Investment
tax allowances are a means of effecting a substantial
artificial reduction in taxable profits. In Malaysia
there is a very wide variety of investment tax allowances.
Broadly speaking, they are an alternative to Pioneer
Status, but they are in addition to the right of
every company to depreciate assets over their useful
lives and set the depreciation off against taxable profits.
Investment
tax allowances are transferred into an "exempt
income account" where they are exempt from corporate
income tax.
Dividends
paid to shareholders out of the "exempt income
account" are free of withholding taxes on distribution.
Dividends from the "exempt income account"
paid to a parent corporation which in turn distributes
them to its shareholders are also free of withholding
taxes.
Some of
the main types of investment tax allowances (ITA) are
as follows:
Manufacturing
Companies.
A company granted ITA gets an allowance of 60% (at
the time of writing) of qualifying capital expenditure
(such as factory, plant, machinery or other equipment
used for the approved project) incurred within five
years from the date on which the first qualifying
capital expenditure is incurred. Companies can offset
this allowance against 70% of their statutory income
for each year of assessment. Any unutilised allowance
can be carried forward to subsequent years until fully
utilised. The remaining 30% of statutory income will
be taxed at the prevailing company tax rate.
To encourage investment in the promoted areas i.e.
the States of Sabah and Sarawak and the designated
"Eastern Corridor" of Peninsular Malaysia, applications
received from 13 September 2003 from companies located
in these areas receive an allowance of 100% on the
qualifying capital expenditure incurred within a period
of five years. The allowance can be utilised to offset
against 100% of the statutory income for each year
of assessment. Companies which have been granted approval
for this incentive but have not commenced commercial
production, or applications under consideration, are
also eligible. All project applications received by
December 31, 2010 are eligible for this enhanced incentive.
Applications received from September 2003 13 from
existing locally-owned companies that reinvest in
the production of heavy machinery such as cranes,
quarry machinery, batching plant and port material
handling equipment, were eligible for Investment Tax
Allowance of 60% (100% for promoted areas) on the
additional qualifying capital expenditure incurred
within a period of five years. The allowance can be
offset against 70% (100% for promoted areas) of the
statutory income for each year of assessment.
High Technology Companies
A high technology company is a company engaged in
defined activities or in the production of defined
products in areas of new and emerging technologies.
A high technology company qualifies for Investment
Tax Allowance of 60% of qualifying capital expenditure
incurred within five years from the date the first
capital expenditure is incurred. Any unutilised allowance
can be carried forward to subsequent years until the
whole amount has been fully utilised. The allowance
can be utilised to offset against 100% of its statutory
income for each year of assessment. A Malaysian-owned
company that acquires a foreign-owned company abroad
to acquire high technology for production within the
country or to gain new export markets for local products
will be granted an annual allowance of 20% of the
acquisition cost for five years.
SMEs Effective
from the year of assessment of 2003, small- and medium-scale
companies with paid-up capital of RM2.5 million and
below are eligible for a reduced corporate tax on
chargeable income of up to RM100,000. The tax rate
on the remaining chargeable income is maintained at
the normal rate. Dividends distributed will be given
a tax credit (20% at the time of writing) in the hands
of the shareholders. To
qualify for the incentive, the small-scale company
has to comply with any one of the following criteria
:
The company’s finished products should be
used as raw materials or components by manufacturing
industries;
The company’s products shall substitute imports
and the local material content is more than 50%
in terms of value;
The company exports at least 50% of its output;
or
The project contributes towards the socio-economic
development of the rural population.
Tourist
Development
A company granted ITA gets an allowance of 60% of
qualifying capital expenditure incurred within five
years from the date on which the first qualifying
capital expenditure was incurred.
Companies
can offset this allowance against 70% of the statutory
income in the year of assessment. Any unutilised
allowance can be carried forward to subsequent years
until the whole amount has been used up. The remaining
30% of the statutory income will be taxed at the
prevailing company tax rate.
As
an added incentive, companies that locate in the
States of Sabah, Sarawak, the Federal Territory
of Labuan and the designated “Eastern Corridor”
of Peninsular Malaysia get an allowance of 80% on
qualifying capital expenditure incurred. The allowance
can be utilised to offset 85% of the statutory income
in the year of assessment. This additional incentive
applies to all applications received by December
31, 2010.
R
& D Expenditure An R&D company, i.e.,
a company that provides R&D services in Malaysia
to its related company or to any other company, is
eligible for an ITA of 100% on qualifying capital
expenditure incurred within 10 years. The allowance
can be offset against 70% of the statutory income
in the year of assessment. Should the R&D company
opt not to avail itself of the allowance, its related
companies can enjoy a double deduction for payments
made to the R&D company for services rendered.
Contract R&D and R&D companies can apply for
the various incentives as long as they fulfill the
following criteria:
Research undertaken should be in accordance with
the needs of the country and bring benefit to
the economy
At least 70% of the income of the company should
be derived from R&D activities
For manufacturing-based R&D, at least 50%
of the workforce of the company must be appropriately
qualified personnel performing research and technical
functions; and
For agriculture-base R&D, at least 5% of the
workforce of the company must be appropriately
qualified personnel performing research and technical
functions
A company can enjoy double deduction on revenue
(non-capital) expenditure for research which is
directly undertaken and approved by the Minister
of Finance. This double deduction applies to payment
for the use of services of approved research institutes,
R&D companies or contract R&D companies.
It also applies to cash contributions to approved
research institutes.
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