Malaysia: How to pursue tax savings whilst creating wealth in Malaysia?

Malaysia offers a wide range of business incentives that make investing in Malaysia an attractive step for foreign companies. As such, companies should take advantage at the various tax incentives available such as exemption on income, extra allowances on capital expenditure incurred, double deduction of expenses, special deduction of expenses, preferential tax treatments for promoted sectors, exemption of import duty, sales tax and excise duty for their benefit. It is important to learn more about incentives in Malaysia if you are planning to invest in the country. 

Companies may seek expert opinions and relevant authorities on all available tax incentives before they make their move to invest, because the incentives vary according to the business’ structure.

Although Malaysia is being viewed neither a tax haven nor a low tax jurisdiction, however for companies which are eligible for a certain tax incentives might only pay an average effective tax rate of 7.5% as only 30% of its profit are subject to tax. It is significantly below the normal corporate tax rate of 25%! 

In the past, these tax incentives were directed to encourage the manufacturing and agricultural sectors, but now they are being extended to the service sector that has emerged as a significant player as well, in the country’s economy. 

Below are some of the major tax incentives available in Malaysia, i.e. Pioneer Status (PS), Investment Tax Allowance (ITA) and Reinvestment Allowance (RA). 

Pioneer Status (PS) 

A company that is granted standard PS will enjoy tax exemption on 70% of the statutory income for 5 years. The balance 30% of the statutory income will be tax at 25% and the effective tax rate is only 7.5%. Notwithstanding the standard rate, some PS companies enjoy tax incentives up to 100% for a period of 5 or 10 years. 

The PS is available to companies engaged in promoted activities or producing promoted products. A long list of activities and manufactured products as “promoted activities” and “promoted products” has indentified by the Malaysia Industrial Development Authority (MIDA) at www.mida.gov.my. 

Investment Tax Allowance (ITA) 

As an alternate to PS, a company that are eligible and engaged in the production of promoted products or activities may apply for ITA. A company can only enjoy either one of the incentive and not both. 

ITA is an addition to the capital allowance claimed by the companies on qualifying plant and equipment acquired by the company during the tax relief period, usually from 5 to 10 years. The normal rate of allowance is 60% on the qualifying capital expenditure. ITA can be offset up to 70% of the statutory income of the company. A 100% ITA may be utilised to reduce 100% of the statutory income of a company for certain promoted product or promoted activities. 

Unutilized ITA and capital allowances during the ITA period may be carried forward for an indefinite period to set off against the future business income in the post ITA period. 

Reinvestment Allowance (RA) 

Reinvestment Allowance or RA is an incentive granted under Sch 7A of the Income Tax Act 1967 to companies in the manufacturing sector that reinvest their capital to embark on a project for either expansion of existing production capacity, modernisation or automation of the production facilities or diversification into related fields. RA is also available to companies engaged in agricultural projects such as cultivation of rice, maize, fruits, vegetables, tubers and roots, livestock farming, spawning, breeding or culturing aquatic stocks, and rearing of chickens and ducks. 

The rate of RA is 60% on the qualifying expenditures, including factory premises, plant and machinery. The RA to be deducted against the statutory income but is restricted to 70% of the statutory income. Any not absorbed RA may be carried forward and deducted against the statutory income of the company in the following year of assessment. A company may claim up to 100% RA if the qualifying project has achieved the level of Process Efficiency Ratio exceeds the industrial average for the year. The period of this incentive is 15 years from the first year of claim by the company. Like the PS and the ITA, company cannot claim RA if they are also claiming other incentives.

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