Exploring the Essentials of Investment Tax Allowance (ITA) in Malaysia

Investment Tax Allowance is an allowance granted based on the qualifying expenditure (QE) incurred for the purpose of the promoted activity or promoted product.

Tax Treatment
A company which has been granted approval for an investment tax allowance is eligible to claim an investment tax allowance on the QE incurred in the basis year for a year of assessment.

Amount of investment tax allowance granted
The amount of the investment tax allowance is calculated based on the rate which has been approved which is 60% or other rate approved by the Minister of Finance which is not more than 100% of the QE.

Tax incentive period
The investment tax allowance is allowed in respect of the QE incurred within the tax incentive period of five (5) years from the date from which the approval is to take effect.

If a company commence to carry on the business after the date from which the approval is to take effect, any QE incurred before the commencement of the business is deemed to be incurred in the basis period in which the business has commenced.

Exemption of statutory income
A company may claim an exemption of income up to 70% or other rate not exceeding 100% of the statutory income of a promoted activity or promoted product which is equal to the amount of the approved ITA.

The balance of 30% or other rate of statutory income would be taxed at the prevailing corporate tax rate.

Unabsorbed investment tax allowance
Where there is no statutory income or it is insufficient to fully utilised the ITA for that year of assessment, the amount of unabsorbed investment tax allowance can be carried forward to the subsequent years of assessment for which there is statutory income until such allowance is fully utilised.

Investment tax allowance withdrawn if assets disposed of within five (5) years
Where a company has incurred capital expenditure on assets for the purposes of a promoted activity or promoted product, it may decide to dispose of the said asset. Any disposal of such assets within a period of five (5) years from the date of acquisition would result in the withdrawal of the ITA granted.

Promoted Activities and Promoted Products
The promoted activities and promoted products are published by statutory order as follows:

1. Promotion of Investments (Promoted Activities and Promoted Products for High Technology Companies) Order 2012 and is read together with Promotion of Investments (Promoted Activities and Promoted Products for High Technology Companies) (Amendment) Order 2018;
2. Promotion of Investments (Promoted Activities and Promoted Products for Selected Industries) Order 2012;
3. Promotion of Investments (Promoted Activities and Promoted Products for Reinvestment) Order 2012;
4. Promotion of Investments (Promoted Activities and Promoted Products) Order 2012;
5. Promotion of Investments (Promoted Activities and Promoted Products for Small Scale Companies) Order 2012

Application for Grant of Approval for Investment Tax Allowance
The company has to make an application to obtain an approval from the relevant authorities before the investment tax allowance can be claim for the relevant year of assessment.

Where an application is made by a company which is controlled directly or indirectly by:

1. A pioneer company or a company which has been granted approval for an investment tax allowance for the same promoted activity or promoted product; or
2. A company granted pioneer status for the same promoted activity or promoted product; or
3. A post-pioneer company or a company which has been granted approval for an investment tax allowance and the tax incentive period has ended,

The application would be considered if it fulfils such conditions as may be prescribed by the Minister in a statutory order.

A pioneer company or a company which has been granted pioneer status or an approval for investment tax allowance of a promoted activity or promoted product is only eligible to apply for investment tax allowance for other promoted activity or promoted product.

A company which has been granted pioneer status may be eligible to apply for investment tax allowance for the same promoted activity or promoted product by giving a notice in writing to the Minister to surrender the grant of pioneer status provided that the Minister is satisfied with the reasons for the surrender of the pioneer status.

All applications of grant for approval for an investment tax allowance are to be made by completing the relevant forms, which are to be submitted to the Malaysian Investment Development Authority (MIDA).

Approval
An approval in respect of an application for an investment tax allowance may be granted by the Minister with the concurrence in writing of the Minister of Finance under the provisions of the Promotion of Investments Act (PIA). The approval may be granted retrospectively from a date not earlier than:

1. The date from which the activity or the product has been determined by the Minister to be a promoted activity or a promoted product;
2. The date from which the company initially engages in the promoted activity or in the production of the promoted product;
3. The date on which the qualifying expenditure has been incurred; or
4. Three (3) years from the date of the application received by the Minister

Whichever is earlier. 

Qualifying Expenditure (QE)
Meaning of QE for purposes of investment tax allowance is the capital expenditure:

1. In relation to manufacturing, means capital expenditure incurred on a factory or on any plant and machinery used in Malaysia in connection with and for the purposes of the promoted activity or promoted product;
2. In relation to agriculture, means capital expenditure incurred in respect of the:
   • Clearing and preparation of land;
   • Planting of crops;
   • Provision of irrigation or drainage systems;
   • Provision of plant and machinery used in Malaysia for the purposes of crop cultivation, animal farming, aquaculture, inland or deep sea fishing and other agricultural or pastoral pursuits;
   • Construction of access roads including bridges; and
   • Contruction or purchase of buildings (including those provided for the welfare of persons or as living accomodation for persons) and structural improvements on land or other structures which are used for the purposes of crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits;
3. In relation to hotel business, means capital expenditure incurred on the purchase of a building or construction of an hotel building of the approved standard in Malaysia, including any alteration, extension and renovation or on the provision of plant and machinery or other facilities used in connection with the hotel business;
4. In relation to a tourist project, means capital expenditure incurred in respect of a tourist project in Malaysia and includes capital expenditure on:
   • Clearing of land for purposes of a tourist project;
   • Planting of trees and plants;
   • Construction of road and other infrastucture facilities provided they are on land forming part of the land used for the purposes of a tourist project;
   • The provision of birds, animals and other exhibits;
   • The provision of plant and machineryl;
   • The provision of buildings (including those provided for the welfare of persons or as living accommodation for persons), structural improvements on land and other structures on land forming part of the land used for purposes of a tourist project;
   • In relation to manufacturing related services, means capital expenditure incurred on any asset used on Malaysia in connection with and for the purpose of such promoted services. Any asset used in Malaysia refers to plant, machinery or buildings.

Compliance of the Conditions of ITA
A company which has been granted the effective date of the ITA has to provide the Minister of Finance with particulars as determined for the purposes of the compliance of any of the conditions imposed. This has to be done within the period of the ITA allowed by the Minister of Finance.

Withdrawal of Approval for Investment Tax Allowance
If a company fails to comply with any of the terms or conditions imposed in the approval for ITA, the Minister may by notice in writing require the company to show cause why the approval shoudl not be withdrawn within 30 days from the date of service of the notice.

The minister may withdraw the approval for ITA if:

1. The company has failed to comply with the show cause notice served on it; or
2. He is not satisfied with the reasons for the non-compliance.

Surrender of Approval for Investment Tax Allowance
Any company which has been granted approval for investment tax allowance of a promoted activity or promoted product, may be eligible to apply for reinvestment allowance upon the surrender of the ITA granted by giving a written notice to the Minister of such a surrender.

A company may at any time surrender the grant of approval of the investment tax allowance for any purpose other than for the purpose of making an application for pioneer status for the same promoted activity or promoted product.

Separate Accounts
A company which has been granted an approval for investment tax allowance is not allowed to carry on any business other than a business where the whole of the gross income is derived from its promoted activity or promoted product during the tax incentive period without informing the Minister.

If the company does carry on a business other than that of the promoted activity or promoted product, it has to keep separate accounts for that other business, including another business involving additional promoted activity or promoted product.