TAR UC (FAFB) – RAC Year 3 (ACADEMIC YEAR 2020/2021)

BBFT3014/BBFT3013 ADVANCED TAXATION

Tutorial 3: Tax Incentive – RA & Double Deductions (R&D Co.)

Suggested answer to Q1

RAC Tax Consultant Sdn. Bhd.

110, Jalan Bersatu,
50000 Kuala Lumpur, Malaysia.

9 July 2020

The Board of Directors

MySegar Sdn. Bhd.
No. 12, Jalan Berusaha
81000 Muar, Johor.

Dear Sirs / Madam,

Tax Incentive / Reinvestment Allowance (RA)

We understand that your company which is manufacturing health tonics since the year 2014 is
considering to claim ‘reinvestment allowance’ for the first time for the year of assessment (YA)
2020. We have the pleasure of advising your board on this tax incentive as follows:

(a) Eligibility to claim RA

Your company is eligible to claim RA for YA 2020 as it has fulfilled requisite
conditions as follows:

(i) It is a resident company in Malaysia carrying on a manufacturing business;

(ii) It has been in operation for not less than 36 months (since 1 January 2014);
(iii) It had undertaken a qualifying project in modernising the existing manufacturing
activity in the year ending 31 December 2020; and
(iv) It had incurred qualifying capital expenditure on factory (extension), plant and
machinery (used for the purpose of the qualifying project) in the basis period for
YA 2020.

(b) The mechanism of this tax incentive

This tax incentive is given by way of an allowance (reinvestment allowance). RA is
given at a rate of 60% on qualifying capital expenditure incurred in the basis period for
a year of assessment. The RA can be deducted against 70% of statutory income from
manufacturing for each YA. The other 30% of statutory income will be taxed at the
prevailing rate for company.

In respect of the amount of RA utilized in a particular YA, equal amount of statutory

income from the manufacturing business will be exempt and it can be credited to
an exempt account. Exempt dividends can be distributed out of this account, subject to
your company has an equal amount of retained earnings to distribute dividend(s).

(c) The period for this incentive

RA can be given for 15 years of assessment from the first YA in which basis period
capital expenditure was first incurred. These 15 YAs would be from YA 2020 to
YA 2034. Qualifying capital expenditure on the factory (including the cost of extension
and/or renovation), plant and machinery directly in use for the purpose of a qualifying
project must be incurred within the basis periods for these 15 YAs.
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Suggested answer to Q1 (Cont’d)

(d) Chargeable income and exempt income for each of the years of assessment

The estimated amount of chargeable income and exempt income for each years of
assessment from 2020 to 2023 are as follows:

YA 2020 2021 2022 2023

RM’000 RM’000 RM’000 RM’000
Chargeable income 450 1,590 2,550 0
Exempt income 1,400 4,060 6,300 0

Please refer to the Appendix I attached.

(e) Circumstances under which RA cannot be claimed

A machine which is in use for purpose of business in the basis period for YA 2020
cannot be given RA under any one of the following circumstances:

1. The machine was acquired by way of a control transfer under any one of
the relevant situation as described under Para. 38(1) Sch. 3.

2. The machine is used by the director(s), or any members of administration,

management or clerical staff.

3. The machine is a leased / rented asset.

4. The machine was used for business but not specifically for purpose of
the qualifying project.

5. The machine was disposed of in the basis period for YA 2020.

6. The machine was to replace an existing/old machine in use for manufacturing

business.

We hope the above information and advice are helpful. Please do not hesitate to contact us for
any further information or clarification.

Thank you.

Yours faithfully,

Signed

Daniel Chew, Tax Manager

RAC Tax Consultant Sdn. Bhd.
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Suggested answer to Q2

RAC Consultancy Sdn Bhd

No. 1, Jalan Bersatu
50000 Kuala Lumpur

6 July 2020

The Board of Directors

MyHerbs Sdn. Bhd.
No. 2, Jalan Bahagia
50300 Kuala Lumpur

Dear Sirs / Madam,

Reinvestment Allowance (RA)

We refer to the above tax incentive and are pleased to provide the following information as
requested for your kind attention:

(i) The period of the tax incentive

The period of the tax incentive for RA is 15 years of assessment (YAs) from the first year
of assessment in its basis period in which qualifying capital expenditure on factory, plant
and machinery is first incurred, i.e. YA 2020 to YA 2034.

(ii) Type of qualifying capital expenditure

RA can be given on qualifying capital expenditure incurred on plant and machinery, factory,
clearing and levelling the land, drainage and irrigation directly in use for plantation.

(iii) The rate of RA and its deduction

RA is 60% on qualifying capital expenditure incurred in the basis period for a YA. The RA
deduction against the statutory income from business is 70%.

(iv) Unabsorbed / Unutilized RA

Any RA that cannot be given or cannot be given in full can be carried forward and be
deducted against 70% of statutory income from business in the subsequent YAs.

The unabsorbed / unutilized RA after the end of the tax relief period (after the 15 YAs) it
can be carried forward to set-off against 70% of statutory income from business within a
period of 7 consecutive YAs. After the end of 7 YAs, any unabsorbed / unutilized RA will
be deemed as Nil / disregarded.

(v) Exempt income

The amount of RA deducted in a YA which is equal to the statutory income abated can be
credited to an exempt account. Dividends that are paid out of this account are tax exempt in
the hands of the corporate shareholders on a two-tier basis.
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Suggested answer to Q2 (cont’d)

(vi) Computation of RA for YA 2020

Qualifying Capital Expenditure (QCE) RM’000

Farming land 0/-/Nil
Plant & machinery 12,000
Clearing and levelling the land for planting 7,000
Drainage and irrigation 4,000
Factory (RM16 million – RM3 million land cost) 13,000
Living quarters for workers 6,000
Total QCE 42,000

Total QCE: RM42,000,000 x 60% of RA = RM25,200,000

===========
(vii) Four differences between RA and ITA

No. REINVESTMENT ALLOWANCE (RA) INVESTMENT TAX ALLOWANCE (ITA)

1 A company must have been in operation for at A new company can claim ITA.
least 36 months to qualify for RA.
2 A company must carry on a business involving A company must carry on a manufacturing business
manufacturing or agricultural but need not be a with a promoted product or an agriculture business
promoted product or promoted activity. involving a promoted activity.
3 A company must have a qualifying project The company is not required to have any qualifying
involving expansion, modernization, automation project to claim ITA.
in existing business or diversification into a
related activity/product within the same
industry.
4 The qualifying capital expenditure must be The qualifying capital expenditure must be incurred
incurred within the basis periods for 15 within 5 years from the date of approval by MIDA.
consecutive years of assessment (YA’s) from
the first YA in which basis period it was first
incurred.
5 The unutilized RA after the end of the tax relief The unutilized ITA after the end of the tax relief
period (after 15 YAs) it can be carried forward period (after 5 years) it can be carried forward
to set-off against 70% of statutory income from indefinitely to set-off against 70% of statutory
business within a period of 7 consecutive YAs. income from business.
After end of the 7 YAs any unabsorbed /
unutilized RA will be deemed as Nil.
6 No application is required but approval is given Application of approval is given by Malaysian
by the Director General of Inland Revenue Investment Development Authority (MIDA) /
based on annual return form submitted to the Malaysian International Trade & Industry (MITI)
Inland Revenue Board.

We trust that the above information is helpful to your company. Should you need any further
clarification or information, please do not hesitate to contact us.

Thank you.

Yours faithfully,
Signed
---------------------------------------
Felix Tan, Tax Director
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q4(a)

Similarities
Investment Tax Allowance (ITA) Reinvestment Allowance (RA)

1. Capital expenditure incurred on industrial Similar capital expenditure incurred on

building, plant and machinery can qualify industrial building, plant and machinery can
for investment tax allowance. qualify for reinvestment allowance.
2. Generally, ITA can be deducted against Generally, RA can be deducted against 70% of
70% of statutory income. statutory income.
3. For a given year of assessment, abated For a given year of assessment, abated statutory
statutory income from business (equal to income from business (equal to the RA utilized)
the ITA utilized) can be credited to can be credited to an exempt account from
an exempt account from which tax exempt which tax exempt dividends can be distributed.
dividends can be distributed.
4. ITA given can be withdrawn if a qualifying RA given can be withdrawn if a qualifying
plant/machine is disposed of within 5 years plant/machine is disposed of within 5 years
from its date of acquisition. from its date of acquisition.
5. Any current year business loss from Any current year business loss from business
business (promoted activity / promoted (manufacturing / agriculture) can be deducted
product) can be deducted against the against the aggregate income (all sources:
aggregate income (all sources: business business and non-business income) in arriving
and non-business income) in arriving at the at the total income. [s44(2)]
total income. [s44(2)]
Any unabsorbed business loss (during the tax
Any unabsorbed business loss (during the incentive period) can be carried forward to
tax incentive period) can be carried subsequent YAs and to be deducted against the
forward to subsequent YAs and to be aggregate income from all businesses. [s43(20].
deducted against the aggregate income
from all businesses. [s43(20]. After the end of the tax incentive period
(15 YAs), the unabsorbed business loss can be
After the end of the tax incentive period carried forward up to 7 consecutive YAs to
(5 YAs), the unabsorbed business loss can deduct against the aggregate income from all
be carried forward up to 7 consecutive businesses. After end of the 7 consecutive YAs,
YAs to deduct against the aggregate any unabsorbed / unutilized amount will be
income from all businesses. After end of deemed as Nil / disregarded.
the 7 consecutive YAs, any unabsorbed /
unutilized amount will be deemed as Nil /
disregarded.

Differences
Investment Tax Allowance (ITA) Reinvestment Allowance (RA)

1. A new company can claim ITA. To qualify for RA, a resident company must
have been in operation for at least 36 months.
2. A company must carry on a promoted A company must carry on a business involving
activity / a business involving a promoted manufacturing or agricultural activity, which
product. may or may not involve a promoted activity /
promoted product.
3. No such a condition of having a qualifying A company must have a qualifying project
project. involving expansion, modernization, automation
or diversification of business activity / product
within the same industry.
BBFT3014 /BBFT3013 ADVANCED TAXATION

Suggested answer to Q4(a) (cont’d)

Differences
Investment Tax Allowance (ITA) Reinvestment Allowance (RA)
4. The qualifying capital expenditure must be The qualifying capital expenditure must be
incurred within 5 years from the date of incurred within the basis periods for 15 years of
approval by MIDA. assessment (YA) from the first YA in which
basis period it was first incurred.
5. The unutilized ITA after the end of the tax The unutilized RA after the end of the tax relief
relief period it can be carried forward period it can be carried forward to set-off
indefinitely and it can be utilized against against 70% of statutory income from business
70% of statutory income from business. within a period of 7 consecutive YAs. After end
of the 7 consecutive YAs, any unabsorbed /
unutilized RA will be deemed as Nil / Zero.
6. Approval for ITA is given by the Approval for RA is given by Director General
Malaysian Investment Development of Inland Revenue / Inland Revenue Board.
Authority (MIDA).

Suggested answer to Q4 (b)

The similarities in the tax treatment in respect of pioneer status and reinvestment allowance:

Pioneer Status (PIA, 1986) Reinvestment Allowance

(Sch. 7A of ITA, 1967)
Resident company A resident company carrying on a A resident company either in
in Malaysia manufacturing business by producing a manufacturing business or agricultural
promoted product(s) or agricultural business undertaking a qualifying
business participated in a promoted project is eligible to claim reinvestment
activity is eligible to claim pioneer allowance which is subject to other
status incentive. requisite conditions.
Capital allowance After the end of the pioneer period (i.e. Similarly, after the end of the tax
(CA) & Industrial post pioneer), the unabsorbed CA/ IBA incentive period (15 YAs), the
building allowance can be carried forward up to unabsorbed CA/ IBA can be carried
(IBA) 7 consecutive YAs and deduct against forward up to 7 consecutive YAs and
the adjusted income. If there were any deduct against the adjusted income. If
unabsorbed / unutilized amount after there were any unabsorbed / unutilized
the 7 YAs, it will be deemed as Nil. amount after the 7 YAs, it will be
deemed as Nil / disregarded.
Business loss After the end of the pioneer period (i.e. After the end of the tax incentive period
post pioneer), the unabsorbed business (i.e. 15 YAs), the unabsorbed business
loss can be carried forward up to loss can be carried forward up to 7
7 consecutive YAs and deduct against consecutive YAs and deduct against the
the aggregate of all business income. aggregate of all business sources. If
If there were any unabsorbed / there were any unabsorbed / unutilized
unutilized amount after the 7 YAs, it amount after the 7 YAs, it will be
will be deemed as Nil / Zero. deemed as Nil / Zero.
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Suggested answer to Q4(b)

The similarities in the tax treatment in respect of pioneer status and reinvestment allowance:

Pioneer Status (PIA, 1986) Reinvestment Allowance

(Sch. 7A of ITA, 1967)
Distribution from the Distribution of business profit from Distribution of business profit from the
tax exempt income the tax exempt account to a tax exempt account to a shareholder is
account attributed to shareholder is treated as tax exempt treated as tax exempt dividend.
the pioneer business/ dividend.
reinvestment
allowance

The differences in the tax treatment in respect of pioneer status and reinvestment allowance:
Pioneer Status (PIA, 1986) Reinvestment Allowance (Sch. 7A of ITA,
1967)
Company A new company qualifies for the tax Only a resident company (in manufacturing /
incentive. agricultural activity) which has been in business
operation for not less than 36 months.
Promoted It must be a promoted product It needs not involve a promoted product /
Product / /promoted activity in the sectors of promoted activity and it is limited only to the
Activity manufacturing, agriculture, tourism, sectors of manufacturing and agriculture.
and hotel.
Period of Five (5) years commencing from the 15 years of assessment from the first year of
incentive date of production for pioneer assessment in which basis period the qualifying
business. expenditure on factory, plant and machinery etc.
was first incurred.
Qualifying No such a condition. Company must undertake a qualifying project to
project expand, modernize, automate its business activity
or diversify into a related product/activity within
the same industry.
Manner of By giving exemption of statutory By giving reinvestment allowance on qualifying
giving tax income at a rate of 70%. expenditure incurred in the basis period for a year
incentive of assessment at a rate of 60%, and deduct it
against 70% of statutory income.
Business Any current year pioneer loss can Any current year adjusted loss from business can
loss only be carried forward and to be be deducted against the aggregate income
deducted against any abated (all sources: business and non-business income) in
statutory income in the subsequent arriving at the total income.
year(s) of assessment (during the
pioneer period) before crediting
abated statutory income to an
exempt income account.
Donation Cash donation(s) to an approved Cash donation(s) to an approved charitable
(Cash) to charitable institution / organization institution / organization is restricted to 10% of its
approved is restricted to 10% of its aggregate aggregate income. It can be given a deduction
institution income. It can be given a deduction from aggregate income (all sources: business and
from aggregate income (all sources: non-business) in arriving at its total income.
business and non-business, i.e.
except of pioneer business on 30%
of statutory income deemed as total
income) in arriving at its total
income.
BBFT3014/BBFT3013 ADVANCED TAXATION

Suggested answer to Q5

(a)(i) Under s.34A of the Income Tax Act 1967, expenditure on research and development
(R & D) qualifies for double deduction in computing the adjusted income of a business if:

1. It is revenue in nature;
2. It is for an activity that falls within the definition of research;
3. It must be for an approved R & D project(s) and must be incurred in the basis
period;
4. An application for approval is submitted to the Technical Division of the Inland
Revenue Board of Malaysia (IRBM) using a prescribed form which has to be
certified by an approved (external) auditor.

(a)(ii) The following expenditures will qualify for double deduction:

RM
Raw materials for research 100,000
Research staff salaries 300,000
Research equipment (capital expenditure) 0
Rental of other research equipment 95,000
Building renovations (capital expenditure) 0
Rental of building for research 120,000
615,000

Only RM615,000 x 85% = RM522,750 will be eligible for double deduction as 15% of
the intended activities are not R & D activities. The 15% of the expenditures equal to
RM615,000 x 15% = RM92,250 will qualify for single deduction only since
the conditions for double deduction will not be met.

Expenditure incurred on quality control or routine testing of products does not fall
within the definition of R & D and will not eligible for double deduction. Single
deduction will be given as these expenses will be incurred in the production of business
income.

Capital expenditure incurred on the renovations of rented premises for the purpose of
carrying on research will qualify for industrial building allowance under Para. 37B of
Sch. 3 of ITA, 1967 once the research has been approved.

Capital allowance and industrial building allowance can also be claimed for the research
equipment and building renovations respectively.

Capital allowances in respect of machinery or plant used can be claimed under Para.
37D of Sch. 3 of ITA, 1967.
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Suggested answer to Q5 (cont’d)

(b) The circumstances under which a double deduction can be given for research expenditure
under ss.34A and 34B, ITA,1967 are:

(i) Where the research is approved by the Director General of Inland Revenue
under powers delegated to him by the Minister of Finance.

(ii) Where the expenditure is made by a person within ten years from the date of
approval for industrial adjustment allowance [under s.31A of the Promotion of
Investments Act 1986.]

(iii) Where it is a contribution to an approved research institute.

(iv) Where it is a payment for use of the services of an approved research institute.

(v) Where it is a payment for use of the services of an approved research company.

(vi) Where it is a payment for use of the services of a research and development
company.

(vii) Where it is a payment for use of the services of a contract research and
development company.

(c) A research and development company is a company which provides research and
development services in Malaysia to its related company or to any other company.

A contract research and development company is a company which provides research

and development services in Malaysia only to a company which is not its related
company.

A related company means (in Section 2 of PIA, 1986):

i. its holding company
ii. its subsidiary, or
iii. a subsidiary of its holding company.