Tax Incentives For Research Behind Chapter 13

10/8/2018 Tax incentives for research and development in Malaysia | ACCA Global
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Tax incentives for research and

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This article is relevant to candidates preparing for the ATX-MYS

Advanced Taxation exam. The article is based on the prevailing
laws as at 31 March 2018. Candidates are expected to already
have a basic understanding of the subject matter.
This article collates and discusses the provisions in the Income Tax Act 1967 (the Act) and the Promotion of Investments Act 1986
(PIA) to promote candidates understanding of the interplay of the income and deductions relating to the various R&D activities or
https://www.accaglobal.com/hk/en/student/exam-support-resources/professional-exams-study-resources/p6/technical-articles/incentives.html 1/9
expenditure. While reading this article, candidates are expected to refer to the relevant provisions of the Act, the PIA, and Public
Ruling 5 of 2004 as amended in 2008.
Incentives discussed in this article
This article discusses the incentives in place to encourage the carrying out of research and development (R&D) activities in Malaysia,
namely:
• Approved R&D expenditure
• Contract R&D company
• R&D company
• In-house R&D
Background
R&D incentives
Section 34(7) of the Act provides for a single deduction for expenditure, non-capital in nature, on scientific research related to the
business and directly undertaken by the taxpayer or on his behalf. This measure was apparently not sufficiently attractive.
In an effort to springboard Malaysia higher up the value chain and increase the quality of its exports of manufactured goods, the
government has actively promoted and encouraged R&D activities in the country. In addition to research grants, the government has
provided a suite of tax incentives as follows:
Double deduction Available for:
• ‘Approved R&D’ expenses – under s34A
• Payment for services by ‘Contract R&D companies’ and ‘R&D companies’ –

under s34B
Exemption of income • Contract R&D company – Pioneer status or Investment tax allowance (ITA)
or additional relief for
capital expenditure • R&D company – ITA
• In-house R&D – ITA
Capital allowances
In addition to the incentives above, paragraph 37B of Schedule 3 of the Act provides for industrial building allowances for a building
used in approved research, used by a contract R&D company or used by an R&D company. Qualifying building expenditure includes
any capital expenditure incurred on the alteration or renovation of rented premises to carry out research activities.
Paragraph 37D of Schedule 3 of the Act similarly provides for capital allowances in respect of capital expenditure for plant and
machinery used for the purpose of approved research, even where the research is not related to the business activity.
Definition of research
Section 2 of the PIA defines research and development to mean:
‘… any systematic or intensive study carried out in the field of science or technology with the object of using the results of the study
for the production or improvement of materials, devices, products, produce or processes but does not include:
• quality control of products or routine testing of materials, devices, products or produce
• research in the social sciences or the humanities
• routine data collections
• efficiency surveys or management studies, and
• market research or sales promotion.’
The objective of the research must be in accordance with the needs of the country and must be beneficial to the Malaysian economy.
Related company
The term ‘related company’ is often used in R&D incentives. It is defined in the PIA as follows:
‘… in relation to a company, a related company means a company:
(a) the operations of which are or can be controlled, either directly or indirectly, by the first-mentioned company;
(b) which controls or can control, either directly or indirectly, the operations of the first-mentioned company;
(c) the operations of which are or can be controlled, either directly or indirectly, by a person or persons who control or can control,
either directly or indirectly, the operations of the first-mentioned company.
Provided that a company shall be deemed to be a related company of another company if:
• at least 20% of its issued share capital is beneficially-owned, directly or indirectly, by that other company; or
• at least 20% of the issued share capital of that other company is beneficially owned, either directly or indirectly, by the first-
mentioned company.’
In short, in relation to a company, a related company includes:
(a) its subsidiary;
(b) its holding company,
(c) a subsidiary of its holding company; and
(d) associated company.
This means that, prima facie, all companies in the same group of companies and direct associates are related companies for the
purpose of R&D incentives.
Public ruling
The tax authorities issued Public Ruling 5 of 2004 entitled Double deduction incentive on research expenditure (with an Addendum
issued in 2008) to clarify relevant issues such as examples of what is research, what is not research, criteria for approval, and what
constitutes qualifying research expenditure.
Approved R&D expenditure
This incentive measure under section 34A of the Act provides for a double deduction in respect of qualifying research expenditure
(which is revenue in nature) related to a research programme undertaken by a business entity. The double deduction is made in
arriving at the adjusted income of the business.
Please note that the research programme must have prior approval by the Minister of Finance. Also, it is not necessary for the
subject matter of the research programme to be related to the business activity carried out by the company.
Qualifying expenditure includes:
• raw materials used in the research project
• technical services
• travelling and transportation costs
• salary and allowances of research personnel
• maintenance costs of research buildings and equipment, and
• rental of equipment, machinery or buildings used for research.
In this regard, it is pertinent to note that payment of royalties, licencing fees, etc, will not qualify as these represent ‘purchased’
research. The thrust of research incentives is that the research activity must be carried out in Malaysia.
Where a pioneer company carries out an approved research project during its tax relief period, it can elect to defer the deduction of
the qualifying research expenditure to the post-pioneer period so as to reap the full benefit of the double deduction. The mechanism
for this is the R&D expenditure charged to the revenue statement during the tax relief period (TRP) is added back, thus increasing
the adjusted (therefore exempted) income during the TRP. The company can elect for the R&D expenditure during the TRP to be
given a single deduction after the TRP [section 34A(4A)].
Contract R&D company

A 'contract R&D company' is defined under section 2 of the PIA as a company which:
• provides R&D services
• in Malaysia
• only to companies other than its related companies.
In other words, a contract R&D company provides its services only to non-related companies – ie all third-party independent
companies.
A contract R&D company is eligible for either one of the incentives below:
1. Pioneer status – exemption of 100% (instead of the standard 70%) of the statutory income for five years from its production day;
or
2. ITA – 100% (instead of the standard 60%) of qualifying capital expenditure incurred within ten years (instead of the normal five
years) to be set off against 70% of the statutory income.
Note that both the pioneer status and the ITA offer enhanced benefits. Additionally, any unabsorbed losses and capital allowances
may be carried forward to the post-tax relief period.
To make it even more attractive to users of the R&D services provided by a contract R&D company, any person who pays for the use
of services of a contract R&D company will be eligible for a double deduction of such payments under section 34B of the Act.
R&D company
An R&D company is defined under section 2 of the PIA to mean a company which:
• provides R&D services
• in Malaysia
• to its related companies or any other companies.
Note that while a contract R&D company must render its services only to unrelated parties, an R&D company may render its services
to related companies.
An R&D company does not qualify for pioneer status: it is eligible for ITA only. The ITA available is 100% of qualifying capital
expenditure incurred within 10 years set off against 70% of statutory income.
Any unabsorbed losses and capital allowances may be carried forward pursuant to the relevant provisions in the Act.
Any person who pays for the use of services of an R&D company and who is not a related company qualifies for a double deduction
of such payments under section 34B of the Act. This means that if a company is likely to provide R&D services to one or more related
companies, the related companies will not qualify for a double deduction for the R&D expenditure. Nevertheless, such related-
company users may avail themselves of the single deduction for scientific research available under section 34(7) of the Act.
Hence, when a group of companies embarks on establishing an R&D entity to cater to its R&D needs, it is well-advised to consider
the relative merits of either going for the ITA incentive for the R&D company or opting for the double deduction for the users of the
R&D services in respect of the R&D fees under section 34B. Please see the illustration below:
Illustration
XYZ Group of companies intends to establish an R&D company (R&D Co) to cater for the burgeoning R&D needs of the group
companies. In the first three-year plan, R&D Co will incur RM2 million of qualifying capital expenditure (QCE) on a factory, machinery
and equipment to carry out R&D services for a highly profitable fellow subsidiary Zee Sdn. Bhd. (Zee) which will pay R&D fees of
RM3 million evenly over three years to R&D Co.
The XYZ Group wants to know whether R&D Co should apply for ITA incentive.
Computation of tax savings for the XYZ group in the first three YAs – click here
In-house R&D
Section 2 of the PIA defines in-house research as:
• R&D
• carried on in Malaysia
• within a company for the purpose of its own business.
The incentive available for such in-house research is ITA at 50% of qualifying capital expenditure incurred within 10 years. The ITA is
set off against 70% of statutory income.
It should be noted that there is no mutual exclusion stipulated for the two incentive measures of
• in-house R&D and
• approved research.
A company may therefore apply for approved research to obtain a double deduction for the R&D expenditure under section 34A of
the Act, and at the same time apply for in-house R&D incentive under the PIA. There is no double claim as the in-house R&D
incentive provides for ITA in respect of qualifying capital expenditure while the section 34A double deduction is expressly for non-
capital expenditure.
R&D Incentives summarised – click here
Written by a member of the ATX-MYS examining team
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10/8/2018 Tax incentives for research and development in Malaysia | ACCA Global

Tax incentives for research and

Home / Students / Study resources / Advanced Taxation (ATX) / Technical articles

This article is relevant to candidates preparing for the ATX-MYS

Ruling 5 of 2004 as amended in 2008.

Incentives discussed in this article

• Approved R&D expenditure

• Contract R&D company

provided a suite of tax incentives as follows:

Double deduction Available for:

• ‘Approved R&D’ expenses – under s34A

• Payment for services by ‘Contract R&D companies’ and ‘R&D companies’ –

• In-house R&D – ITA

Section 2 of the PIA defines research and development to mean:

• quality control of products or routine testing of materials, devices, products or produce

• research in the social sciences or the humanities

• routine data collections

• efficiency surveys or management studies, and

• market research or sales promotion.’

‘… in relation to a company, a related company means a company:

either directly or indirectly, the operations of the first-mentioned company.

In short, in relation to a company, a related company includes:

(a) its subsidiary;

(b) its holding company,

(c) a subsidiary of its holding company; and

(d) associated company.

purpose of R&D incentives.

constitutes qualifying research expenditure.

Approved R&D expenditure

arriving at the adjusted income of the business.

Qualifying expenditure includes:

• travelling and transportation costs

• salary and allowances of research personnel

• maintenance costs of research buildings and equipment, and

• rental of equipment, machinery or buildings used for research.

given a single deduction after the TRP [section 34A(4A)].

Contract R&D company

• provides R&D services

• only to companies other than its related companies.

may be carried forward to the post-tax relief period.

• provides R&D services

• to its related companies or any other companies.

RM3 million evenly over three years to R&D Co.

Section 2 of the PIA defines in-house research as:

• within a company for the purpose of its own business.

set off against 70% of statutory income.

• in-house R&D and

R&D Incentives summarised – click here

Written by a member of the ATX-MYS examining team

• Student Accountant hub

ACCA Learning Community

ACCA-X online courses

Member events and CPD

Past exam papers

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