8.

1 INTRODUCTION

Investment Incentives
The investment incentives enacted under the Promotion of Investments Act 1986 are: A)Pioneer Status B)Investment Tax Allowance (ITA) C)Industrial Adjustment Allowance (IAA) D)Infrastructure Allowance (IA)

 The incentives enacted under the Income tax Act 1967 are:
A) Reinvestment Allowance (RA) B) Incentives for Approved Service Project C) Increased Export Incentives D)Incentive for Investment Holding Company E) Incentive for unit Trust F) Incentive for Venture Capital Company G)Incentive for Approved Operational Headquarters H)Incentive for Foreign Fund Management I) Incentive for Closed End Fund J) Double Deductibility of Qualifying Expenses

Pioneer Status
o A company given Pioneer Status will be granted partial exemption from the payment of income tax. o Company will be granted tax exemption on 70% of the statutory income for 5 years. The balance 30% of that statutory income will be taxed at the prevailing company tax rate.

Investment Tax Allowance (ITA)

o Company will be granted an allowance of 60% in respect of qualifying capital expenditure (such as factory, plant, machinery or other equipment used for approved project) incurred within 5 years from the date the first capital expenditure is incurred. o The allowance can be utilized to exempt up to 70% of the statutory income in the assessment year. The balance of that statutory income will be taxed at the prevailing company tax rate. o Any unutilized allowance can be carried forward to subsequent years until the whole amount has been fully utilized.

Industrial Adjustment Allowance (IAA)

o A company will be granted an allowance of 60% to 100% based on the industrial adjustment activities undertaken. o The allowance will be given in respect of qualifying capital expenditure incurred within 5 years. o The allowance can be utilized to set off against 100% of adjusted income in the year of assessment.

Infrastructure Allowance (IA)

o Any company resided in Malaysia engaged in manufacturing, agriculture, hotel, tourist or other industrial/commercial activity in Sabah, Sarawak and the designated Eastern Corridor of Peninsular Malaysia. o Company will be granted an allowance of 100% in respect of capital expenditure on infrastructure (such as reconstruction, extension, or improvement of any permanent structure including a bridge, jetty, port or road). o The allowance can be utilized to exempt up to 85% of statutory income in the year of assessment. The balance of that statutory income will be taxed at the prevailing company tax rate. o Any unutilized allowance can be carried forward to the subsequent years until it is fully utilized.

Reinvestment Allowance (RA)

o RA is granted to manufacturing companies, which have been in operation for at 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. o RA is in the form of an allowance of 60% of capital expenditure incurred for the expansion, modernization and upgrading of production facilities and diversification into related products. o The allowance can be utilized to offset against 70% of the statutory income in the year of assessment.

Incentives for Approved Service Project (ASP)

o Exemption under Section 127 of the Income Tax 1967, companies undertaking ASP can apply for income tax exemption of 70% of their statutory income for five years. o Companies undertaking ASP of national and strategic importance are eligible for a 100% income tax exemption of their statutory income for ten years. o Applications should be submitted to the Ministry of Finance.

8.3 Pioneer Status

Is granted to all companies participating in a promoted activity or producing a promoted product for an initial period of 5 years commencing from the production day

Who can become pioneer status ?

Under Promotion of Investment Act 1986, a person who invest in promoted product or activities :Of national and strategic important In promoted areas For contract research and development For high technology companies For small scale companies

Promoted Activity
Means a manufacturing, agricultural, integrated agricultural, hotel, tourist or other industrial or commercial activity determined by Minister and national and strategic important.

What is promoted product ?

Means any product as determined by Minister under section 4. Includes a product which is of national and strategic important

Promoted Areas
Defined to be Eastern Corridor of Peninsular Malaysia the states of Sabah and Sarawak and the Federal Territory of Labuan. After 2 September 2006, Perlis has been included as promoted area.

Why we need to apply pioneer status ?

Exemption from income tax for a 5 years period. For extended up to 5 years when: Capital expenditure of RM 25m @500 fulltime employee Opinion of the Minister promotes the economic and technological development of Malaysia

Why we need to apply pioneer status ?

Eligibility Tax Extension Exemption Period 100% ADJ 100% 5 years 5 years Unabsorbed Unabsorbed Losses Capital Allowance c/f Not to be c/f Not to be c/f

Before 1/1/1991 1/1/1991 1/11/1991 After 1/11/1991 Promoted Areas National and strategic important

70% 100% 100%

No extension No extension 5 years

Not to be c/f Not to be c/f Not to be c/f

Not to be c/f Not to be c/f Not to be c/f

Contract R&D
High-technology

100%
100%

5 years
5 years

Not to be c/f
Not to be c/f

Not to be c/f
Not to be c/f

Tax Relief Period

| Pre-pioneer Pioneer Status (5y) | Post-pioneer

For the 1st 5 years, tax relief period is when commenced a new business on the same day commenced the production of promoted product or activity. For extended 5 years, it deemed to have a new business.

Tax Relief Period

Section 15(c) Promotion of Investment Act 1986, pioneer company shall make up account for pioneer business: < 1year of the date of commenced pioneer business Every year < 1 year of the date of tax exemption period end

Tax Relief Period

Tax relief period of Pioneer company begin on: Production day Continues for 5 years Extended for 5 years Tax relief period shortened if pioneer certificate cancelled.

Pioneer Certificate

When ?
Section 7(1) PIA 1986: Within 6 months from the date granted pioneer status Extended period allow by Minister

Pioneer Certificate
Section 7(2) PIA 1986, pioneer certificate shall state: Marketable quantities Date of factory commenced the production Rate of production Location of factory Section 6(2) PIA 1986, have been complied with or conditions have not been complied with If failure to apply, withdrawal pioneer status

Investment Tax Allowance

Meaning
An alternative incentive to pioneer status. One of the tax incentive to reduce tax liability.

Company that involved in promoted activity or produce promoted product eligible apply for Investment Tax Allowance(ITA). Same promoted activity or promoted products only can get 1 incentive, either pioneer status or investment tax allowance.

Who can apply ?

Any company participate in promoted activity or produce promoted product Example: Cultivation of tea or fruits
Investment in promoted areas(Sabah, Sarawak, Kelantan, Terengganu, Pahang,etc) will get 100% claim for investment tax allowance.

Qualifying Expenditure
Manufacturing Agricultural

Hotel business

Tourism projects

Manufacturing
Capital expenditure incurred on a factory or on any plant and machinery used in Malaysia for the purposes of the promoted activity or promoted product.

Agricultural
(a) the clearing and preparation of land; (b) the planting of crops; (c) the provision of irrigation or drainage systems; (d) 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; (e) the construction of access roads including bridges; (f) the construction or purchase of buildings (including those provided for staff)

Hotel Business
construction of an hotel building of the approved standard in Malaysia, including any alteration,extension and renovation or on the provision of plant and machinery or other facilities used in connection with the hotel business.

Tourism projects
(a) clearing of land for purposes of a tourist project; (b) planting of trees and plants; (c) construction of road and other infrastructure facilities provided used for the purposes of a tourist project; (d) the provision of birds, animals and other exhibits; (e) the provision of plant and machinery; (f) the provision of buildings (including those provided for staff ), structural improvements on land and other structures on land forming part of the land used for purposes of a tourist project.

Non Qualifying Expenditure

Buildings & Plant and machinery ( which are provided for the use of office staff) For example: Director member of management, administrative clerical staff

How to calculate ?

Rate of Allowance
No. Companies and other particulars Years of exemption( period) Rate of ITA (% of qualifying expenditure) Restricted to % of statutory income 1 2 3 4 5

Project of National and Strategic Importance Project in Promoted Areas High Technology Companies Contract R&D Company R&D company

5 5 5 10 10

100 100 60 100 100

100 100 100 70 70

6
7

In house R&D
Technical or Vocational Training Company

10
10

50
100

70
70

Other companies( SMEs)

60

70

Example 8.2
Syarikat ABC Sdn Bhd (SMEs company) was granted ITA of 60% for producing a promoted product commencing from 1.1.2010.It closed its accounts on 31.12.2010.It incurred capital expenditure of RM200,000. Capital Allowance for y/a 2010 is RM30,000 and disallowable expenses to be added back is RM10,000.Net profit for the year is RM100,000.

Y/A 2010 Net profit Add : Non allowable expenses Adjusted Income Less: Capital Allowance Statutory Income Less: ITA (60% X 200,000 =120,000 ) Restricted to: (70% X 80,000=RM56,000) Chargeable Income

RM 100,000 10,000 110,000 (30,000) 80,000 (56,000) 24,000

Unabsorbed ITA c/f ( 120,000- 56,000) = RM 64,000 ( transfer to y/a2011)

Tax payable: RM24,000 X 20% =RM 4,800

Exercise 8-2
Sonata Bhd a Korean Company( SMEs company) is a Malaysian resident involved in the production of electric chips. The company, which operating in Sabah,has been enjoying ITA since 2007.However after nothing that Sabah is not strategic location, the management moved the plant to the Kulim HiTech Industrial Area in early 2009.

2008 (Sabah- promoted product+ promoted area)

2009 (Kulim promoted product)

2010 (Kulim promoted product)

Qualifying expenditure 2008: (RM2,300,000-RM800,000)*+RM3,000,000 =RM 4,500,000 2009: RM2,500,000+RM1,000,000+RM8,000,000 =RM 11,500,000 2010: RM 1,000,000

How to choose between pioneer status & ITA ?

Pioneer status Investment Tax Allowance

Calculate based on statutory Calculate based on qualifying income. capital expenditure. Suitable for company which Suitable for company which have large profit use more capital expenditure & not expected to generate large profit in a short time.

Thank you !