cross-border professional services.

As a professional services hub, focus should be put on the export of these professional services, for example accounting, IT, engineering services, etc.

In today’s age of Internet connectivity where video and group collaboration software allow interaction of people across the world thousands of miles apart, and all information can be shared online, the majority, if not the entirety of these service offerings could be done remotely in Malaysia.

Taking the accounting industry as an example, all documents and information such as transaction slips, invoices, bank statements and others could be shared from a foreign country via email or cloud storage and the professional in Malaysia could draft the accounts and send back the finalised financial statements via the same.

Even certain engineering services in construction and civil engineering, and manufacturing could be conducted remotely by employing software tools.

Therefore, multinational companies or professional services companies could set up their hub in the form of outsourcing centres, shared service centres or technical centres to provide these services remotely to their group of companies or clients respectively.

In order to drive domestic and foreign direct investments into this industry, the government could consider providing tax and other non-fiscal incentives to companies in this industry.

However, a balance needs to be achieved in order to protect local and current industry players.

In this respect, the government could consider a more targeted tax incentive regime such as income tax exemptions and exemption of service tax on exported professional services.

These tax incentives are important to level the playing field so to enable these companies to better compete against other professional services providers in other countries.

For example, if the Malaysian company is charging Malaysian service tax (if the exported services relate to land or matters here), the pricing from the company to the foreign customer would not be competitive compared to local service providers in the service recipient company’s country.

The government could improve the competitive situation further by working with all stakeholders involved in the professional services ecosystem such as educational institutions, local professional firms and professional institutes to improve the supply of certified manpower, for example, accounting technicians, for employment by these professional service centres.

Luring expats

Further, the government could consider attracting high-level expatriates specialising in these professional services fields to be employed to bring their knowledge and expertise into the country and for our professionals to gain from their experience.

On this front, the government could also introduce preferential tax rates for these professional expatriates such as a flat 15% personal tax rate which is currently being given to C-suite employees of manufacturing companies that have relocated their operationshere or to employees of an approved global services hub.

In addition, non-fiscal measures can be introduced such as easier immigration processes for the application and obtaining of work permits for these expatriates.

Besides making Malaysia a professional services hub, these measures could lead to rectifying the brain drain issue currently being faced by companies in the accounting, IT and engineering industries.

By making the country the hub for professional services, the value added of the professional services being offered would be increased which could lead to raising the ceiling for professional services as a whole. Further, an increase in demand for professionals will drive supply, and limited supply will raise prices in terms of salaries of the professionals. The increase in the average salaries of professionals in the industry would go a long way in retaining the talents in the country.

In conclusion, the export of manufactured goods has traditionally been a major contributor to Malaysia’s total exports.

With our vast number of professionals, relatively low salaries, multilingual skills and cheaper currency, the government should use these factors to our advantage to promote the country as a professional services hub.

With the focus being turned towards increasing the taxable income base, the increase in profits of the professional services companies and salaries of professionals will result in an increase in the taxable income base which leads to bigger tax collections.

This is a different but equally effective solution to the government’s financial challenge instead of increasing taxes which has a limit before businesses and citizens start feeling the strain.

Source: TheStar