This article is relevant to candidates preparing for the Advanced Taxation (ATX‑MYS) exam. The article is based on the prevailing laws as at 31 March 2018.
This article collates and discusses the provisions in the Income Tax Act 1967 (the Act), and the Promotion of Investments Act 1986 (PIA). While reading this article, candidates are expected to refer to the relevant provisions of the Act and PIA, as amended. Although some dates referred to may be in the past, the underlying principles and concepts covered in the article are still examinable and remain relevant for current candidates. Candidates are advised to read this article in conjunction with the syllabus and study guide and examinable documents that are relevant for the exam session they are preparing for.
This article is relevant to section A2(c) of the syllabus and study guide.
Section A2(c)(iii), (iv), and (v) require candidates to be able to determine tax liabilities of companies, involving application of the following exemptions and reliefs:
(iii) Pioneer status,
(iv) Investment tax allowance, and
(v) Reinvestment allowance.
Candidates must first study closely the source authority for these incentives – ie the relevant laws, and the respective IRB public rulings or guidelines, where available, to obtain a good general understanding. This article aims to augment that understanding through comparison, contrasting, and analysis.
The incentive measures discussed in this article are:
Mode of incentive |
Incentive measure |
| Full or partial exemption of statutory income | Pioneer status |
| Additional relief for qualifying capital expenditure | Investment tax allowance
|
Terms used
The following abbreviated terms are used in this article:
General
It is possible for a company to be granted PS by MIDA for multiple promoted products or promoted activities with their respective TRPs commencing and ending on different dates. The production day is significant as it marks the commencement of the PS – ie the TRP subsists for exactly five years from the production day. Separate accounts must be kept for each pioneer business, distinct from the rest of the business activities.
A pioneer company is deemed to have three periods in its lifecycle: pre-pioneer, pioneer and post-pioneer periods. The pioneer business is deemed to have permanently ceased at the end of the TRP. A new business (post-pioneer business) is deemed to have commenced on the day following the end of the TRP. This has implications for CA.
During the TRP of a company which has been granted the standard (or normal) PS, 70% of the SI of pioneer income after deduction of various losses (see Appendix B) is exempted. The balance of 30% is "leap-frogged" to the total income stage to form part or whole of the total income of the pioneer company. This means that the 30% is quarantined for tax: approved donations and other deductions from aggregate income are by-passed (see Illustration 2).
Treatment of CA – pre-pioneer, pioneer, post pioneer
CAs are compulsorily deducted from the AI of a pioneer business – ie the income of pioneer company is reduced by CAs notwithstanding that no claim for such allowances is made.
Appendix A contains the CA rules for pioneer companies. As they are highly technical, illustration 1 below is provided to explain them:
Illustration 1
Facts
ABC Sdn Bhd (ABC) was granted PS in respect of its promoted product on 1 May 2013. The manufacturing business commenced on 1 November 2013. The 'production day' for PS purposes was ascertained to be 1 September 2014. ABC closes accounts annually to 31 December.
QCE was incurred as follows:
| Date | RM'000 |
| 10 July 2013 | 360 |
| 15 December 2013 | 400 |
| 4 April 2014 | 120 |
| 7 July 2019 | 680 |
Based on the above, the three periods are:
The basis periods are as follows:
| YA | Basis period | QCE incurred (RM'000) | |||
| YA 2013 | 1 November 2013 to 31 December 2013 | Pre-pioneer | 760 (360 + 400) | ||
| YA 2014 | 1 January 2014 to 31 August 2014 | Pre-pioneer | 120 | ||
| YA 2014 | 1 September 2014 to 31 December 2014 | Pioneer | |||
| YA 2015 | 1 January 2015 to 31 December 2015 | Pioneer | |||
| YA 2016 | 1 January 2016 to 31 December 2016 | Pioneer | |||
| YA 2017 | 1 January 2017 to 31 December 2017 | Pioneer | |||
| YA 2018 | 1 January 2018 to 31 December 2018 | Pioneer | |||
| YA 2019 | 1 January 2019 to 31 August 2019 | Pioneer | |||
| YA 2019 | 1 September 2019 to 31 December 2019 | Post-pioneer | 680 |
Computation and deduction of CAs –
click here
Treatment of losses
The rules relating to the treatment of losses for a pioneer company are contained in Appendix B.
Illustration 2 below serves to illustrate the mechanism of exemption of pioneer income. In particular, note the following:
Illustration 2
Sample computations for a pioneer company
Facts
DEF Sdn. Bhd. has the following sources of income:
YA 2018
| RM'000 | |||
| Business 1 (non-pioneer) | SI | 142 | |
| Business 2 (non-pioneer) | Adjusted loss | (389) | |
| Business 3 - pre-pioneer - pioneer | Adjusted loss Adjusted loss | (40) (99) |
|
| Business 4 (pioneer) | SI | 300 | |
| Interest income | 80 | ||
| Unabsorbed non-pioneer business loss b/f | (25) | ||
| Donation (approved) | 10 |
YA 2019
| RM'000 | ||||
| Business 1 (non-pioneer) | SI | 120 | ||
| Business 2 (non-pioneer) | SI | | 50 | |
| Business 3 (pioneer) | SI | 70 |
||
| Business 4 (pioneer) | SI | 500 | ||
| Interest income | 132 | |||
| Donation (approved) | 50 |
Computation of tax charged –
click here
General
Like PS, ITA is an incentive measure available only for promoted products or promoted activities. It is an alternative to PS, but comes in the form of additional relief of 60% of the qualifying capital expenditure (QCE) incurred to be set-off against 70% of SI. QCE for ITA is defined in s29 of the PIA. [Note: Candidates are expected to be conversant with this definition.]
ITA and PS are mutually exclusive. Also, once a promoted product has been granted ITA, the said promoted product cannot qualify for another round of ITA later on after the five year TRP from the date on which the approval is agreed to take effect. Separate accounts must be kept in respect of the promoted product or activity which has been granted ITA [s43A of PIA].
Sample computations
The worked example below illustrates the mechanism of computing ITA and the set-off against SI.
Illustration 3
Facts
OPQ Sdn Bhd (year-end 31 December) was granted ITA in respect of its manufacturing of a promoted product with effect from 1April 2018. QCE and forecast income for the promoted product is expected to be as follows:
| YA | AI (RM'000) | CA (RM'000) | Date QCE incurred | QCE incurred (RM'000) |
| 2018 | 3,000 | 3,000 | 10 August 2018 | 60,000 |
| 2019 | 22,500 | 2,500 | 2 February 2019 | 12,000 |
| 2020 | 37,000 | 7,000 | Nil |
Computation and set-off of ITA –
click here
It should be noted that in the above illustration, the TRP runs from 1 April 2018 to 31 March 2023. Any QCE incurred after 31 March 2023 will not be eligible for ITA.
General
RA is an incentive provided under the Act [Schedule 7A] to encourage reinvestment or continued investment by foreign and domestic investors, hence the rather long 15-year TRP.
RA shares similarities with ITA in its features and the incentive mechanism. The additional relief on QCE incurred is 60% to be set off against 70% of the SI from the business in respect of the QP. [See Illustration 3]
If a company is of the view that it fulfils the stipulated requisites, it may claim RA in the relevant tax return. There is no requirement to apply for prior approval from any authority. In the past, there has been a high incidence of DGIR's differing interpretation regarding:
Many cases went to the courts for judicial determination. These cases were followed by laws being amended and public rulings issued to better reflect DGIR's interpretation. The situation has now stabilised somewhat and the following features are now applicable:
Comparison and analysis
Below is an analysis of the three incentive measures to help candidates in the selection of the appropriate incentive to optimise tax benefits.
|
PS |
ITA |
RA |
| Eligible product or activity | Must be promoted product or promoted activity | Must be promoted product or promoted activity | Need not be promoted product. Must have 'qualifying project', as defined, for manufacturing or farming business |
| TRP | Five years from the production day | Five years from the agreed effective date of approval | 15 consecutive years from the first claim of RA |
| Capital intensive? | Not relevant | Must have substantial capital expenditure, and must be incurred during the five year TRP | Must have substantial capital expenditure |
| Approval needed | Approval by MIDA
|
Approval by MIDA | No prior approval from any authority is needed. But the claim is subject to DGIR's scrutiny and interpretation |
| Restriction on QCE? | No, as the exemption is based on income, not on capital expenditure incurred | • Generally, no restriction on QCE as defined in PIA [s29] • No restriction on factory space, factory storage space not restricted to 10% • However, ITA cannot be given for replacement of existing plant and machinery, or for automation per se |
Considerable restriction on QCE: • Only plant and machinery directly used in manufacturing qualify • Plant and machinery used in post-production do not qualify • Factory space is restricted to where plant and machinery is installed, and only 10% storage space |
Set-off of
|
CAs are compulsorily deducted. Special rules apply on eligibility and set-off of CAs | Normal CA rules under Schedule 3 of the Act apply | Normal CA rules under Schedule 3 of the Act apply |
| Set-off of losses | Special rules apply on set-off of non-pioneer and pioneer loss | Normal loss rules per the Act [s43(2) and s44(2)] apply | Normal loss rules per the Act [s43(2) and s44(2)] apply |
| Carry forward of unabsorbed allowance | Not applicable as no unabsorbed allowance is carried forward | Unabsorbed ITA may be carried forward to be set-off against SI of same promoted product/activity until fully absorbed | Unabsorbed RA may be carried forward to be set-off against SI of same business until fully absorbed |
| Any income compulsorily subject to tax? | Yes. 30% of SI of pioneer business will be taxed, regardless of loss or donation | No. Absorption is at SI, no balance goes to form part of total income | No. Absorption is at SI, no balance goes to form part of total income |
Exempt income, exempt dividend
|
Pioneer income after CAs and losses is exempt and credited to exempt account for distribution of exempt dividend | Amount of ITA absorbed against SI is credited to exempt account for distribution of exempt dividend |
Amount of RA absorbed against SI is credited to exempt account for distribution of exempt dividend |
| General | PS is beneficial if substantial pioneer profits are generated early in the TRP |
ITA is beneficial for capital intensive projects. After approval by MIDA, room for DGIR's interpretation is minimal | RA's scope is widest (QP on expansion, modernisation, automation and diversification), and TRP is longest, but is subject to DGIR's scrutiny and interpretation |
CA rules for a pioneer company
1. Where a pre-pioneer asset is used in a pioneer business:
2. Where the asset is used for the pioneer business and continues to be used for the post-pioneer business:
3. Where pre-pioneer CAs cannot be utilised or cannot be utilised in full, such unabsorbed CAs are set off against the income from the pioneer business.
4. Any unabsorbed pioneer CAs are carried forward to the following YA during the pioneer period.
5. Where CAs cannot be fully utilised by the pioneer business for the YA in the basis period immediately prior to the YA in the basis period in which the day of commencement of the post-pioneer business falls, such unabsorbed CAs shall be carried forward to be set off against the income of the post-pioneer business.
Rules on absorption of losses for a pioneer company
The following rules are deduced by reading together s21A of PIA and sections 43 and 44 of the Act.
Provision |
Comments |
The pioneer income of a pioneer company is reduced to the extent of any adjusted loss for the basis period for a YA in respect of a business relating to:
|
Losses referred to here are current year losses |
(a) a non-promoted activity or product
|
This refers to a non-pioneer business current year loss
|
(b) a promoted activity or promoted product for which no PS or ITA was granted
|
This refers to a non-pioneer business, but more significantly, it excludes the current year pre-pioneer loss – ie in the first YA in which TRP commences
|
| (c) a promoted activity or promoted product granted pioneer status or ITA but whose TRP has expired | This refers to the unabsorbed pioneer loss b/f from a pioneer business whose TRP has expired |
Other observations
Written by a member of the ATX-MYS examining team