Published by BusinessToday & AstroAwani, image by BusinessToday.
Budget 2025 is themed “Reinvigorating the Economy, Driving Reforms and Prospering the Rakyat”.
Overall, Budget 2025 reflects the MADANI Government’s continuing commitment and determination to propel Malaysia forward and upward towards becoming a more economically inclusive, equitable, progressive and prosperous nation.
EMIR Research is grateful that the MADANI Government under Prime Minister cum Finance Minister YAB Dato’ Seri Anwar Ibrahim announced the following policy proposals:
- Measure 3 – Expanding the revenue base (Focus 1: Driving Reforms)
The imposition of a 2% dividend tax – a form of capital gains tax (CGT) – on income (“paid, credited or distributed”) exceeding RM100,000 received by individual shareholders (resident and non-resident) of listed and non-listed companies with exemption given to the Employees Provident Fund/EPF (as first proposed in EMIR Research articles, “Capital gains tax as a strategic fiscal policy lever”, March 20, 2023 and “Budget 2022 & 12MP – debt ceiling, windfall & capital gains taxes”, October 13, 2021).
The Armed Forces Fund Board, Amanah Saham Nasional Bumiputera (ASNB) and other unit trusts are also exempted.
- Measure 7 – Public-private partnership (Focus 1: Driving Reforms)
The promotion of public-private partnership (PPP) as a way forward to reduce the fiscal burden and optimise the strategic allocation and use of resources via synergies between the government and private sector (as first recommended by EMIR Research in e.g., “New economic model for PPP in Malaysia”, February 3, 2020; “A new vision for SMEs – turning the policy paradigm on its head”, November 12, 2020, among others.).
- Measure 18 – Strategic investments (Focus 2: Reinvigorating the economy)
The implementation of what’s in effect a “strategic investment fund” (RM200 million) to complement and supplement the main contributions by the private sector as spearheaded by the government-linked investment companies (GLICs) under the Government-Linked Enterprises Activation and Reform Programme (GEAR-uP) – earmarking an allocation RM120 billion over the next five years with RM25 billion set aside for 2025 alone (EMIR Research article, “Budget 2024 – new financing models”, November 16, 2024).
These include the allocations under Dana Pemacu and Dana Perintis by Retirement Fund Inc. (KWAP) alongside the setting up of Jelawang Capital Sdn Bhd as the “National Fund-of-Funds” by Khazanah Nasional to accelerate the growth of Malaysia’s venture capital ecosystem.
- No. 21: Facilitating Export Markets (Focus 1: Driving Reforms, Appendix 1 – Touchpoints)
The provision of a Market Development Grant to assist our exporters in promoting Malaysian products globally.
EMIR Research had called for the provision of financial (and not only technical) assistance to our small and medium-sized enterprises (SMEs) to facilitate their entry into global markets, including the Regional Comprehensive Economic Partnership/RCEP trade bloc (EMIR Research participation in “Post-Budget 2023 – Talk to Terrence Show”, RTM, October 13, 2022).
And with a focus on exploring new markets in Africa, Latin America, and the Middle East (as outlined in EMIR Research article, “Malaysia falling behind regional competitors for FDI – beginning of end?”, January 4, 2021).
- No. 26: Food Security (Focus 1: Driving Reforms, Appendix 1 – Touchpoints)
EMIR Research’s call in “Strategic focuses for Budget 2023” (February 24, 2023) for the expansion of community farming (especially in urban areas and ideally in every parliamentary constituency) is also reflected in Budget 2025’s allocation of RM10 million to expand the MADANI community gardens (Kebuniti) programme by the All-Party Parliamentary Party Group Malaysia (APPGM).
However, Budget 2025 didn’t look into tax incentives in specific details regarding data centres (as part of the next wave” of investments to power our economy forward).
This may be due to the MADANI Government rethinking its approach to investments in data centres – as they don’t necessarily generate significant number of high-skilled jobs.
Currently, tax incentives for data centres come under DESAC (Digital Ecosystem Acceleration Scheme).
Budget 2025 has neither updated nor confirmed (and provided clarity and certainty on) the extension of the provisions and guidelines of the DESAC tax incentive framework (see, “Budget 2025: The centre of opportunity for Malaysia’s data boom”, Lee Boon Siew, The Edge Malaysia, October 16, 2024).
Under DESAC, data centres which fall under the category of “Digital Infrastructure Providers”/DIP (rather than “Digital Technology Providers”/DTP) are eligible for an investment tax allowance (ITA) of 100% on capital expenditure which can be offset against 100% of statutory income for a period of up to 10 years.
In effect, “… this is essentially a 200% tax depreciation of eligible capital costs, which effectively reduces the tax payable once the data centre becomes profitable”.
Under the DTP category, new companies enjoy a tax rate of 0% to 10% up to 10 years. And 10% up to 10 years is provided for existing companies that diversifies into new service activities or new service segments.
Now, DESAC could substitute or better still complement the pre-existing framework and scheme for the DIP with what’s known as “super-deduction”.
Pending the implementation of a global minimum tax (GMT) at 15%, corporate tax for multinational companies (MNCs), including data centres, remains unchanged at 24%.
The policy proposal – super-deduction – is borrowed from the UK example.
The ITA’s UK equivalent would be “full expensing”.
Like ITA, full expensing basically combines initial allowance (IA), annual allowance (AA) and accelerated capital allowance (ACA) all at once.
The ITA/full expensing excludes depreciation costs that‘re normally spread out over a number of years (which, again, under DESAC is up to the maximum 10-year period – typically corresponding to the expected life cycle of the asset, e.g., the servers).
However, there’re two distinct and inter-related/correlated differences between the ITA and full expensing. These are as follows:
- Unlike the ITA which only applies to new companies that engage in promoted activities, full expensing applies to all companies (new and pre-existing) post-Covid-19.
As such, the ITA applies to companies with no track record (of aggregate profit) yet whereas full expensing can be enjoyed by companies that have already experienced profits.
Full expensing can work (out) to be a form of reinvestment (for the pre-existing companies) in relation to the deployment of profits.
- ITA would imply that new companies and start-ups take time to recoup their investment and the need for a long(er) gestation period (hence the 10-year period).
This entails the necessity to either a) “spread out” the use of the 100% entitlement; or b) only fully utilise it at a later time down the road so as to maximise the tax deductions.
However, with super-deduction, the ITA’s limited category applicability can be brought to par with full expensing in terms of the reinvestment incentivisation – other than improving cashflow in the current period.
There’re basically two types of assets/equipment or hardware (qualifying expenditure/QE) for a (typical) data centre:
- utilities (switchboard/switchgear, humidifier, air/liquid cooling system, power distribution unit/PDU, etc.); and
- operational (servers, storage infrastructure, routers).
Super-deduction could especially apply to the former (utilities) as part of the policy measures to fiscally incentivise the harnessing and deployment of renewable energy and green technology to power the cloud and storage operations.
This would help to mitigate the downside or side-effects of data centres being a huge consumption player in water and electricity.
How does super-deduction differ from the ITA (full expensing)?
Super-deduction would allow a data centre company (capital expenditure/capex intensive) to not only compute and claim upfront in the year on which the QE was incurred (e.g., as first year allowance/FYA) the full tax percentage on the full cost/purchase price of an asset but also a certain “mark-up” – as determined by the Malaysian Investment Development Authority (MIDA) and executed/enforced by the Inland Revenue Board (IRB).
Concomitantly, it allows for the full cost/rate to be frontloaded in one go instead of the expected life-span of the asset (via the capital allowances of the IA, AA and the ACA in lieu of depreciation and amortisation costs, as per accounting procedure).
This helps to further shorten the duration for return on investment (ROI) and, by extension, the period of (net) profitability.
In short, super-deduction goes further (ringgit for ringgit terms) in that it’s above 100% deductible, let’s say at 150%.
For example, data centre company XYZ purchases (hire purchase/HP, bank loan instalments, full payment from e.g., retained earnings) utilities assets to the amount of, say, RM10 million.
Data centre company XYZ can claim RM15 million in deduction set against 100% of statutory or chargeable income.
If the statutory/chargeable income is RM25 million and the write-off is 150%, i.e. RM10 million + RM5 million = RM15 million, then the tax liability is RM10 million.
Super-deduction could therefore help to reduce the tax liability of data centres during the “transition” period to a GMT.
It could also be an impetus to catalyse re-investments into renewable energy and green technology – whereby improved cashflow resulting in higher profitability and retained earnings can be a launching pad for the expansion of utilities assets in renewable energy and green technology.
Super-deduction could also incentivise data centres to invest in green technologies such as flywheel hydro-turbine utilising centrifugally-driven kinetic force as a form of renewable energy for the dual-role/use of a) energy generation and b) storage for cooling purposes. Such mechanism can be readily located near rivers (run-of-river – downward flow of river) and other sources of water such as canals.
Energy generated from the flywheel mechanism can be transmitted via e.g., the local transformer – substation (high voltage) attached to the data centre – and secondarily stored in a battery storage system (BSS).
Flywheel rotational power has a roundtrip efficiency of up to 90% and could serve as an eminent complementary mechanism to BSS (e.g., “Battery and Flywheel hybridization of a reversible Pumped-Storage Hydro Power Plant for wear and tear reduction”, Stefano Casarin, Giovanna Cavazzini, and Juan Ignacio Pérez-Díaz, Journal of Energy Storage, Volume 71, 1 November 2023; “Future energy storage turns on flywheel technology”, Richard Cairney, Faculty of Engineering, University of Alberta, May 4, 2018, etc.).
It’s in line with the policy suggestion by the Deputy Minister of Investment, Trade & Industry and Member of Parliament for Iskandar Puteri (where data centres in Johor are located as the leading destination in the country) for there to be investment “… into creating alternative water sources instead of competing with the [other users] for water (speech delivered at the Malaysia Cloud and Data Center Convention 2024 on October 24).
Investing in a BSS also can serve to mitigate the issue of power outage.
The BSS “sub-plant” would then be coupled to the “circuit breakers” (switchboards or switchgears).
This setup would limit power interruption (intermittency or “latency”) to only, say, 3 seconds before power is restored again by tapping into the BSS under the alternating current (AC)-oriented electricity supply system (both conventional and renewable grids) with resumption of transmission via the switchboards or switchgears (high or low voltage) and finally to the remote power panel/RPP (low voltage) as directly connected to the servers.
As the MADANI Government is restructuring its investment incentive framework for data centres (“Govt to restructure data centre incentives with “scorecard” approach — Treasury sec gen”, The Edge Malaysia, October 21, 2024), perhaps super-deduction could be tied to the purchase of locally-produced/supplied renewable energy and green technology assets as part of the scorecard approach.
In the final analysis, the MADANI Government could still re-envision high quality job creation and investment but this time as indirect (spillover effect) – via spurring the renewable energy and green technology industry in creating the demand for powering data centres as facilitated by the tax incentive framework embodied by the ITA alongside the proposed super-deduction.
To conclude, a “radical” tax allowance scheme which plays a role in “turbo-charging” investments in renewable energy and green technology (in line with the National Energy Transition Roadmap/NTER) and under what would be the industry’s energy efficiency blueprint and roadmap (similar to Singapore’s Green Data Centre Roadmap) could help to power data centres and, by extension, position Malaysia to be a leading regional hub (with the concomitant of the multiplier effects).
Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.
