BKAT3023 ADVANCED TAXATION ( A181 )

PROBLEM-BASED LEARNING PROJECT

(INVESTMENT INCENTIVES)

Submitted to:
PROF. MADYA. DR. ZAINOL BIN BIDIN

Prepared by:

BIL MATRIC. NO. NAME

1 241546 FARAH AMIRA BINTI RAMLI

2 251083 NURUL NABILA BINTI ABDUL WAHAB
3 255210 TAN SIN YING
4 255220 SOVITA A/P SUBRAMANIAM
5 255362 THIVEYA A/P SELVENATHAN
6 256659 KHADIJAH HANUN BINTI MOHD ISMAIL

Submitted date: 15th November 2018

UUM COLLEGE OF BUSINESS

UNIVERSITI UTARA MALAYSIA
 TABLE OF CONTENT

Page

1.0 Introduction

1.1 Overview of Investment Incentives 1

1.2 Investment Incentives available in Malaysia 1

1.3 Types of Investment Incentives 3

2.0 Pioneer Status and Investment Tax Allowance

2.1 Pioneer Status 11

2.2 Investment Tax Allowance 14

3.0 Results of Pioneer Status and Investment Tax

Allowance Computation

3.1 Pioneer Status 17

3.2 Investment Tax Allowance 18

3.3 Choice of Incentives 19

4.0 Conclusion 20

5.0 Reference
1.0 INTRODUCTION

1.1 Investment Incentives

Investment incentives is also known as tax incentives which is the government

measure that is in intention to encourage individuals and businesses to spend money or to

save money by reducing the amount of tax that they have to pay. One of the objectives of the

tax incentives is to ease or reduce overall tax burden for investors. Therefore business

communities should take advantage of the various tax incentives available for their benefit.

Investment incentive can be defined as policy implemented by government to promote the

establishment of new businesses or to encourage existing businesses to expand or not to

relocate elsewhere.

Different incentives might have different effect on company income or profit. Some

incentives are mutually exclusive from each other. Therefore, it is important for the investors

to have knowledge on tax incentives so that they can plan to get optimal from available

incentives provided by the government.

1.2 Investment Incentives available in Malaysia

In Malaysia, investment incentives are offered to manufacturing, agriculture and

tourism sector or activities. Malaysia offers a wide range of tax incentives for the promotion

of investments in selected industry sectors, which include the traditional manufacturing and

agricultural sectors, as well as other sectors such as those involved in Islamic financial

services, ICT, education, tourism, healthcare as well as research and development. Tax

incentives are provided in the Promotion of Investment Act (PIA), 1986, Income Tax Act

(ITA),1967, Customs Act , Sale and Service Tax Act as stated in the Malaysian Investment

Development Authority (MIDA) website. (Noraza Mat Udin, 2018)

1
There are two types of tax incentives in Malaysia which is direct incentives and indirect

incentives. Indirect tax incentives are the exemption that is given to taxpayers for specific

product or services in the form of exemptions from import duty, sale tax and excise duty

encourage foreign investments, while direct tax incentives grant partial or total relief from

income tax payment for a specified period.

To encourage foreign investments, Malaysia offers many incentives and other advantages to

foreign investors and has entered into double taxation agreements with more than 40

countries. Malaysia has investment guarantee agreements with most major industrialized

countries. These agreements generally guarantee that, except for public purposes, Malaysia

will not expropriate or nationalize property without prompt and adequate compensation.

Tax incentives are provided under the Promotion of Investment Act 1986 and the Income Tax

Act 1967. The main incentives are as follows: (L Y LU & Co, 1996-2018)

List of incentives in Malaysia

Pioneer status Double deduction of expenses

Approved agricultural projects incentives Operational Headquarters Incentives

Incentives for overseas construction projects Incentive for approved overseas investments

In bound tour operators incentives Industrial building allowance

Research and development incentives Reinvestment allowance

Industrial adjustment allowance Investment tax allowance

Labuan International Offshore Finance

Centre

Table 1: List of incentives in Malaysia

2
1.3 Type of Investment Incentives

Investment incentive is a government implemented incentive policy aimed to encourage

investors into its domestic market or to promote expansion of existing businesses.

1.3.1 Incentives For The Manufacturing Companies

The major tax incentives for companies investing in the manufacturing sector are the Pioneer

Status and the Investment Tax Allowance. Eligibility for Pioneer Status and Investment Tax

Allowance is based on certain priorities, including the level of value-added, technology used

and industrial linkages. Eligible activities and products are termed ad “promoted activities” or

“promoted products”. The company must submit its application to MIDA before commencing

operation/production.

i. Pioneer Status

A company granted Pioneer Status (PS) enjoys five year partial exemption from the payment

of income tax. It pays tax on 30% of its statutory income*, with the exemption period

commencing from its Production Day (defined as the day its production level reaches 30% of

its capacity).

Unabsorbed capital allowances as well as accumulated loss incurred during the pioneer

period can be carried forward and deducted from the post pioneer income of the company.

Applications for Pioneer Status should be submitted to the Malaysian Investment

Development Authority (MIDA).

ii. Investment Tax Allowance

As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance

(ITA). A company may granted ITA is entitled to an allowance of 60% on its qualifying

capital expenditure (factory, plant, machinery, or other equipment used for the approved

3
project) incurred within five years from the date the first qualifying capital expenditure is

incurred.

The company can offset this allowance against 70% of its statutory income for each year of

assessment. Any unutilized allowance can be carried forward to subsequent years until fully

utilized. The remaining 30% of its statutory income will be taxed at the prevailing company

tax rate.

1.3.1.1 Incentives for High Technology Companies

A high technology company is a company engaged in promoted activities or in the production

of promoted products in areas of new and emerging technologies.

1.3.1.2 Incentives for Strategic Projects

Strategic projects involve products or activities of national importance. They generally

involve heavy capital investments with long gestation periods, have high levels of technology,

are integrated, generate extensive linkages, and have significant impact on the economy.

1.3.1.3 Incentives for Small and Medium Enterprises

Effective from the Year Assessment 2009, for the purpose of imposition of income tax and

tax incentives, the definition of SMEs is reviewed as a company resident in Malaysia with a

paid up capital of ordinary shares of RM2.5 million or less at the beginning of the basis

period of a year of assessment whereby such company cannot be controlled by another

company with a paid up capital exceeding RM2.5 million. SMEs are eligible for a reduced

corporate tax of 20% on chargeable incomes of up to RM500,000. The tax rate on the

remaining chargeable income is maintained at 25%.

4
1.3.1.4 Incentives for Investments in Selected Industries

a. Machinery and Equipment

Machine tools, material handling equipment, robotic and factory automation equipment and

modules and components for machine tools, material handling equipment and robotic and

factory automation equipment.

b. Specialized Machinery and Equipment

Specialized process machinery or equipment for specific industries, packaging machinery and

modules and components for specialized process machinery or equipment for specific

industry and packaging machinery.

c. Incentives for the Automotive Industry

Promoting the assembly and manufacturing of Energy Efficient Vehicles and its critical

components/systems is crucial to enhance the development of Malaysia’s automotive industry.

d. Incentives for the Aerospace Industry

Aerospace industry development was one of the strategic and high technology areas

identified by the Government. It includes activities that directly and indirectly contribute to

the Maintenance, Repair & Overhaul (MRO), Aero-Manufacturing, System Integration and

Engineering & Design.

e. Incentives for the Utilization Of Palm Biomass

Companies that utilize oil palm biomass to produce value-added products such as bio-based

chemicals, biofuel, particleboard, medium density fibreboard, plywood and pulp and paper

are eligible.

5
f. Incentive for Industrialised Building System

Columns, beams, slabs, wall, roof trusses, precast concrete system, formwork system, steel

framing system, blockwork system, timber framing system, innovative system.

1.3.2 Incentives for the Agricultural Sector

The promotion of Investments Act 1986 states that the term “company” in relation to

agriculture includes agro based cooperative societies and associations and sole

proprietorships and partnerships engaged in agriculture.

1.3.2.1 Incentives for Food Production

Specific incentives are introduced to attract investment in to food projects both at the farm

level as well as at the production/processing level. These will enhance the supply of the raw

material for the food processing sector and thus reducing reliance on imports of such raw

material.

1.3.2.2 Incentives for Halal Products

To encourage new investments in halal food production and to increase the use of modern

and state-of-the-art machinery and equipment in producing high quality halal food that

comply with the international standards, companies which in halal production and have

already obtained halal certification from JAKIM in compliance with MS 1500:2004, are

eligible for the Investment Tax Allowance (ITA) OF 100% of qualifying capital expenditure

incurred within a period of five years.

1.3.3 Incentives for Biotechnology Industry

A company undertaking biotechnology activity and has been approved with BioNexus

Status* by the Malaysian Bioeconomy Development Corporation Sdn Bhd (Bioeconomy

Corporation).

6
1.3.4 Incentives for Environmental Management

1.3.4.1 Incentives for Forest Plantation Projects

Companies that undertake forest plantation projects are eligible for the following incentives

under the Promotion of Investments Acts, 1986 :

a. Pioneer status with income tax exemption of 100% of the statutory income for 10

years. Unabsorbed capital allowances as well as accumulated losses incurred during

the pioneer period can be carried forward and deducted from the post pioneer income

of the company or

b. Investment Tax Allowance (ITA) of 100% on the qualifying capital expenditure

incurred within five years. The allowance can be offset against 100% of the statutory

income for each year of assessment. Any unutilized allowances can be carried

forward to subsequent years until fully utilized.

1.3.4.2 Incentives for Waste Recycling Activities

Companies undertaking waste recycling activities that are high value-added and use high

technology are eligible for Pioneer Status or ITA. These activities which include the

recycling of agricultural wastes or agricultural by-products, recycling of chemicals and the

production of reconstituted wood-based panel boards or products.

1.3.4.3 Incentives for Green Technology

In Budget 2014, the Government had announced the provision of investment tax allowance

for the purchase of green technology assets and income tax exemption on the use of green

technology services and system to further strengthen the development of green technology.

7
1.3.4.4 Incentives for Waste Eco Park

Waste Eco Park (WEP) is defined as a place for waste recycling, recovery and treatment

activities to be carried out and approved by relevant authorities. The park has to incorporate

basic infrastructure such as road, drainage, utilities, and sewerage, building and facility for

waste receipt and separation, waste water treatment facility, waste

recycling/recovery/treatment facilities and building for education/awareness center.

1.3.5 Incentives for Research and Development

The Promotion of Investments Act 1986 defines research and development (R&D) as “any

systematic or intensive study carried out in the field of science or technology with the

objective of using the results of the study for the production or improvement of materials,

services, products, produce or processes” but does include quality control of products or

routine testing of materials, device, products or produce, research in the social sciences or

humanities, routine data collection, efficiency surveys and market research or sales

promotion.

1.3.6 Incentives for Training

List of Incentives for training

Deduction for cost of recruitment of workers Deduction for pre-employment training

Deduction for non-employee training Deduction for cash contributions

Special Industrial Building Allowance Tax exemption on educational equipment

Tax exemption on royalty payments Double deduction for approved training

Human Resource Development Fund Tax incentive for Structure Internship

(HRDF) Programmed

Table 2: List of Incentives for Training

8
1.3.7 Incentives for Approved Services Projects

Approved Service Projects (ASPs) or projects in the transportation, communications and

utilities sub-sectors approved by the Minister of Finance qualify for the following tax

incentives :

(i) Exemption under Section 127 of the Income Tax Act 1967

(ii) Investment Allowance under Schedule 7B of the Income Tax Act 1967

1.3.8 Incentives for the Shipping and the Transportation Industry

The income of a shipping company derived from the operation of Malaysian ships is 70%

exempted from tax from Year of Assessment 2012. This incentive only applies to residents. A

“Malaysian Ship” is defined as a sea-going ship registered as such under the Merchant

Shipping Ordinance 1952 (Amended), other than a ferry, barge, tugboat, supply vessel, crew

boat, lighter, dredger, fishing boat or other similar vessels.

1.3.9 Incentives for Information and Communication Technology

From the Year of Assessment 2009 to the Year of Assessment 2015, a person residing in

Malaysia is eligible for ACA in respect of capital expenditure incurred in the basis period for

a year of assessment in relation to the purchase of any information and communications

technology equipment used for the purpose of a business.

1.3.10 Incentives for Less Developed Areas

Existing manufacturing/services company expanding its operation into less developed areas

or newly established manufacturing/services company is eligible.

9
1.3.11 Other Incentives

a. Industrial Building Allowance

b. Industrial Building Allowance for Buildings in MSC Malaysia

c. Deduction of audit fees

d. Tax incentive for angel investor

e. Tax incentive on costs of dismantling and removing assets

f. Incentive for acquiring proprietary rights tariff related incentives

g. Donations for environmental protection

h. Incentive for employee’s accommodation

10
2.0 PIONEER STATUS AND INVESTMENT TAX ALLOWANCE

2.1 Pioneer Status

70% of Statutory income (SI) is exempted from income tax. In other words, only 30% of SI

will be taxed at the prevailing company tax rate. This incentive is given up to five (5) years

from the production day (determined by the Minister of International Trade and Industry).

However, the 5-year period can be extended to another five (5) years if the manufacturing

activities related to treatment of water or project that are of national or strategic important to

Malaysia and satisfying certain requirements stipulated in the act follows:

i. the company must incurred a capital expenditure of RM 25 million or must have

employed 500 full time employees by the end of tax relief period.

ii. if the Minister of Finance satisfy that the company will promote or enhance the economic

and technological development of Malaysia in line with the government policy.

Full exemption of statutory income (100%) is available for certain types of promoted product

or activity. There are five types of pioneer status offered under PIA 1986 as follows:

No. Types of Pioneer Status (PS) % of exemption Pioneer periods

1 Normal PS for promoted products/activities 70 5

(manufacturing and non-manufacturing such as

agriculture, hotel projects and small companies).

2 National and strategic importance. 100 10

3 Contract R&D company. 100 5

11
Continued:

4 High technology company including new and 100 5

emerging technologies and Industrial Linkage

Programme.

5 Selected industries - machinery and equipment 100 10

industry, specialized machinery and equipment

industry, utilization of biomass to produce value

added products, generation of renewable energy.

6 Automotive component modules. 100 5

7 Company undertaking reinvestment in post- 70 or 100 5

pioneer period.

8 Commercialization of R&D findings. 100 10

Table 3: Types of Pioneer Status

Tax relief period of a pioneer company starting from the first production day (the date is

stated in pioneer certificate) and continues for a period of 5 years. MIDA normally issue a

pioneer certificate after the company has achieved 30% production of its production capacity,

which will be treated as production day. The 10-year PS period would be granted for an

initial five years period and would be extended by another five years subjected to fulfilling of

certain conditions.

12
 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
PIONEER STATUS
RM '000 RM '000 RM '000 RM '000 RM '000
S.4(a) Business Income
Profit before tax 8,000
Less:
Allowable expenses (4,000)
Dividend (800)
Rental income (500)
Adjusted income / (loss) 2,700 6,800 (1,000) 10,600 9,200
Add:
Balancing Charge 1,000
Less:
Balancing allowances (1,000)
Capital allowance:
-Current year (800) (2,000) (5,000) (3,500) (1,200)
-Broad forward (4,000)
Capitalised allowance utilised (800) (2,000) (5,000) (7,500) (1,200)
Statutory income (Pioneer
Business) 1,900 4,800 NIL 3,100 7,000
70% of Statutory Income 1,330 3,360 2,170 4,900
(-) Adjusted loss (Pioneer or
Non-Pioneer Business) (1,000)
(-) Unutilised Loss Brought
Forward (830)
1,170 4,070
30% of Statutory Income 570 1,440 NIL 930 2,100
Statutory Income/Loss (Non-
Pioneer Business) 1,200 800 600 1,000
Total Statutory Business Income 1,770 2,240 600 930 3,100
S.4(c) Dividend Exempted
S.4(d) Rental 500 1,000
Royalty 1,000
Chargeable Income 2,270 2,240 1,600 930 4,100

13
Continued:

Malaysian Tax (24%) 544.8 537.6 384.0 223.2 984.0

70% of Statutory Income 1,170 2,100
Current Year Statutory Loss (1,170) (830)
Current Year Adjusted Loss
Exempt income account balance 1,330 3,360 NIL NIL 1,270
Total Tax Liability 2,673.6
Total Exempt Income 5,960

Table 4: Pioneer Status

2.2 Investment Tax Allowance

The Investment Tax Allowances (ITA) is an alternative incentive that companies can opt for

other than the Pioneer Status. ITA is designed to cater for projects which have large capital

investments (capital intensive) with long gestation period. As in the case of pioneer status, a

company granted ITA will enjoy different degree of exemption depending on the types of

promoted products or activities. Unlike pioneer status where incentive is given percentage of

exemption on statutory income, the ITA is given by way of extra allowance (in addition to

capital allowance) on qualifying capital expenditure incurred.

There are 12 categories of ITA as specified under Section 26 of the PIA 1986 as follows:

NO. Category QCE Exemption No. of

years
(%) (% of SI)

1 Normal ITA (manufacturing and non- 60 70 5

manufacturing, such as agricultural, hotel
projects and small company).

2 National and strategic importance. 100 100 5

3 Contract R&D company. 100 70 10

14
Continued:

4 R&D company. 100 70 10

5 In-house research. 50 70 10

6 High technology company including new and 60 100 5

emerging technologies and Industrial Linkage
Programme.

7 Technical or vocational training company and 100 70 10

private higher educational institutions.

8 Selected industries - machinery and equipment 100 100 5

industry, specialized machinery and equipment
industry, utilization of biomass to produce value
added products, generation of renewable energy.

9 Automotive components modules. 60 100 5

10 Company undertaking reinvestment in post- 50,60 70 or 100 5 or 10

pioneer period. or 100

11 Production of halal food product. 100 100 5

12 Conservation of energy for own consumption. 60 100 5

Table 5: 12 Categories of Investment Tax Allowance

15
INVESTMENT TAX YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5

ALLOWANCE (ITA) RM '000 RM '000 RM '000 RM '000 RM '000

S.4(a) Business Income

Profit before tax 8,000
Less:
Allowable expenses (4,000)
Dividend (800)
Rental income (500)
Adjusted income / (loss) 2,700 6,800 - 10,600 9,200
Add:
Balancing Charge -
Less:
Balancing allowances (1,000)
Capital allowance (800) (2,000) - (3,500) (1,200)
Absorbed capital allowance (4,000)
Statutory income 1,900 4,800 - 3,100 7,000

70% of Statutory Income 1,330 3,360 - 2,170 4,900

Capital expenditure (QCE) 1,500 6,000 2,500 1,400 5,000
(-) Investment tax allowance
(60% of QCE) (900) (3,600) (1,500) (840) (3,000)
(-) Absorbed Investment tax
allowance - - - (1,500) (170)
Balance of 70% of Statutory
Income 430 240 - - 1,730

30% of Statutory Income 570 1,440 - 930 2,100

Statutory Income (Non-pioneer
business) 1,200 800 600 - 1,000
S.4(c) Dividend Exempted - - - -
S.4(d) Rental 500 - 1,000 - -
Royalty - - - - 1,000

16
Continued:

(-) Current year business loss - - - -

Chargeable Income 2,700 2,480 1,600 930 5,830
Malaysian Tax (24%) 648.0 595.2 384.0 223.2 1,399.2
Absorbed capital allowance c/d - - 4,000 - -
Unabsorbed investment tax
allowance c/d - - 1,500 170 -
Exempt income account balance 900 3,600 - 2,170 3,170
Total Tax Liability 3,249.6
Total Exempt Income 9,840

Table 6: Investment Tax Allowance

3.0 RESULTS OF PIONEER STATUS AND INVESTMENT TAX ALLOWANCE

COMPUTATION

3.1 Pioneer Status

3.1.1 Explanations:

As Dynamica Sdn Bhd (DSB) participating or producing a promoted product may be eligible

to apply for pioneer status.

3.1.2 Tax Relief

There is no specific date of production day given in the case. Therefore, the tax relief period

of a pioneer company starting from the first production day and continues for a period of 5

years. During this period, 70% of the statutory income derived by Dynamica Sdn Bhd from the

manufacturing of the promoted product appropriately adjusted by any pioneer loss, will

constitute pioneer income exempted from income tax.

17
3.1.3 Income Tax Payable

During the five-year period, Year 1 until Year 5, Dynamica Sdn Bhd expects to register total

adjusted income of RM 28,300,000, which is reduced to RM 16,800,000 after deducting

capital allowances utilised. Next, the amount of RM 5,040,000, being 30% of the statutory

income of the pioneer business and will be subject to income tax. Dynamica Sdn Bhd can

expect to pay taxes at the rate of 24%, so this will total up to RM 2,673,600 by the end of

year assessment Year 5.

3.1.4 Cumulative Exempt Income Credited Into Exempt Account

The total of the statutory income amounted of RM 16,800,000 only RM 5,960,000 will be

credited into the exempt account. That is mean by the end of the year of assessment Year 5,

the shareholders of Dynamica Sdn Bhd will be potentially only avail themselves RM

5,960,000 as exempt dividend.

3.2 Investment Tax Allowance

3.2.1 Explanations:

As Dynamica Sdn Bhd (DSB) participating or producing a promoted product may be eligible

to apply for investment tax allowance (ITA).

3.2.2 Analysis Of Investment Tax Allowance

In Year 1, the investment tax allowance incurred which amount of RM 900,000, being 60%

of RM 1,500,000. In addition, the restricted to 70% of statutory income will be credited to the

exempt account and in Year 3 70% of statutory income is NIL. Yet, its total exempt income

credited to the exempt account stands at the amount of RM 9,840,000. Finally, Dynamica Sdn

18
Bhd can expect to pay taxes at the rate of 24%, so this will total up to RM 3,249,600 by the

end of year assessment Year 5.

3.3 Choice of Incentives: Pioneer Status or Investment Tax Allowance

THE COMPARATIVE ANALYSIS

Item Pioneer Status (RM) ITA (RM)

Tax Chargeable/payable 2,673,600 3,249,600

Exempt income to exempt account 5,960,000 9,840,000

Table 7: The Comparative Analysis

Based on the comparative analysis above, pioneer status has a greater tax benefit to

Dynamica Sdn Bhd compare than investment tax allowance (ITA). This is because pioneer

status gives tax benefit to Dynamica Sdn Bhd and its shareholders in terms of reduced tax

liability. Pioneer status has a lower total tax payable charged amount of RM 2,674,000

compare than investment tax allowance. So, it is highly recommended for Dynamica Sdn Bhd

to apply the pioneer status compare to ITA.

19
4.0 CONCLUSION

In conclusion, after doing this project we are able to compute the tax computation for

the main incentives of manufacturing company in Malaysia, both Pioneer Status and

Investment Tax Allowance. Based on various resources that we found, we gain a new

knowledge and understanding about the Malaysian tax rules and how to apply it in the real

life in the future. After the computation, we came with a great result to suggest Dynamica

Sdn Bhd to apply Pioneer Status compare to Investment Tax Allowance since it gives the

and lower tax payable. From here, we realized that how important for a company in Malaysia

to make a further analysis and observation before making any decision to apply the incentives.

The company can apply any incentives related to their business industries, but only a certain

incentives that give a high benefit.

20
5.0 REFERENCE

a. Choong, K. F. (2016). Advanced Malaysian Taxation: Principle and Practice (16th ed.).

Kuala Lumpur: InfoWorld.

b. Choong, K. F. (2016). Malaysian Taxation: Principle and Practice (22nd ed.). Kuala

Lumpur: InfoWorld.

c. Inland revenue Board Malaysia. (n.d.). Retrieved from

http://www.hasil.gov.my/bt_goindex.php?bt_kump=5&bt_skum=5&bt_posi=6&bt_unit=1&b

t_sequ

d. Lauren. (n.d.). SMI Business. Retrieved from Incentive for Export:

http://www.smibusinessdirectory.com.my/smisme-editorial/banking-a-finance/380-intensive-

for-export.html

e. MIDA. (2009). Malaysia Investment In The Manufacturing Sector. Kuala Lumpur: MIDA.

Noraza Mat Udin, M. M. (2018). Malaysian Corporate Taxation Module. Kedah:

TISSA UUM.