Question

Question 1 Tenaga Sdn Bhd (TSB), a manufacturing company and was incorporated in Kuala Terengganu on 1 February 2010 with an authorised and paid-up share capital of RM5 million. TSB is engaged in producing promoted products. The company had acquired a piece of land for RM500,000 in cash. TSB completed the construction of a factory on the land on 31 August 2011, at a cost of RM1 million, and commenced the manufacturing of hi-tech machine on 1 October 2011. PSB's financial year end is on 30 September annually. As business has been profitable, TSB is now ready for expansion. It has commenced construction of a new factory building at a cost of RM4.5 million on the existing land with completion expected no later than 30 June 2018. At the same time, TSB plans to install new hi-tech machinery costing RM5 million by the end of July 2018 so that production may commence in early August 2018. TSB is considering applying for investment incentives but unsure on the benefits of it. You are required to advise TSB by: Determine whether TSB is qualifies for any type of investment incentives by stating all the conditions which must be fulfilled for the company. At least TWO (2) types of investment incentives are to identified.

Answer 1

Ans. The major tax incentives for companies investing in the manufacturing sector are the Pioneer Status and the Investment Tax Allowance. Eligibility for Pioneer Status and Investment Tax Allowance is based on certain priorities, including the level of value-added, technology used and industrial linkages. Eligible activities and products are termed as "promoted activities" or "promoted products".

(i) Pioneer Status-

A company granted Pioneer Status enjoys a five year partial exemption from the payment of income tax. It pays tax on 30% of its statutory income, with the exemption period commencing from its Production Day. Un-absorbed capital allowances as well as accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company.

(ii) Investment Tax Allowance-

As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted ITA is entitled to an allowance of 60% on its qualifying capital expenditure (factory, plant, machinery or other equipment used for the approved project) incurred within five years from the date the first qualifying capital expenditure is incurred.

The company can offset this allowance against 70% of its statutory income for each year of assessment. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate.