Implementation Guidelines for Investment-Related Incentives under the Malaysian Budget 2015
06 April 2015 | Source: Ministry of International Trade & Industry
The Ministry of International Trade and Industry has announced detailed guidelines for the four new tax incentives introduced under the Malaysian 2015 Budget, for investors and companies in four different segments, namely: Incentive for Less Developed Areas; Incentive for Industrial Area Management; Capital Allowance to Increase Automation in Labour Intensive Industries; and Incentive for the Establishment of Principal Hub. This is the implementation guidelines for the four new tax incentives.

1. Incentives for Less Developed Areas

a) This incentive package was categorised under the ‘Strengthening Economic Growth' strategy, to ensure balanced and inclusive regional growth with continued promotion of investments in less developed areas.

b) Customised incentive based on the merit of each case:

i. Income Tax Exemption of 100% up to 15 years of assessment (5+5+5) commencing from the first year of assessment the company derives statutory income. The company must comply with the conditions and achieve the Key Performance Index (KPIs) for each additional 5 years.

OR

Income Tax Exemption equivalent to 100% of qualifying capital expenditure (Investment Tax Allowance) incurred within a period of 10 years. The allowance can be offset against 100% of statutory income for each assessment year. Unutilised allowances can be carried forward until fully absorbed. The company must comply with the conditions and achieve the KPIs for additional 5 years.

ii. Stamp duty exemption on transfer or lease of land or building used for development in relation to manufacturing and services activities.

iii. Withholding tax exemption on fees for technical advice, assistance or services or royalty in relation to manufacturing and services activities up to 31st December 2020.

iv. Import duty exemption on raw materials and components that are not produced locally and used directly in the manufacture of finished products subject to the prevailing policy, guidelines and procedures

v. Import duty exemption on machinery and equipment that are not produced locally and used directly in the activity for selected services sector subject to the prevailing policy, guidelines and procedures

c) Eligibility criteria:

i. A company incorporated under the Companies Act, 1965.

ii. Eligible applicants:

a. Existing company expanding its operation into the less developed areas; or

b. Newly established company

iii. The company is to undertake its manufacturing or services activities in the less developed areas that will lead to substantial creation of employment and rural development.

iv. Complies with other conditions specified by the Minister of Finance including value added, local employment and Managerial, Technical and Supervisory staff index (MTS Index).

d) Mechanism:

Incentives to be provided under the Customised Incentive Scheme, Section 127(3A), Income Tax Act, 1967 and Section 80(1A) Stamp Act 1949 to be tabled in the National Committee on Investment (NCI). The recommendation is to be forwarded to the Ministry of Finance for the Minister's consideration.

e) Effective Date of Application

Applications received by MIDA from 1 January 2015 until 31 December 2020 is eligible to be considered for this incentive.

2. Incentive for Industrial Area Management

a) This new incentive is expected to be a key factor to support the development of industries by having a more systematically maintained public facilities/infrastructure. Among the objectives of the incentives are:

i. To address the lack of proper management and upkeep of Industrial Estates (IEs);

ii. To provide a more conducive investment environment with better infrastructure management;

iii. To promote growth and foster development of IEs and surrounding areas;

iv. To leverage on the location comparative advantages; and

v. To improve IEs' management towards a park management model.

b) Details of incentive:

i. 100% tax exemption on statutory income for 5 years commencing from the date the company commences its activities. The activities are as specified in the eligibility criteria para c (vii).

ii. Effective date: The date of first sale or invoice issued.

c) Eligibility criteria:

i. The Industrial Estate must be gazetted by the State Authority as an industrial land.

ii. A newly established company or existing company appointed by a Local Authority (PBT) must have an agreement on the management of IEs.

iii. The company undertakes the management of an existing IE specified by the PBT.

iv. A company incorporated under the Companies Act, 1965.

v. The company must be approved/licensed by a PBT.

vi. The company must be self-funded.

vii. The company must undertake all of the following management, upgrading and maintenance activities within the IE:

1) Roads, street lightings and drainage systems

2) Common facilities (e.g.: facilities available for all the tenants located in the industrial park, bridges/underpass/flyover, signage, convention/conference halls, parking and other such facilities meant for common use of the tenants located in the industrial park)

3) Landscaping including grass planting and cutting, tree planting, pruning, cutting and removal and garden maintenance

4) Industrial waste collection, transfer and disposal

5) Database system maintenance

viii. The company may undertake any of the following qualifying services:

1) Maintain and repair buildings (e.g: roofing, structural, electrical, water, sewerage, HVAC, leak detection, telecommunication)

2) Security and personnel (e.g: security guards, parking access, CCTV)

3) Relevant consultation (e.g: tenant relations and specialised advisory services on designing/planning of building/plant)

4) Rental of common facilities (e.g: warehousing, parking)

5) Rental of accommodation/hostels for factory workers

6) Relevant transportation (e.g: transportation for factory workers)

7) Environmental management (e.g: air pollution, wastewater, water treatment, and noise pollution)

8) Construction of main infrastructure supports (e.g: electrical substations, reservoir)

9) Janitorial/Cleaning services

10) IT infrastructure (e.g: network operating centre, IT networking infrastructure, network security centre and PC & computing training lab)

11) Recreational and relaxation areas for tenants and their workforce

12) Any adapted facilities as required by tenants

ix. At least 70% of the annual income of the industrial area management derives from activities specified from paragraph c (vii).

x. The company must have commenced its operation not later than one (1) year from the date of application received by MIDA.

d) Mechanism:

Incentives to be provided under the Income Tax (Exemption) (No. 11) Order 2006 [P.U.(A) 112/2006] Income Tax Act, 1967 and approved through the NCI.

e) Effective Date of Application

Application received by MIDA from 1 January 2015 until 31 December 2017 is eligible to be considered for this incentive.

3. Capital Allowance to Increase Automation in Labour Intensive Industries

a) Among the objectives of the incentives are:

i. To encourage manufacturing companies to engage in innovative and productive activities;

ii. To encourage the quick adoption of automation especially for labour intensive industries; and

iii. To further spur automation initiatives

b) Categories for Automation Capital Allowance

Category 1: High labour intensive industries (rubber products, plastics, wood, furniture and textiles)

Automation capital allowance of 200% will be provided on the first RM4 million expenditure incurred within the year of assessment 2015 to 2017; and

Category 2: Other industries

Automation capital allowance of 200% will be provided on the first RM2 million expenditure incurred within the year of assessment 2015 to 2020.

c) Eligibility criteria:

Eligibility criteria for Category 1: for high labour intensive industries and Category 2: for other industries:

i. Manufacturing companies incorporated under the Companies Act 1965

ii. Possesses a valid business license from local authority and manufacturing license from MITI;

iii. Company resides in Malaysia;

iv. Company operates at least for 36 months.

v. Expenditure incurred within the relevant years of assessment

vi. The automation equipment is used directly in the manufacturing activities.

vii. The automation equipment should enhance the productivity such as reducing man hours, reducing workers and increasing volume of output.

viii. The automation equipment adopts technology that is more advanced than the technology currently used by the company and to be verified by SIRIM.

ix. Acquiring similar type of machine and equipment is permissible in 2 years of acquiring the existing machine and equipment (only for SMEs - based on the definition in Income Tax Act, ITA 1967).

x. The automation machines or equipment should be verified by SIRIM.

d) Required Documents

Required documents for Category 1 and 2:

i. ICA 2 form (to provide Annex on reduction of working hours, number of employees and increase the number of products);

ii. SIRIM report for productivity level (verification that prove the use of the equipment/machines can increase the productivity compared to benchmark figures);verification;

iii. Valid business license (MITI/Local Authorities); and

iv. Companies shall furnish a certification by External Auditors confirming the following:

a. list of purchased and installed equipment/machines with Purchase Order/Invoice and other documents of purchase as proof and the functions of the equipment/machines; and

b. proof of documents that the company has already paid the entire cost of the equipment/ machinery.

e) Submission Process

Submission process for Category 1 and 2:

i. Company fills in ICA 2 form and submit to respective division in MIDA for non-technical eligibility;

ii. Company submits application to SIRIM for each machine (for verification of productivity level). Proposed application procedure for verification of machines/equipment for automated capital allowance by SIRIM and criteria as in APPENDIX;

iii. MIDA to evaluate the application;

iv. MIDA to provide approval letter to the company and a copy need to be sent to the Inland Revenue Board (IRB); and

v. The company needs to keep the letter for audit purpose by IRB.

f) Implementation Timeline

i. Implementation timeline for Category 1:

Year of Assessment (YA) 2015 - YA 2017 (Including expenditure in 2014, if any)

ii. Implementation timeline for Category 2:

Year of Assessment (YA) 2015 - YA 2020 (Including expenditure in 2014, if any)

 

FLOW CHART FOR THE APPLICATION PROCESS OF AUTOMATED CAPITAL ALLOWANCE (AUTOMATED CA) - PRE APPROVAL

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Notes:

(i) Companies approved must provide the following documents during audit by IRB

• Copy of documents submitted to SIRIM

(ii) MIDA will issue approval letter once based on the investment projection by companies. Companies need to declare the expenditure to IRB to enjoy the incentive.

4. Incentive for the Establishment of Principal Hub

a) Definition of Principal Hub

A locally incorporated company that uses Malaysia as a base for conducting its regional and global businesses and operations to manage, control, and support its key functions including management of risks, decision making, strategic business activities, trading, finance, management and human resource.

b) Incentives for Principal Hub

i. An approved Principal Hub company is eligible for a 3-tiered corporate taxation rate as follows:

3-tier Incentive Tier 3 Tier 2 Tier 1
Blocks (years) 5 +5 5 +5 5 +5
• Tax rate 10% 5% 0% 

ii. Eligibility criteria:

- Local incorporation under the Companies Act 1965

- Paid-up capital of more than RM2.5 million.

- Minimum annual sales of RM300 million (Additional requirement for goodsbased applicant company).

- Serves and control network companies in at least 3 countries outside Malaysia

Network company is "related companies or any entity within the group including subsidiaries, branches, joint ventures, franchises or any other company related to applicants' supply chain and business with contractual agreements".

- Carry out at least three qualifying services, of which one of the qualifying services must be from the strategic services cluster as follows:

A. Strategic Services

1. Regional Profit & Loss (P&L) / Business Unit Management

P&L Management focuses on the growth of the company with direct influence on how company resources are allocated - determining the regional/global direction, monitoring budget expenditure and net income, and ensuring every program generates a positive ROI

2. Strategic Business Planning and Corporate Development

3. Corporate Finance Advisory Services

4. Brand Management

5. IP Management

6. Senior-level Talent Acquisition and Management

B. Business Services

1. Bid and Tender Management

2. Treasury and Fund Management

3. Research, Development & Innovation

4. Project Management

5. Sales and Marketing

6. Business Development

7. Technical Support and Consultancy

8. Information Management and Processing

9. Economic/Investment Research Analysis

10. Strategic Sourcing, Procurement and Distribution

11. Logistics Services

C. Shared Services

1. Corporate Training and Human Resource Management

2. Finance & Accounting (Transactions, Internal Audit)

3. General Administration

4. IT Services

- Employment Requirement

i. Tier 3: 15 high value jobs, including 3 key strategic/management positions

ii. Tier 2: 30 high value jobs, including 4 key strategic/management positions

iii. Tier 1: 50 high value jobs, including 5 key strategic/management positions

• Minimum monthly salary for high value jobs is at least RM5,000.

• Minimum monthly salary of key strategic/management positions is at least RM25,000.

Definition of High Value Jobs

Jobs that require higher and more diverse set of managerial/ technical/professional skills such as management, analytics, communication, problem-solving, and proficiency in information technology

iv. At least 50% of the high value jobs must be Malaysians by end of year 3.

- Annual Business Spending

i. Tier 3: RM 3 Million

ii. Tier 2: RM 5 Million

iii. Tier 1: RM10 Million

- Must have HR training and development plan for Malaysians.

- The applicant should be the planning, control and reporting centre for the qualifying services.

- Malaysian-owned and incorporated businesses are encouraged to provide headquarters-related services and expertise to their overseas companies.

- Significant use of Malaysia's banking and financial services and other ancillary services and facilities (e.g trade and logistics services, legal and arbitration services, finance and treasury services).

- Income tax exemption threshold received from inside and outside of Malaysia is based on the ratio of 30:70 (inside:outside).

Note: Each tier (Tier 1 - Tier 3) can be considered for an extension up to 5 years within the tiers subject to fulfilling the above criteria and:

a. Jobs: 20% incremental of the base commitment; and

b. Business spending: 30% incremental of the base commitment

c) Facilities Accorded to Principal Hub

An approved Principal Hub company will enjoy the following facilities:

i. Bring in raw materials, components or finished products with customs duty exemption into free industrial zones, LMW, free commercial zones and bonded warehouses for production or re-packaging, cargo consolidation and integration before distribution to its final consumers for goods-based companies.

ii. No local equity/ownership condition

iii. Expatriate posts based on requirements of applicant's business plan subject to current policy on expatriates.

iv. Use foreign professional services only when locally-owned services are not available.

v. A foreign-owned company is allowed to acquire fixed assets so long as it is for the purpose of carrying out the operations of its business plan.

vi. Foreign Exchange Administration flexibilities.

d) Mechanism:

i. Incentives to be provided under Section 127(3)(b), Income Tax Act, 1967 and approved through the NCI.

ii. All commitments will be given flexibilities to comply the criteria of first block by end of Year 3 of each tier. Failing to do so will lead to claw back on tax taken from Year 1. This relaxation is not applicable for existing company who already enjoy IPC/RDC/OHQ incentives.

iii. Company must submit yearly report to MIDA for evaluation of performance. Failing to do so, the incentive will be withdrawn.

iv. For existing companies that have completed IPC, OHQ or RDC incentive can be considered the Principal Hub incentive by complying the criteria of Tier 1 for a maximum incentive period of 5 years with corporate tax rate of 10%. Consideration is subject to the following additional commitment under Tier 1:

• 20% incremental commitment of the existing employment; and

• 30% incremental commitment of the existing business spending.

e) Effective Date of Application:

Applications received by MIDA from 1 May 2015 until 30 April 2018 is eligible to be considered for this incentive.

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