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Archive for the ‘Taxation’ Category

21

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.

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4

Service tax in Malaysia is governed by Service Tax Act 1975. This act is in effect in all parts of Malaysia except Langkawi, Tioman, Labuan and free trade areas as determined by the government. And for those who are new in business, you would have to pay your service tax to the Royal Malaysian Customs.

Please be reminded that your service tax is charged according to 2 factors which are:

  • the nature of your business and;
  • annual turnover (revenue) threshold.

Here is what I mean: company which provide employment services with an annual turnover of RM150,000 needs to get service tax license and must pay 5% to the Royal Malaysian Customs.

To apply for the service tax license, go to the nearest Customs branch and fill up the JKED 1 form. Now you can apply for your service tax license online!

Go to E-lesen (http://elesen.customskl.gov.my/elesen/src/index.php?page=home). There are also categories of businesses subject to service tax under the “Important Notices” page. For further information on license, dial up +603 8882 2610.

So be sure to check with the Customs to see whether your business is actually liable to pay service tax or not. Among the businesses which confirm have to pay service tax are:

  • Car rental agencies (revenue >RM150k)
  • Restaurant having more than 25 rooms
  • Restaurants with 25 rooms or less (revenue > RM300k)
  • Accounting / legal services (revenue >RM150k)

To know more visit here:

If you need further clarification do contact the Royal Malaysian Customs at

Note: They are very friendly, I once import bulk of mp3 watches from China for distribution in Malaysia and the officer is very helpful in answering my questions on whether my products are subject to import duty or not:)

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