Fiscal Regimes
 
Incentives and tax concessions have long been an important instrument of Malaysia's economic development strategy.  The Malaysian Government has reduced corporate tax from 28% in 1998 to 25% in 2009. This move has helped to reduce further the cost of doing business and accorded companies with greater capacity to expand capital spending.
 

Some of the other incentives / tax concessions that have been granted to companies operating in the country are as follows;

 
Pioneer Status - A company which is granted "Pioneer Status" obtains very favorable fiscal treatment in respect of income derived from "promoted activities" or "promoted products". What constitutes a "promoted activity" or a "promoted product" is determined by the Minister of Finance and published in the Government Gazette.
 
Pioneer status may be considered amongs others, in the following cases;


• Where a manufacturing company is capable of achieving world class standards in terms of product quality, product price and capacity it will be eligible for pioneer status with a 100% tax exemption on statutory income for a period of up to 10 years. Smaller manufacturing companies are eligible for a 100% tax exemption on statutory income for a period of 5 years;


• A high technology companies, being defined as companies in which at least 7% of the work force are science and technical graduates and of which research and development costs amount to 1% of gross sales is eligible also for pioneer status. 100% of the statutory income of high technology companies is exempted from tax for a period of 5 years;


•  Strategic projects defined as projects of national importance which involve heavy capital expenditure, long gestation periods, high levels of technology and have a significant impact on the economy. 100% of the statutory income of a company engaged in a strategic project is exempted from taxes for a period of 10 years;


• Applications received from 13 September 2003 from existing locally-owned companies that reinvest in the production of heavy machinery such as cranes, quarry machinery, batching plant and port material handling equipment, are eligible for pioneer status with a tax exemption of 70% (100% for promoted areas) on the increased statutory income arising from the reinvestment for a period of five years.


• Research & Development Companies: Such companies as defined by law are entitled to pioneer status with full tax exemption on statutory income for a period of 5 years;


• Companies engaged in software development can obtain pioneer status for a period of 5 years with a 100% exemption from taxes on business income provided that the software is for a general purpose and not customized (i.e. for only one client) and where existing software has been modified provided the cost of acquiring the existing package does not exceed 25% of the modification expenditure;

 

Double Deduction Tax Incentives - Expenses incurred on certain activities can also be set off twice against taxable profits. Among these activities includes;

 

•  Promotion of Exports - Expenses which are aimed at promoting exports and the supply of goods overseas can be deducted twice from taxable profits. The list of allowable expenses are set out in the income tax legislation and include overseas advertising, export market research, preparation of tenders for the supply of goods overseas, overseas travel and accommodation, cost of maintaining overseas offices & approved industrial exhibitions. This incentive is available to manufacturing & agricultural companies producing "promoted products" or engaged in "promoted activities". The allowance is also available to the tourist industry in respect of costs incurred in the overseas promotion of Malaysia as a tourist destination.

 

• Employee Training Programs - Expenditure incurred by manufacturing companies on government approved training programs designed to develop and upgrade skills to modernize manufacturing processes can be deducted twice from taxable profits. This incentive is available to manufacturing companies & companies engaged in the hotel and tourist industry.

•  Research & Development - All expenditure incurred on government approved research, payments made for the use of services of approved research institutes and voluntary cash contributions made to approved research institutes can be deducted twice from taxable profits.


•  Freight Charges - Certain manufacturing industries located in certain regions of the country (e.g. timber companies in Sabah) can deduct double the amount of freight charges incurred.

 

•  Brand Promotion Advertising - Expenditure incurred promoting an export quality standard Malaysian owned product is subject to double tax deduction. Promotion of a brand name means making a name internationally known and therefore would include such expenditure as bill-boards in international airports or highways. The company must be 70% Malaysian owned and the product must achieve export quality standards. This incentive is available to manufacturing companies.
 
For projects deemed as strategic and of national importance, the Government may consider granting other incentives such as; 

 

Investment Tax Allowance - An allowance of 60% (80% for Sabah, Sarawak, Labuan and designated Eastern Corridor of Peninsula Malaysia) of qualifying capital expenditure incurred during the first five years. The allowance can be utilized to offset against the 70% (85% for Sabah, Sarawak, Labuan and designated Eastern Corridor of Peninsula Malaysia and 100% for high technology companies) of the statutory income in the year of assessment. Any unutilized allowance can be carried forward to the following year until the amount has been used up.
 
Reinvestment Allowance(RA) - An allowance of 60% of capital expenditure incurred by the companies. The allowance can be utilized to offset against the 70% (100% for Sabah, Sarawak, Labuan and designated Eastern Corridor of Peninsula Malaysia and companies which can improve significantly in productivity) for of the statutory income in the year of assessment. RA is given for a period of 5 years beginning from the year of first  reinvestment is made. Upon expiry of RA, companies producing promoted products/engaging in promoted activities are eligible for Accelerated Capital Allowance on capital expenditure where 40% of initial rate and 20% of annual rate will enable capital write off within 3 years.
 

Malaysia Foreign Direct Investment (FDI) regime is tightly regulated in that all foreign manufacturing activity must be licensed regardless of the nature of the business in which it is engaged. The foreign equity restrictions in Malaysia are not determined by a law or an act. Malaysia instead  has a Foreign Equity Guidelines.  This has allowed the Government maximum policy and regulatory space to screen and control FDI to suit the economic and industrial needs of the country at a given particular  time.

 

Foreign investors exploring minerals in Malaysia are permitted to control 100% equity and can also form joint ventures with local companies. Total equity participation is also permitted for extraction, mining and processing of ores, depending on a case-to-case basis.

 

Amongst some of the incentives that has been accorded to the mineral sector includes abolishing the export duties on most minerals, and most raw minerals, including ores and concentrates, are subject to low or zero level import duties. For those minerals still subject to import duties, the importer may apply to the Government for a waiver. Imported equipments for use in mineral projects are subject to the general schedule of import tariffs but an application for a waiver may be made on a case-by-case basis.
 
On major mineral commodities, apart from paying corporate  tax  to the Federal  government, mine and quarry operators also pay value-based royalties to the state where their operation is located . Royalty rates may  varies depending on the mineral commodity and as assessed by each of the individual states.
 
The Malaysian government is now urging miners to revive abandoned mines, especially tin mines, while also encouraging the states to issue more mining licences. Every state is responsible for the issue of mining licences in consultation with federal agencies such as the Department of Minerals and Geoscience and the Department of the Environment. Recent Policy updates, such as preference in the grant of exploration rights to existing holders of mining licences, is an additional encouragement for local mining contractors to stay in business. A schedule of area-based land premiums and rental fees, processing and application fees for mining lands is published in each State.


 

           

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