BBFT3024 ADVANCED TAXATION (RPA)

Tutorial 2: Tax Incentives under PIA 1986

i. Pioneer Status (PS)
ii. Investment Tax Allowance (ITA)

Suggested answer to Q1

RPA Tax Consultancy Sdn. Bhd.

No. 1, Jalan Utama
Subang Jaya
40000 Selangor

The Board of Directors

Prime Sdn. Bhd.
345, Jalan Besar, Serdang
40000 Selangor.

Current date

Dear Sir/Madam,

Tax Incentives: Pioneer Status, Investment Tax Allowance and Reinvestment Allowance

We refer to the meeting with your board of directors and the recent email received from your
chief accountant with the projected income and expenditure for the years of assessments 2022
to 2027, we have the pleasure of advising your board on the above tax incentives as follows:

(a) Mechanism of giving incentive

The pioneer tax incentive is given by direct abatement/exemption of statutory income
from the pioneer business at the prescribed rate of 70%. The other 30% of the
statutory income will be deemed to be total income and to be taxed at the prevailing
tax rate for the relevant year of assessment.

(b) Tax incentive/relief period

The tax relief period for pioneers is 5 years commencing from the ‘production date’.
It will be stated in the pioneer certificate issued by the Malaysian Investment
Development Authority. The period will be from 1.1.2023 to 31.12.2027 and will
involve the years of assessment (YAs) 2023 to 2027.

(c) Pre-pioneer: Capital allowance and Business loss for YA 2022

The pre-pioneer unabsorbed capital allowance of RM3.5 million can be carried
forward into the pioneer period and can be deducted against the adjusted income from
the pioneer business.

The pre-pioneer business loss of RM300,000 is to be set off against the aggregate
income of RM120,000 for YA 2022. The unabsorbed business loss of RM180,000
(RM300,000 - RM120,000) for YA 2022 cannot be carried forward into the pioneer
period. It can be carried forward to the post-pioneer period after YA 2027 and it can
be deducted against the statutory income from the post-pioneer business.
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Suggested answer to Q1 (cont’d)

(d) Pioneer business loss

The pioneer loss of RM1 million for YA 2023 has to be carried forward
(during/within the pioneer period) and must be deducted against the abated statutory
income from the pioneer business for YA 2026 before crediting the abated statutory
income to an exempt income account. For pioneer business loss, it cannot be set off
against the aggregate income (business and non-business income).

(e) Total chargeable income and total exempt income for the pioneer period
For the pioneer period from YAs 2023 to 2027, the total chargeable income would be
RM5,280,000 and the total exempt income would be RM10,830,000 [Please refer to
the attached Appendix I].

(f) Pioneer status (PS) vs Investment tax allowance (ITA)

The rate of ITA is 60% on qualifying capital expenditure incurred. The ITA that can be
given would be RM10,740,000 [Refer to Appendix II].

When ITA is fully given a deduction against 70% of the statutory income in the period
from YAs 2023 to 2027 or later, an equal amount of abated statutory income would be
exempt; and the amount of exempt income would be RM10,740,000. It would be lower
than the exempt income in the case of 'pioneer status' opted as the incentive by an
amount equal to RM90,000 [RM10,830,000 (PS) – RM10,740,000 (ITA)]. Hence, it is
not tax-efficient to opt for ITA.

(g) The possibility of claiming reinvestment allowance for YA 2027 onwards

After the end of the pioneer period, i.e. YA 2027, for YAs 2028 to 2042 (15 YAs), it is
possible for your company to claim reinvestment allowance, provided the following
conditions would be fulfilled:

1. It must be tax resident in Malaysia;

2. It has a qualifying project whereby it undertakes expansion, modernise, automate

its business activity or diversifies into a related product within the same industry
(manufacturing); and

3. It must incur qualifying capital expenditure on factory, plant and machinery in

the basis period for the relevant YA’s in respect of its qualifying project.

Noted that your company is carrying out a manufacturing business and has operated for
more than 36 months by then on 1.1.2028, the beginning of the basis period for YA 2028
(basis period: 1.1.2028 to 31.12.2028).

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

Thank you.

Yours faithfully,*

Eric Tan
Eric Tan, Tax Manager

*Note: Not to use ‘Yours sincerely’ (informal)

BBFT3024 ADVANCED TAXATION

Suggested answer to Q4

Report to Victory Sdn. Bhd. (VSB)

From: Ms Karen, RPA Tax Consultancy Sdn. Bhd.

To: Board of director, Victory Sdn. Bhd.

Date: Current date

Subject: Report on tax incentives

This report will highlight the key aspects for VSB on the commencement of manufacturing a
promoted product and having been granted a tax incentive.

(a) The period of the tax incentive

The period of the incentive is 5 years from the date of approval by the Malaysian
Investment Development Authority, i.e., from 1 April 2022 to 31 March 2027.

(b) Qualifying capital expenditure (QCE) and Non-QCE

ITA can be given on qualifying capital expenditure incurred on factory/industrial
building/plant and machinery directly in use for the purpose of the promoted 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 the factory/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 year of assessment. ITA will be deducted against 70% of statutory income from the
business.

(d) Exempt income account

For the amount of ITA deducted, an equal amount of statutory income is abated and 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 dividend received into a second-
tier exempt account and distribute the exempt dividend to its shareholder(s).

(e) Tax payable, ITA and Exempt income

Please refer to the attached Appendix for the details of tax computation for YAs 2023 to
2027 and a summary of tax payable, ITA claimable and exempt income as follows:

Year of Assessment (YA) 2023 2024 2025 2026 2027

RM’000 RM’000 RM’000 RM’000 RM’000
Tax payable 0 0 0 511.2 2,625.6
ITA 7,200 0 300 480 2,280
Exempt income 0 0 2,100 5,600 2,560
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Suggested answer to Q4 (cont’d)

(f) Option: Pioneer status vs. Investment tax allowance

If pioneer status opted, the abated statutory income at 70% after deducting pioneer loss
brought forward RM300,000 from YA 2023 which can be credited to the exempt
income account as follows:

Year of Assessment 2023 2024 2025 2026 2027

RM’000 RM’000 RM’000 RM’000 RM’000
Statutory income (SI) as per 0 0 3,000 8,000 11,900
Appendix (Business 2)

Exempt income account (Pioneer)

Exempt income @ 70% of SI 0 0 2,100 5,600 8,330
Less: Non-pioneer business loss 0 0 0 0 0
Pioneer business loss b/f 0 0 300 0 0
Exempt balance b/f 0 0 0 1,800 7,400
Exempt balance c/f 0 0 1,800 7,400 15,730

For the investment tax allowance (ITA) opted, the amount of ITA at 60% of the
qualifying capital expenditure incurred on the factory and plant & machinery would be
RM9,060,000 (refer to Appendix). When the ITA is fully utilized, the amount of abated
statutory income would be RM9,060,000.

However, if your company were to opt for pioneer status instead of investment tax
allowance, the exempt income under pioneer is higher than ITA by RM6,670,000
[RM15,730,000 (PS) – RM9,060,000 (ITA)].

- End of Report -
BBFT3024 ADVANCED TAXATION

Suggested answer to Q5

(a) (i) Pioneer status (PS)

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

(ii) Investment Tax Allowance (ITA)

TSB should opt for ITA if it is carrying on a business of manufacturing a
promoted product and the business profits are expected to be low or to suffer
losses and qualifying capital expenditure is substantial at the initial years (the
first 5 years from the date of approval by Malaysian Investment Development
Authority (MIDA). The company can have more than one business as the
business loss will not reduce the amount to be credited to the tax-exempt income
account of the investment tax allowance in the current year.

(iii) Reinvestment allowance (RA)

If TSB to opt for RA, it must be a resident company in Malaysia and has been in
business operation for not less than 36 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 year of assessment (YA). It must incur qualifying capital
expenditure for the relevant YAs in respect of the qualifying project.

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

PS is given by direct exemption of statutory income from the pioneer business at
the prescribed rate of 70%. The other 30% of the statutory income will be
deemed to be total income and to be taxed at the prevailing tax rate for the
relevant year of assessment.

For ITA, the incentive is given by way of allowance based on 60% of qualifying
capital expenditure incurred (in the basis period of a year of assessment) over a
period of 5 years from the date of approval by MIDA. For the ITA utilized in a
YA, an equal amount of statutory income from the business involving a
promoted 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 year of assessment) for a
period of 15 consecutive YAs, from the first YA in which the basis period
qualifying plant expenditure was first incurred on an industrial building, plant
and machinery for purpose of the qualifying project. For the RA utilized in a YA,
equal amount of statutory income (from the business involving a qualifying
project) is abated/exempt.
BBFT3024 ADVANCED TAXATION

Suggested answer to Q5(b) (cont’d)

(ii) The period of tax incentive

PS is granted for 5 years from the date of production stated in the pioneer
certificate.

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

RA is given for 15 consecutive YAs, from the first YA in which the basis period
of the qualifying capital expenditure on industrial building, plant or machinery
was first incurred directly in use for the purpose of a qualifying project.

(iii) The withdrawal of the tax incentive

For PS, there is no provision to withdraw an exemption of statutory income from
the pioneer business.

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

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

(iv) The tax treatment of the current year’s business loss (if any)
The current year pioneer loss has to be carried forward and it must be deducted
against the abated statutory income from the pioneer business for the subsequent
YA onwards (within the pioneer period) before crediting the abated statutory
income to an exempt income account. Pioneer business loss cannot be set off
against the aggregate income in the current or non-pioneer business income in the
company.

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

For RA, the current year’s business loss is treated similarly as in the case of ITA.