MALAYSIA spends significant resources in attracting foreign direct investments to locate their businesses in Malaysia spearheaded through the Malaysian Investment Development Authority under the Ministry of International Trade and Industry and other agencies at the federal and state levels. To entice foreign investors into Malaysia and to encourage local investors to reinvest, there is a range of tax incentives. The principal incentives are Pioneer Status which exempts taxable profits and Investment Tax Allowance which relieves profits equivalent to the capital expenditure incurred on investments. These are available to manufacturers, service providers, logistics providers, biotechnology companies and companies in the digital arena.
Where is the problem?
Investors spend time engaging the investment agencies such as Mida in applying for tax incentives and each incentive has a range of extensive conditions to be met. Examples of the conditions would be the requirement to meet a percentage of the local value add, workforce to comprise at least 80% Malaysian employees, a percentage of technical staff, minimum number of full time employee, operational expenditure requirements, infrastructure commitments and the requirement to transact with related parties on an arm’s length basis.
At the time the application is made, many of the conditions to be met are only a forecast. Once the incentive is approved by the National Committee on Investment, the conditions committed by the investor becomes mandatory and non compliance will result in the incentive being withdrawn.
Investors should carefully vet the conditions imposed before they undertake the investment and enjoy the incentive. The conditions must be met throughout the period. In case it takes time to ramp up to meet the conditions, it is absolutely advisable in the current climate to obtain a written confirmation with the investment agencies that the conditions can be met gradually over the period of the incentive.
Another mandatory requirement many investors are not paying attention to is the submission of the annual compliance report certified by the auditors. Non compliance of this requirement will also jeopardise the incentive.
When will you realise the damage is done?
If the investor fails to comply with the conditions annually and have not taken the necessary action to engage the investment agency to have the conditions relaxed at the time they were unable to meet the conditions, the damage is done and the incentive will be withdrawn by the Inland Revenue Board.
Should the authorities rethink their approach?
If investors have put in the best efforts to meet the conditions but are unable to do so due to market conditions such as the unavailability or the unwillingness of the Malaysian workers to join the workforce, should the investor’s tax incentive be jeopardised because many investors may have inadvertently forgotten to engage the investment agencies or submit their compliance reports on a timely basis?
Yes, such delinquent investors are partly to be blamed for their non compliance with the paperwork and regular engagement with the authorities. However, the spirit of providing the incentive is to ensure that the investors receive a benefit from the government to locate their investments here and the investors have factored this into their decision to invest in Malaysia.
It is important to distinguish investors who have genuinely tried to comply with the conditions from those who took no action to comply, and consideration should be given to the former group to allow them to enjoy the incentive despite their failure to submit the necessary paperwork on time and engage the authorities to have their conditions relaxed.
Taking away the incentive from taxpayers later without giving due consideration to the sincerity of the investors would be detrimental to Malaysia in competing for FDI in the international arena.
Time for the investment agencies and IRB to rethink their “clinical” approach.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.