TAR UC (FAFB) – RAC Year 3 (ACADEMIC YEAR 2021/2022)

BBFT3014/BBFT3013 ADVANCED TAXATION Tutorial 2: Tax Incentive – PS &

ITA

Suggested answer to Q1

RAC Tax Consultant Sdn. Bhd.

No. 1, Jalan Utama
50000 Kuala Lumpur.

6 July 2021

The Board of Directors

Satu Sdn. Bhd.
81C, Jalan Pelaburan
40000 Shah Alam,
Selangor.

Dear Sirs/Madam,

Tax incentives: Pioneer Status & Reinvestment Allowance

Further to your letter dated 1 July 2021 received from your finance manager withtheprojected income and
expenditure for the years of assessments (YA) 2021 to 2026, wehave the pleasure of advising your board on
the above tax incentive as follows:

(a) Mechanism of giving incentive

The incentive is given by direct exemption of statutory income fromthe pioneer business at the
prescribed rate of 70%. The other 30% of the statutory incomewill be deemed to be total income and
taxable at the tax prevailing tax rate of for the relevant YA.

(b) Capital allowance and loss for the pre-pioneer business The unabsorbed/unutilised capital allowance
of RM5,500,000 frompre- pioneer can be carried forward into the pioneer period and can be
deductedagainst the adjusted income from the pioneer business. If there is anyunabsorbed capital
allowance after the end of the pioneer period, it canbecarried forward to deduct against the adjusted
income from the business.

The unabsorbed business loss of RM200,000 (RM300,000 – RM100,000) from pre-pioneer can
only be carried forward to the post-pioneer periodandtobe given deduction against the statutory
income from the post-pioneer business.

After the end of the pioneer period, the unabsorbed business loss (if any) has to be utilized within 7
consecutive YAs (i.e. YAs 2027 to 2033). Anyunabsorbed / unutilized amount which is not deducted at
the end of the periodof 7 consecutive YAs shall be deemed as Nil / disregarded.
BBFT3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q1(cont’d)

(c) Pioneer business loss for YA 2022

The pioneer business loss for YA 2022 has to be carried forward(during/within the pioneer period)
and must be deducted against the abatedstatutory income from the pioneer business before
 crediting the latter (abatedstatutory income) to an exempt income account. It cannot be deducted
against the aggregate income from all sources (business and non-business) in arrivingat the total
income.

(d) Total chargeable income and total exempt income for the pioneer periodFor the pioneer period
from YAs 2022 to 2026, the total chargeable incomewould be RM5,076,000 and total exempt income
would be RM10,510,000. Please refer to the Appendix A attached for the details tax computation.

(e) The possibility of claiming reinvestment allowance for YA 2027 onwards After the end of the
pioneer period, for YAs 2027 to 2041 (15 YAs), it is possiblefor your company to claim
reinvestment allowance, provided the followingconditions would be fulfilled:

1. Your company must be resident in Malaysia;

2. It has a qualifying project whereby it undertake to expand, modernize, automate its business
activity or diversify into a related product withinthe
same industry (manufacturing); and

3. It must incur qualifying capital expenditure on factory, plant andmachinery in the basis period for
the relevant YA’s in respect of its qualifying project.

Noted that your company would have operated for more than 36 months bythenon 1.11.2026, the
beginning of the basis period for YA 2027 (basis period: 1.11.2026 to 31.10.2027).

We hope the above information is helpful. Please do not hesitate to contact us if you needfurther information.

Thank you.

Yours faithfully,

Michael Yeo

Michael Yeo
Tax Director
BBFT 3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q3

RAC Tax Consultant Sdn. Bhd.

11, Jalan USJ4/1A,
47610 UEP Subang Jaya
Selangor.

Current date, 2021

The Board of Directors

Victory Sdn. Bhd.
No. 123, Jalan Universiti,
40000 Petaling Jaya, Selangor

Dear Sirs/Madam,
Investment tax Allowance

We understand that your company has commenced manufacturing a promoted product and had been granted
‘investment tax allowance’ (ITA) incentive. We have the pleasureof advising your company in respect of
this tax incentive on aspects as follows:

(a) The period of the incentive

The period of the incentive is 5 years from the date of approval (by MIDA), that is, from 1 August
2020 to 31 July 2025.

(b) Qualifying capital expenditure

ITA can be given on qualifying capital expenditure incurred on factory/ industrial building / plant
and machinery directly in use for the purpose of thepromoted product.

ITA would not be given in respect of capital expenditure incurred on plant, machinery and living
quarters that are used by the director(s) or any member of the management, administrative or clerical
staff. The land for thefactory/industrial building will not qualify for ITA.

(c) The rate of ITA and its deduction

The rate of ITA is 60% on qualifying capital expenditure incurred in the basis period for a YA. ITA will
be deducted against the 70% of statutory income frombusiness.

(d) Exempt income

For the amount of ITA deducted, equal amount of statutory income is abatedand can be credited to an
exempt account. Dividends that are paid out of this account are tax exempt. A corporate shareholder
may credit the exempt dividendreceived into a second tier exempt account and on distributes the exempt
dividend toits shareholder(s).
BBFT3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q3 (cont’d)

(e) ITA and Exempt income

The estimated amount of ITA claimable and exempt income for each YAfromYA 2021 to YA 2025
are as follows:

2025
YA 2021 2022 2023 2024

RM’000 RM’000 RM’000 RM’00

0

ITA 11,400 0 900 5,400

Exempt income 0 0 0 0

RM’000
0
3,920

Please refer to the Appendix I.

(f) Option: Pioneer status or Investment tax allowance If pioneer status is opted, the abated
 statutory income at 70%after deducting
pioneer business loss brought forward RM160,000 from YA 2021 which canbecredited to the exempt
account for the pioneer period in YA 2025 wouldbeRM3,760,000 [RM5,600,000 x 70% =
RM3,920,000 - RM160,000 (pioneer business loss b/f from YA 2021)].

For the investment tax allowance (ITA) opted, the amount of ITAat 60%of the qualifying capital
expenditure incurred on the factory and plant &machinery would be RM17,700,000 (refer to
Appendix I). When the ITAis fully utilized, the amount of abated statutory income would be
RM17,700,000.

Hence, it (VSB) should not opt for pioneer status in preference to investment tax allowance as the
exempt income under ITA is higher than pioneer byRM17,700,000 (ITA) – RM3,760,000 (PS) =
RM13,940,000.

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,

IVAN LEE

Ivan Lee
Tax Consultant
BBFT3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q4

(a) (i) I would advise Task Sdn. Bhd. (TSB) to opt for pioneer status (PS) if it is carrying on a business
of manufacturing a promoted product andthe
business profits are high and qualifying capital expenditure is not substantial at the initial
years (the first 5 years). The company shouldnot have pioneer loss as it will affect the future
year abated statutoryincome (exempt income). It should not have a non-pioneer business
andpioneer business in the same company. For the abated statutory incomefrom pioneer
business will be reduced if the non-pioneer business suffers business losses in the current year.

(ii) I would advise TSB to opt for investment tax allowance (ITA) if it iscarrying on a
business of manufacturing a promoted product andthe
business profits are expected to be low or to suf er losses and qualifyingcapital expenditure is
substantial at the initial years (the first 5 yearsfrom the date of approval by MIDA). The
company can have more thanone business as the business loss will not reduced the amount
tobe
credited to the tax exempt income account of the investment taxallowance in the
current year.

(iii) I would advise TSB to opt for reinvestment allowance (RA) if it isa resident company and
has been in business operation for not less than36 months, and it had undertaken a qualifying
project in expanding, automating or modernizing its manufacturing activities or diversifying
into a related product within the same manufacturing activity in the basis period for a YA.

(b) (i) The mechanism of the tax incentive

For pioneer status is given by direct exemption of statutory income from the pioneer
business at the prescribed rate of 70%.
 For ITA, the incentive is given by way of allowance based on 60%of qualifying capital
expenditure incurred (in the basis period of a YA) over a period of 5 years from the date
of approval by MalaysianInvestment Development Authority (MIDA). For the
ITAutilizedina
YA, equal amount of statutory income (from the business involvingapromoted
product) is abated / exempt.

For RA, the incentive is given by way of allowance based on 60%of qualifying capital
expenditure incurred (in the basis period of a YA) for a period of 15 consecutive years of
assessment, fromthe first YAinwhich basis period qualifying plant expenditure was first
incurredon
industrial building, plant and machinery for purpose of the qualifyingproject. For the RA
utilized in a YA, equal amount of statutory income(from the business involving a qualifying
project) is abated/exempt.
BBFT3014/BBFT3013 ADVANCED TAXATION Suggested answer to Q4 (cont’d)

(b) (ii) The period of incentive

For pioneer status, the incentive is granted for 5 years fromthe date of production stated in the
pioneer certificate.

For ITA, the incentive is granted for 5 years from the date of approval by MIDA.

For RA, the incentive is given for 15 years of assessment, fromthe first YA in which the basis
period of the qualifying capital expenditure onindustrial building, plant or machinery was
first incurred directly inusefor the purpose of a qualifying project.

(iii) The withdrawal of the tax incentive

For pioneer status, there is no provision to withdraw an exemptionof statutory income from
pioneer business.

The ITA / RA granted can be withdrawn if the relevant plant/machinery

concerned is disposed of within five (5) years fromthe date of its acquisition. The withdrawal is
by adding an equal amount tothe
statutory income for the YA in which basis period it was disposed of.

(iv) The tax treatment of the current year business loss, if any.
For pioneer status, the current year pioneer loss has to be carriedforward and it must be
deducted against the abated statutory incomefrom the pioneer business for the
subsequent YA onwards (withinthe
pioneer period) before crediting the abated statutory income toanexempt income account.

For ITA, the current year business loss can be deducted against theaggregate income from
all sources (business and non-business income) in arriving at the total income under Section
44(2). Any unabsorbedbusiness loss can be carried forward to subsequent YA(s) and
tobededucted against the aggregate income from all businesses under Section 43(2).

For RA, the current year business loss and any unabsorbed business loss are treated similarly as
in the case of ITA.