Crowe Chat Vol.12/2020
Tax
Companies often incur R&D expenses to develop new products or to create new technology or information that can improve the effectiveness of products or make the production of products more efficient. In order to encourage taxpayers to undertake R&D activities, the Malaysian Government has put in place various incentives in the form of -
(a) a special provision under Subsection 34(7) of the Income Tax Act, 1967 (ITA), where a single deduction is given for R&D expenditure that is non-capital in nature; or
(b) a special deduction under Section 34A of the ITA, where a double deduction is given for in-house R&D expenditure that is non-capital in nature; or
(c) a special deduction under Section 34B of the ITA, where a double deduction is given for –
(i) contribution in cash to an approved research institute;
(ii) payment for the use of the services of an approved research institute or approved research company; or
(iii) payment for the use of the services of a R&D company or a contract R&D company.
Previous PR
The previous PR PR5/2004 - Double Deduction Incentive on Research Expenditure was issued on 30 December 2004 and its Addendum was issued on 3 April 2008.
New PR and Guidelines
The Inland Revenue Board of Malaysia (IRBM) issued the following PR and Guidelines on 13 August 2020 to update the previous PR based on the current legislation:
- PR5/2020 - Tax Treatment Of Research And Development Expenditure Part I - Qualifying Research And Development Activity
- PR6/2020 - Tax Treatment Of Research And Development Expenditure Part II - Special Deductions
- Guidelines On The Application Procedure For A Special Deduction In Respect Of A Qualifying Research And Development
Details of new PR
PR5/2020 - Tax Treatment Of Research And Development Expenditure Part I - Qualifying Research And Development Activity
- Research and Development Activity and Project
Businesses continuously undertake specific activities to create new products or technologies and refer to these activities as R&D activities. However, such activities do not automatically qualify as R&D activities for income tax purposes. An activity undertaken for the purposes of R&D must fulfill the definition of R&D under Section 2 of the ITA to qualify as a qualifying R&D activity.
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Section 2 of the ITA: “‘research and development’ means any systematic, investigative and experimental study that involves novelty or technical risk carried out in the field of science and technology with the object of acquiring new knowledge or using the results of the study for the production or improvement of materials, devised, products, produce or processes, but does not include— (a) quality control or routine testing of materials, devices or products; (b) research in the social sciences of the humanities; (c) routine data collection; (d) efficiency surveys or management studies; (e) market research or sales promotion; (f) routine modifications or changes to materials, devices, products, processes or production methods; or (g) cosmetic modifications, stylistic changes to materials, devices, products, processes or production methods”. |
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Where an R&D project consists of a set of R&D activities, the eligibility for a double deduction or single deduction incentive under the ITA is ascertained at the qualifying R&D activity level and not at the R&D project level. |
- Determination of a Qualifying R&D Activity
Following the introduction of the new definition of R&D under Section 2 of the ITA with effect from 28 December 2018, this PR further explains that a qualifying R&D activity has to jointly fulfill the following three (3) criteria:
(a) have an objective to –
(i) acquire new knowledge;
(ii) create new products or processes; or
(iii) improve existing products or processes.
(b) involved in something new (novelty) or technical risk; and
(c) is a systematic, investigative and experimental (SIE) study in a field of science or technology.
PR6/2020 - Tax Treatment Of Research And Development Expenditure Part II – Special Deductions
- Double Deduction or Single Deduction
An eligible person may claim an incentive in the form of a double deduction or a single deduction for qualifying R&D expenditure incurred on a qualifying R&D activity. The double deductions under Section 34A and Section 34B of the ITA have been previously dealt with in PR5/2004. This PR explains the single deduction under Subsection 34(7) of the ITA for revenue expenditure incurred on a qualifying R&D activity.
PR6/2020 - Tax Treatment Of Research And Development Expenditure Part II – Special Deductions
- Qualifying R&D Expenditure
- To qualify for a double deduction under Section 34A and Section 34B of the ITA, revenue expenditure must be incurred for a qualifying R&D activity which has been approved by the Minister in the basis period.
- Whereas, for a single deduction under Subsection 34(7) of the ITA, revenue expenditure must be incurred for a qualifying R&D activity in the basis period.
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The accounts for the expenditure incurred for each R&D activity must be kept separately regardless of whether the said activity has been approved by the Minister or not. |
Income Tax Rules for Deduction of Listing Expenses
Introduction
It was proposed in the 2020 Budget that tax deductions be given for listing expenses incurred by technology-based companies and Small and Medium Enterprises.
New Income Tax Rules
The Income Tax (Deduction for Expenses in Relation to Listing on Access, Certainty, Efficiency (ACE) Market or Leading Entrepreneur Accelerator Platform (LEAP) Market of Bursa Malaysia Securities Berhad) Rules 2020 was gazetted on 3 September 2020.
Details of New Income Tax Rules
Effective date
From Year of Assessment (YA) 2020 to YA 2022.
What is the tax deduction?
A deduction of an equivalent amount is given for the following expenditure incurred for listing on the ACE or LEAP Market:
- Payment of fees to Bursa Malaysia Securities Berhad and Securities Commission of Malaysia; and
- Professional fees for -
- advisory fees to the sponsor (main adviser for listing on ACE Market and approved adviser (main adviser for listing on LEAP Market); and
- listing exercise – fees to solicitor, company secretary, tax adviser, reporting accountant, auditor, valuer, independent market researcher, issuing house and share registrar; and
- Payment of fees for underwriting, placement and brokerage services.
When is the tax deduction claimable?
The tax deduction is only claimable for the basis period in a YA the technology-based company is listed on the ACE or LEAP Market.
How much is claimable?
The total amount of tax deduction is limited to RM1.5 million and the amount of deduction must not exceed the adjusted income (prior to deduction of the above expenses). Any excess of expenditure which cannot be claimed or cannot be claimed in full will not be allowed to be carried forward to future YAs.
Who can claim this deduction?
A technology-based company involved in the design, development and manufacture, production or application in any of the following fields and activities:
- advanced electronics and information technology;
- telecommunications;
- equipment/ instrumentation, automation and flexible manufacturing systems;
- life sciences and biotechnology;
- healthcare;
- electro-optics, non-linear optics and optoelectronics;
- advanced materials;
- energy;
- aerospace;
- transportation; or
- value-added services.
