1.

Tax incentives for R&D

Delta Sdn Bhd have two options of receiving R&D incentive under the income Tax Act
Section 34A, if they implement R&D by themselves or they can get the in-house R&D under
the promotion of Investments ACT Section 26E. According to the Income Tax Act section
34A, the approved R&D expenditures of R&D projects are entitled to receive double deduction
under the approved R&D incentives on their adjusted income of the business.

1.1.1 Double deduction R&D incentive for revenue expenditure

There are 2 conditions which needs to be fulfilled in order to be eligible for the double
deduction incentive. Firstly, the R&D project must be given approval by the Ministry of
Finance and the research programme not necessarily need to be related to the business activity
performed by the company. For obtaining the approval, the research project must fulfil the
LHDN’s definition of research and it should be focussed on production of new or improved
materials or systems for commercial production or usage. Besides, it should be beneficial to
the country’s economy such as training Malaysian workers for undertaking research activities
and technology transfer in Malaysia (Kasipilai, 2015).

Secondly, the expenditures related to the R&D projects for double deduction must not
be capital in nature. The qualifying expenditures of R&D eligible for double deductions are as
follows: -

I.Raw materials which are used for research purpose not including any acquisition of fixed
assets used in research. For every project, the name, cost of and amount of raw materials
used and information related to projects must be kept. Cost of material used for
administrative or production purposes not eligible for double deduction.
II.The salary expenditures of employees who are directly part of the research project is
eligible is qualified for double deduction and expenditures such as EPF, SOCSO, medical
feels, benefits are not eligible for double deduction. Salaries related to employees
involving in attending research courses/seminars directly related to the research may be
consider for the claims.
III.Expenditures of technical services such as consultancy fees paid for certain research
organization or individual for advice or testing related to the research project. Technical
services received from overseas and carried out in Malaysia is also eligible for double
deduction. If the payment for technical services from overseas is above 70% of total
 allowable expenditure, the payment will not be eligible for double deduction. However,
the remaining allowed expenditure will be eligible for double deduction.
IV.Travelling costs such as employees visiting research locations for the research purpose
and it includes daily allowances as well. Daily allowance is capped to 400 for a person
or the actual cots, whichever is lower. Expenditures such as visiting suppliers, clients,
exhibitions, market surveys and other expenses which are not related to research are not
eligible for double deduction.
V.Transportation cost such as transporting the raw materials used in the research. But,
expenses such as cost of transporting fixed assets, postage for administrative purposes
and others not related are not eligible for the double deduction.
VI.Maintenance costs incurred for building, equipment, machinery and motor vehicles
which are used for research project purpose is eligible for double deduction. But,
expenses not directly related to research project don’t quality of double deduction.
VII.Rental expenses such as building, equipment, machinery and motor vehicles which are
directly used for research project purpose is eligible for double deduction. But, expenses
not directly related to research project don’t quality of double deduction.
VIII. Other expenditures such as electricity, water, telephone, courier, stationery, clothes
and photographs which are directly incurred for research can be claimed for double
deduction on the other revenue expenditure. Capital expenditures incurred on machinery,
plant, fixtures, land, building of a permanent nature or in the acquisition of any rights
over the any property will not be eligible for double deduction (Kasipilai, 2015).

Furthermore, Schedule 3 act paragraph 37B offers capital allowances to industrial

building which is used for the approved research, used by an R&D company or used by a
contract R&D company. Any capital expenditures incurred on the renovation or alteration of
rented premises used for research activities are eligible for qualifying building expenditure.

Additionally, Schedule 3 act paragraph 37D similarly offers capital allowances to

capital expenditures related to the machinery and plants which are used for the approved
research purpose, regardless of the research is different from the business activity.
 Qualifying R&D expenditure of approved 8,000,000
Double deduction 16,000,000
Capital allowance 10,000,000
Total Amount of tax deduction 26,000,000
Figure 1: - Total tax deduction of revenue expenditure.

From the figure 1, it can be seen that the total amount of 26 million may be claimed as
tax deduction. Besides, it is also important to note that while the approved R&D incentive
offers immediate tax relief for the revenue, deferred tax relief will be provided through capital
allowance for a period of time which depends the nature of the assets.

1.1.2 In-house R&D Incentives for capital expenditure

According to Section 26E of PIA 1986, the in-house R&C incentive would first require
Delta Sdn Bhd to carry out the R&D in Malaysia and the capital expenses must be related to
R&D which was also not been claimed under any other tax incentive for that capital expenses.
Investment tax allowance (ITA) can be applied to the Minister of International Trade. The
investment tax allowance for the in-house research is 50% for qualifying capital expenditure
that incurred in a period of 10 years which is a set off against 70% of statutory income
(Kasipilai, 2015).

Since R&D is a promoted activity that meets S.26E PIA 1986, and no tax incentive were
claimed for capital expenditure, Delta Sdn Bhd is in a good standing for receiving approval for
ITA. ITA will be given for the next 10 years from the approval date effectively. Under this
R&D incentives, Delta Sdn Bhd is qualified to get the ITA 50% on the qualified capital
expenditure incurred at the period of year of assessment (YA). For the year of assessment, only
a maximum of 70% from the statutory income will be subjected to the ITA for tax exemption
while the left over 30% will be subject to tax. Any amount that are not utilized can be carried
forward for future absorptions (Choong, 2018). The carried forward amount will be absorbed
each year will be accounted in exempt account for the franking exempt dividends.

Qualifying R&D expenditure of In-house 10,000,000

ITA at 50% 5,000,000
Capital allowance 10,000,000
Total Amount of tax deduction 15,000,000
Figure 2: - Total tax deduction of capital expenditure.