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Alan Garcia and Tai Lai Kok KPMG in Australia and KPMG in Malaysia
Alan Garcia is an R&D Tax Partner at KPMG in Australia and KPMG's Asia Pacific (ASPAC) Regional Lead R&D Tax Partner. Tai Lai Kok is a Tax Partner at KPMG in Malaysia.
Continuing our series of articles in Tax Planning International Asia-Pacific Focus, herein we describe research and development (R&D) tax incentives available to businesses in Malaysia. We shall summarise the various incentive measures and also provide insights into these measures in Malaysia. KPMG operates a global R&D Incentives practice deploying an integrated network of R&D specialists to advise multinationals and local businesses alike on obtaining R&D tax entitlements.
Malaysia first introduced an R&D tax incentive scheme in 1982 as a 133 percent elevated deduction, soon increasing the benefit to an attractive, internationally competitive double deduction (200 percent) in 1986.
The corporate tax rate for companies resident in Malaysia is 25 percent, which means that the double deduction affords the same level of tax savings (i.e. 25 percent) on taxpayers' R&D expenditure.
Over the last three decades, the Malaysian Government has further developed and diversified the various incentive mechanisms, tailoring these to industry sectors in an effort to encourage companies and institutions to locate their R&D activities in the country.
R&D is defined as any systematic or intensive study undertaken in the field of science or technology with the objective of using the results of the study for the production or improvement of materials, devices, products, produce or processes.
Design and prototyping activities are also eligible for R&D incentives.
In Malaysia, the relevant authorities for assessment and approval of the various incentives are the Malaysian Investment Development Authority (MIDA) and Inland Revenue Board of Malaysia (IRBM).
In general the types of activities, which are not exhaustive, such as general education and training, scientific and technical information services, routine computer maintenance and software development, setting-up of a manufacturing line or equipment, routine soil or fertilizer analysis or testing, fabrication or modification of machinery or equipment, and general commercial activities do not constitute R&D.
In addition to the above, the definition of R&D excludes the following:
• quality control of products or routine testing of materials, devices, products or produce,
• research in the social sciences or humanities,
• routine data collection,
• efficiency surveys or management studies, and
• market research or sales promotion.
R&D incentives in Malaysia are available as follows:
• Double deduction (applies to in-house R&D and contract R&D),
• Pioneer Status (which provides full income tax exemption for 10 years),
• Investment Tax Allowance (ITA), and
• Tax exemptions (includes exemptions from income tax, import duty, sales tax and excise duty).
The above categories of R&D Incentives apply variously across Malaysia's commercial activities including: In-house R&D; Contract R&D; Importation of equipment for R&D purposes; R&D on behalf of related companies; Commercialisation of R&D findings.
Below is a detailed overview of each category.
This category of benefits is available to companies undertaking in-house R&D.
Companies may deduct up to 200 percent of the eligible R&D expenditure in respect of approved research projects against their business income.
Alternatively, the eligible companies may opt for an ITA of 50 percent on qualifying capital expenditure incurred within 10 years. This benefit can be offset against 70 percent of statutory income.
Applications should be made to MIDA and companies may be eligible for a second round of the ITA incentive subject to approval from MIDA.
Revenue expenditure that is incurred by an entity for R&D directly undertaken for its own business must be approved by the authorities. The R&D activities must also be carried out in Malaysia for the benefit of the Malaysian operations.
In practice, a company applying for the R&D double deduction should prepare well in advance and liaise closely with the government authorities to effectively manage the R&D application process. This is because R&D double deduction applications must be lodged prior to completion of the current financial year.
Applications should be submitted to the IRBM for approval.
Companies that make cash contributions, donations or payments for the use of services of approved research institutes or companies, contract R&D companies or R&D companies.
Companies may deduct up to 200 percent of the eligible R&D expenditure against their business income.
The research institutes or companies, contract R&D companies or R&D companies must be granted approved status by the relevant authorities.
This category applies to contract R&D companies as well as R&D companies (see eligibility below).
A full tax exemption on statutory income for five years (contract R&D companies only) or ITA at 100 percent on qualifying capital expenditure incurred within 10 years to be offset against 70 percent of statutory income.
For R&D companies, if the company opts not to avail itself of the ITA incentive, related companies can enjoy a double deduction for payments made for the R&D services.
Companies may be eligible for a second round of the above incentives subject to approvals from MIDA.
A “contract R&D company” is defined as one that provides R&D services in Malaysia only to non-related companies.
In contrast, an “R&D company” provides R&D services in Malaysia to its related companies or to any other company.
At least 70 percent of the company's income must be derived from R&D activities and at least 50 percent (for the manufacturing sector) or 5 percent (for the agricultural sector) of its workforce must be qualified personnel performing R&D and technical functions.
This category applies to companies undertaking in-house R&D or other qualifying R&D activities.
Qualifying entities can obtain an exemption from import duty, sales tax and excise duty.
This incentive category is applicable to approved research institutes or companies that purchase specific machinery or materials from overseas or local suppliers to undertake R&D activities.
Entities undertaking R&D work in Malaysia on behalf of related companies operating within or outside Malaysia may obtain approved Operational Headquarters (OHQ) status.
Eligible entities receive a full tax exemption for 10 years on income from qualifying services.
Furthermore, expatriates working in the OHQ company pay individual income tax based on the number of days they are in Malaysia.
The OHQ must have a minimum paid-up capital of Malaysian Ringgit RM500,000 (approximately US$151,814.00). There is also a minimum business-spending requirement of RM1.5 million (approximately US$455,441.00) per year. Finally, the company must carry out at least three qualifying services (one of which may be R&D) for a minimum of three related companies outside Malaysia.
Entities (investors) which invest in subsidiary companies engaged in the commercialisation of R&D findings, as well as subsidiary companies (investees) which undertake the commercialisation of R&D findings.
The investor may be able to obtain a tax deduction equivalent to its investment cost in the investee.
In addition, the investee may be eligible for Pioneer Status which provides a 100 percent tax exemption on its statutory income for a period of 10 years.
However, eligibility for the tax deduction by the investor shall cease in the year of assessment in which the tax relief period for the investee commences.
At least 70 percent of the investor must be owned by Malaysians. Moreover, the investor should, in turn, own at least 70 percent of the investee commercialising the R&D findings.
The R&D findings must be resource-based and the commercialisation must be implemented within one year from the date of approval of the incentive.
Multimedia Super Corridor (MSC) Malaysia Status Companies may qualify for a subsidy (under the Intellectual Property Grant Scheme) of up to 70 percent of the initial costs incurred for filing applications to register trade/service marks, patents and industrial designs in obtaining Intellectual Property (IP) protection.
BioNexus Status companies which have ownership or beneficial use of IP necessary to commercialise biotechnology projects and R&D findings may qualify for funding of up to RM2.5 million (approximately US$758,841.00) per company from the Malaysian Biotechnology Corporation (BiotechCorp).
The Ministry of Science and Technology also offers funding for projects with IP acquisition, up to a maximum of 100 percent of the total acquisition cost or RM2 million (approximately US$607,073.00), whichever is lower.
A Brand Promotion Grant is also available for small and medium enterprises (SME) whereby a 100 percent deduction is allowed for the registration cost of patents and trademarks. Non-SMEs may also apply for a 50 percent reimbursable grant.
Grants or subsidies that are allocated to companies by the Malaysian Federal or State Government are exempt from tax. Any expenditure incurred or reimbursed out of income in relation to such grants or subsidies would be disallowed deductions.
While R&D incentives in Malaysia are not restricted to specific industries, historically the companies that tend to be granted incentives are often in electrical & electronic products (43 percent), transport equipment (23 percent), chemical & chemical products (19 percent), machinery & equipment (12 percent), plastic products (2 percent) and textile & textile products (1 percent).
[Source: Performance Reports 2008-2011, MIDA].
Recently, the Malaysian Government has placed emphasis on R&D activities on bioeconomy. A new tax incentive for companies undertaking biotechnology activities was introduced in the 2014 National Budget. Companies which are granted BioNexus status from BiotechCorp may qualify for PS with a tax exemption of 100 percent of its statutory income for 10 years or ITA of 100 percent on qualifying capital expenditure incurred within a period of five years. Other benefits include (but are not limited to) exemption of import duty and sales tax on importation of raw materials/components and machinery and equipment.
Alan Garcia is an R&D Tax Partner with KPMG in Australia and is KPMG's Asia-Pacific Regional R&D Lead Partner. He has more than 17 years of R&D tax experience across all industries including energy and natural resources, information technology, manufacturing, food-sector, agribusiness and biotech as well as undertaking reviews for multi-site global and national companies. Alan manages 'high value’ R&D audits and appeals, providing advice on R&D issues, including strategy and R&D planning.
Tai Lai Kok is the Head of Tax of KPMG in Malaysia and is KPMG's Malaysia R&D Lead Partner. He has 22 years of corporate tax experience. His expertise includes inbound and outbound investments, local and international mergers and acquisitions, privatisation, corporate restructuring/planning and tax incentives with particular emphasis on the services and manufacturing sectors. Some of the clients he has advised include Government Linked Companies, multinational companies, publicly listed companies in the oil and gas industry, property development, plantation, Real Estate Investment Trust and financial institutions.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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