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TAX INCENTIVES

TAX INCENTIVES. DR ABU SOFIAN YAACOB. Tax Incentives. Why does the Government introduce tax incentives? Encourage investments. Stimulate development. TYPES OF TAX INCENTIVES. Four types of incentives: Exemption of income Deduction from income Rate reduction Deferral of tax

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TAX INCENTIVES

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  1. TAX INCENTIVES DR ABU SOFIAN YAACOB

  2. Tax Incentives • Why does the Government introduce tax incentives? • Encourage investments. • Stimulate development.

  3. TYPES OF TAX INCENTIVES • Four types of incentives: • Exemption of income • Deduction from income • Rate reduction • Deferral of tax • (related to timing to tax income)

  4. 4 Key Tax Incentives Available • Pioneer status • Investment tax allowance • Industrial adjustment allowance • Infrastructure allowance • Double deduction for promotion of exports • Reinvestment allowance • Investment allowance • Double deductions ( + IT Orders) • OHQ companies (IT Orders) • Exemption of profits (Section 127) (IT Orders) PIA 1986 ITA 1967

  5. TAX INCENTIVES Manufacturing Industries

  6. Manufacturing Industries • Pioneer Status • Investment Tax Allowances • Reinvestment Allowances • Export Allowance • Deductions for Promoting Exports

  7. Pioneer Status

  8. Conditions for PSs 5 & 6 PIA Resident companies participating in • promoted activity or promoted product. • promoted activity in promoted areas. • Contract research and development company; or • High technology company • National and strategic importance • Approved industrial linkage programme • Public sector commercialisation of R&D findings • List of activities covers: manufacturing, agriculture, hotel and tourism.

  9. Conditions Application is made to MIDA • Must obtain Pioneer Certificate within 6 months or such extended date from the date of approval of the PS. • Pioneer Certificate states the commencement date of PS ie “production day” . • In practice, production day = day where production capacity achieve 30%

  10. Promoted Product & Activity: Listed by MIDA Examples: • Cultivation of tea • Processing of herbs • Fruits • Retreading of aircrafts tyres • Recycling of chemicals • Paper • Machinery and equipment • others

  11. Promoted Areas • Eastern Corridor of Peninsula Malaysia: Kelantan, Terengganu, Pahang; • District of Mersing in Johor; • States of Sabah & Sarawak; • Labuan; and • Perlis (YA 2007)# - Sch 7A

  12. PS

  13. Pioneer Status • Exemption of Income: • PS companies is exempted from the payment of tax: • partially (70%) or fully (100%) of SI • over a period of 5 years (tax holiday period). • The balance of 30% (not exempted)is taxed at prevailing rate.

  14. Pioneer Status (PS) PS Sdn Bhd was granted PS on 7 July 2003. The production day was established as 1 Jan 2004. The followings are the income for YA 2004:- RM Adjusted income (Pioneer) 200,000 CA (100,000) Interest income 10,000 Compute the tax computation for YA 2004.

  15. Pioneer Status (PS) RM Adjusted income (Pioneer) 200,000 Less : CA (100,000) ------------ Statutory Income 100,000 Less : Exemption ( 70,000) (70% x 100,000) ----------- 30,000 Other Income 10,000 ----------- Chargeable Income 40,000 ----------- Tax liability (RM40,000 x 26%) 10,400 ======

  16. Characteristic of Pioneer Status Other features : - Restriction –mutually exclusive - Exempt income for franking of exempt dividends- Two Tier Distribution

  17. TAX RELIEF PERIOD

  18. Tax Relief Period • A company was granted pioneer status on 10.12.1998 commenced a production on 20.12.1998 • On 10.03.1999 the company was granted the pioneer certificate and production date commenced on 1.03.1999. • Tax relief period for the initial 5 years is from 01.03.1999 to 28.2.2004.

  19. 5 years Pre Pioneer Period Post pioneer period Biz Production 28.2.2005 Commence Date 20.12.98 (30%) 1.3.99

  20. Question Company’s year end : 30.4. Commencement date : 1.5.2000 Production date : 1.9.2000 Tax exempted : 5 years Tax Relief Period : ????? What is the pre-pioneer period and post-pioneer period?

  21. SEPARATE BUSINESS SOURCE

  22. PIONEER STATUS Commencement of PS is considered a separate business and cease permanently when the PS period ends 5 years Pre Pioneer Period Post pioneer period Biz Production Commence Date (30%)

  23. PIONEER STATUS • Business activity is a separate and distinct bus. source during • the: • Pre-pioneer period • Pioneer period • Post-pioneer period

  24. Treatment of Losses/Capital Allowance (Pre Pioneer Company to Pioneer Company) Rule : • Pre-pioneer unabsorbed business losses: - Can be c/f to utilize against future years non- pioneer business income and not pioneer income. • Pre-pioneer unabsorbed capital allowances: - can be utilized in pioneer period. • From YA 2006, must satisfy the “substantial ownership test”.

  25. Treatment of Capital AllowancesApplication after 1.11.91 PRE PIONEER PIONEER PD YA 2000 2001 Adj. Income 100.0 100.0 Capital Allowance 150.066.0* Statutory Income Nil34.0 CA unabsorbed 50.0 * Unutilized CA in the pre-pioneer period (RM 50) is taken to offset the pioneer period adjusted income i.e. RM 50 is included in RM 66.

  26. Treatment of Losses/Capital Allowance(Pioneer Period to Post Pioneer Period) • Pioneer business losses not allowed to offset against non-pioneer income. Only offset against pioneer income. • Pioneer losses unabsorbed during the pioneer period are not allowed to be c/f to post- pioneer period except for PS contract R&D Co. • Unutilized CA in the pioneer period are not allowed to c/f to the post-pioneer period.

  27. Treatment of Capital AllowancesApplication after 1.11.91 PIONEER PD POST PIONEER YA 2003 2004 Adj Income 100.0 100.0 Capital Allowance 150.066.0* Statutory Income Nil34.0 CA unabsorbed 50.0 * Unutilised CA (RM 50) in the pioneer period cannot be utilised in the post pioneer period ie RM 66 does not include RM 50.

  28. Pioneer Status (PS) - 2006 Budget • From 1.10.2005 unabsorbed losses and CA are tax deductible after tax holiday period.

  29. Pioneer Status (PS) - 2006 Budget PIONEER PD POST PIONEER YA 2006 2007 Adj Income 100.0 100.0 Capital Allowance 150.066.0* Statutory Income Nil34.0 CA unabsorbed 50.0 * Unutilized CA (RM 50) in the pioneer period can be utilized in the post pioneer period ie RM 66 includes the b/f CA of M 50.

  30. PIONEER STATUS • Business activity is a separate and distinct bus. source: • promoted activity or product • each additional promoted activity or product • any non pioneer business

  31. Separate Account Concept PIONEER NON PIONEER PIONEER BUSINESS BUSINESS BUSINESS 1 2

  32. Example Non-pioneer business adjusted loss: Eg: • Pioneer status business is chemical recycling • Non pioneer business is trading in chemicals • Trading in chemicals is making a loss of RM 100,000 in the year 2004

  33. Rules on Non Pioneer LossesApplication after 1.11.91 (s 21A/25) • Current Year Non-Pioneer Status Losses: • Must offset Pioneer Income first. • Excess is considered as current year loss and utilized against any non-pioneer income. Insufficient losses b/f. • Non-Pioneer b/f Losses: • No different from normal treatment of b/f losses i.e Losses are allowed against future statutory business (non- pioneer) income.

  34. Example 1 Financial details of Mari Sini Sdn Bhd which is a pioneer company for YA 2004 is as follows: Pioneer SI RM58,500 Non-Pioneer Loss (RM22,000) Other Income Nil Required: Compute Total Income and YA 2004 credit to exempt income account.

  35. Pioneer: SI RM58,500 70% of SI RM40,950 Less: CY Non-Pioneer Loss (RM22,000) Less: Unabsorbed Pioneer Loss 0 Amount to exempt income acct RM18,950

  36. Non-Pioneer SI - Less: Losses prior years - Add: SI from other sources - Aggregate income - Less: Current year losses - Total Income - Add: Pioneer income (30% x SI) RM17,550 Chargeable income RM17,550

  37. Pioneer Business: AI XX Less: CA (XX) SI XX 37 70% of SI X Less: CY Non-Pioneer Loss (X) Less: Unabsorbed Pioneer Loss (X) Amount to exempt income acct XX • Pioneer activity under separate company if non-pioneer activity is loss making. • Exempt income account can be used to pay two-tier exempt dividends. 30% of SI = Deemed Total Income

  38. 38 Non-Pioneer SI xxx Less: Losses prior years (xxx) Add: SI from other sources xxx Aggregate income xxx Less: Current year losses (xxx) ** Total Income xxx Add: Pioneer income (30% of SI) xxx Chargeable income xxx ** Non-Pioneer Status Current Year Losses: To offset pioneer income first before allowed to setoff against the other non pioneer income. Excess to offset against non-pioneer aggregate income.

  39. Pioneer Company • Two computation: • Pioneer Business: • SI • Exempt income • Chargeable income • Pioneer losses c/f • CA c/f • Non Pioneer Business • 30% of SI • Total income (non pioneer)

  40. Question PS- exemption 70% of SI. Compute the tax.

  41. Date of Application of PS Different treatment for application: • Before to 1.1.1991 • Between 1.1.1991 to 30.10.1991 • On and after 1.11.1991

  42. Computation - Generally Application of PS: • Before 1.1.1991: 100% exemption of adjusted income. • Between 1.1.1991 – 31.10.1991: 100% exemption of statutory income. • After 1.11.1991:

  43. Computation - Generally Application of PS: • After 1.11.1991: Generally, The company will be granted tax exemption on 70% of the statutory income for 5 year . The 30% balance of the statutory pioneer income is, however, subjected to tax at the prevailing company tax rate. However, some companies are exempted 100% on the SI for 5 years.

  44. INVESTMENT TAX ALLOWANCE

  45. ITA

  46. (Budget 2006) • Extending the scope to science courses: • Biotechnology • Medical and Health Science • Community Health • Molecular Biology, Material Food Science & Technology. • Approval from Ministry of Finance

  47. Conditions • Approval by MIDA / MOF. • A locally incorporated resident company • Granted to co. carrying our promoted activities or products listed by MIDA • ITA and pioneer status are mutually exclusive in respect of the same promoted activity or product. • Incurred qualifying capital expenditure (QCE) in relation to promoted activity

  48. Capital expenditure on buildings used as living accommodation for members of management, administrative or clerical staff. • Plant, machinery, buildings used wholly or partly by directors, member of management, administrative or clerical staff (e.g. furniture & fittings, cars & office equipment). Non Qualifying

  49. Integrated Agricultural Activity • Production of agricultural produce + manufacture such produce. • Only promoted activity where ITA is granted on 2 activities which run concurrently.

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