For those who are aware of the Malaysian government’s effort in promoting a selected industry (ICT for MSC Companies) for example: we hear that these companies are given financial or fiscal incentives.
These incentives come in the following form:
- Pioneer status with a certain % of tax exemption on statutory income for a number of years
- Investment Tax Allowance
Therefore you can analyze that the financial incentives above are all in the form of “tax”. It’s fine for seasoned entrepreneur as they understand how these incentives work for them, but for new comers or micro entrepreneurs, how do you take advantage of these fiscal incentives?
This article focuses on explaining briefly on what the items above are and how they work.
1. Pioneer Status
Pioneer status in Malaysia simply means tax exemption on your statutory income. Let’s take an example:
“Pioneer Status – 100% exemption from taxable statutory income. This incentive is granted for a period of 5 years for the first round.” – MSC Malaysia Status Companies.
What does this mean?
- That means that you get 100% exemption from your statutory income (not to be confused with chargeable income or your profit before tax on your balance sheet!)
- It’s been granted for 5 years and you can appeal for another after quite some time.
Some hidden things you should know!
- Some pioneer status does not mean you are exempted 100% on your statutory income. It could be in the form of exemption for “promoted activities”. Say you are in manufacturing of fibre optics and you do some trading at the same time. Trading is not exempted from income tax but the promoted activities such as “manufacturing of fibre optics” is exempted.
- Pioneer status certificate and application is entirely different! You are required to produce the “promoted activity” first before you can get the full certificate.
- There is a“production fulfillment” criteria time period before you can get for the pioneer certificate. During that time, you need to fulfill the number of production as stipulated by the gov. agency.
Other helpful things you should know:
- How do I calculate statutory income? Fairly simple, the equation is: (Net profit before tax + (non-allowable expenses) – (allowable expenses) – (capital allowance on your machinery) = statutory income. If you wanna more, do refer to Section 42, Statutory Income, Income Tax Act 1967
- How do I calculate pioneer status income? The approved promoted activities less your statutory income. For example: You have RM100k statutory income and deduct amount NOT under “promoted activities”. If all your statutory income is derived from “promoted activities, your taxable income is nil. For more information refer: LHDN – Pioneer Status
How can pioneer status benefit you?
- Duh! You don’t have to pay tax!
- You can use that amount that is supposed to pay for tax for other operating expenses for your company’s growth.
- More dividend amount for shareholders obviously.
2. Investment Tax Allowance
Sometimes we hear the term where they say you can choose either pioneer status or Investment Tax Allowance. But what is the main difference?
Which company is suitable for ITA?
- Companies which have to incur lots of costs in acquiring equipment and machinery or fixed assets
- Companies with R&D undertaking and need lots of investment
How Do I calculate ITA?
Let’s say we take an example where you are entitled for 100% ITA for 5 years on a certain infrastructure. Say you build an infrastructure worth RM200,000 and your statutory income calculated for the year was RM500k. Deduct the RM200k from the RM500k and you are left with RM300k chargeable income subject to tax.
Please take note that you can use the RM200k elsewhere rather than paying tax or to be distributed to your shareholders as dividends.
For a more accurate example: refer to LHDN website on ITA Calculation.
What do I need to know?
- Again, read the terms, not all investments on fixed assets are subject to exemption, it depends on which industry you are in. Be sure to check with your agency for the “qualifiying expenditure”.
- There is a certain percentage on different “qualifying expenditure”. To get an accurate result, check with your tax agent. If you don’t have one, appoint one.
To get a complete list of manufacturing, manufacturing related services and services sector in Malaysia that is entitled to pioneer status and MIDA, download this book published by MIDA (Malaysia Industrial Development Authority) : Malaysia: Investment in The Manufacturing Sector (Policies, Incentives and Facilities)
Note: Please consult your tax agent, they know better. I just do this on the surface and my previous working experience on auditing therefore I computed the note for financial statements but not compute the tax calulcation. This is a brief overview of what I understood from tax agent.