8.1 INTRODUCTION

Investment Incentives• The investment incentives enacted under the

Promotion of Investments Act 1986 are:

A)Pioneer StatusB)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 ProjectC) Increased Export IncentivesD)Incentive for Investment Holding Company E) Incentive for unit TrustF) Incentive for Venture Capital CompanyG)Incentive for Approved Operational HeadquartersH)Incentive for Foreign Fund ManagementI) Incentive for Closed End FundJ) Double Deductibility of Qualifying Expenses

Pioneer Statuso 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 importantIn promoted areasFor contract research and developmentFor high technology companiesFor 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 full-

time employeeOpinion of the Minister – promotes the

economic and technological development of Malaysia

Why we need to apply pioneer status ?

Eligibility Tax Exemption

Extension Period

Unabsorbed Losses

Unabsorbed Capital Allowance

Before 1/1/1991 100% ADJ 5 years c/f -

1/1/1991 – 1/11/1991

100% 5 years Not to be c/f Not to be c/f

After 1/11/1991 70% No extension Not to be c/f Not to be c/f

Promoted Areas 100% No extension Not to be c/f Not to be c/f

National and strategic important

100% 5 years Not to be c/f Not to be c/f

Contract R&D 100% 5 years Not to be c/f Not to be c/f

High-technology 100% 5 years 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 dayContinues for 5 yearsExtended 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 statusExtended period allow by Minister

Pioneer Certificate

• Section 7(2) PIA 1986, pioneer certificate shall state:

Marketable quantitiesDate of factory commenced the productionRate of productionLocation of factorySection 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

MeaningAn 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

• 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: Directormember of management, administrative clerical staff

How to calculate ?

Rate of AllowanceNo. Companies and other

particularsYears of exemption( period)

Rate of ITA(% of qualifying expenditure)

Restricted to % of statutory income

1 Project of National and Strategic Importance

5 100 100

2 Project in Promoted Areas 5 100 100

3 High Technology Companies

5 60 100

4 Contract R&D Company 10 100 70

5 R&D company 10 100 70

6 In house R&D 10 50 70

7 Technical or Vocational Training Company

10 100 70

8 Other companies( SME’s) 5 60 70

Example 8.2

Syarikat ABC Sdn Bhd (SME’s 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.

Unabsorbed ITA c/f ( 120,000- 56,000) = RM 64,000

( transfer to y/a2011)

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

Y/A 2010 RMNet profit 100,000Add : Non allowable expenses 10,000

Adjusted Income 110,000Less: Capital Allowance (30,000)

Statutory Income 80,000Less: ITA (60% X 200,000 =120,000 ) (56,000)Restricted to: (70% X 80,000=RM56,000)

Chargeable Income 24,000

Exercise 8-2• Sonata Bhd a Korean Company( SME’s

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.

Qualifying expenditure2008: (RM2,300,000-RM800,000)*+RM3,000,000 =RM 4,500,0002009: RM2,500,000+RM1,000,000+RM8,000,000 =RM 11,500,0002010: RM 1,000,000

2008 2009 2010

(Sabah- promoted product+ promoted area)

(Kulim – promoted product)

(Kulim –promoted product)

How to choose between pioneer status & ITA ?

Pioneer status Investment Tax Allowance

Calculate based on statutory income.

Calculate based on qualifying capital expenditure.

Suitable for company which have large profit

Suitable for company which use more capital expenditure & not expected to generate large profit in a short time.

Thank you !