Deloitte Malaysia: Budget 2022 proposals fairly positive for takaful industry

Government servants watch Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz speaking during the tabling of Budget 2022 in the Dewan Rakyat, October 29, 2021. — Picture by Shafwan Zaidon
Government servants watch Finance Minister Datuk Seri Tengku Zafrul Abdul Aziz speaking during the tabling of Budget 2022 in the Dewan Rakyat, October 29, 2021. — Picture by Shafwan Zaidon

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KUALA LUMPUR, Nov 29 — Budget 2022 has proposed changes that are fairly positive for the takaful industry but nothing particularly impactful for the conventional insurers, said Deloitte Malaysia today.

In a statement today, the company said overall some players in the industry have done relatively well in the past year despite the pandemic as life and medical insurance saw an increase in uptake as people generally got more concerned about their well-being together with the introduction of Covid-19 related coverage.

“The proposed Prosperity Tax of 33 per cent to be levied on chargeable income in excess of RM100 million is likely the change that would financially impact the industry the most,” said Deloitte in a summary prepared by its financial services industry tax leader Mark Chan and tax senior manager Leong Mei Seong.

The company said the Finance Bill 2021 has proposed some meaningful and impactful changes to the takaful industry, which could potentially cushion the blow of the Prosperity Tax to an extent.

The first change is to allow the shareholders’ fund of the family takaful business to tax the Wakalah fee income received and claim deductions on management expenses and fees incurred to earn said Wakalah fee income.

“This will align the tax treatment to the business model, but potentially result in incremental taxable income if the Wakalah fee which is based on percentage of contribution is significantly higher than the management expenses which may not be completely deductible,” said Deloitte.

The second change that is welcomed is allowing the shareholders’ fund of the takaful companies to claim capital allowances.

“While this is only applicable to assets acquired and put to use in financial year ending 2022 onwards, it will give takaful companies a form of tax shelter to cushion the Prosperty Tax. It also puts the tax efficiency of the takaful companies on par with the conventional insurers,” said Deloitte.

However, it noted that the proposal was unlikely to significantly impact the insurance sector as the sector was excluded from the foreign income tax exemption.

“If the insurance company invests through collective investment schemes or invests in retail investment vehicles, returns from these investments would be impacted to the extent these vehicles have exposure in non-Malaysian debts and equities,” said Deloitte Malaysia.

It added that the Finance Bill 2021 proposed a new Section 107D that will introduce a withholding tax mechanism on monetary payments to agents, dealers and distributors that are resident individuals who received RM100,000 or more in monetary and non-monetary payments in the preceding year.

In short, the insurance companies need to identify the agents that fall within this threshold as at Dec 31, 2021 to implement this tax on Jan 1, 2022, it added.

“This will definitely be an operational challenge given the ambiguity still surrounding the new requirements and the extremely compressed timeline to achieve system readiness.

“We hope the authorities will consider a transitional period to realistically give insurance companies and other affected companies the time needed to adapt and administer this new tax moving forward,” said Deloitte. — Bernama

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