Incentives for the Manufacturing Sector
Incentives for High Technology Industries
Incentives for Strategic Projects
Incentives for the Agricultural Sector
Incentives for the Tourism Industry
Incentives for Research and Development
Incentives for Software Development
Incentives for Computers and Information Technology Assets
Incentives for Multimedia Super Corridor (MSC)
Incentive for Acquiring Proprietary Rights
Incentives for Training
Incentives for the Storage, Treatment and Disposal of Toxic and Hazardous Wastes
Incentives for Operational Headquarters (OHQs)
Incentives for International Procurement Centres
Incentives for Approved Service Projects
Incentive for the Shipping Industry
Tariff Related Incentives
Tax incentives both direct and indirect, for the manufacturing, agriculture and tourism sectors are provided for in the Promotion of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972 and Excise Act 1976.
The direct incentives are designed to grant partial or total relief from the payment of income tax for a limited period of time. Indirect tax incentives are given in the form of exemptions from import duty, sales tax and excise duty.
Incentives for the Manufacturing Sector
The major incentives for companies in the manufacturing sector are the Pioneer Status and Investment Tax Allowance and Reinvestment Allowance.
Eligibility for either Pioneer Status or Investment Tax Allowance will be determined according to priorities termed as promoted activities or promoted products as determined by the Minister of International Trade and Industry. (Please refer to the grey list ) In addition, the level of value-added, local material content, technology and industrial linkages will also be factors for consideration. http://www.mida.gov.my/
Applications for Pioneer Status or Investment Tax Allowance should be submitted to MIDA.
1.1 Pioneer Status
A company granted Pioneer Status will enjoy partial exemption from the payment of income tax. It will only have to pay tax on 30% of its statutory income. The period of tax exemption is five years, commencing from the Production Day as determined by the Minister of International Trade and Industry.
As an added incentive, companies located in the States of Sabah, Sarawak, the Federal Territory of Labuan* and the designated “Eastern Corridor”** of Peninsular Malaysia, will only have to pay tax on 15% of their statutory income during the tax exemption period of five years.
* Only applicable to the hotel and tourist industry
** The Eastern Corridor of Peninsular Malaysia covers Kelantan, Terengganu, Pahang and the district of Mersing in Johor.
Investment Tax Allowance (ITA)
As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance. A company granted Investment Tax Allowance will be given an allowance of 60% in respect of qualifying capital expenditure incurred within five years from the date on which the first qualifying capital expenditure is incurred. The allowance can be utilized to offset against 70% of the statutory income in the year of assessment. Any unutilized allowance can be carried forward to subsequent years until the whole amount has been used up. The balance i.e. 30% of the statutory income will be taxed at the prevailing company tax rate.
As an added incentive, companies located in the States of Sabah, Sarawak, the Federal Territory of Labuan* and the designated “Eastern Corridor”** of Peninsular Malaysia will be granted an allowance of 80% in respect of the qualifying capital expenditure incurred. The allowance can be utilized to offset against 85% of the statutory income in the year of assessment.
Reinvestment Allowance (RA)
Reinvestment Allowance (RA) is granted to manufacturing companies which have been in operation for at least 12 months and incur qualifying capital expenditure for the expansion of production capacity, modernization and upgrading of production facilities, and diversification into related products and automation of production facilities.
The RA is in the form of an allowance of 60% of capital expenditure incurred by the companies. The allowance can be utilized to offset against 70% of the statutory income in the year of assessment. Any unabsorbed allowance will be allowed to be carried forward to the following years until it is fully utilized. RA will be given for a period of five (5) years beginning from the year the first reinvestment is made. The RA can only be claimed on completion of the qualifying project i.e. after the building is completed or when the plant/machinery is put to operational use. However, assets acquired from the reinvestment cannot be disposed within two (2) years of reinvestment.
Companies which undertake reinvestment projects in the promoted areas, of Sabah, Sarawak and the “Eastern Corridor” of Peninsular Malaysia will be allowed to utilize the allowance fully to offset against the statutory income for the year of assessment.
The above consideration for RA is applicable until the Year of Assessment 2000. After the Year of Assessment 2000, the reinvestment must also result in an increase in productivity╣.
╣ Productivity will be measured by using the Process Efficiency Ratio as shown below:-
Process Efficiency Ratio (PER) = Total Output - BIMS
Total Input - BIMS
BIMS (Bought in Materials and Services) is defined as the value of materials consumed + supplies, consumables, printing and lubricants + cost of goods sold in the same condition + utilities + payment to contractors + payments for industrial work done by others and stores & supplies + payments for non-industrial services.
To encourage companies to reinvest in equipment which can improve significantly their productivity level, an allowance of 60% will be allowed to be used fully to offset against the statutory income, similar to the scheme granted to the "Eastern Corridor" of Peninsular Malaysia, Sabah and Sarawak. In this respect, a company is required to show that the Process Efficiency Ratio (PER) has increased by at least the same rate as the GDP growth rate for that particular industry in the manufacturing sector.
Applications for RA should be submitted to the Inland Revenue Board.
Incentives for Industrial Adjustment
Companies in operation before 31 December 1990 in the wood-based, textile, machinery and engineering sectors are eligible for certain incentives when undertaking or participating in approved industrial adjustment programmers.
For purposes of these incentives, industrial adjustment has been defined as any activity proposed to be undertaken by a particular sector in the manufacturing industry to restructure by way of reorganization, reconstruction or amalgamation within that particular sector with a view to strengthening the basis for industrial self-sufficiency, improving industrial technology, increasing productivity, and enhancing the efficient use of natural resources and the efficient management of manpower.
Companies undertaking approved industrial adjustment programmers are eligible for the Industrial Adjustment Allowance (IAA). The IAA provides for an allowance of up to 100% in respect of qualifying capital expenditure incurred by a manufacturing company in its efforts at undertaking industrial adjustment. The features of the IAA are:
- The industrial adjustment program has to be approved by the Minister of International Trade and Industry and the Minister of Finance.
- The IAA is given for qualifying capital expenditure incurred within five years from the date of approval of the incentive.
- Companies enjoying Investment Tax Allowance (ITA) shall only be eligible to apply for IAA in respect of the capital expenditure on which ITA has not been granted.
- Companies granted IAA will not be eligible for Reinvestment Allowance in respect of the same expenditure.
Applications for IAA should be submitted to MIDA.
1.5 Incentives for Small-Scale Companies
Small-scale manufacturing companies incorporated in Malaysia with shareholders’ funds not exceeding RM500,000, and having Malaysian equity of at least 70%, are eligible for pioneer status incentive under the Promotion of Investments Act 1986, provided they meet specified criteria and they propose to manufacture products or participate in activities listed as promoted products/activities for small-scale manufacturers. (Please refer to the green list) http://www.mida.gov.my/
1.6 Incentives to Strengthen the Industrial Linkages Scheme
1.6.1 Incentive for Large Companies
To encourage large companies to participate in an approved industrial linkages scheme, expenditure incurred for the training of employees, product development and testing and factory auditing to ensure the quality of vendors' products will be allowed as a deduction in the computation of income tax.
1.6.2 Incentives for the Vendor
Vendors including SMIs which produce intermediate goods in an approved industrial linkages scheme will be eligible for the following incentives:
- Pioneer Status with full tax exemption at statutory income level for a period of five years; or
- Investment Tax Allowance of 60% on qualifying capital expenditure incurred within a period of five years. The allowance can be offset against the statutory income for each assessment year without any restriction.
To encourage vendors to produce intermediate goods for the international market, vendors in an approved industrial linkage scheme who are capable of achieving world class standards in terms of price, quality and capacity will be eligible for the following incentives:
- Pioneer Status with full tax exemption at statutory income level for a period of 10 years; or
- Investment Tax Allowance of 100% on qualifying capital expenditure incurred within a period of five years. The allowance can be offset against the statutory income for each assessment year without any restriction.
1.7 Incentives for Export
Manufacturers producing for the export market are eligible to apply for the following:
1.7.1 Double Deduction for Promotion of Exports
Certain expenses incurred by resident companies for the purpose of seeking opportunities for export of products manufactured in Malaysia are eligible for double deduction. The expenses that qualify are those incurred on:
- overseas advertising
- supply of free samples abroad
- export market research
- preparation of tenders for supply of goods overseas
- supply of technical information abroad
- exhibits and/or participation in trade or industrial exhibitions approved by the Ministry of International Trade and Industry (MITI)
- services rendered for public relations work connected with exports
- fares in respect of travel overseas by employees of companies for business
- accommodation and sustenance expenses incurred by representatives of the company who go overseas, up to RM200 per day
- cost of maintaining sales offices overseas for the promotion of exports.
1.7.2 Double Deduction on Freight Charges - for Rattan and Wood-based Products
Manufacturers in Sabah and Sarawak who export rattan and wood-based products (excluding sawn timber and veneer) will be eligible for double deduction on freight charges incurred by them.
1.7.3 Double Deduction on Sea Freight from Sabah and Sarawak*
Manufacturers who ship their goods from Sabah and Sarawak to Peninsular Malaysia via ports in Peninsular Malaysia will be eligible for double deduction on freight charges incurred by them.
* Proposed in the 2000 Budget
1.7.4 Double Deduction of Export Credit Insurance Premiums
Premium payments on export credit insurance are eligible for double deduction.
1.7.5 Tax Exemption on the Value of Increased Exports
To further promote exports, effective from 1 January 1998, companies in the manufacturing, agricultural and services sectors are eligible for tax exemption as follows:-
- exemption of statutory income equivalent to 10% of the value of increased exports provided that the goods exported attain at least 30% value-added
- exemption of statutory income equivalent to 15% of the value of increased exports provided that the goods exported attain at least 50% of value-added
- exemption of statutory income equivalent to 10% of the value of increased exports are given to companies which export fruits and cut flowers.
- exemption of statutory income equivalent to 10% of the value of increased exports are given to companies in selected services sectors comprising the legal, accounting, engineering consultancy, architecture, marketing, business consultancy, office services, construction management, building management, plantation management, health and education.
1.7.6 Industrial Building Allowance (IBA)
A company is eligible for industrial building allowance (IBA) of 10% of qualifying expenditure in respect of buildings used as warehouses for storing goods for export and re-exports.
1.7.7 Export Credit Refinancing Scheme (ECR)
In line with the Government’s objective to promote the exports of manufactured goods, Malaysian exporters can avail themselves of export credit refinancing (ECR) which provides short-term credit at preferential rates of interest.
This facility is operated by the commercial banks, while the Export - Import Bank of Malaysia (EXIM Bank) will refinance those commercial banks which have extended export credit to eligible exporters. The exporter may invoice his exports in any currency but financing is made available only in Malaysian Ringgit.
The features of the facility are as follows:
(a) Two types of facilities are available under the scheme: thepre-shipment ECR facility which provides working capital to direct and indirect exporters (i.e., domestic suppliers of inputs to final exporters) and the post-shipment ECR facility which enables Malaysian exporters to obtain immediate funds upon shipment of eligible goods sold on credit terms.
(b) To be eligible for the ECR facility, goods to be exported must satisfy the following criteria:
- the product should not be listed in the “negative list” (list of products not eligible for the ECR) and it should have a minimum value-added of 20% and a minimum domestic resource content of 30%. For products that do not fulfil the value-added and domestic resource content criteria, exemption is given by EXIM Bank on a case-by-case basis.
- Access to the ECR scheme would be subject to the exporter having secured an ECR credit facility with any of the commercial banks and upon presentation of certain documents to the bank. For pre-shipment ECR, financing is granted upon presentation of an export order or a certificate of performance (CP). The CP is used as an additional basis for pre-shipment financing to facilitate consistent exporters whose volume of exports are at least RM1 million per year to fund their inventory and raw materials prior to the receipt of export orders. For post-shipment ECR, the necessary documents are the invoice, customs export declaration form and bill of lading (transport documents).
(c) The maximum period of financing is four months for pre-shipment ECR and six months for post-shipment ECR.
(d) The eligible amount of the pre-shipment facility is 80% of the value of the export order under the order-based method or 70% of the value of exports of the preceding 12 months under the certificate of performance method. For the post-shipment facility, the eligible amount of financing is 100% of the invoice value.
(e) The minimum amount for ECR financing is RM10,000 and the minimum drawdown is RM2,000.
1.8 Incentives for Promoting Malaysian Brand Names
As a tool to promote the marketing of local branded products, effective from Year of Assessment 1998, expenditure incurred in advertising locally (for example advertisements on billboards at strategic locations such as at international airports and highways) is eligible for double deduction when it satisfies the following criteria:-
- the company is owned by at least 70% Malaysian;
- the brand is owned by the company and is registered in Malaysia; and
- the company's product must achieve export quality standards
1.9 Training Incentives
1.9.1 Pre-employment Training
Training expenses incurred by companies prior to the commencement of business, are eligible for a single deduction. Companies are required to provide evidence that the trainees will be employed as their employees.
1.9.2 Double Deduction for Expenses Incurred for Approved Training
Double deduction for expenses incurred on approved training is given to manufacturing and non-manufacturing companies. Automatic approval on double deduction for expenses incurred is given if the employees are trained at approved training institutions. This incentive is available only to those companies which do not contribute to the Human Resources Development Fund (HRDF). For the manufacturing sector, the programme could be undertaken either as an in-house training or at approved training institutions. However, for the non-manufacturing sector, the training should be held at approved training insitutions only.
1.9.3 Human Resource Development Fund (HRDF)
Please refer to Chapter 6.2.4
1.10 Special Building Allowance for Accommodation and Child Care Facilities of Employees
A special industrial building allowance of 10% of the expenditure incurred on the construction/purchase of a building is given if the building is used for accommodation of employees or is used for providing child care facilities to employees in the manufacturing and hotel or tourism sectors.
1.11 Infrastructure Allowance
Companies which are engaged in the manufacturing, agricultural, hotel or tourism or other industrial/commercial activities in the States of Sabah and Sarawak and the designated "Eastern Corridor" of Peninsular Malaysia and which incur qualifying capital expenditure on infrastructure such as reconstruction, extension or improvement of any permanent structure including bridges, jetties, ports and roads, are eligible for an infrastructure allowance of 100%. The allowance can be utilised to set off against 85% of the statutory income in the year of assessment. The balance of that statutory income will be taxed at the prevailing company tax rate. Any unutilised allowance can be carried forward to the subsequent years until it is fully utilised.
2. Incentives for High Technology Companies
High technology companies are defined as companies engaged in promoted activities or in the production of promoted products in areas of new and emerging technologies. (Please refer to the yellow list). High technology companies are eligible for the following incentives:
The high technology company must fulfil the following criteria:
High technology companies who are eligible should submit their applications
for Pioneer Status or ITA to MIDA.
3. Incentives for Strategic Projects
Strategic projects are generally defined as projects involving products/activities of national importance. They involve heavy capital investments with long gestation periods; have high levels of technology and are integrated; generate extensive linkages; and generally have significant impact on the economy. Such projects are eligible for the following incentives:
Applications for these incentives should be submitted to MIDA.
4. Incentives for the Agricultural Sector
Under the Promotion of Investments Act 1986, the term company” in relation to agriculture includes:
Companies producing promoted products or engaged in promoted activities (please refer to the grey list in the back pocket of this brochure) are eligible to apply for the following incentives:
4.1 Pioneer Status
As in the manufacturing sector, companies producing promoted products or engaged in promoted activities are eligible for Pioneer Status. (Please refer to Chapter 3.1.1)
4.2 Investment Tax Allowance (ITA)
Companies producing promoted products or engaged in promoted activities can apply for Investment Tax Allowance (ITA). (Please refer to Chapter 3.1.2) To enable agricultural projects to enjoy greater benefits, the Government has broadened the definition of qualifying capital expenditure to include the following:
- the clearing and preparation of land;
- the planting of crops;
- the provision of plant and machinery used in Malaysia for the purposes of crop cultivation, animal farming, aquaculture, inland or deep-sea fishing and other agricultural or pastoral pursuits;
- the construction of access roads including bridges, the construction or purchase of buildings (including those provided for the welfare of persons or as living accommodation for persons) and structural improvements on land or other structures which are used for the purposes of crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits. Such roads, bridges, buildings, structural improvements on land and other structures should be on land forming part of the land used for the purpose of such crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits.
In view of the time lag between start-up of the agricultural project and processing of the produce, integrated agricultural projects are eligible for ITA for an additional five years for expenditure incurred for processing or manufacturing operations.
4.3 Reinvestment Allowance
Reinvestment Allowance is granted to a person or a company engaged in the production for at least 12 months of essential food such as rice, maize, vegetable, tubers, livestock, aquatic products, and any other activities approved by the Minister of Finance. The qualifying capital expenditure comprises:
- the clearing and preparation of land;
- the planting of crops;
- the provision of irrigation or drainage systems;
- the provision of plant and machinery;
- the construction of access roads including bridges;
- the construction or purchase of buildings, including those provided for the welfare of persons or as living accommodation for persons and structural improvements on land or other structures.
Agricultural projects (excluding the processing of agricultural inputs) are exempted from the productivity criteria.
Please refer to Chapter 3.1.3 for details of Reinvestment Allowance.
4.4 Agricultural Allowance
A person or a company carrying on an agricultural activity can claim capital allowances or agricultural allowances under Schedule 3 of the Income Tax Act 1967 in respect of certain capital expenditure incurred for purposes of that business. Capital expenditure incurred in agricultural activities which are eligible for deduction are as follows:
- Expenditure incurred on the clearing and preparation of land, planting of crops and construction of roads for purposes of agriculture is eligible for a yearly allowance of 50% of the expenditure incurred.
- Expenditure incurred on construction of buildings for the welfare of persons or living accommodation can be written off at a rate of 20% per annum.
- Expenditure incurred on the construction of any other building used for the purposes of working the farm can be written off over a period of 10 years.
As long as companies incur the above qualifying expenditure, they will be given this allowance irrespective of whether or not they have been granted Pioneer Status or Investment Tax Allowance.
4.5 Deduction for Capital Expenditure on Approved Agricultural Projects
Deduction for Capital Expenditure on Approved Agricultural Projects has been provided for under Schedule 4A of the Income Tax Act 1967.
An “approved agricultural project” means an agricultural project approved by the Minister of Finance. Only qualifying capital expenditure incurred within a specific time frame and in respect of a farm cultivating and utilising a specified minimum acreage for each approved project as stipulated by the Minister of Finance will qualify.
This incentive allows a person carrying on an approved agricultural project to elect so that the qualifying capital expenditure incurred by him in respect of that project is deducted from his aggregate income, including income from other sources. Where there is insufficient aggregate income, the unabsorbed expenditure will be carried forward to subsequent years of assessment. Where he so elects, he will not be entitled to any capital allowance or agricultural allowance on the same capital expenditure.
The qualifying capital expenditure eligble for deduction for the purposes of this incentive is as follows:-
(a) the clearing and preparation of land;
(b) planting of a new crop related to an approved agricultural project (replanting is deductable under section 34 (6)(d);
(c) the construction of roads and bridges in estate areas;
(d) the construction of buildings in estate areas under approved agricultural projects or the construction of buildings on estate areas for the welfare and housing of the relevant workers; and
(e) the construction of a pond or the installation of an irrigation or drainage system used for the purposes of an agricultural project.
4.6 Double Deduction for Promotion of Exports
Please refer to Chapter 22.214.171.124 http://www.mida.gov.my/
4.7 Double Deduction of Export Credit Insurance Premiums
Please refer to Chapter 126.96.36.199 http://www.mida.gov.my/
4.8 Tax Exemption on the Value of Increased Exports
Please refer to Chapter 188.8.131.52 http://www.mida.gov.my/
4.9 Export Credit Refinancing Scheme
Please refer to Chapter 184.108.40.206 http://www.mida.gov.my/
4.10 Industrial Building Allowance
Please refer to Chapter 220.127.116.11 http://www.mida.gov.my/
4.11 Infrastructure Allowance
Please refer to Chapter 3.1.11 http://www.mida.gov.my/
4.12 "Group Relief" for Food Production
As a continuous effort to increase food production, companies engaged in food production are eligible for "group relief" where losses incurred by these companies are allowed as deductions from the income of other companies in the same group. The term "companies in the same group" refers to related companies where 70% of the equity is being owned by the same shareholder. The qualifying criteria are as follows:-
- products that are eligible for the incentive must be approved by the Minister of Finance;
- at least 80% of the sales is for domestic market;
- the project must be implemented within one year from the date of approval; and
- this incentive is mutually exclusive with Pioneer Status, ITA, capital allowance under schedule 4A and RA. Expansion or diversification projects are eligible for the RA if the companies surrender the "group relief".
Applications for this incentive should be submitted to the Ministry of Agriculture and received by 31 December 1999.
5. Incentives for the Tourism Industry
To encourage the growth of domestic tourism including "eco-tourism" and
"agro-tourism", incentives are available for tourist projects, hotel businesses,
construction of holiday camps and recreational projects including summer camps
and construction of convention centres with a hall capable of accommodating at
least 3,000 participants.
Hotel businesses refer to the following:-
The incentives available are:-
5.1 Pioneer Status
Please refer to Chapter 3.1.1 http://www.mida.gov.my/
5.2 Investment Tax Allowance
Please refer to Chapter 3.1.2 http://www.mida.gov.my/
5.3 Industrial Building Allowance
An initial allowance of 10% and an annual allowance of 2% is granted in respect of capital expenditure incurred on a hotel building which is used for the purpose of a hotel business carried out by a company granted Pioneer Status or Investment Tax Allowance.
5.4 Special Building Allowance for Accommodation and Child Care Facilities of Employees.
Please refer to Chapter 3.1.10 http://www.mida.gov.my/
5.5 Infrastructure Allowance
Please refer to Chapter 3.1.11 http://www.mida.gov.my/
5.6 Double Deduction for Expenses Incurred on Approved Training
A double deduction for training expenses is provided to companies engaged in the hotel and tour operation business that send their employees to approved training institutions.
5.7 Double Deduction on Overseas Promotion
Double deduction is also given to hotels and tour operators on expenditure incurred on promotional activities overseas. The qualifying expenditure are:-
- expenditure on publicity and advertisements in any mass media outside Malaysia;
- expenditure on the publication of brochures, magazines and guide books, including delivery costs that are not charged to the overseas customers;
- expenditure on market research into new market overseas, subject to the prior approval of the Minister of Culture, Arts and Tourism;
- expenditure that includes fares to any country outside Malaysia for the purposes of negotiating or securing a contract for advertising or participating in trade fairs, conferences or fora approved by the Minister of Culture, Arts and Tourism. Such expenses are subject to a maximum of RM200 per day for lodging and RM100 per day for food for the duration of the stay overseas;
- expenditure in organising trade fairs, conferences or fora approved by the Minister of Culture, Arts and Tourism; and
- maintenance of sales offices overseas, for the purposes of promoting tourism to Malaysia.
5.8 Deduction for Tour Operators and Convention Organisers
Tour operators who bring in at least 500 foreign tourists a year through group inclusive tours that enter and exit the country by air, sea or land, will be exempted from tax in respect of income derived from the business of operating such tours. The incentive is effective until the Year of Assessment 2000*. It will be given to travel operators who are registered and approved by the Ministry of Culture, Arts and Tourism.
Effective from the Year of Assessment 1997, local companies which promote international conferences in Malaysia will be eligible for income tax exemption on income earned from bringing at least 500 foreign participants into the country.
* Proposed in the 2000 Budget
5.9 Incentive for Domestic Tourism
To encourage domestic tourism, companies that organise domestic tour packages with at least 1,200 local tourists per year will be granted income tax exemption on the income earned. A domestic tour means any tour package within Malaysia participated by local tourists (excluding inbound tourists) by air, land or sea transportation and providing at least one night accommodation. This incentive will be effective for Year of Assessments 1999 and 2000*.
* Proposed in the 2000 Budget
6. Incentives for Research and Development (R & D)
The definition of R & D in the Promotion of Investments Act 1986 is as follows:-
"Research and development means any systematic or intensive study carried out in the field of science or technology with the object of using the results of the study for the production or improvement of materials, devices, products, produce or processes but does not include:-
To further strengthen the foundation for a more integrated R&D in the future, companies which carry out designing or protoyping as an independent activity are eligible for incentives.
6.1 Contract R & D Company
A contract R & D company (i.e., a company which provides R & D services in Malaysia only to companies other than its related companies) is eligible to apply for Pioneer Status with full income tax exemption at statutory income level for five years or an Investment Tax Allowance (ITA) of 100% on qualifying capital expenditure incurred within 10 years. The ITA can be utilised to offset against 70% of the statutory income in the year of assessment.
6.2 R & D Company
An R & D company (i.e. a company which provides R & D services in Malaysia to its related companies or to any other companies) is eligible to apply for an ITA of 100% on qualifying capital expenditure incurred within 10 years. The ITA can be utilised to offset against 70% of the statutory income in the year of assessment. The related companies concerned will not enjoy double deduction for payments made to the R & D company for the use of its services (please see 10.4), inless the R & D company opts not to avail itself of the ITA.
Contract R & D and R & D companies are eligible to apply for the various incentives provided they fulfil the following criteria:
- research undertaken should be in accordance with the needs of the country and bring benefit to the Malaysian economy;
- at least 70% of the income of the company should be derived from research and development 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-based R&D, at least 5% of the workforce of the company must be appropriately qualified personnel performing research and technical functions.
6.4 In-house Research
Companies which carry out in-house research in Malaysia (i.e. R & D carried out within a company for the purpose of its own business) are eligible to apply for ITA of 50% on qualifying capital expenditure incurred within 10 years. The ITA can be utilised to offset against 70% of the statutory income in the Year of Assessment.
Applications relating to 6.1, 6.2 and 6.4 should be submitted to MIDA.
6.5 Double Deduction for Research & Development
Double deduction is allowed on revenue expenditure incurred by a person on research directly undertaken by him or on his behalf, which is approved by the Minister of Finance.
Double deduction is allowed on payment for the use of services of approved research institutes, R & D companies or contract R & D companies, as well as on cash contributions made to approved research institutes.
6.6 Other Incentives
- Industrial Building Allowance in the form of an initial allowance of 10% and an annual allowance of 2% is available for buildings used for purposes of approved R & D.
- Capital allowance on capital expenditure incurred in the provision of plant and machinery used for R & D.
- Machinery/equipment, materials, raw materials/component parts and samples used for R & D purposes are eligible for exemption from import duties, sales tax and excise duties.
7. Incentives for Software Development
In line with the Government's objective to encourage the development of computer software, companies which develop both original software and/or undertake major modifications of existing software other than those deemed established, are eligible to apply for Pioneer Status incentive for a period of five years under the Promotion of Investments Act, 1986. However, the granting of the incentive is governed by the following guidelines:
Applications for this incentive should be submitted to MIDA
8. Incentives for the Use of Information Technology (IT)*
Computers and information technology assets are given an initial allowance of 20% and an annual allowance of 40%. Thus the full amount can be written off within a period of two years.
Effective from the Year of Assessment 2000 (current year basis), all operating expenditure including payments to consultants, related to the usage of IT in improving management and production processes in the manufacturing, agriculture and services sectors is allowed as deduction in the computation of income tax*.
* Proposed in the 2000 Budget
9. Incentives for Multimedia Super Corridor (MSC)
The MSC is a 15-by-50 kilometre (9-by-30 mile) zone extending south from Malaysia's present national capital and business hub, Kuala Lumpur. The MSC is a perfect environment for companies wanting to create, distribute, and employ multimedia products and services.
Companies with MSC Status are entitled to operate tax free for up to 10 years or receive a 100 percent investment tax allowance, and enjoy other incentives and benefits backed by the Malaysian Government's Bill of Guarantees:-
Provide a world-class physical and information infrastructure; Allowance unrestricted employment of knowledge workers from overseas; Ensure freedom of ownership of companies; Allow freedom of sourcing capital globally for MSC infrastructure and freedom of borrowing funds; Provide competitive financial incentives including no income tax for up to 10 years or an Investment Tax Allowance, and no duties on the import of multimedia equipment; Become a regional leader in intellectural property protection and cyberlaws; Ensure no censorhip of the Internet; Provide globally competitive telecommunication tariffs; Tender key MSC infrastructure contracts to leading companies willing to use the MSC as their regional hub; and Provide a high-powered implementation agency to act as an effective on-stop super shop to ensure the MSC meets company needs.
Malaysia's Multimedia Development Corporation (MDC) is driving this bold initiative. The MDC is a fully empowered "one-stop super shop" wholly focused on ensuring the unconditional success of the MSC and the companies operating in it. Applications for MSC Status is handled by the MDC.
For more information, please refer to "Investing in Malaysia's Multimedia
Super-Corridor: Policies, Incentives and Facilities".
10. Incentive for Acquiring Proprietary Rights
Expenditure incurred on acquiring patents, designs, models, plans, trade
marks or brands and other similar rights from foreigners is allowed as deduction
in the computation of income tax if the right is used without involving the
transfer of ownership and results in payment of royalty. This deduction is given
in the form of depreciation for 10 years.
11. Incentives for Training
In order to encourage human resource development, the following incentives are available:
11.1 Investment Tax Allowance
- Investment Tax Allowance of 100% for a period of 10 years is given to companies which establish technical or vocational training institutions. This allowance will be abated from the statutory income. Abatement for each assessment year will be limited to 70% of the statutory income.
- Existing companies providing technical or vocational training that incur new investment to upgrade their training equipment or expand their training capacities are also eligible for this incentive.
Applications for this incentive should be submitted to MIDA.
11.2 Deduction for Cash Contributions
Single deduction is given for contributions in cash to a technical or vocational training institution which is not operating primarily for profit and those established and maintained by a statutory body.
11.3 Exemption from Import Duty, Sales Tax and Excise Duty on Machinery, Equipment and Materials
Please refer to Chapter 18.104.22.168 http://www.mida.gov.my/
11.5 Human Resources Development Fund (HRDF)
Please refer to Chapter 6.2.4 http://www.mida.gov.my/
11.6 Industrial Building Allowance
Industrial Building Allowance (IBA) of 10% of qualifying capital
expenditure is granted to a company which has incurred expenditure on
buildings used for industrial and technical or vocational training.
12. Incentives for the Storage, Treatment and Disposal of Toxic and Hazardous Wastes
Incentives are granted to encourage the setting up of proper facilities for the storage, treatment and disposal of toxic and hazardous wastes. Companies which are directly involved in the storage, treatment and disposal of toxic and hazardous wastes in an integrated manner are eligible for the Pioneer Status incentive for five years.
Those companies which are themselves waste generators and wish to establish facilities to store, treat and dispose of their wastes, either on-site or off-site, would be eligible for a special allowance at an initial rate of 40% and an annual rate of 20% for all capital expenditure.
As a further incentive, both categories of companies will enjoy import duty and sales tax exemption for machinery, equipment, raw materials and components for the storage, treatment and disposal of toxic and hazardous wastes.
In addition, environmental protection equipment is given an initial allowance
of 40% and an annual allowance of 20% to enable the full amount to be written
off within a period of three years.
13. Incentives for Operational Headquarters (OHQs)
“Approved operational headquarters” (OHQ) refers to a locally incorporated company, whether local-owned or foreign-owned, which carries on a business in Malaysia of providing qualifying services to its offices or its related companies outside Malaysia.
Companies granted OHQ status will enjoy a concessionary tax rate of 10% for income from qualifying services rendered to, interest on foreign currency loans extended to, and royalties received from R & D work carried out on behalf of their offices or related companies outside Malaysia.
To be eligible for the incentives provided, the paid-up capital of the company should be a minimum of RM0.5 million and total business spending should be at least RM1.5 million per annum. The company should also carry out a minimum of three of the following qualifying services to its offices or related companies outside Malaysia:
Approved OHQs can also enjoy non-fiscal incentives as follows:-
Applications for these incentives should be submitted to the Ministry of
14. Incentives for International Procurement Centres
'International Procurement Centre' (IPC) refers to a locally incorporated company, whether local or foreign-owned, which carried on a business in Malaysia to undertake procurement and sale of raw materials, components and finished products for its group of related and unreleated companies in Malaysia and abroad. This would include procurement and sale from local sources or from third countries.
Companies that have a sizeable network of companies outside Malaysia which are well established and sizeable in terms of assets and employees, with a substantial number of qualified professionals, technical and other supporting personnel, can apply for an approved IPC status.
In order to encourage the establishment of IPCs and to make Malaysia as a marketing and distribution centre, the Government offers the following incentives for approved IPSc.
To qualify for the incentives, the IPCs must fulfil the following criteria:
Applications for these incentives should be submitted to Ministry of International Trade and Industry.
15. Incentives for Approved Service Projects (ASP)
Projects in the transportation, communications and utilities sub-sectors of the service sector, approved by the Minister of Finance are eligible for tax incentives. The incentives offered are as follows:-
15.1 Exemption Under Section 127, Income Tax Act 1967
Generally companies undertaking ASP are eligible for exemption of 70% of the statutory income for 5 years. However, companies undertaking ASP in Sabah, Sarawak and the designated "Eastern Corridor" of Peninsular Malaysia will be eligible for exemption on 85% of the statutory income for 5 years. Companies undertaking ASP of national and strategic importance will be eligible for 100% exemption of statutory income for 10 years.
15.2 Investment Allowance (IA) Under Schedule 7B Income Tax Act 1967
Generally companies undertaking ASP are eligible for IA of 60% on qualifying capital expenditure incurred within 5 years from the date the capital expenditure is first incurred. The allowance can be used to set off against 70% of the statutory income. However, companies undertaking ASP in Sabah, Sarawak and the designated "Eastern Corridor" of Peninsular Malaysia will be granted IA of 80% on qualifying capital expenditure incurred within 5 years from the date the capital expenditure is first incurred. The allowances can be utilised to set off against 85% of the statutory income
Companies undertaking ASP of national and strategic importance will be granted IA of 100% on qualifying capital expenditure incurred within 5 years from the date the capital expenditure is first incurred. The allowance can be utilised to set off against 100% of the statutory income. Any unutilised allowance can be carried to the subsequent years until it is fully utilised.
16. Incentives for the Shipping Industry
The income of a shipping company derived or deemed to be derived from the operations of Malaysian ships is exempted from tax. This incentive is granted to residents only. "Malaysian Ship" means a sea-going ship registered as such under the Merchant Shipping Ordinance 1952 (Amended) other than a ferry, barge, tugboat, supply vessel, crew boat, lighter, dredger, fishing boat or other similar vessels.
17. Tariff Related Incentives
17.1 Tariff Protection
Consistent with its policy of an open economy, the Malaysian Government adopts a trade liberalisation approach and continuously reviews downward the country’s tariff structure.
However, in certain cases, tariff protection is considered for deserving infant industries which are in a position to supply a major portion of the domestic market - provided the product is of acceptable quality and the price to consumers is reasonable.
In granting tariff protection, the degree of utilisation of domestic raw materials, the level of local value-added, and the level of technology of the industry will be taken into consideration. Tariff protection granted will be reviewed from time to time, consistent with the needs of the industry and the welfare of consumers.
17.2 Exemption from Import Duty on Direct Raw Materials/Components
Effective from 1 January 1999, full exemption from import duty can be considered on raw materials/components irrespective of whether the finished products are sold in the domestic market or are exported.
(i) Manufacture of Goods for Export
Full exemption from import duty on direct raw materials are normally granted, provided the raw materials/components are not manufactured locally or, where they are manufactured locally, are not of acceptable quality and price.
(ii) Manufacture of Goods for the Domestic Market
Full exemption from import duty on direct raw materials and components that are not manufactured locally can be considered.
Full exemption from import duty can also be considered if the finished product made from dutiable raw materials/components is not subject to any import duty.
17.3 Exemption of Import Duty and Sales Tax on Machinery and Equipment
Most machinery and equipment not produced locally are not subject to import duty and sales tax. However, machinery and equipment with import duty and sales tax can be considered for exemption if:
- they are used directly in the manufacturing process, and
- the equipment is used for environmental control, recycling, maintenance and quality control.
17.4 Drawback of Excise Duty on Parts, Ingredients or Packaging Materials
Under Section 19(1) of the Excise Act 1976, a drawback of excise duty in respect of parts, ingredients or packaging materials of any goods manufactured, may be claimed by the manufacturer if such parts, ingredients or packaging materials on which excise duty has been paid, are used in the manufacture of goods which are exported.
Movements of excisable goods from licensed premises for use in the manufacture of goods by a factory in a Free Zone or the islands of Langkawi or Labuan are considered as exports from Malaysia.
17.5 Drawback of Sales Tax on Materials Used in Manufacture
Under Section 29 of the Sales Tax Act 1972, all duty-paid goods used as materials for the manufacture of other goods which are subsequently exported, are eligible for drawback of the sales tax in full.
Similarly, goods from the Principal Customs Area which are used in the manufacture of other products by a factory in a Free Zone or on the islands of Langkawi or Labuan are considered as exports of goods from Malaysia
17.6 Drawback of Import Duty
All duty-paid goods used as parts or ingredients or as packaging materials in the manufacture of other goods which are subsequently exported, are eligible for drawback of import duty in full.
The conditions for duty drawback, as stipulated under Section 99 of the Customs Act 1967, are as follows:
- The finished goods exported have been manufactured on premises approved by the Director-General of Customs.
- Such books and accounts are kept as the Director-General of Customs may require for the purpose of ascertaining the quantity of the goods used in the manufacture or for the packing of such manufactured goods.
- Such goods are re-exported within twelve months of the date upon which the import duty was paid or such further period as approved by the Director-General of Customs.
- Written notice has been given on the export declaration form that a claim for drawback will be made, and such claim is made in the prescribed form and established to the satisfaction of a senior officer of Customs within six months of the date of such re-export or such further period as approved by the Director-General of Customs.
Movement of goods from the Principal Customs Area to a Free Zone or the
islands of Labuan or Langkawi are regarded as exports. Therefore, such goods, if
manufactured in the Principal Customs Area, will be eligible for drawback of