MIDA’s E-Newsletter in has introduced readers to the Forum of Harmful Tax Practices (FHTP) and its requirements in fulfilling Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. This edition aims to update readers on the current progress and incentive recipients’ tax responsibilities.
Incentives namely the Pioneer Status for High Technology, Pioneer Status for Contract R&D, Green Technology Services and Principal Hub had been identified for evaluation by FHTP. During the last engagement between Malaysia and FHTP, decision and consensus for the first three incentives were achieved while the latter remains under evaluation. The contract R&D and Green Technology services which are categorised under the non-IP regime were reviewed and amended to ensure that substance is included as part of the incentive criteria and conditions.
Moving forward, all projects approved under the Green Technology Services and Pioneer Status for Contract R&D will subject to substance requirements such as the number of full-time employment and operational expenditures. For further information on these criteria, kindly visit the forms and guideline section of MIDA’s website.
Incentive Recipients’ Tax Responsibilities
As for the Pioneer Status for High Technology incentive, the last FHTP meeting agreed for the incentive to be re-classified as ‘out of scope’ as compared to its earlier classification as an IP Regime. The re-classification was made since the Pioneer Status for High Technology incentive targets the manufacturing segment as opposed to mobile services which is under the purview of FHTP. However, the legislation is required to be amended to exclude Intellectual Property (IP) income. Following this, the necessary amendments were made through Finance Bill 2018 and the Promotion of Investments (Promoted Activities and Promoted Products for High Technology Companies) (Amendment) Order 2018. Through these amendments, the Pioneer Status for High Technology incentive is only applicable for the manufacturing income of the qualifying activity while any form of IP income will be excluded from the incentive.
While future Pioneer Status for High Technology incentive recipients will be informed on the exclusion of IP income from the incentive, it may not be as straightforward as compared to the existing recipients who have been enjoying the incentive. The existing players are given a transition period before they are required to join the bandwagon. The magic date is 30 June 2021. A company which has been granted a Pioneer Status for High Technology incentive and received its Pioneer Certificate can enjoy the incentive until 30 June 2021. On 1 July 2021 onwards, the incentive will only be valid for the exemption of manufacturing income, and any IP income has to be excluded, and a separate account is required to be maintained. Companies are now obliged to identify whether or not there is IP income embedded into the income of their qualifying high technology manufacturing activity. Companies that have IP income which is currently exempted with incentive are advised to talk to MIDA for further consultation on the way forward.
Malaysia’s engagement with the FHTP, OECD is a continuous process in ensuring the country remains competitive on a level playing field while ensuring international obligations are met. MIDA’s newsletter will furnish our readers with more updates as progress is made. Keep subscribing!