Export incentives regime of Malaysia

This article serves as reference material for candidates preparing for the ATX-MYS, Advanced Taxation Malaysian variant exam from the December 2021 session onwards. The laws referred to are those in force at 31 March 2021. This article supersedes an article published in 2011 relating to export incentives. This article is based on current legislation relating to the export of manufactured products and agricultural produce, and does not purport to trace successive development.  

Background

Since its independence as a nation, Malaysia has always focused on exporting its agricultural produce and manufactured products. As the economy developed, the export sector has seen an expansion into higher value-added content and the export of services. Successive gazette orders have been introduced to reflect the various policies to incentivise increase in export volume, seeking new markets, and improving the quality of exports.

This article serves to provide a holistic view of the prevailing export incentives regime relating to the export of manufactured products and agricultural produce. Readers are encouraged to peruse the respective gazette orders as a prerequisite to a proper appreciation of the ensuing contents.

A macro-picture

The suite of export incentives pertaining to the increased export of manufactured products and agricultural produce comprises the following:

1. Malaysian international trading company (MITC)
2. Allowance for increased exports (normal AIE)
3. Enhanced AIE for significant increase, new markets and excellence (enhanced AIE), and
4. Promotion of exports expenditure (PoE).

Below is a comparative summary of the incentives:
 

Details of each of the above incentive measures are as follows:

1. Malaysian International Trading Company (MITC) 
[PU(A) 60/2002 as amended by order 181/2003]

Objective
This incentive aims to encourage the development and growth of large Malaysian trading companies to support the Malaysian export sector.

Eligibility
A company approved as a MITC is eligible for the tax incentive upon certification by the Malaysian External Trade Development Corporation (MATRADE) that:

• The company is incorporated in Malaysia, and that at least 60% of the issued share capital of the company is Malaysian-owned
• The company has achieved annual sales of more than RM10 million
• Not more than 20% of its annual sales is derived from the trading of commodities, and
• The company uses local services for purposes of banking, finance and insurance and uses local ports and airports.

Tax incentive: exemption
A MITC is eligible for a tax exemption of 20% of the value of increased exports restricted to a maximum of 70% of statutory income (SI) for that year of assessment (YA).

For the purpose of this incentive, ‘export sales’ means sales derived from the export of local and imported goods and commodities but does not include trading commissions and profits derived from trading at a commodity exchange and sales to free industrial zones and licensed manufacturing warehouses.

‘Value of increased exports’ means the difference in free on board (FOB) value of goods and commodities exported in a basis period, and that of the immediately preceding basis period.

(Note: FOB means term of sale under which the price invoiced or quoted by a seller includes all charges up to placing the goods on board a ship at the port of departure specified by the buyer. This means the price does not include carriage, freight and insurance from the port to the destination).

Incentive period
A MITC is eligible for the tax exemption for five consecutive years, beginning from the YA in which the MITC first qualified for the exemption.

Carry forward
If any amount determined to be exempt is not absorbed because of the restriction to 70% of SI or absence of SI, such amount may be carried forward to be given to the MITC in the first subsequent YA in which there is SI from the business.

Two-tier exempt account and exempt dividend
Any amount which is exempt under this incentive may be credited to an exempt account from which an exempt dividend may be distributed. A corporate shareholder may credit the exempt dividend thus received into a second tier exempt account and on-distributes the exempt dividend to its shareholder/s. 

Comments
This incentive encourages companies presently engaged in trading of commodities to diversify into international trading of goods as they would likely have the requisite volume of exports to start with. However, such companies must be mindful that they must keep the export of commodities to a maximum of 20% of total annual sales revenue. 

The condition of at least 60% Malaysian-owned includes a Malaysian-owned company. There is no stipulation that it must be owned by individuals who are Malaysian citizens.

Note that there is no exclusion of specific agricultural produce for the MITC incentive.

The RM10 million annual turnover threshold renders the MITC status within reach of many companies. 

A trading company set up within the group to export the goods manufactured by related manufacturing companies is eligible for MITC status.

There is no mutual exclusion to other incentives.

WORKED EXAMPLE

Facts
Bahan Sdn Bhd is owned as follows:

• Bahan Holding Bhd: 65%
• Foreign Pte Ltd: 35%

Comparative details of its income are as follows: 

Notes:

1. About 10% of export sales relate to sale of natural rubber and crude palm oil.
2. Sales revenue is stated at free on board value.
3. All exports are shipped through Port Klang and Johor Port.
4. Bahan Sdn Bhd transacts all trade through Malayan Banking Bhd and insures with Malaysian insurance companies.

SOLUTION

Eligibility
In the YA 2020, Bahan Sdn Bhd does not qualify as a MITC as its annual sales revenue fell short of RM10 million.

In the YA 2021, Bahan Sdn Bhd qualifies as a MITC as it fulfils all four of the conditions:

• It is incorporated in Malaysia and more than 60% Malaysian-owned
• For the YA 2021, it has achieved annual sales of RM11.5 million (therefore more than RM10 million)
• Only 10% (ie not more than 20%) of its annual sales is derived from the trading of commodities (natural rubber and crude palm oil), and
• Malaysian ports, Malaysian bank and insurance companies are used in its business.

Upon obtaining a letter from the MATRADE confirming the above, Bahan Sdn Bhd is eligible for the MITC incentive in YA 2021 as it recorded an increase in the export sales over its export sales in the immediately preceding basis period for the YA 2020.

Bahan Sdn Bhd will potentially qualify for the MITC incentive for five consecutive YAs – ie YA 2021 until YA 2025, provided that it registers an increase in export sales in each YA over its immediately preceding YA.

Computation

2. Allowance for increased exports (AIE)
[PU(A) 162/2019]

Objective
AIE was introduced to encourage an increase in exports.

Pre-requisites
A qualifying company (QC) is one incorporated and resident in Malaysia. It must also be at least 60% owned directly by an individual who is a Malaysian citizen.

A QC must be engaged in manufacturing or agriculture, exporting its manufactured products or agricultural produce. 

Note that only the manufacturing company that exports its own manufactured products qualifies for the incentive. “Manufacturing” has the same meaning as for reinvestment allowance in Schedule 7A, ie conversion into a new product, assembly of parts, mixing of materials by a chemical process, with specified exclusions. The manufactured product must not be specifically excluded or prohibited under the Customs Act.

“Agricultural produce” means fresh/dried fruits/flowers, ornamental plant/fish, frozen raw prawn/cuttlefish/squid, and frozen cooked peeled prawn that have been planted, reared or caught by the QC.

Tax incentive
This incentive is given at the following rates:

(i) Exemption of SI equivalent to 10% of the value of increased exports is given to manufacturers provided that the goods exported attain at least 30% of value added;

(ii) Exemption of SI equivalent to 15% of the value of increased exports is given to manufacturers provided that the goods exported attain at least 50% of value added; and

(iii) Exemption of SI equivalent to 10% of the value of increased exports of agricultural produce by the company.

The above exemption of SI is restricted to a maximum of 70% of SI and subject to the respective rates given under (i), (ii) and (iii). 

Any unutilised allowance may be carried forward indefinitely to be set off against SI from the export of agricultural produce or the manufactured product. This means that if the activity of exporting said produce /product ceases in future, any unabsorbed allowance will effectively be disregarded. Hence, the QC is required to maintain a separate account for the export activity and other business activity it may carry out.

The amount utilised is credited to a tax exempt account from which tax-free dividends can be declared. For corporate shareholders, there is a second tier exempt account from which an exempt dividend may be distributed.

Determination of value of increased exports
The value of increased exports is determined as follows:

a. The FOB value of export sales for the basis period of a YA compared with the FOB value of export sales for the basis period of the immediately preceding YA, and both are 12 month periods ending on the same date each year;

EXAMPLE

b. The average FOB value of export sales in a basis period of a YA compared with the average FOB value of export sales for the basis period of the immediately preceding YA, where both (or one) of the basis periods are not 12 month periods ending on the same date each year due to a change of basis period or a newly incorporated QC.

Note: The value of FOB in a basis period or the basis period immediately preceding that basis period shall not be equal to zero for the purpose of determining the value of increased exports.

Non-application
This incentive does not apply to a QC which has been granted:

• Reinvestment allowance under Schedule 7A, or investment allowance under Schedule 7B
• Any incentive under the PIA
• Any exemption under s.127(3) or (3A)
• Deduction under s.154 other than for capital allowances, audit/secretarial/tax fees.

Specific exclusion
The AIE does not apply to exports of certain products such as:

• tin ingots or slabs, tin ore and concentrate
• natural rubber sheet and slabs, Standard Malaysian Rubber, crepe natural rubber, natural rubber latex and natural gums
• crude palm kernel oil, palm kernel cakes and crude palm oil
• copra, copra cakes and crude coconut oil
• logs, sawn timber (ungraded and non-kiln dry) and wood chips (except briquettes)
• petroleum oils (crude and other than crude) and petroleum gases, and other gaseous hydrocarbons (liquefied or in gaseous state) hydrogen, nitrogen and oxygen. 

Incentive period
There is no finite period for AIE: a company may qualify for the incentive as long as the requisite conditions are fulfilled.

WORKED EXAMPLE

Facts
Kayu Sdn Bhd is a company producing wood-based products and is incorporated and resident in Malaysia. 70% of its ordinary share capital is held by Mr Warga, a Malaysian citizen.

It produces dried flowers, manufactures chairs and high-grade paper for security printing.

Kayu Sdn Bhd has been granted with pioneer status for the manufacturing of security paper but the tax relief period had ended in YA20x0.

Relevant details are as follows:

SOLUTION

Eligibility
Kayu Sdn Bhd is eligible for the AIE in YA20x2 and YA20x3 because:

• it is incorporated and resident in Malaysia, and at least 60%-owned by a Malaysian citizen;
• it is directly involved in manufacturing chairs and security paper and producing dried flowers (agricultural produce);
• for YA20x2 and YA20x3, it does not enjoy any tax incentive: its pioneer status had ended two years earlier; and
• it has recorded increase in exports of manufactured goods and agricultural produce.

The rate of AIE is:

• 10% for chairs as the value added is more than 30%
• 15% for security paper as the value added is more than 50%
• 10% for dried flowers being agricultural produce.

Computation

3.  Enhanced AIE
[PU(A) 161/2019]

Objective
To encourage Malaysian companies to further strive for not just increase but significant increase in the export of high-quality manufactured goods so as to be able to penetrate new markets.

Pre-requisites
The following pre-requisites are common between enhanced AIE and the normal AIE:

• A qualifying company (QC) is one incorporated and resident in Malaysia. It must also be at least 60% owned directly by an individual who is a Malaysian citizen.
• A QC must be engaged in manufacturing or agriculture, exporting its manufactured products or agricultural produce. 
• Note that only the manufacturing company that exports its own manufactured products qualifies for the incentive. 'Manufacturing' has the same meaning as for reinvestment allowance in Schedule 7A, ie conversion into a new product, assembly of parts, mixing of materials by a chemical process, with specified exclusions. The manufactured product must not be specifically excluded or prohibited under the Customs Act.
• 'Agricultural produce' means fresh/dried fruits/flowers, ornamental plant/fish, frozen raw prawn/cuttlefish/squid, and frozen cooked peeled prawn that have been planted, reared or caught by the QC.

The additional pre-requisites are:

• significant increase in exports
• penetration of new markets, and
• attaining Export Excellence Award

Export sales
Export sales means direct export sales of manufactured products or agricultural produce from Malaysia, but excludes sales to free industrial zones, free commercial zones, licensed manufacturing warehouses, and Labuan/Langkawi/Tioman companies.

Determination of value of increased exports
The basis is the same as for AIE.

The incentive
 

Restriction to 70% of statutory income and carry forward
The amount determined above is absorbed against 70% of statutory income. Any amount unabsorbed may be carried forward indefinitely to be set-off against the SI of the same export business in future. Hence, if the export activity ceases in future, any unabsorbed allowance will be disregarded.

Exempt account and two-tier exemption
The amount absorbed is credited into an exempt account, from which an exempt dividend may be distributed. The corporate shareholder may credit such exempt dividend received into a second-tier exempt account and distribute a second round of exempt dividend. 

Separate source and separate account
The company that claims this incentive must maintain separate records for export sales that qualify for exemption on the value of increased exports.

Non-application
This incentive is not available to a company in a basis period in which it has been granted:

• Reinvestment allowance
• Investment allowance under Schedule 7B
• Incentive under PIA
• Exemption under s.127(3)(b) or s.127(3A);

Or made any claim for deduction under any s.154 rules other than for the deduction of:

• capital allowances
• audit expenditure, and
• secretarial fee and tax filing fee

Specific exclusions
This incentive does not apply to exports of certain products such as:

• tin ingots or slabs, tin ore and concentrate
• natural rubber sheet and slabs, Standard Malaysian Rubber, crepe natural rubber, natural rubber latex and natural gums
• crude palm kernel oil, palm kernel cakes and crude palm oil
• copra, copra cakes and crude coconut oil      
• logs, sawn timber (ungraded and non-kiln dry) and wood chips (except briquettes)
• petroleum oils (crude and other than crude) and petroleum gases and other gaseous hydrocarbons (liquified or in gaseous state) hydrogen, nitrogen and oxygen. 

Incentive period
There is no finite period for the enhanced AIE: a company may qualify for the incentive as long as the requisite conditions are fulfilled.

4. Promotion-of-exports (PoE)
S.41 and Schedule to the Promotion of Investments Act 1986.
PU (A) 14 – Income Tax (Deduction for promotion of exports) Rules 2007.

Eligibility
Every company resident in Malaysia, including a pioneer company, is eligible for this incentive. However, no deduction will be made during the tax relief period (TRP). The deductions instead will be accumulated and allowed against the income of the post-pioneer business immediately after the end of the TRP.

Qualifying expenses
A double deduction is given to eligible companies in respect of approved outgoings and expenses that are incurred:

• primarily and principally for the purpose of seeking opportunities, or
• in creating or increasing a demand for the export of goods or agricultural produce, manufactured, produced, assembled, processed, packed, graded or sorted in Malaysia. 

The Income Tax (Promotion of Exports) Rules 1986 prescribes deductions in respect of outgoings and expenses incurred for the promotion of exports. Only expenses that are of a revenue nature and allowable under s.33 of the ITA in computing the adjusted income of the company will qualify for deductions. 

The approved outgoings and expenses that qualify for these deductions are provided in Paragraph 4(2) of the rules:

• Publicity and advertisement in any media outside Malaysia.
• Supply of samples to potential clients abroad, including delivery cost of samples.
• Preparation of tenders for the supply of goods or agricultural products for potential clients outside Malaysia.
• Fares with respect to travel outside Malaysia by company representatives for the purpose of negotiations or signing of contracts, or for the purpose of participating in trade or industrial exhibitions, additional deduction is limited to RM300 per day for accommodation and RM150 per day for sustenance.
• Supply of technical information to potential clients abroad related to the goods or agricultural products that are offered for sale, not including expenses relating to the supply of technical information after purchase.
• Participation in trade or industrial exhibitions outside Malaysia approved by the minister.
• Cost of maintaining sales office outside Malaysia for the promotion of exports from Malaysia.
• Professional service fees for packaging design subject to conditions that the product is of export quality and the company uses local professional services.
• Participation in virtual trade shows.
• Participation in trade portals for the promotion of local products.
• Cost of maintaining warehouses outside Malaysia.
• Cost of registering patent, trademark and product licensing.

Written by a member of the ATX-MYS examining team