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INVESTMENT INCENTIVES & POLICIES |
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Investment
Incentives |
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Incentives
for the Manufacturing Sector
The major incentives for companies in the manufacturing
sector are the Pioneer Status and Investment Tax Allowance. Eligibility
for either Pioneer Status or Investment Tax Allowance will be determined
according to priorities in the form of "promoted activities" or "promoted
products" as determined by the Ministry of International Trade and
Industry. For details of promoted activities and products, please
refer to the Malaysian Industrial Development Authority.
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 85% of its statutory income. The period of tax exemption is
five years, commencing from the production date as determined by the
Ministry of International Trade and Industry.
As an added incentive, companies located in the states of Sabah and
Sarawak in East Malaysia 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.
The Eastern Corridor of Peninsular Malaysia covers Kelantan, Terengganu,Pahang,
excluding the districts of Lipis, Raub, Jerantut and Cameron Highlands
(except those approved industrial estates located in these districts),
and the district of Mersing in Johor.
Investment Tax Allowance (ITA)
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 utilised to
offset 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. 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 and
Sarawak in East Malaysia 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 utilised 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 incur qualifying capital expenditure for the expansion
of production capacity, modernisation and upgrading of production
facilities, and diversification into related products.
The RA is in the form of an allowance of 60% of capital expenditure
incurred by the companies. The allowance can be utilised to offset
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 utilised.
Companies that reinvest in promoted areas, that is, the States of
Sabah and Sarawak and the "Eastern Corridor" of Peninsular Malaysia
will be allowed to utilise the allowance fully to offset against the
statutory income for the year of assessment.
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 programs.
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 reorganisation,
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 programs 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 Industrial Adjustment Allowance
are:
The industrial adjustment program has to be approved by the Ministry
of International Trade and Industry and the Ministry 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.
In addition, an Industrial Adjustment Fund has been set up for companies
undertaking restructuring programs. The Industrial Adjustment Fund
provides loans to qualifying companies at concessionaire rates. |
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Incentives
for High Technology Industries
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. High technology companies
are 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.
The high technology company must fulfil the following criteria: Local
research and development (R&D) expenditure to gross sales should be
at least 1% on an annual basis. However, companies are allowed a period
of three years from the date of operation/ commencement of business
to comply with this requirement. The percentage of science and technical
graduates to total workforce should be at least 7%.
Incentives for Strategic
Projects Strategic projects are those with heavy
capital investment and high technology, which can generate extensive
linkages, and which have significant impact on the Malaysian economy.
The Government will consider granting the following incentives to
strategic projects of national importance:
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.
Incentives for Small-Scale
Companies
Small-scale manufacturing companies with shareholders'
funds not exceeding RM500,000, which are incorporated in Malaysia
under the Companies Act 1965, and having Malaysian equity of at least
70%, are eligible for incentives provided under the Promotion of Investments
Act 1986. To encourage the development of small-scale industries,
the Government offers the following incentives:
Small-scale companies which meet specified criteria will be granted
Pioneer Status if they propose to manufacture products or participate
in activities listed as promoted products/activities for small-scale
manufacturers. Full exemption from customs duty on raw materials,
components, machinery and equipment which are not available locally.
Incentives for the Agricultural
Sector
Under the Promotion of Investments Act 1986, the
term "company" in relation to agriculture includes: agro-based co-operative
societies and associations, sole proprietorships and partnerships
engaged in agriculture.
Companies producing promoted products or engaged in promoted activities
are eligible to apply for the following incentives:
Pioneer Status
As in the manufacturing sector, companies producing
promoted products or engaged in promoted activities are eligible for
Pioneer Status. Investment Tax Allowance (ITA)
Companies producing promoted products or engaged in promoted activities
can apply for Investment Tax Allowance (ITA). 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.
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. |
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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.
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 he so elects, he will not
be entitled to any capital allowance or agricultural allowance on
the same capital expenditure.
An "approved agricultural project" means an agricultural project approved
by the Ministry of Finance. Only qualifying capital expenditure incurred
within a specific time frame and in respect of a farm cultivating
and utilising a specified minimum hectare for each approved project
as stipulated by the Ministry of Finance will qualify.
Where there is insufficient aggregate income for the qualifying farm
expenditure to be deducted from, the unabsorbed expenditure will be
carried forward to subsequent years of assessment.
Reinvestment Allowance
Reinvestment Allowance is granted to a person
or a company engaged in the production of essential food such as rice,
maize, vegetable, tubers, livestock, aquatic products, and any other
activities approved by the Ministry. 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.
Export Credit Refinancing Scheme
Double Deduction of Export Credit Insurance Premiums
Double Deduction for Promotion of Exports Industrial Building Allowance
Incentives for Research and Development Incentives for the Tourism
Industry
The following incentives are available for both tourist projects and
hotel businesses:
Pioneer Status
Investment Tax Allowance
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.
Double Deduction for Expenses Incurred on Approved Training - A double
deduction for training expenses is provided to companies engaged in
the hotel and tour operations business which send their employees
to approved training institutions.
Incentives for Operational Headquarters
The term "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.
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:
management and administrative service;
treasury and fund management services;
corporate financial advisory services;
research and development; and
training and personnel management.
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.
Approved OHQs can also:
apply for expatriate posts which will be approved based on expertise,
skill requirements and needs of the company. Duration of work permits
will be between three to five years.
borrow freely from domestic sources in foreign currency without the
approval of the central bank for treasury and fund management operations
for their related companies outside Malaysia.
borrow freely from domestic sources in Malaysian Ringgit (RM) up to
a maximum of RM10 million for use in Malaysia. Borrowing in excess
of RM10 million requires prior approval from the central bank.
invest freely in foreign securities and lend to related companies
outside Malaysia as long as the domestic borrowing in RM is within
the RM10 million limit and the remittances are made in foreign currency
equivalent. open foreign currency accounts with the designated banks
in Malaysia, including the offshore banks in Labuan, or overseas banks
for crediting foreign currency receivable other than export proceeds.
use professional services of a foreign firm if such services are not
available in Malaysia.
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Incentives
for Research and Development
The following incentives are available to encourage
research and development (R & D):
Double Deduction for Expenses Incurred on R & D
Expenses of a revenue nature incurred by a person on research related
to his business and directly undertaken by him or on his behalf is
eligible for deduction. Revenue expenditure incurred for research
approved by the Ministry of Finance is eligible for double deduction.
Investment Tax Allowance - Investment Tax Allowance of 50% on qualifying
expenditure (related R & D activity) for a period of 10 years. This
allowance will be granted at the statutory income level and abatement
for each assessment year will be limited to 70% of statutory income.
Industrial Building Allowance
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 research.
Capital Allowances for Plant and Machinery - Plant and machinery used
for purposes of approved research are eligible for capital allowances.
Double Deduction for Cash Contributions and Payments - Double deduction
is given for cash contributions made to approved research institutions
and payments for the use of the services of an R & D company or a
contract R & D company.
Incentives for R & D Companies and Institutions
To further promote R & D activities, the following
incentives will be given to approved companies or institutions established
to undertake R & D:
Tax exemption for a period of five years for carrying out R & D activities
for a specified industry. Dividends received by shareholders are also
exempted from tax.
Accumulated losses incurred during the tax relief period are allowed
to be carried forward to the post-tax relief period.
Investment Tax Allowance of 100% of qualifying capital expenditure
incurred within a period of 10 years for carrying out R & D activities
for holding/affiliate or associate companies. This allowance will
be abated from the statutory income but abatement for each assessment
year will be limited to 70% of the statutory income. Holding/affiliate
associate companies concerned will not enjoy double deductions for
payments made to the approved research company. However, the approved
research company may opt not to avail itself of this incentive and
hence its holding/affiliate or associate companies will continue to
enjoy double deduction for payments made for R & D carried out by
that research company.
Industrial Building Allowance in the form of an initial allowance
of 10% and an annual allowance of 2% is available for buildings used
for carrying out research.
Incentives for Training
In order to encourage human resource development,
the following incentives are available:
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.
Deduction for Cash Contributions Single deduction for contributions
in cash to a technical or vocational training institution established
and maintained by a statutory body.
Exemption from Import Duty, Sales Tax and Excise Duty on Machinery,
Equipment and Materials Machinery, equipment and materials used for
training are eligible for exemption from import duties, sales tax
and excise duties.
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 employ less than
50 Malaysian workers and with paid-up capital of less than RM2.5 million.
Companies which employ 50 or more Malaysian workers have to contribute
1% of the monthly wages of their employees to the Human Resources
Development Fund (HRDF). With effect from 1 January 1995, companies
which employ less than 50 to a minimum of 10 employees and with a
paid-up capital of RM2.5 million and above will also have to contribute
to the HRDF. These companies can then avail themselves of the matching
grants provided by the HRDF. Companies are allowed single deductions
for training expenses incurred prior to commencement of business.
Industrial Building Allowance
Industrial Building Allowance (IBA) is granted
to a company which has incurred expenditure on buildings used for
industrial and technical or vocational training. The allowance is
at an annual rate of 10%. 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. |
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Incentives
for Export
Manufacturers producing for the export market
are eligible to apply for the following:
Export Credit Refinancing (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 central bank, Bank
Negara Malaysia, 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: the pre-
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:
(i) 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 Bank Negara on a case-by-case
basis.
(ii) 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 RM3 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 landing (transport documents).
The maximum period of financing is four months for pre-shipment ECR
and six months for post-shipment ECR. 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. The
minimum amount for ECR financing is RM10,000 and the minimum draw-down
is RM2,000.
Double Deduction of Export
Credit Insurance Premiums
Premium payments in respect of insurance of products
exported paid by exporters to approved local insurance companies are
allowed as double deduction.
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 export
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.
Industrial Building Allowance (IBA)
A company is eligible for industrial building
allowance (IBA) in respect of buildings used as warehouses for storing
goods for export. The IBA consists of an initial allowance of 10%
and an annual allowance of 2%.
Incentives for Computers and Information Technology Assets
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.
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 waste 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 waste, 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.
Infrastructure Allowance
Companies which undertake projects in the States of Sabah and Sarawak
and the designated "Eastern Corridor" of Peninsular Malaysia and which
incur qualifying capital expenditure on infrastructure facilities
such as bridges, jetties, connecting roads and substations, are eligible
for an infrastructure allowance of 100%. |
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Non-fiscal
Incentives
Tariff Protection
Consistent with its policy of an open economy,
the Malaysian Government adopts a trade liberalization 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 utilization 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.
Exemption from Import Duty on Direct Raw Materials/Components
The level of exemption from import duty granted on raw materials/
components depends on whether the finished products are sold in the
domestic market or are exported.
(i) Manufacture of Goods for Export
In the case of companies manufacturing finished products for the export
market, 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
Exemption from import duty on raw materials and components can be
considered for any manufacturing company if it complies with the equity
condition as stipulated in the manufacturing license under the Industrial
Coordination Act 1975 or it has been granted an extension of time
to comply with the equity condition.
Where the raw materials/components are not manufactured locally, full
exemption from import duty is normally given if:
The finished product made from dutiable raw materials/components is
not subject to any import duty.
The manufacturing company has complied with the government policy
guidelines in terms of equity participation, management and employment
structure in all categories.
In all other cases, partial exemption can be considered where manufacturers
are normally required to pay 2% or 3% import duty. For raw materials
which are subject to import duty of 3% or less, applications for exemption
will not be considered.
Full import duty exemption will be given to companies located in the
States of Sabah and Sarawak and the designated "Eastern Corridor"
of Peninsular Malaysia on raw materials, components and parts which
are not available locally although the finished products made from
such materials are for the domestic market.
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.
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 draw back 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.
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. |
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