DAY 1: TUESDAY, 25 JULY 2017

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2 DAY 1: TUESDAY, 25 JULY 2017 Topic: Tax Incentives : Issues and Challenges Speaker: Nor aini Ja afar Director, Tax Policy Department Lembaga Hasil Dalam Negeri Malaysia 2

3 Inland Revenue Board collection (RM bil) Inland Revenue Board collection (RM bil) 3

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5 Background Current development Issues and challenges Going forward 5

6 Tax incentives can be defined as any incentives that reduce the tax burden of enterprises in order to induce them to invest in particular projects or sectors. UNCTAD Tax Incentives and Foreign Direct Investment A Global Survey (ASIT Advisory Studies No.16) 2000 What is Tax Incentive? 6

7 Promotion of Investment Act Income Tax Act - Exemption Order / Rules Other Acts LBATA, 7

8 Categories of incentives Reinvestment Allowance AUTOMATIC AUTOMATIC Industry based Legislation PROMOTED PRODUCT/ ACTIVITY APPROVAL Qualifying terms and conditions 8

9 Exemption/Allowances/Deduction 9

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11 CURRENT DEVELOPMENT Areas/ locations New Activities 11

12 Corridors 12

13 Corridors Authority Location/ Areas of coverage Focused Sector/ Industry Iskandar Malaysia Iskandar Region Development Authority (IRDA) State of Johor, Southern Peninsular Malaysia Education Financial Healthcare ICT & Creative Industries Logistics Tourism NCER ECER SDC SCORE Northern Corridor Implementation Authority (NCIA) States of Perlis, Kedah, Penang and Northern Perak Agriculture Human Capital Development Infrastucture Manufacturing Tourism East Coast Economic Region Development Council (ECERDC) States of Kelantan, Terengganu and Pahang, as well as the district of Mersing in Johor. Agriculture Education Manufacturing Oil & Gas Petrochemical Tourism Sabah Economic Development and Investment Authority (Sedia) Sabah (East Malaysia) Agriculture Green Technology Human Capital Infrastructure Manufacturing Tourism Regional Corridor Development Authority (RECODA) Sarawak (East Malaysia) Aluminium Glass Marine Engineering Metal-based Oil & Gas Timber-based Tourism Aquaculture Livestock Palm oil Tourism 13

14 New Activities 14

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16 Too Many Incentives Intention/ Policy/ Interpretation Compliance of Conditions Managing Tax Incentives Platform for Aggressive Tax Planning International Commitments 16

17 Too Many Incentives Exemption of income Investment allowance Reinvestme nt allowance Deduction on expenses Accelerated Capital allowance 17

18 Incentives shopping Too Many Incentives 18

19 Intention/Policy/Interpretation 19

20 Reinvestment Allowance Qualifying Activity Manufacturing & Selected Agri. project Qualifying Project expansion modernization automation diversification Qualifying Period Qualifying Criteria 15 years 36 months in operation Qualifying Capital Exp. Factory, plant & machinery 60% QCE against 70%/100% SI Policy/Intention/Interpretation 20

21 Reinvestment Allowance Development Expansion project (100% deduction) 1989 Expansion Modernisation Diversification (100% deduction) 25% 40-50% 60% Expansion project (100% deduction) 1991 Expansion Modernisation Diversification (100% deduction) 50% 1997 Extended to specific agricultural project (70% of Statutory Income (SI) 100% of SI if located in promoted area) 21 Intention/ Policy/ nterpretation

22 Reinvestment Allowance Development 60% 60% 60% 36 months in operation 2009 Income from qualifying project Extended to automation project Introduction of qualifying period (70% of SI,100% of SI if located in promoted area, 100% of SI if achieves a level determined by Minister of Finance) 60% 2012 Promoted area Definition factory (SETM & OKA Concrete Ind. case) Intention /Policy/ Interpretation 60% 2016 Definition automating, diversifying, expanding, manufacturing, modernising, machinery, disposed of. Three additional years 22

23 Capex Value added Location Terms and Conditions 23

24 Terms and Conditions 24

25 Terms and Conditions 25

26 Request for relaxation No. of application Terms and Conditions 26

27 Labuan Research & Development Manufacturing Positive Vision Labuan Ltd Altera Latex Manuf. Nimble Solutions Terms and Conditions 27

28 Gross Income Statutory Income Unabsorbed Incentives Aggregate Income 28 Managing Tax Incentives

29 Managing Tax Incentives 29

30 Platform for Aggressive Tax Planning 30

31 Diverting activities to outside Workshop on Tax Incentives and Base Protection 2015 Export zones leakages into domestic economy. Disguising nonqualifying activities Fictitious employees Existing to new Top ten abuses of tax incentive regimes Overvaluation Restructured as foreign investors. Accelerate income Transfer pricing Fictitious investments 31

32 15 ACTIONS International commitments 32

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35 Post approval services Compliance 35

36 Incentive is my right perception 36

37 Going Forward Targeted Get back the benefits Compliance 37

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