KUALA LUMPUR: Malaysia's latest tax reforms, outlined in the Budget 2024 to stimulate domestic startups, drive clean energy investment, and modernise tax administration, are set to benefit innovative startup businesses, green technology sectors, and service-oriented companies.

BMI, a Fitch solutions company, said the budget's sweeping tax reforms aimed to stimulate local industries and channel investment into key sectors, including advanced manufacturing.

Among the initiatives are Reinvestment Allowance (RA), Electric Vehicles (EVs) Tax Incentives and Global Services Hub Tax Incentive.

BMI said the RA effectively lowers the tax burden on companies that undertake capital investments to modernise machinery, upgrade technology or diversify into higher-value products, while the extended tax incentives until the assessment year 2027 for EVs will reduce operational costs for businesses in the rental sector, potentially accelerating fleet upgrades and increased adoption of green vehicles.

"Companies that set up global service centres in Malaysia will benefit from a reduced tax rate under the Global Services Hub Tax Incentive," it said in a statement.

BMI noted that Malaysia's corporate income tax rate of 24 per cent positions it towards the higher end of the spectrum in the broader Asia region.

In contrast, ASEAN neighbours such as Singapore and Thailand offer more competitive rates of 17 per cent and 20 per cent, respectively, positioning them as more favourable investment destinations on a tax basis.

However, BMI said introducing targeted incentives can offset the high tax rates.

"While Malaysia's corporate income tax rate is high by regional standards, the introduction of targeted investment incentives is poised to enhance investment appeal in key innovative and sustainable sectors.

"This strategy will enhance Malaysia's attractiveness as an investment hub before the Global Minimum Tax (GMT)  comes into effect. Once the GMT is adopted broadly across Asia, the competition edge will shift as low tax rates will no longer be a draw for foreign direct investment, given that the tax floor will be uniform in adopting markets," it said.

BMI said consequently, economies like Malaysia will need to offer additional incentives to enhance their attractiveness to businesses.

"Such proactive measures are expected to strengthen Malaysia's overall value proposition for companies operating within its borders," it added.

Malaysia's implementation of the GMT, as part of the Organisation for Economic Co-operation and Development's (OECD) Base Erosion Profit Shifting (BEPS) 2.0 project, has been deferred to 2025.

This tax will affect multinational enterprises (MNEs) with consolidated revenues exceeding 750 million euros, by instituting a floor of 15 per cent on their tax rates.

Introducing mechanisms such as the Qualified Domestic Minimum Top-Up Tax and the Income Inclusion Rule will fortify the tax base against erosion, aligning Malaysia with global efforts to curtail tax avoidance.