Tax incentive for the electrical and electronics (E&E) sector

Tax incentive for the electrical and electronics (E&E) sector

In Budget 2020, it was proposed that companies in the electrical and electronics (E&E) sector, whose reinvestment allowance (RA) period has expired, be eligible to apply for a special investment tax allowance (see Take 5: Budget 2020 Malaysia and Special Tax Alert: Highlights of Budget 2020).

Following the proposal, MIDA has published on its website the “Guidelines and procedures for the application of special investment tax allowance for the E&E sector” dated 26 March 2021 (see Tax Alert No. 8/2021).

To legislate the above, the Income Tax (Exemption) (No. 10) Order 2021 [P.U.(A) 370] was gazetted on 21 September 2021. The Order provides that a qualifying company is exempted from payment of income tax in respect of statutory income derived from a qualifying project. The amount exempted will be equivalent to an allowance of 50% of the qualifying capital expenditure incurred by the qualifying company, to be set-off against 50% of statutory income for each YA. The exemption is for a period of five consecutive years commencing from the date the qualifying company first incurs qualifying capital expenditure, as determined by the Minister or Minister of International Trade and Industry (MITI), and shall not be earlier than 1 January 2020.

The application for exemption must be submitted to MIDA between 1 January 2020 and 31 December 2021.

The following terms have been defined in the Order:

(a)  Qualifying company

        A company which:

• Is a Malaysian-resident and incorporated or deemed to be registered under the Companies Act 2016
• Is engaged in manufacturing activities in the E&E sector in compliance with the Industrial Co-ordination Act 1975 (ICA) and intends to reinvest in a qualifying project
• Holds a business license from the relevant local authority
• Holds an ML from MITI or a letter from MIDA providing an exemption from ML requirements
• Has made a claim for the following incentives, where the incentive period ended by YA 2019 in respect of the same qualifying project:
  • RA under Schedule 7A of the ITA
  • Any incentive under the Promotion of Investments Act 1986 (PIA)

(b)  Qualifying project

        A project undertaken by a qualifying company to expand, modernize, automate or diversify its business of manufacturing activities in the E&E sector, which is approved by the Minister.

(c)   Qualifying capital expenditure

        Capital expenditure incurred by a qualifying company in relation to the cost of:

• Purchasing or constructing a building or factory; and
• Providing a machinery or plant

        which is used in Malaysia solely for the purpose of carrying on a qualifying project.

        It excludes capital expenditure incurred on:

• Buildings used as living accommodation, or
• Machinery or plant which is provided wholly or partly for the use of a director or individual who is a member of the management or administration, or clerical staff, of the qualifying company

The exemption is subject to the qualifying company complying with the conditions imposed by the Minister, which includes the qualifying company:

• Investing at least RM1.5 million in the qualifying project within the exemption period
• Incurring an approved adequate amount of annual operating expenditure in Malaysia to carry on the qualifying project
• Employing an approved adequate number of full-time employees in Malaysia to carry on the qualifying project
• Participating in the vendor development programme or human capital development programme

The Order stipulates that the exemption granted does not absolve the qualifying company from any requirement to submit any return, statement of accounts or any other information, as required under the ITA. The qualifying company is also required to maintain a separate account for income derived from qualifying and non-qualifying projects. Qualifying and non-qualifying projects are to be treated as separate and distinct sources of income.

The non-application provisos stipulate that the Order will not apply to a qualifying company for a YA if the qualifying company has:

(a)   Made a claim for allowances under Schedule 7A or 7B of the ITA

(b)  Been granted any incentive under the PIA for the same qualifying project

(c)   Been granted an exemption under Section 127(3)(b) or 127(3A) of the ITA for the same qualifying project

(d)  Made a claim for deduction under any rules made under Section 154 of the ITA except:

(i)    The rules in relation to allowance in Schedule 3 of the ITA

(ii)   The Income Tax (Deduction for Audit Expenditure) Rules 2006, or

(iii)  The Income Tax (Deduction for Expenses in relation to Secretarial Fee and Tax Filing Fee) Rules 2020

The Order is deemed to have come into operation on 1 January 2020.