The
Income Tax (Exemption) (No. 10) Order 2021 [P.U.(A) 370/2021] (‘
Exemption Order’) was gazetted on 21 September 2021 and is deemed to have come into operation on
1 January 2020.
The exemption
The Exemption Order exempts a qualifying company in the basis period for a year of assessment from the payment of income tax in respect of statutory income derived from a qualifying project, which is equivalent to the amount of allowance of fifty per cent of the qualifying capital expenditure incurred by that qualifying company.
The exemption under the Exemption Order is for a period of five consecutive years (the ‘
exemption period’) commencing from the date of the first qualifying expenditure incurred by the qualifying company (being no earlier than 1 January 2020), as determined by the Minister of Finance (‘
Minister’) or the Minister of International Trade and Industry, as the case may be.
Key definitions
The key definitions for the Exemption Order are set out below.
A ‘
qualifying company’ is a company which:
- is incorporated or deemed to be registered under the Companies Act 2016 which is resident in Malaysia;
- is involved in a manufacturing activity in electrical and electronic sector in compliance with the Industrial Co-ordination Act 1975 for the purpose of reinvestment in the qualifying project;
- holds a business licence issued by the relevant local authority;
- holds a manufacturing licence issued by the licensing officer pursuant to Industrial Co-ordination Act 1975 or a confirmation letter of exemption from manufacturing licence issued by the Malaysian Investment Development Authority, as the case may be; and
- has made a claim for reinvestment allowance under Schedule 7A of the Income Tax Act 1967 (‘ITA’) and any incentive under the Promotion of Investments Act 1986 (‘PIA’) for which the period of that incentive has ended in the year of assessment 2019 or any other preceding years of assessment in respect of the same qualifying project.
A ‘qualifying project’ is a project approved by the Minister which is undertaken by a qualifying company in expanding, modernising, automating or diversifying its business of carrying on manufacturing activity in electrical and electronic sector.
A ‘qualifying capital expenditure’ refers to the following capital expenditure incurred by a qualifying company in relation to a building, factory, machinery or plant used in Malaysia solely for the purpose of carrying on a qualifying project:
- in relation to a building or factory, the cost of purchasing or constructing a building or factory; and
- in relation to a machinery or plant, the cost of providing a machinery or plant,
but does not include capital expenditure incurred on:
- any building used as a living accommodation; or
- any machinery or plant which is provided wholly or partly for the use of a director or an individual who is a member of the management or administration, or clerical staff, of the qualifying company.
Conditions for exemption
A qualifying company that seeks exemption under the Exemption Order must submit an application to the Minister through MIDA on or after 1 January 2020 but no later than 31 December 2021.
An exemption granted is subject to the qualifying company complying with the conditions imposed by the Minster which include:
- The amount of investment in the qualifying project must be at least RM1.5 million within the exemption period;
- The qualifying company must incur an approved adequate amount of annual operating expenditure in Malaysia to carry on the qualifying project;
- The qualifying company must employ an approved adequate number of full-time employees in Malaysia to carry on the qualifying project; and
- The qualifying company must fulfil either of the following:
- Undertake a vendor development programme by developing at least two new local vendor companies; or
- Undertake a human capital development programme by (a) undertaking an internship programme with a local university or polytechnic by taking at least five students who are Malaysian citizens for each year of assessment and undertaking the internship programme for a minimum period of three months during the exemption period; or (b) collaborating with local university on curriculum enhancement in relation to electrical and electronic syllabus; or (c) undertaking an upskilling or reskilling programme with a local university, polytechnic or technical institution.
The amount of statutory income which is exempted under the Exemption Order shall not exceed fifty per cent for each year of assessment.
Carrying forward qualifying capital expenditure
Where in a year of assessment, exemption cannot be granted or granted in full by reason of (a) the limit of the exemption to fifty per cent of statutory income in a year of assessment; or (b) the absence or insufficiency of statutory income of the qualifying company from the qualifying project, then the amount that cannot be exempted for a particular year of assessment shall be deemed to be a qualifying capital expenditure incurred for a period of seven consecutive years of assessment commencing immediately after the end of the exemption period. Any amount not given at the expiry of the seven-year post-exemption period shall be disregarded.
Effect of disposal
Where a qualifying capital expenditure is incurred by a qualifying company on a building, factory, machinery or plant used for the purposes of a qualifying project, and such building, factory, machinery or plant is disposed of within two years from the date of the acquisition of such building, factory, machinery or plant, the exemption granted under the Exemption Order shall be withdrawn in the basis period for the year of assessment in which such building, factory, machinery or plant is disposed of.
If a qualifying company disposes to its related company (as defined in section 2(1) of the PIA) any building, factory, machinery or plant in respect of which an exemption is applied by the qualifying company under the Exemption Order, the qualifying capital expenditure incurred by the related company shall be deemed to be a sum equal to zero.
Withdrawal of exemption
The Minister may withdraw the exemption granted if the qualifying company fails to comply with any condition imposed in relation to the exemption. Upon withdrawal of the exemption, any the exemption granted under the Exemption Order in respect of any statutory income shall be deemed to have not been granted to the qualifying company from the first year of the exemption period.
Separate source and account
Where a qualifying company carries on a qualifying project and a project other than a qualifying project, each project is to be treated as a separate and distinct source of project for the qualifying company.
A qualifying company which is granted an exemption under the Exemption Order is required to maintain a separate account for income derived from each project carried on by the qualifying company.
Non-application
The Exemption Order shall not apply to a qualifying company which in a basis period for a year of assessment:
- has made a claim for reinvestment allowance under Schedule 7A to the ITA or investment allowance for the service sector under Schedule 7B to the ITA;
- has been granted an incentive under the PIA in respect of the same qualifying project;
- has been granted an exemption under section 127(3)(b) or section 127(3A) of the ITA in respect of the same qualifying project;
- has made a claim for deduction under any rules made under section 154 of the ITA except:
- the rules in relation to allowances under Schedule 3 to the ITA;
- the Income Tax (Deduction for Audit Expenditure) Rules 2006; or
- the Income Tax (Deduction for Expenses in Relation to Secretarial Fee and Tax Filing Fee) Rules 2020.
Comments
The Minister/ MIDA appears to be vested with the discretion to determine the “
approved adequate amount of annual operating expenditure” and the “
approved adequate number of full-time employees”. As these conditions go to the root of the exemption, taxpayers seeking exemption under the Exemption Order should obtain confirmation/ approval from the Minister/ MIDA of the specific requirements of these conditions to ensure that they will be able to comply with the same.
Alert by Desmond Liew (Senior Associate) of the Tax Practice and Faith Chan (Associate) of the Corporate Practice of Skrine.