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Manufacturing

SABAH INVESTMENT INCENTIVES & POLICIES  
Investment Incentives  
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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All information are compiled by Jesselton Communications Sdn.Bhd. 2000.