PETALING JAYA: Budget 2027’s enhanced 5% tax incentive for Global Services Hubs (GSH) strengthens Malaysia’s bid to attract multinational companies and regional operations, but uncertainty over the Global Minimum Tax (GMT) and the unchanged headline corporate tax rate could limit its broader competitiveness, tax practitioners said.
The incentive, effective Jan 1, 2027, offers qualifying new GSH companies a preferential 5% tax rate on income from GSH activities, while existing Principal Hub and GSH companies can qualify for the same rate on income above an agreed baseline. The incentive period can be renewed in five-year increments, up to a maximum of 30 years.
Companies undertaking treasury and fund management activities will also benefit from withholding tax exemptions on interest payments and stamp duty exemptions on intercompany loan agreements, subject to applicable conditions.
Wong & Partners tax, trade and wealth management partner Yvonne Beh said the GSH regime was a standout measure for investors and multinational companies seeking to establish regional hubs, while the proposed reduction in corporate tax rates for MSMEs and the sales tax refund mechanism would be more relevant to domestic businesses.
“For investors and multinational companies looking to establish a regional hub, the Global Services Hub regime is a standout measure as the incentive offers a low income tax rate potentially for up to 30 years with other tax relief such as withholding tax and stamp duty exemptions,” she told SunBiz.
Beh said the lower MSME tax rates could improve cash flow and working capital, while the proposed sales tax refund mechanism could reduce cascading tax costs along supply chains.
However, she said Budget 2027 contained numerous targeted incentives but relatively few changes to broader structural issues affecting investment certainty, including the interaction with the GMT and Malaysia’s indirect tax framework.
“One of the principal gaps is that the Budget 2027 proposal contains many targeted incentives, but relatively little changes on the larger structural questions affecting investment certainty, including the interaction with Pillar Two and the country’s indirect tax framework,” she said.
“There is no reintroduction of the GST, but the SST regime remains largely unchanged.”
Thannees Tax Consulting Services director Sangeetha Balan told SunBiz the enhanced GSH incentive could strengthen Malaysia’s proposition for multinational companies deciding where to locate regional headquarters, shared services and treasury operations.
The longer incentive horizon could provide greater certainty for companies making long-term investment decisions involving employees, technology, infrastructure and regional business support functions.
Sangeetha said the package could strengthen Malaysia’s efforts to attract treasury functions, an area where Singapore has traditionally been strong.
Nevertheless, she noted that the incentive did not eliminate the broader difference between Malaysia’s headline corporate tax rate of 24% and Singapore’s 17%.
The GSH preferential rate applies to qualifying income and eligible companies, rather than all corporate earnings.
“Instead, the enhanced GSH incentive signals an effort to compete through targeted tax advantage and longer-term certainty for high-value services, rather than through a broad reduction in corporate tax,” Sangeetha said.
Companies consider more than headline tax rates when deciding where to establish regional operations. Access to skilled workers, operating costs, infrastructure, regulatory certainty and market access also influence investment decisions.
The GSH incentive could therefore strengthen Malaysia’s position for selected high-value activities without necessarily improving its tax proposition for every investor or business sector.
A key concern for multinational groups is how the 5% GSH rate interacts with the GMT under the Organisation for Economic Co-operation and Development’s Pillar Two Framework.
The framework generally seeks to ensure that in-scope multinational groups with annual consolidated revenue of at least €750 million (RM3.4 billion) pay a minimum effective tax rate of 15% in each jurisdiction where they operate, subject to the applicable rules.
For groups within its scope, the preferential Malaysian rate does not automatically translate into an equivalent reduction in their overall tax burden. Depending on the applicable rules and the group’s circumstances, top-up tax could reduce the benefit of the preferential rate.
Sangeetha said multinational companies would need clarity on how the GSH incentive interacts with the GMT, which could reduce the benefit for large groups subject to the 15% minimum effective tax rate.
The issue presents a challenge for Malaysia as governments seek to attract investment through tax incentives while implementing international rules intended to limit tax competition.
For investors, the actual benefit will depend on eligibility, the treatment of qualifying income and the interaction with applicable minimum-tax rules.
While the GSH incentive is aimed at international investment, Budget 2027 also proposes lower income tax rates for MSMEs to ease operating cost pressures and support domestic business activity.
Under the proposal, the tax rate on the first RM150,000 of chargeable income will be reduced to 14%, while the rate on the next RM450,000 will fall to 16%. The government estimates that the reduction could provide additional income of up to RM6,000 for 300,000 MSMEs.
The lower rates could leave eligible businesses with more funds to support working capital, purchase equipment and invest in expansion. However, the immediate benefit will depend on taxable profits, meaning loss-making businesses will not enjoy the same direct tax savings.
Another measure with implications for businesses is the proposed sales tax refund mechanism for manufacturers purchasing specified machinery, spare parts and equipment from local traders or distributors. The proposal also covers specified raw materials used in the production of pharmaceuticals, animal feed, fertilisers and pesticides.
Beh said the mechanism could help reduce cascading sales tax along supply chains, potentially lowering tax costs for manufacturers and making local procurement more attractive.
The effectiveness of the mechanism will depend on the scope of eligible purchases, documentation requirements and the time taken to process claims. Lengthy refund periods could leave businesses financing tax balances while continuing to meet supplier payments and other operating expenses.
CC International Bhd managing director Lam Kwai Soon said the MSME tax cuts and measures to improve manufacturers’ cash flow offered targeted relief, but several outstanding policy issues could affect the wider business environment.
“The reinvestment allowance remains under review. Mature manufacturers have been waiting for two Budgets, and this was the most requested item,” Lam told SunBiz.
The allowance remains under review, leaving businesses awaiting greater certainty over the tax treatment of reinvestment. The government has said it is reviewing the allowance, including its eligibility conditions and how the incentive is provided.
Lam also pointed to the lack of clarity on the proposed carbon tax, which could affect investment planning for companies in emissions-intensive industries and Malaysian exporters exposed to evolving international carbon requirements.
He said the absence of clear details on the tax’s implementation, timing and rate could leave businesses uncertain about future compliance costs and the implications for their competitiveness.
Lam said Malaysia’s competitiveness would depend on whether productivity improvements could keep pace with rising labour costs.
Budget 2027 raises the minimum wage to RM2,000 a month from June 2027 and includes measures to support training, automation and technology adoption. However, Lam said the Budget did not sufficiently address the underlying productivity challenges facing businesses.
He highlighted the need for stronger support for automation, research and development, technology transfer and improvements in the business environment to help companies generate greater output and value from their workforce.
Without corresponding productivity gains, higher wage costs could put pressure on businesses, particularly those with limited capacity to invest in new technology or improve operational efficiency.
Lam said Budget 2027 partially strengthened Malaysia’s competitiveness through targeted incentives, including the GSH tax rate and measures to improve manufacturers’ cash flow. However, he said the headline corporate tax rate remained at 24%, compared with Singapore’s 17%.
He added that investors would also consider regulatory certainty, talent availability, the speed of approvals and the efficiency of business operations when deciding where to locate investments.
Budget 2027 also extends accelerated capital allowances for locally produced plant and machinery, as well as information and communications technology equipment and software, until Dec 31, 2030.
However, Sangeetha said the semiconductor industry’s request for an increase in the Automation Capital Allowance ceiling remained an important gap in the announced measures.
The absence of a higher ceiling could disappoint manufacturers seeking additional tax support for automation, although the impact will depend on individual investment plans and eligibility for existing allowances, she added.
