Incentive For The Agricultural Sector in Malaysia

Incentive For The Agricultural Sector in Malaysia

The Promotion on Investment Act 1986 states that the term ‘company” in relation to agriculture includes:

>>Agro-based cooperative societies and association

>>Sole proprietorship and partnership engaged in agriculture

Companies producing promoted products or engaged in promoted activities (See Appendix I: List of Promoted Activities and Products - General) in the agricultural sector qualify for the following incentives:

1. Main Incentives for the Agricultural Sector

(i) Pioneer Status
As in the manufacturing sector, companies producing promoted products or engaged in promoted activities are eligible for Pioneer Status.

A Pioneer Status company enjoys a partial exemption form income tax. It pays tax on 30% of its statutory income for five years, commencing from its Production Day (defined as the day of first sale of the agriculture produce).

Accumulated losses and unabsorbed capital allowance incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post pioneer income of a business relating to the same promoted activity or promoted product.

Applications received form companies located in the promoted areas i.e the States of Perlis, Sabah and Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia, will enjoy a 100% tax exemption on their statutory income during their 5 year exemption period. All project applications received by 31 December 2010 will be eligible for this enhanced incentive.

Application should be submitted to MIDA.

(ii) Investment Tax Allowance

As an alternative to Pioneer Status, companies producing promoted products or engaged in promoted activities can apply for Investment Tax Allowance (ITA). A company granted ITA is eligible for an allowance of 60% on its qualifying capital expenditure incurred within five years form the date on which the first qualifying capital expenditure is incurred.

Companies can offset this allowance against 70% of their statutory income in the year of assessment. Any unutilized allowance can be carried forward to subsequent years until fully utilized. The remaining 30% of the statutory income is taxed at the prevailing company tax rate.

Application received form companies located in the promoted areas i.e. the States of Perlis, Sabah and Sarawak, and the designated “Eastern Corridor” of Peninsular Malaysia, will enjoy an allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowances can be utilized to offset against 100% of the statutory income for each year of assessment. All project applications received by 31 December 2010 will be eligible for this enhanced incentive.

Application should be submitted to MIDA.

To increase the benefits to agricultural projects, the government has broadened the definition of qualifying capital expenditure to include expenditure incurred on:

>>Clearing and preparation of land

>>Planting of crops

>>Provision of plant and machinery used in Malaysia for the purpose of crop cultivation, animal farming, aquaculture, inland fishing or deep-sea fishing, and other agricultural or pastoral pursuits.

>>Construction of access roads including bridges, construction or purchase of buildings (including those provided for the welfare of people or as living accommodation), and structural improvements on land or other structures which are used for crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits. Such roads, bridges, building, structural improvements on land and other structures should be on land forming part of the land used for the purpose of such crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits.

In view of the time lag between start-up processing of the produce, integrated agricultural projects qualify for ITA for an additional five years for expenditure incurred for processing or manufacturing operations.

Applications should be submitted to MIDA.

(iii) Incentives for Food Production

(a) Incentives for New Projects

To encourage food production, a company, which invests in a subsidiary company engaged in food production, together with the subsidiary company, qualifies for one of the following incentive packages:

Incentive Package A:

>>A company which takes up at least 70% equity in a subsidiary company engaged in food production reveives a tax deduction equivalent to the amount of investment made in that subsidiary; and

>>The subsidiary company enjoys full income tax exemption on its statutory income for 10 years commencing from the first year the company enjoys profits, in which:

* Losses incurred before and during the exemption period can be brought forward after the exemption period of 10 years;

* Dividends paid from the exempt income are exempted in the hands of the shareholders.

Incentive Package B:

>>A company which takes up at least 70% equity in a subsidiary company engaged in food production will be given group relief for the losses incurred by the subsidiary company before it records any profit, and

>>The subsidiary company enjoys full income tax exemption on its statutory income for 10 years. This commences from the first year the company enjoys profits in which:

* Losses incurred during the tax exemption period can be brought forward after the exemption period of 10 years; and

* Dividends paid from the exempt income are exempted in the hands of the shareholders.

The eligible food products are as approved by the Minister of Finance. These include kenaf, deep-sea fishing, vegetables, fruits, herbs, spices, aquaculture, and the rearing of cattle, goats and sheep.

Companies should commence food production within a period of one year from the date the incentive is approved. The incentive period for this scheme is extended for applications received until 31 December 2010.

Applications should be submitted to the Ministry of Agriculture and Agro-based Industry.

b) Incentives for Existing Companies Which Reinvest

An existing company that reinvests in the production of the above food products also qualifies for the same incentives for a period of five years.

The food production project both new and existing companies should commence within a year form the date the incentive is approved. Applications should be submitted to the Ministry of Agriculture and Agro-based Industry by 31 December 2005.

c) Tax Incentives for ‘Halal’ Food Production

To encourage new investments in ‘halal’ food production for the export market and to increase the use of modern and state-of-the-art machinery and equipment in producing high quality ‘halal’ food that comply with the international standards, companies which invest in ‘halal’ food productions and have already obtained ‘halal’ certification from JAKIM are eligible for the Investment Tax Allowance of 100% of qualifying capital expenditure incurred within a period of 5 years.

This allowance can be offset against 100% of the statutory income in the year of assessment. Any unutilized allowances can be carried forward to subsequent years until the whole amount has been fully utilized.

Applications should be submitted to MIDA.

For further information on obtaining ‘Halal’ certification from JAKIM, please visit JAKIM’s website at http://halaljakim.gov.my/

(iv) Incentive for Reinvestment in Food Processing Activities

A locally-owned manufacturing company with Malaysian equity of at least 60% that reinvests in promoted food processing activities is eligible for another round of the Pioneer Status or Investment Tax Allowance (ITA) incentive. Activities located in the promoted areas, i.e the States of Perlis, Sabah, Sarawak and the “Eastern Corridor” of Peninsular Malaysia, are eligible for the Pioneer Status and ITA incentives in accordance with that given to promoted areas.

2. Additional Incentives for the Agricultural Sector

(i) Reinvestment Allowance

Persons or companies engaged for at least 12 months in the production of essential food such as rice, maize, vegetables, tuber, livestock, aquatic products, and any other activities approved by the Minister of Finance can enjoy the Reinvestment Allowance (RA).

The qualifying capital expenditure includes expenditure incurred on:

>>Clearing and preparation of land

>>Planting of crops

>>Provision of plant and machinery used in Malaysia for the purpose of crop cultivation, animal farming, aquaculture, inland fishing or deep-sea fishing, and other agricultural or pastoral pursuits.

>>Construction of access roads including bridges, construction or purchase of buildings (including those provided for the welfare of people or as living accommodation), and structural improvements on land or other structures which are used for crop cultivation, animal farming aquaculture, inland fishing and other agricultural or pastoral pursuits. Such roads, bridges, buildings, structural improvements on land and other structures should be on land forming part of the land used for the purpose of such crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits.

The RA is in the form of an allowance of 60% of the qualifying capital expenditure incurred within a period of 15 years beginning from the first reinvestment is made. The allowance can be offset against 70% of the statutory income in the year of assessment. Unutilized allowances can be carried forward to the following years until fully utilized. Companies that undertake reinvestment projects in the promoted areas i.e. the States of Perlis, Sabah, Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia, can offset the allowance fully against their statutory income for that year of assessment.

Claims should be submitted to the IRB.

(ii) Incentive for Reinvestment in Resource-Based Industries

This incentive is offered to companies that are at least 51% Malaysian-owned and are in the rubber, oil palm and wood-based industries products, which have export potential. Companies in these industries reinvesting for expansion purposed are eligible for another round of Pioneer Status or Investment Tax Allowance (ITA). Activities located in the promoted areas i.e the States of Perlis, Sabah, Sarawak and the designated “Eastern Corridor” of Peninsular Malaysia are eligible for higher levels of exemption/allowance under Pioneer Status or ITA in accordance with that given for promoted areas.

Applications should be submitted to MIDA.

(iii) Incentives for Modernising Chicken and Duck Rearing

To promote modernization and the usage of environment-friendly practices in the agricultural sector, chicken and duck rearers who reinvest for the purpose of shifting form the opened house system to the closed house system will be eligible for RA for a period of 15 consecutive years commencing from the first year the reinvestment is made.

This incentive is given on condition that the minimum rearing capacity of the closed house system is as follows:

>>20,000 broiler chickens/broiler ducks per cycle; or

>>50,000 layer chickens/layer ducks per cycle

>>20,000 parent or grandparent stock of chickens/ducks per cycle

All projects must be approved by the Ministry of Agriculture and Agro-based Industry.

Claims should be submitted to the IRB.

(iv) Accelerated Capital Allowance

Upon the expiry of the Reinvestment Allowance (RA), companies that reinvest in promoted agricultural activities and food products are eligible to apply for the Accelerated Capital Allowance (ACA). These activities include the cultivation of rice, maize, vegetable, tubers, livestock, aquatic products and any other activities approved by the Minister of Finance.

The ACA on the capital expenditure is to be utilized within two years, i.e. an initial allowance of 20% in the first year and an annual allowance of 40%.

Claims should be submitted to the IRB, accompanied by a letter from MIDA certifying that the companies are undertaking promoted agricultural activities or producing promoted food products.

(v) Agricultural Allowance

A person or a company carrying on an agricultural activity can claim capital allowances and special industrial building allowances under the income Tax Act 1967 for certain capital expenditure. Capital expenditure, which qualifies, includes expenditure incurred on:

>>Clearing and preparation of land

>>Planting of crops

>>Provision of plant and machinery used in Malaysia for the purpose of crop cultivation, animal farming, aquaculture, inland fishing or deep-sea fishing, and other agricultural or pastoral pursuits

>>Construction of access roads including bridges, construction or purchase of buildings (including those provided for the welfare of people or as living accommodation), and structural improvements on land or other structures which are used for crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits. Such roads, bridges, buildings, structural improvements on land and other structures should be on land forming part of the land used for the purpose of such crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits

A company continues to get the allowance for as long as it incurs the expenditure, regardless of whether it already enjoys Pioneer Status or ITA.

Claims should be submitted to the IRB.

(vi) Accelerated Agriculture Allowance for the Planting of Rubberwood Trees

To ensure a regular supply of rubberwood for the furniture industry, a non-rubber plantation company that plants at least 10% of its plantation with rubberwood trees is eligible for the Accelerated Agriculture Allowance whereby the write-off period on the capital expenditure incurred for land preparation, planting and maintenance of rubberwood cultivation is accelerated from two years to one year.

Application should be submitted to the Ministry of Plantation Industries and Commodities.

(vii) 100% Allowance on Capital Expediture for Approved Agricultural Projects

Schedule 4A of the Income Tax Act 1967 provides for a 100% allowance on capital expenditure for Approved Agricultural Projects as approved by the Minister of Finance. This covers qualifying capital expenditure incurred within a specific time frame for a farm that cultivates and utilises a specified minimum acreage as stipulated by the Minister of Finance.

Approved agricultural projects are those for the cultivation of vegetables, fruits (papaya, banana, passion fruit, star fruit, guava and mangosteen), tubers, roots, herbs, spices, crops for animal feed and hydroponics-based products; ornamental fish culture; fish and prawn rearing (pond culture, tank culture, marine cage culture, and off-shore marine cage culture); cockles, oysters, mussels, and seaweed culture; shrimp, prawn and fish hatchery; and certain species of forest plantations.

The incentives enables a person carrying on such a project to elect to deduct the qualifying capital expenditure incurred in respect of that project from his aggregate income, including income form other sources. Where there is insufficient aggregate income, the unabsorbed expenditure can be carried forward to subsequent years of assessment. Where he so elects, he will not be entitled to any capital allowance or agricultural allowance on the same capital expenditure.

The qualifying capital expenditure eligible for deduction includes expenditure incurred on:

>>Clearing and preparation of land

>>Planting of crops

>>Provision of plant and machinery used in Malaysia for the purpose of crop cultivation, animal farming, aquaculture, inland fishing or deep-sea fishing, and other agricultural or pastoral pursuits

>>Construction of access roads including bridges, construction or purchase of buildings (including those provided for the welfare of people or as living accommodation), and structural improvements on land or other structures which are used for crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits. Such roads, bridges, buildings, structural improvements on land and other structures should be on land forming part of the land used for the purpose of such crop cultivation, animal farming, aquaculture, inland fishing and other agricultural or pastoral pursuits.

This incentive is not available to companies that have been granted incentives under the Promotion of Investment Act 1986 and whose tax relief periods have not started or have not expired.

Claims should be submitted to the IRB.

(viii) Tax Exemption on the Value of Increased Exports

A company which exports fresh and dried fruits, fresh and dried flowers, ornamental plants and ornamental fish enjoys a tax exemption of its statutory income equivalent to 10% of the value of its increased exports.

Claims should be submitted to the IRB.

(ix) Incentives for Companies providing Cold Chain Facilities and Services for Food Products

Companies providing cold room and refrigerated truck facilities and related services such as the collection and treatment of locally produced perishable food products qualify for Pioneer Status or Investment Tax Allowance (ITA). Activities located in the promoted areas are offered more attractive levels of Pioneer Status or ITA.

Application received from existing locally owned companies to reinvest in cold chain facilities and services for perishable agricultural produce are eligible for the following incentives:

a) Pioneer Status with a tax exemption of 70% (100% for promoted areas) on the increased statutory income arising from the reinvestment for a period of five years. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or

b) Investment Tax Allowance of 60% (100% for promoted areas) on the additional qualifying capital expenditure incurred within a period of five years. The allowance can be offset against 70% (100% for promoted areas) of the statutory income in each year of assessment. Any unutilized allowances can be carried forward to subsequent years until the whole amount has been fully utilized

Application should be submitted to MIDA

(x) Double Deduction for Expenses to Obtain “Halal” Certification and Quality Systems and Standards Certification

To enhance the competitiveness of Malaysian companies in the global market for ‘halal’ products (products suitable for consumption by Muslims) including “halal” food, double deduction will be given for the purpose of income tax computation to companies which incur expenses in obtaining;

a) Quality system and standards certification as well as ‘halal’ certification from the Department of Islamic Development Malaysia (JAKIM)

b) International quality systems and standards certification

Claims should be submitted to the IRB.

For further information on obtaining ‘Halal’ certification from JAKIM, please visit JAKIM’s website at http://halaljakim.gov.my/

(xi) Double Deduction on Freight Charges for Export of Rattan and Wood-based Products

Manufacturers who export rattan and wood-based products (excluding sawn timber and veneer) qualify for double deduction on freight charges.

Note: please refer to Section 17 for other incentives related to the agricultural sector.

APPENDIX 1

AGRICULTURAL PRODUCTION

1. Cultivation of tea
2. Cultivation of fruits
3. Cultivation of vegetables, tubers or roots
4. Cultivation of rice or maize
5. Cultivation of herbs or spices
6. Cultivation of essential oil crops
7. Production of planting materials
8. Cultivation of crops for animal feed
9. Floriculture
10. Apiculture
11. Livestock farming (excluding rearing of chickens, ducks or pigs)
12. Production of breeder stock
13. Spawning, breeding and culturing of aquatic products
14. Off-shore fishing
15. Cultivation of medical plants
16. Sericulture*
17. Cultivation of cocoa*
18. Cultivation of coconut*
19. Cultivation of sago palm*
20. Rearing of chickens and ducks*

PROCESSING OF AGRICULTURAL PRODUCE
1. Chocolate and chocolate confectionery
2. Fruits
3. Vegetables, tubers or roots
4. Essential oil
5. Livestock products
6. Aquatic products
7. Agricultural waste or agricultural by-products
8. Aquaculture feed
9. Plant extracts for pharmaceutical, perfumery, cosmetic or food industries
10.High fructose syrup
11. Cocoa and cocoa product
12. Illipe products*
13. Coconut products except copra or crude coconut oil*
14. Starch products*

FORESTRY AND FORESTRY PRODUCTS
1. Cultivation of timber, bamboo or cane
2. Cane products
3. Bamboo products

MANUFACTURE OF RUBBER PRODUCTS
1. Earthmover tyres, agricultural tyres, industrial tyres, commercial vehicle tyres, motorcycle tyres, aircraft tyres or solid tyres
2. Precured tread liner
3. Retreading of aircraft tyres

4. Latex products:
(a)Surgical gloves
(b)Safety/special function gloves
(c)Condoms
(d)Catheters
(e)Rubber (elastomeric) specialty coatings
(f)Rubberised fabrics

5. Dry rubber products
a. Beltings
b. Hoses, pipes and tubings
c. Rubber profiles
d. Inflatable rubber products
e. Industrial and office equipment rollers
f. Seals, gaskets, washers, packings and rings
g. Anti-vibration, damping and sound insulation products
h. Rubber linings
i. Rubber floorings
j. Rubber moulds
k. Modified natural rubber

6. Reclaimed rubber
7. Rubber support
8. Latex products*
a. Carpet underlay
b. Swimming caps
c. Ballons
d. Finger cots
e. Toys
f. Latex thread

MANUFACTURE OF OIL PALM PRODUCTS AND THEIR DERIVATIVES
1. Oleochemicals or oleochemical derivatives or preparations
2. Margarine, vanaspati, shortening or other manufactured fat products
3. Fattty acid distillate derivatives
4. Cocoa butter replace’s, cocoa, butter substitutes, cocoa butter equivalent, palm mid fraction or special olein
5. Crude palm kernel oil and palm kernel cake/expeller
6. Palm-based nutraceuticals, constituents of palm oil/palm kernel oil
7. Palm-based food products:
a. Specially animal fat replacer
b. Palm-based mayonnaise and salad dressing
c. Substituted coconut milk/powder
d. Red palm oil and its products
e. Palm-based food ingredient
f. Modified (interesterified) palm oil and palm kernel oil products
g. Microencapsulated palm-based products
8. Processed products from:
a. Palm fatty acid distillate/palm kernel fatty acid distillate
b. Palm kernel cake/expeller
c. Palm oil mill effluent
9. Products from palm biomass
10. Refining of palm oil or palm kernel oil*

MANUFACTURE OF WOOD AND WOOD PRODUCTS
1. Reconstituted wood-based panel boards or products.
2. Wooden solid or other specialized function doors or wooden solid windows
3. Multi-ply parquet
4. Wooden furniture or parts
5. Insulation for cryogenic vessels
6. All wooden products except sawn timber, veneer and plain plywood*

MANUFACTURE OF PULP, PAPER AND PAPERBOARD
1. Pulp
2. Newsprint
3. Security paper
4. Resin impregnated paper and products thereof
5. Printing and writing paper
6. Corrugated medium paper, testliner or kraftliner
7. Kraft paper
8. Paperboard
9. Moulded paper
10. Specialty paper
11. All types of paper and paper products from pulp*



Source: MIDA, Malaysia Investment In the Manufacturing Sector, February 2007