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Automation Capital Allowance (Automation CA) for Manufacturing and Servicess Sectors

MY - man-hard-hat-is-working-robot

AUTOMATION CAPITAL ALLOWANCE (AUTOMATION CA) FOR MANUFACTURING AND SERVICES SECTORS

Manufacturers involved in innovative and productive activities eligible for an Automation Capital Allowance (Accelerated Capital Allowance) of 200% on the first RM10 million of qualifying capital expenditure.

Automation Capital Allowance (Automation CA) For Manufacturing And Services Sectors

1) Objective:

The Automation Capital Allowance (Automation CA) was introduced to encourage adoption of automation among manufacturing companies.

2) Tax Incentive

Categories

Tax Incentive

1.

High labour-intensive industries (rubber products, plastics, wood, furniture and textiles)

2.

Other industries including Service Sector

Automation CA of 200% on the first RM10 million in qualifying expenditure incurred within year of assessment from 2023 to 2027

3) Eligibility Criteria

  • Companies must be incorporated under the Companies Act 2016;
  • Tax residents of Malaysia;
  • Companies must have been operating in manufacturing or services activities for a minimum of 36 months;
  • The company must incur expenditures for at least one (1) machinery /equipment / software / system with an adaptation of Industry 4.0 within the eligible amount of RM10 million
  • Industry 4.0 elements:-
  • √ Big Data Analytics;
  • √ Cloud Computing;
  • √ Augmented Reality;
  • √ Cybersecurity;
  • √ Artificial Intelligence;
  • √ Additive Manufacturing;
  • √ System Integration;
  • √ Simulation;
  • √ Internet of Things (IoT);
  • √ Autonomous Robots;
  • √ Advanced Materials.

This incentive is eligible to be considered for application received by MIDA from 1st January 2023 until 31st December 2027.

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Incentive For Reinvestment Under New Industrial Master Plan (NIMP) 2030

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Incentive For ReinvestmentUnder New Industrial MasterPlan (NIMP) 2030

New Industrial Master Plan (NIMP) 2023 offers reinvestment incentive with two tiers. Tier 1 providing Investment Tax Allowance (“ITA”) of 100% qualifying capital expenditure (“QCE”) against 100% of statutory income and Tier 2 offering ITA of 60% QCE against 70% of statutory income. This incentive is designed to encourage existing companies to reinvest in high-growth and high-value activities.

Incentive For Reinvestment Under New Industrial Master Plan (NIMP) 2030

  1. Malaysian government has introduced a reinvestment incentive aligned with the New Industrial Master Plan (NIMP) 2030, featuring a tiered and outcome-driven framework.
  2. Objectives of the incentive are:
    • To motivate companies to invest in sectors with high growth potential and substantial value.
    • To ensure that the tax incentives provided by the Government support the achievement of the targeted outcomes under the NIMP 2030 and further stimulate national economic growth.
  3. This incentive provides an opportunity for existing companies that have exhausted their Reinvestment Allowance, to continue to increase their capacity and investment in high-growth and high-value areas in the country.

A. Type of Incentives

  • The incentive is an Investment Tax Allowance (ITA) of 100% (or 60%) on the qualifying capital expenditure (excluding land cost) incurred for 5 years.
  • The allowance can be offset against up to 100% (or 70%) of statutory income for each assessment year until fully utilized.

B. Eligible Applicant

  • The company must be a Malaysian resident and incorporated in accordance with the Companies Act 2016.
  • Undertake expansion or diversification projects in the manufacturing sector.
  • The company eligible for only one (1) round of this reinvestment incentive.

C. Eligibility Criteria

List of product(s) or activity(ies) eligible for the reinvestment incentive as below:
  • Aerospace
  • Automotive
  • Chemical including biotechnology
  • Electrical & Electronics
  • Food Processing
  • Halal
  • Machinery & Equipment
  • Medical Devices
  • Metal
  • Mineral
  • Palm Oil-based Products
  • Pharmaceutical including biotechnology
  • Petroleum Products and Petrochemicals
  • Rail
  • Rubber-based Products
  • Ship building and Ship Repair
  • Textile, Apparel and Footwear
  • Wood, Paper and Furniture
The tiering tax incentive will be based on an outcome-based approach as follows:
Tier 1
Tier 2
Tax incentive
ITA of 100% on qualifying capital expenditure (QCE) (excluding land) and set off against 100% of statutory income.
ITA of 60% on QCE (excluding land) and set off against 100% of statutory income.
Incentive period
5 years
Minimum Conditions
  1. QCE must be incurred within the proposed 3-year period capital expenditure (excluding land) to be realised within 3 years as proposed;
  2. Implementation of Industrial Revolution 4.0 (IR4.0) technologies is required; and
  3. R&D expenditures (included related to product and technology improvement) must align with the proposed plan.
Additional Conditions
Subject to the following outcomes (but not limited to):

  1. Adequate number of newly hired Malaysian full-time employees in high-value positions (with minimum basic salary RM 10,000/month);
  2. The number of local and/or local service providers (companies incorporated in Malaysia) engaged as proposed;
  3. Adoption of green technology (generation of renewable energy or utilisation of energy efficiency equipment); and
  4. Any additional requirements for sustained economic growth, as stated in the approval letter.

Not Applicable.

D. Date of Application

Applications received by Malaysia Investment Development Authority (“MIDA”) from 1 January 2024 until 31 December 2028 are eligible to be considered for this incentive.

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Johor-Singapore Special Economic Zone (JS-SEZ)

Johor-Singapore Special Economic Zone-cover

Johor-Singapore Special Economic Zone (JS-SEZ)

On 8 January 2025, Malaysia Government announced tax package incentive for The Johor-Singapore Special Economic Zone (JS-SEZ). JS-SEZ offers a special corporate tax rate 5% for up to 15 years for new investment in qualifying activities such as aerospace manufacturing, medical devices, global services hubs and artificial intelligence and also special personal income tax rate 15% for 10 years for knowledge worker.

Introduction

Johor-Singapore Special Economic Zone (JS-SEZ) is the first special economic zone spanning Southeast Asia’s borders located in the southern Malaysian state of Johor.

Effective from January 1, 2025, companies undertaking new investment in high-growth sectors within the JS-SEZ eligible to apply for special corporate tax rate of 5% for up to 15 years, 15% tax rate up to 10 years for knowledge workers employed in the JS-SEZ, stamp duty exemption etc.

Location

Source: www.irda.com.my

Why Invest in JS-SEZ

Invest-JS-SEZ-01
Competitive Cost Advantage
Invest-JS-SEZ-02
Strong Government Support
Invest-JS-SEZ-03
Designated Flahships Areas
Invest-JS-SEZ-04
Strategic Location & Strong Connectivity
Attractive Policies & Incentives

Competitive Tax Incentive

A. Special Tax Corporate Tax Rate:

Special tax rate of 5% for up to 15 years for companies undertaking new investment as below:

No.

Category
Type of Incentive
1.
Flagship F (Kulai – Sedenak)

Manufacturing Company:
  1. Artificial Intelligence (AI), Quantum Computing Supply Chain;
  2. Medical Devices; or
  3. Pharmaceuticals.

Flagship E (Senai – Kulai)
Aerospace Manufacturing; and Maintenance Repair and Overhaul (MRO) Services.

2.

Flagship A (Johor Bahru Waterfront) and

Flagship B (Iskandar Puteri)
Global Service Hub.

Qualifying Services:
  1. Regional P&L;
  2. Strategic Business Planning;
  3. Corporate Development; and
  4. Regional or Global Treasury and Fund management conducting cash pooling activities via onshore intermediaries.
Special tax rate of 5% for a period of up to 15 years;

Eligibility Criteria / Conditions
  1. Annual operating expenditure of at least RM50 million;
  2. Company must Serve / Business Control of at least 10 Network Companies;
  3. Annual sales turnover of at least RM500 million and forex in-flow into the local banking system as proposed;
  4. A minimum of 50% of high-value positions (with a minimum monthly basic salary of RM10,000) shall be filled by full-time Malaysian employees as proposed.
3.
Flagship G (Desaru-Penawar)

Integrated Tourism Development
100% Investment Tax Allowance (ITA) on eligible capital expenditure (excluding land cost) for a period of 5 years. This allowance can be deducted up to 70% of statutory income for the relevant assessment year.

Eligibility Criteria / Conditions
  1. Company which does not have an existing entity or related entity undertaking same hotel or tourism project in Malaysia;
  2. Paid-up capital of at least RM2.5 million;
  3. Investment in capital expenditure (excluding land) of at least RM500 million;
  4. Company undertaking integrated tourism project which consists of the following:
    1. Hotel with minimum number of rooms of 80 which consists of standard, superior, deluxe and suite; and
    2. Minimum 1 tourist attractions (i.e. water park, outdoor park consists of rides and/or games, convention centre with capacity minimum of 3,000 participants, or outdoor sport excluding golf course and driving range).

4.

Flagship C (Tanjung Pelepas)

Smart Logistics Complex
Smart logistic operator who invests in development of smart logistics and carry out any of the eligible logistic activities:

a. Regional Distribution Hub;
b. Integrated Logistics Services;
c. Dangerous Goods Storage;
d. Cold Chain Facilities
100% Investment Tax Allowance (ITA) on eligible capital expenditure (excluding land cost) for a period of 5 years. This allowance is deducted up to 100% of the statutory income for the relevant assessment year.

Eligibility Criteria / Conditions
  1. Investment in capital expenditure (excluding land) of at least RM500 million;
  2. The built-up area of the smart warehouse complex must be at least 50,000m2 and equipped with at least three (3) enabling elements technologies under the IR4.0;
  3. Use the application of modern construction techniques i.e. achieving a score for the Industrial Building System (IBS) that has been set by the Construction Industry Development Board (CIDB)
  4. Total full-time workforce must consist of at least 80% Malaysian citizens;
  5. A minimum of 30% of total high-value positions (with a minimum basic salary of RM10,000) shall be filled by full-time Malaysian employees.
5.
Flagship D (Tanjung Langsat – Kong-Kong)

Manufacturing – Downstream Specialty Chemicals
Eligible product(s) / activity(ies):
a. Base Chemicals;
b. Organic intermediates C1 to C6
c. Specialty chemicals;
d. Fertilizers;
e. Polymers / Plastics;
f. Oleo chemical / Biochemical.
Special tax rate of 5% or 10% for a period of up to 10 years, for A company with capital investment (excluding land) of RM500 million and above in the manufacturing sector; OR
60% or 100% Investment Tax Allowance (“ITA”) on eligible capital expenditure (excluding land cost) for a period of 10 years.

Eligibility Criteria / Conditions
  1. A new company or an existing company undertaking diversification activities in relation to the eligible activities / products under this cluster;
  2. The company is required to have a minimum paid-up capital of RM2.5 million at the point of submission of application to MIDA;
6.
Additional Incentives
  1. 40% stamp duty exemption on the instrument of transfer/ financing agreement for the purchase of a commercial property in Flagship A and B that remains unsold as at 31st December 2024. The stamp duty exemption to be provided under Section 80(1) under the Stamp Act 1949;
  2. A deduction equivalent to amount not exceeding RM1 million for each year assessment in respect of cash contribution or contribution in-kind by qualifying person who sponsors a hallmark event.
  3. The hallmark event referred to is an event of regional or international significance which is carried on in Flagship G and supported/ verified by MOTAC. For contribution made between 1 January 2025 to 31 December 2034.
  4. ACA in respect of renovation costs incurred on a building or part of a commercial building located in Flagship A-G for the purpose of qualifying company’s business. Qualifying companies are companies that have been approved any tax incentives under PIA 1986 or ITA 1967 between 1 Jan 202 – 31 December 2034 and operating in Flagship A-G. This incentive to be utilized only once throughout their business operation in JS-SEZ.

To include expenses on:
  • General electrical installation
  • Lighting
  • Gas system
  • Water system; Kitchen fittings
  • Sanitary fittings
  • Door, gate, window, grill and roller shutter
  • Fixed partitions
  • Flooring (including carpets)
  • Wall covering (including paint work)
  • Incentives & Eligibility Criteria
  • False ceiling and cornices
  • Ornamental features or decorations excluding fine art
  • Canopy or awning
  • Recreation room for employee
  • Air-conditioning system
  • Day care centre for employees’ children
  • Surau
  • Reception area
  • Green elements, smart solutions systems

Initial Allowance: 20%, Annual Allowance: 40%

B. Special Tax Rate for Knowledge Workers:

A special tax rate of 15% for a period of 10 years is provided for eligible knowledge workers in all Flagships.

Eligibility Criteria / Conditions:

  1. Malaysian/Non-Malaysian citizen;
  2. Not generating employment income in Malaysia 24-months prior;
  3. Salary abroad/in Malaysia >RM20,000 per month.
  4. Subject to academic qualifications / years of professional work experience
  5. Subject to MyCOL profession and JS-SEZ qualifying sectors
Source: MIDA guideline

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Family Office Incentive Scheme in Forest City Free Trade Zone (FCFTZ)

Forest-City

Family Office Incentive Scheme in Forest City Free Trade Zone (FCFTZ)

First location in Malaysia which provide 0% concessionary tax rate for family offices. This incentive is valid for an initial period of 10 years and an additional 10 years with further conditions.

Forest City Special Financial Zone (FCSFZ)

Following amendment bills were tabled and passed by House of Parliament in July 2024 and gazetted in Sept 2024, FCSFZ is first onshore duty-free zone and special financial zone in Forest City, Johor, Malaysia.

Pulau Satu, Forest City is the first location in Malaysia to offer a zero (0%) percent tax rate for Family Office established under the Single Family Office Scheme.
FCSFZ-map
Source: https://forestcitycgpv.com

Single Family Office (SFO) & Single Family Office Vehicle (SFOV)

What is Single Family Office (SFO)?

What is Single Family Office (SFO)?

  1. SFO is a corporate vehicle;
  2. Wholly owned or controlled by members of a single wealthy family;
  3. Created to exclusively manage the assets, investments and long-term interests of that family;
  4. SFO may also represent multiple generations and branches of the family.

What is Single Family Office Vehicle (SFOV) ?

  1. SFOV is a corporate vehicle;
  2. Wholly owned or controlled by members of a single wealthy family;
  3. Established solely for the purposes of holding the assets, investments and long-term interest of members of the single family.

SFO vs SFOV

SFO-SFOV

Key Conditions on SFOVs Tax Incentives

SFOV must be incorporated in Malaysia, preregistered with the Securities Commission (SC), and operating in Pulau Satu, FCSFZ to be eligible for zero (0%) Concessionary Tax Rate for first initial 10 years + additional 10 years. The below conditions are also required to be fulfilled during the incentive periods.

Conditions

First 10 Years
Additional 10 Years
1. Minimum AUM

RM30Mil (*USD7Mil)

RM50Mil (*USD11.5Mil)

2. Minimum Domestic Investment in Promoted Activities
At least 10% of AUM or RM10Mil (*USD2.3Mil), whichever is lower
At least 10% of AUM or RM10Mil (*USD2.3Mil), whichever is higher
3. Minimum local operating expenditure per annum
RM500,000 (*USD115,000)
RM650,000 (*USD150,000)
4. Minimum full time employees
Two (2) and each with a minimum monthly salary of RM10,000 and of whom at least one (1) is an investment professional.
Four (4)
*1 USD = 4.32740 MYR

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Green Investment Tax Allowance (GITA) For Own Comsumption

GITA-cover

MALAYSIA GREEN INVESTMENT TAX ALLOWANCE (GITA) FOR OWN COMSUMPTION

Companies undertake in green technology project for own consumption may enjoy up to 100% Green Investment Tax Allowance (“GITA”) to be offset against 70% of statutory income. Promoted activities such as green building, renewable energy system, energy efficiency, battery energy storage system, electric vehicles etc.
In 2024 Budget, the green technology tax incentives have been revised to the following categories:
  • Green Investment Tax Allowance (GITA) Project for Business Purposes;
  • Green Investment Tax Allowance (GITA) Asset for Own Consumption; and
  • Green Income Tax Exemption (GITE) Solar Leasing
The Malaysian Green Technology and Climate Change Corporation (MGTC) has issued a new guideline for GITA for own consumption project as below:

(i) Investment Tax Allowance :

Tier 1
Tier 2
Qualifying Activities
Qualifying asset as approved by Minister of Finance, Battery Energy Storage System (BESS) and Green Building.
Qualifying asset as approved by Minister of Finance (Appendix 11), Renewable Energy System and Energy Efficiency (Appendix 2).
Percentage of GITA
100%
60%
Percentage (%) of Statutory Income to be Set-Off
70%
70%
Qualifying CAPEX
  • The qualifying capital expenditure must be an approved asset by MOF that have been verified by MGTC and is listed under the MyHIJAU Directory;
  • For Green Building, the qualifying CAPEX must be verified by the locally Green Building Rating Tools/ Certification Body approved by Government;
  • The asset must be new and owned by the Company;
  • The asset must be used in the business carried out by the company in Malaysia for own consumption and not for income generation.
Qualifying Asset
  • Electric vehicles (for commercial / industrial used only);
  • EV Infrastructure;
  • Green Building;
  • Energy Storage
  • Energy Efficiency;
  • Renewable Energy System;
  • Waste Composter or waste recycling;
  • Wastewater recycling or rainwater harvesting
Incentive Period
Qualifying Capital Expenditure incurred starting from 1 January 2024 until 31 December 2026.
Application Period
The application made under the GITA Asset Guidelines must be received by the Malaysian Green Technology and Climate Change Corporation [“MGTC”] from 1st January 2024 until 31st December 2026.

(ii) Eligibility Criteria:

a) New or existing Company:
  • A newly established company that incurred qualifying capital expenditure under GITA Asset; OR
  • Existing Company operating in Malaysia but has not incurred qualifying capital under GITA Asset and has not been approved for Green Technology Incentive.
b) Companies within the same group incurring the qualifying capital expenditure:
  • The project carried out in building/location separately from activities carried out by holding company or related companies;
  • The plant, machinery and equipment used shall be separately used and shall not be transferred from holding company or related companies;
  • Not shares the same employees as per holding company or related companies except for the management staff and directors of the Company;
  • This project must not result in a reduction in the investment of holding company or related companies.
c) To comply all the following criteria:
  • Minimize the degradation of the environment or reduce greenhouse emission;
  • Promotes health and improvement of environment; and
  • Conserves the use of energy, water and/or other forms of natural resources or promote the use of renewable energy or able to recycle waste material resources.

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Malaysia Cold Chain Facilities

Cold Chain Facilities-cover

Malaysia Cold Chain Facilities

Investment in cold chain facilities or providing services for perishable agricultural produce such as fruits, vegetables, flowers, ferns, meat and aquatic products eligible for tax exemption up to 70% of statutory income or Investment Tax Allowance of 60% up to 5 years.

Companies providing cold chain facilities and services for perishable agricultural products i.e. fruits, vegetables, flowers, ferns,
meat and aquatic products are eligible for:

Type of Company
Incentive
New Company

  • Pioneer Status with tax exemption of 70% of statutory income for a period of
    5 years;

  • Unabsorbed pioneer losses after the end of pioneer period are allowed to be
    carried forward for 7 consecutive year of assessments;

    OR

  • Investment Tax Allowance (ITA) of 60% on the qualifying capital expenditure
    incurred for 5 years;

  • Unutilised allowances can be carried forward until fully absorbed.

Existing Company
(Company intend to reinvest in cold chain facilities for perishable agricultural produce)
  • Pioneer Status with tax exemption of 70% of increased statutory income for
    a period of 5 years;
  • Unabsorbed pioneer losses after the end of pioneer period are allowed to be
    carried forward for 7 consecutive year of assessments;

    OR

  • Investment Tax Allowance (ITA) of 60% on the additional qualifying capital
    expenditure for 5 years;
  • Unutilised allowances can be carried forward until fully absorbed.
Eligible Company
Eligible Activities
  • Must be Independent Service Provider (i.e the company conducts all of the cold chain activities on its own);
  • At least 60% of the company’s revenue must be derived from the provision of cold room facilities, refrigerated transportation and other related services for local agriculture produce.
  • Provision of cold room facilities or refrigerated transportation for local agricultural produce with or without other post-harvest activities including cleaning, washing, grading, freezing/chilling and packing;
  • Provision of cold room facilities or refrigerated transportation for local processed food products.

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Malaysia Global Services Hub Tax Incentive

MSC Malaysia-Status-Service-Incentive

MALAYSIA GLOBAL SERVICES HUB TAX INCENTIVE

With Global Services Hub tax incentive, the companies will benefit from corporate income tax rates of 5% or 10% based on outcome for a period of up to ten (10) years. This incentive aims to establish Malaysia as a competitive hub in the global service sector in the region.
Global Services Hub tax incentive is an outcom-based incentives which uses a tiered rate in the provision of incentives on service income, or service and trading income achieved.

1. Overview Of The Incentive

An approved Global Services Hub company is eligible to enjoy the following concessionary corporate income tax rates:
Category
Concessionary Corporate Income Tax Rate
Period of incentive (Blocks Years)
Type of income exempted
A. New Company
Tier 1 : 0%
Tier 2 : 5%
5 (+5)
(i) Services income; or
(ii) Services and B Existing Company trading income
B. Existing Company
Tier 1 : 5% on value added income
Tier 2: 10% on value added income
5
(i) Services income; or
(ii) Services and B Existing Company trading income
Preferential income tax rate of 15% be given for a period of 3 consecutive years of assessment limited to three (3) non- citizen individuals holding key/C-Suite positions with a monthly salary of at least RM35,000 in a new company approved with Global Services Hub tax incentive.

2. Qualifying Services and Additional Services

  • Regional P&L / Business Management Unit;
  • Strategic Business Planning;
  • Corporate Development;

    AND

    Any 2 qualifying activities under the services category as follows:
  • Strategic services;
  • Business services;
  • Shared services;
  • Other services.

3. Outcome-based conditions

  • Annual operating expenditure;
  • High value full time employees;
  • C-suite with minimum salary of RM35,000;
  • Locally ancillary services;
  • Collaboration with higher education institution/TVET;
  • Training for Malaysian students/citizen;
  • Environmental. Social and Governance (ESG) elements; or
  • Other conditions as determined by the Minister of Finance.
Application received by Malaysian Investment Development Authority (MIDA) from 14 October 2023 to 31 December 2027.

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Why Dubai

Why Dubai

Why Dubai

The UAE’s 0% corporate tax policy transcends numbers; it’s an invitation to transform your business aspirations into reality. With a robust infrastructure, a strategic location, and a welcoming environment, the UAE beckons entrepreneurs and visionaries to harness its potential.

One of the LOWEST TAX RATES in the world, embracing 0% Corporate Tax in the UAE

The United Arab Emirates (UAE) stands as a global beacon of business innovation and prosperity. In the heart of this thriving economic landscape, the UAE offers an array of incentives and advantages to both local and international companies. At the core of this allure is the UAE’s corporate tax policy, a game-changer that propels businesses towards uncharted heights.

Tax Exemptions for Companies in Dubai vs Malaysia

Why Dubai-Tax Exemption
Tax
Rate
Conditions
Value-Added Tax (VAT)
While the UAE champions business freedom, it maintains a balanced approach with a 5% VAT rate, obliging businesses with revenue exceeding AED 375,000 Yet, the UAE’s commitment to global trade is evident as exports of goods remain untaxed, fostering an environment ripe for international commerce.
5%
0%
Businesses with revenue > AED 375,000 (USD 102,000)
Export of goods
Value-Added Tax (VAT)
In the UAE, the benefits extend beyond corporate tax. Dividends, capital gains, intragroup transactions, and reorganizations all enjoy a tax rate of 0%, fostering an ecosystem where business can flourish without restraint.
0%
Dividend and Capital gain, as well as intragroup transaction and reorganisations.

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Featured Ideas & Insights Publications Transfer Pricing

Improving Transfer Pricing Compliance

people from different countries having meeting discussion

Improving Transfer Pricing Compliance

The Transfer Pricing Rules 2023 supersedes the rules that were released in 2012. Significant changes were made with the intention to boost compliance and provide taxpayers with more clarity with regards to Transfer Pricing compliance.

Transfer Pricing Guidelines (“TPG”）

The 2012 Transfer Pricing Guideline was intended to provide detailed guidance to taxpayers on how to comply with the requirements of the law under Section140A of Income Tax Act 1967 and the TP Rules 2012. The 2012 TPG is applicable to:

  • Controlled transactions between associated persons, where at least one party is assessable or chargeable to tax in Malaysia; and
  • Applies to both cross-border transactions and domestic related party transactions.

The guidelines reinforces that companies involved in related party transactions in Malaysia should prepare a Transfer Pricing Documentation (“TPD”) for the year of assessment but not required to be submitted unless requested by tax authorities.

 

Companies who fall below this threshold may opt to prepare a minimal Transfer Pricing Documentation template (from FY 2022 onwards) instead of a full scope Transfer Pricing Documentation. Prior to FY 2022, Companies who fall below the threshold were required to prepare a limited scope Transfer Pricing Documentation.

The IRB

The IRB released a TPD Flowchart to assists taxpayers in determining the circumstances where full or minimal TPD is required. Companies can be exempted from preparing if any adjustments made does not alter the total tax payable (i.e. both companies do not enjoy incentive, suffer losses or taxed at different rates)

Transfer Pricing Documentation (“TPD”) Flowchart

transfer pricing documentation flowchart

Transfer Pricing Rules 2023

The Income Tax (TP) Rules 2023 supersedes the rules that was released in 2012 and is effective from the year of assessment 2023. Significant changes were made with the intention to boost compliance and provide taxpayers with more clarity with regards to TP compliance. Some of the important changes that affect the way TPDs will be prepared moving forward:

TRANSFER PRICING RULES 2023​

Contemporaneous TP documentation requirements

A person who enters into a controlled transaction shall prepare a contemporaneous transfer pricing documentation which is brought into existence prior to the due date for furnishing a return in the basis period for a year of assessment in which a controlled transaction is entered into.

As per Transfer Pricing Rules 2023, the contemporaneous transfer pricing documentation shall contain:

  • The date of completion in the TPD
  • Additional information on the MNE Group that is relevant to the taxpayer’s business in Malaysia. Alternatively, the taxpayer can attach the Master file prepared by the Group or ultimate holding company with the Local TPD.
  • A detailed list of information and/or documentation to be included or attached in the Local TPD
  • Taxpayers must indicate in the TPD if any of the information or documents required are not applicable to the taxpayers.
  • Failure to do so will result in an incomplete TPD.
  • For the purposes of this rule MNE means a collection of enterprises related through ownership or control which is required to prepare consolidated financial statements

Method to determine arm’s length price

The person shall ensure that the best method selected and that it can be supported by explanation and reasons to justify the selection. However, the Director General may review the selected method and disregard the taxpayer’s selected method and replace with a different method if they are the opinion that it is not the most appropriate method.

Comparability of transactions

An uncontrolled transaction shall be used as a comparable in determining an arm’s length price of a controlled transaction. A person shall accurately delineate the controlled transaction by identifying the commercial or financial relations between associated person based on the economically relevant characteristics.

Intra-group Services

A person shall demonstrate that the intra-group services have been rendered and the provision of such services has conferred an economic benefit or commercial value to his business and the charge for the intra-group services is justified. Intra-group means services rendered between associated persons. Intra-group services shall be disregarded if it involves:

  • Shareholder or custodial activities
  • Duplicative services
  • Services that provide incidental benefits or passive association benefits
  • On-call services

Cost contribution arrangement

A person shall determine the arm’s allocation of cost for such arrangement is in accordance with the allocation that would been undertaken by an independent person in a similar arrangement.

Intangible property

Intangible property” refers to an asset which is neither a physical asset nor a financial asset but such asset is capable of being owned or controlled for use in commercial purposes, whose use or transfer would be compensated had it occurred in a transaction between independent persons in comparable circumstances which includes patent, invention, formula, process, design, model, plan, trade secret, know-how or marketing intangible.

 

Any party that contributes to the functions above should be entitled to an arm’s length consideration, regardless of legal ownership

Full Scope TPD

A full scope report may consist of the following:

 

a) Group worldwide organizational structure

b) Description of MNE Group businesses
c) MNE’s intangible assets
d) MNE’s intercompany financial activities
e) MNE’s financial and tax position
f) Local organizational structure and company background
g) Nature of business/industry and market conditions
h) Controlled transactions and Pricing policies including formula adopted and sample documents to justify
i) Assumption, strategies and information regarding factors that influenced the price setting policies
j) Functions, assets and risk analysis including risk analysis framework
k) Comparability analysis
l) Selection and application of the transfer pricing method including basis to justify the selection
m) Financial information
n) Other relevant/supporting documents

Simplified TPD

Prior to FY 2022, Companies that fall outside the scope of the threshold amounting RM25 million for revenue and RM15 million of RPTs. A simplified TP documentation consists of items (f), (h) and (i) as listed above. Taxpayer is allowed to apply any method other than the five methods described in the TPG provided it results in arm’s length outcomes.

 

f) Organizational Structure
(i) the taxpayer’s worldwide organizational and ownership structure covering all associated persons whose transactions directly or indirectly affect the pricing of the documented transactions; and
(ii) a description of the management structure of the local entity, a local organization chart, and a description of the individuals to whom local management reports and the country(ies) in which such individuals maintain their principal offices.

 

(h) Controlled Transactions
(i) description of details of the property or services to which transaction relates; any intangible rights or property attached thereto, the participants, the scope, timing, frequency, type and value of the controlled transactions (including all relevant related party dealings in relevant geographic markets);
(ii) names and addresses of all associated persons, with details of the relationship with each such associated person;
(iii) the nature, terms (including prices) and conditions of transactions (where applicable) entered into with each associated person and the quantum and value of each transaction;
(iv) an overview description of the business, as well as a functional analysis of all associated persons with whom the taxpayer has transacted;
(v) all commercial agreements setting forth the terms and conditions of transactions with associated persons as well as with third parties; and
(vi) a record of any forecasts, budgets or any other financial estimates prepared by the person for the business as a whole and for each division or product separately.

 

(i) Pricing Policies
Details of pricing policy for each type of controlled transaction shall include:

(i) the formula adopted, including anticipated profit margin/mark-up and cost component;
(ii) how the formula is applied;
(iii) who determine the pricing policy & how often is the policy being revised;
(iv) sample of documents to support the pricing policy; and
(v) comparability study to ensure the arm’s length price.

Minimum TPD Template (PIN 1/2023)

The template was originally released in 2022 to simplify compliance for SMEs and reduce administrative burden of compliance. Companies that fall below the threshold can choose to fill in the details requested in the minimum TPD template.

 

The template is a form that consists of 4 parts as follows:

Minimum Transfer Pricing Documentation Template

Income Tax (Country-by-Country Reporting) Rules 2016 (“CbyCR Rules”)

The tax authorities issued the CbyCR Rules followed by the Labuan CbyCR Regulation, effective from 1 January 2017 and is applicable to MNE Groups with total consolidated group revenue of at least RM 3 billion. The rules state that the ultimate parent (reporting entity) would have to complete the CbyC Report and submit it to the tax authorities on or before 12 months from the last day of the reporting FY (i.e. 31 December 2023 if the tax payer’s year end is 31 December 2022).

 

Additionally, there is also a requirement for the Malaysian Companies to notify the tax authorities under Subrule 6(1) and 6(2) of the PU (A) 357/2016, by disclosing the information in the tax returns or by submitting the manual notification form. 

 

Malaysian parent entities and subsidiaries submitting the Form C , TR , TA , TC or TN can furnish the notification by way of tax returns while companies filing Form LE & TF are required to furnish the notification using a manual notification form:

Reporting entity
[Annex B1]

The reporting entity shall notify the Director General in writing if it is the ultimate holding entity on or before the last day of the FY. Details of all Malaysian and foreign non-reporting constituent entities must be included

Non-reporting entity
[Annex C1 & C2]

The Malaysian subsidiary must notify the Director General in writing of the identity and tax
residence of the reporting entity on or before the last day of the FY.

Tax Return Form

Throughout the year from FY 2014 to FY 2022, the income tax return form has been amended to include additional disclosures as follows:

 

a) Transfer Pricing Documentation and its related information
Tax payer is to disclose its characterization, other related information and all type of transactions they are involved in with a related party and the amount.

 

b) Disclosure of whether the taxpayer is subject to interest restriction under Section 140C.

Tax authorities introduced Restriction on deductibility of interest under Section 140C of the Income Tax Act 1967, effective 1 July 2019 onwards aimed at restricting the deduction of interest expense in relation to cross border transaction.

The Rules are applicable to:

  • companies who have been granted any financial assistance in a controlled transaction;
  • the total amount of any interest expense for all such financial assistance exceeds RM500,000 in the basis period.

The maximum amount of interest that is deductible is 20% of the Tax EBITDA. The balance is allowed to be carried
forward.

 

c) Disclosure on CbyCR
Tax payer is to disclose if CbyCR is relevant for the Group and fill in the relevant information of the reporting entity.

TP Penalties and Power to Disregard Structures

Failure to furnish contemporaneous TP documentation
With the introduction of Section 113B of the ITA, any person who fails to furnishing a contemporaneous TPD shall be liable to the following:

 

a) Fine of not less than RM20,000 and not more than RM100,000; or

b) Imprisonment for a term not exceeding six (6) months; or
c) Both.

Taxpayers can appeal on the decision with the Special Commissioners of Income Tax but the burden of proof is on the
taxpayers.


5% surcharge on TP adjustments
Under Section 140A (3C), the Director General may impose a surcharge of not more than 5% of the total transfer pricing adjustments regardless if there is any additional taxes payable by the taxpayers. Any surcharge imposed shall be treated as collection tax.

 

Power to disregard structure in controlled transactions
Under S140A (3A) and (3B), the Director General will be empowered to disregard any related party transaction structure adopted by the company if he is of the opinion that:

a) The economic substance of that transaction differs from its form; or
b) The commercial reality of that transaction differs from the arrangement which would have been adopted by an
independent party.
In these circumstances, the Director General will be allowed to make adjustments to the structure to reflect the structure
that would have been adopted in a third party arrangement.

 

Failure to comply (after adjustments have been issued)
Penalties will be imposed under subsection 113(2) and the TP Audit Framework 2019. The rates can range from 30% to 100% depending on whether the TP documentation is prepared contemporaneously

Illustration on Penalties

Illustration On Penalties​ of failure to submit transfer pricing documentation
Illustration if calculation On Penalties​ of failure to submit transfer pricing documentation

Key Take-aways

  • Tax authorities have provided a cost efficient template for SME companies to encourage compliance
  • In addition to the template, taxpayers also need to include documentation or analysis to justify that the RPT is carried out
  • at market price (i.e. comparability study)
  • While there are exemptions to preparing TPD, it is not always possible determine whether adjustments will result in
  • additional tax until the audit is carried out
  • Keep in mind that the penalties have not been amended or adjusted for such exemptions. The risk of IRB imposing the
  • 5% surcharge on adjustments on top of remaining penalties are still present.
  • Burden of proof is on taxpayers to maintain the relevant records, documentation and calculation to justify the arm’s length
  • nature of the inter-company transactions
  • Taxpayers need to reassess the completeness and robustness of the TPD prepared previously and make amendments
  • where necessary
  • Even if taxpayer’s results fall within the new definition of the arm’s length range, taxpayers cannot take it for granted that
  • no adjustments will be made in the event of an audit.
  • Taxpayers must not take lightly the importance of justifying the selected TP method as the best possible method

How We Can Help

Our dedicated team of professionals has experience in various disciplines to respond effectively and efficiently to our clients’ individual requirements. This professional capability allows us to advise and plan strategies critical to our clients’ needs and success within the challenges of the present business environment.

 

Our service includes a total approach to our clients’ problems and needs. Using a team approach, our services are tailored to meet our clients’ individual requirements. We stress on a high degree of competence, professionalism and commitment among our team members.

 

We offer the following services with a clear focus on the business issues and regulatory requirements of the client’s industry:

  • Audit and Assurance
  • Tax & Transfer Pricing Advisory and Compliance
  • Business Advisory
  • China Desk
  • Financial and Transaction Advisory
  • Risk, Governance and Sustainability Advisory
  • Valuation Advisory
  • Migration Advisory
  • Offshore Advisory

Should you have any questions or require any assistance on the above, please do not hesitate to drop us an email or call us.


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Malaysia Digital Tax Incentive

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Malaysia Digital (MD) Status Incentive (formerly known as MSC Malaysia Status)

MSC Malaysia Status Service Incentive is now rebranded to Malaysia Digital (“MD”). Companies awarded with MD status shall be entitled to a set of incentives, rights and privileges from the Government of Malaysia. MD status companies have flexibility to choose benefits (either with or without tax incentives).

MALAYSIA DIGITAL (“MD”) STATUS SERVICE INCENTIVE (formerly known as MSC Malaysia Status)

On 4th July 2022, The Government of Malaysia through the Malaysia Digital Economy Corporation (“MDEC”) launched Malaysia Digital (“MD”) as the new national strategic initiative to accelerate and further develop digital economy replaces the Multimedia Super Corridor (“MSC”) Malaysia.

1. ELIGIBILITY CRITERIA

To be eligible to apply for the MD Status Company, companies are required to meet the following criteria:-
a) The company incorporated under the Companies Act 2016 and resident in Malaysia; AND
b) Proposing to carry out one or more of the MD activities (please refer Appendix A).
c) Other general conditions:-
  • To comply with all applicable permit/licensing requirements and to ensure that the required permit/license has been obtained from the relevant authority for the implementation of MD Approved Activities.
With effective from 25th March 2022, MD Status Company are not subjected to minimum office space requirements and are allowed to operate and undertake MD Approved Activities in any location within Malaysia.

2. BENEFITS OF MD STATUS COMPANIES

i. MD BILL OF GUARANTEES (BoGs)

  • A set of incentives, rights and privileges available for MD status companies;
  • MD status companies eligible to access or apply for, amongst others:-
    1. Tax incentives (income tax exemption or investment tax allowance);
    2. Foreign knowledge worker quota and passes;
    3. Multimedia / ICT equipment import duty and sales tax exemptions;
    4. Freedom of ownership by exempting local ownership requirements;
    5. Flexibility to source capital and funds globally

ii. OTHER BENEFITS

MD Status companies are also eligible to access facilitation of other benefits as below, subject to certain criteria and conditions:-
  • Access to the local and international market and ecosystem;
  • Business matching and partnership;
  • Grant and funding facilitation; and/or
  • Participation in MD catalytic programs.

3. COMPANIES WITH MD STATUS COMPANY WILL HAVE TO COMPLY WITH THE FOLLOWING CONDITIONS WITHIN 12 MONTHS FROM THE DATE OF AWARD OF SUCH STATUS:

Activity

Commencement of operation and undertaking of the Malaysia Digital Approved Activities in Malaysia.

Knowledge Workers

Minimum of 2 full-time employees (comprising knowledge workers) with minimum average monthly base salary of RM5,000 employed for the MD Approved Activities.

Operating Expenditure

Minimum annual operating expenditure of RM50,000 incurred for the MD Approved Activities.

Paid-up Capital

Minimum of RM1,000.00.
As per MDEC’s announcement, the guidelines for the above tax incentives will be released by soon. Please be guide accordingly.

THE MALAYSIA DIGITAL ACTIVITIES Research, development and commercialization of solution and/or provision of services in relation to any of the following technologies or areas:

  1. Big data analytics (BDA);
  2. Artificial intelligence (AI);
  3. Financial technology (FinTech);
  4. Internet of things (IOT);
  5. Cybersecurity (technology/software/design and support);
  6. Data centre and cloud (technology/software/design and support);
  7. Blockchain;
  8. Creative media technology;
  9. Sharing economy platform;
  10. User interface and user experience (UI/UX);
  11. Integrated circuit (IC) design and embedded software;
  12. 3D printing (technology/software/design and support);
  13. Robotics (technology/software/design)
  14. Autonomous (technology/software/design and support);
  15. Systems/network architecture design and support;
  16. Global business services or knowledge process outsourcing;
  17. Virtual, augmented and/or extended reality – new/additional activity ;
  18. Drone technology – new/additional activity ;
  19. Advance telecommunication technology – new/additional activity ; OR
  20. Other emerging technologies deemed significant for the digital ecosystem subject to approved by the Approval Committee – new/additional activity.

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