Table of Contents
Introduction ..................................................................................................................................... 1
Tax Incentives in Malaysia ............................................................................................................. 2
Double Deduction ....................................................................................................................... 2
Incorporation Expense ................................................................................................................ 2
Reinvestment Allowance ............................................................................................................ 3
Pioneer Status.............................................................................................................................. 3
Investment Tax Allowance ......................................................................................................... 4
How Tax incentives especially Pioneer Status and Investment Tax Allowance create Economic
Growth ............................................................................................................................................ 5
Conclusion ...................................................................................................................................... 7
References ....................................................................................................................................... 8
Introduction
Tax incentives are tools used by the government to promote a specific economic goal. These are
like incentives given to certain selected group of taxpayers, they can be tax exemptions, tax
holidays, credits, investment allowances, preferential tax rates and import tariffs (or customs
duties), and deferral of tax liability (United Nations, 2018). When the tax incentives are designed
properly and implemented successfully, they can attract a lot more investments in the country. The
government can use tax incentives to promote investment and economic growth in a specific
industry such as agriculture, manufacturing or they can promote certain geographical zones.
Malaysian government has number of tax incentives available for companies namely, Pioneer
Status, Investment Tax Allowances, Reinvestment Allowance, Research and Development
Activity, Incorporation Expenditure, Deduction for Cost of Acquisition of Proprietary rights and
double deduction.
Tax Incentives in Malaysia
Double Deduction
This type of incentive allows a company to deduct/set off certain activities of their expenditure
twice against the taxable/chargeable income. Some of the activities are, promotion of export: the
list for the expenses are listed in the income tax act which includes expenses such as overseas
advertising, export market research, preparation of tenders for the supply of goods overseas and
approved industrial exhibitions etc.
employee training programs: this incentive can be used by manufacturing companies and hotel
and tourism companies. The expenditure that can be double deducted should be on government
approved training programs which are designed to improve and develop skills of employees in
manufacturing and hotel and tourism companies which can modernize the processes within these
companies.
disabled persons: This incentive can be used by manufacturing companies and are the
remuneration given to employees who are disabled mentally and physically.
Research and development: Any expenditure that company incurs on government approved
research, expenses on the services of approved research institutes and any donation or cash
contributions to approved research centers will be available to be double deducted.
Freight charges: Specific manufacturing companies located in certain locations such as timber
companies located in Sabah will be eligible for double deductions. (Kluwer, 2020)
Brand promotion advertising: Another incentive available to manufacturing companies who are at
least 70% Malaysian owned. They can receive double deduction on cost of promoting their
products internationally that will increase their exports. (Kluwer, 2020)
Incorporation Expense
Incorporation expense are the expenses incurred by companies before they start operating, for
example registration fees, preparing and printing M&A and prospectus, cost of circulating and
advertising prospectus, cost of drawing up preliminary contracts or any other costs incurred prior
to the commencement.
Schedule 4B of the ITA 1967 and paragraph 3.2 (INLAND REVENUE BOARD OF MALAYSIA, 2013)
allow companies to deduct expenses that are incurred prior to the commencement of the business
or its operations.
Reinvestment Allowance
This tax incentive is available to resident companies of Malaysia who have been operating for
more than past 36 months and incur capital expenditure to expand, automate, modernize, or
diversify their existing manufacturing business or approved agriculture project. The allowances
are as follows:

Allowances given for the first 15 years when they claim

Allowance is computed at 60% of QCE incurred and can be utilized against 70% of
statutory income.

The projects that have achieved the level of productivity required by the Minister of
Finance will not be restricted to 70% and can be utilized a full 100% income tax exemption.

If the asset for which the allowance is granted for is disposed off within five years,
allowance will be withdrawn. (PWC, 2020)

Unutilized RA can be carried forward indefinitely until it is fully utilized.
Pioneer Status
Pioneer status is granted to companies carrying out promoted activities or products listed by the
MIDA (Malaysian Industrial Development Authority). For a company to be eligible it must also
be locally incorporated company (accaglobal, 2020). To apply for pioneer status company must send
application to MIDA. If it is approved, the company will be eligible for a tax relief for five years
and up to 70% of statutory income. PS will be issued to companies once they have achieved 30%
production of the installed company and the commencement date of PS will be stated on the
pioneer certificate. (PROMOTION OF INVESTMENTS ACT 1986)
Following are the promoted areas which will not be restricted to 70% exemption on statutory
income:

Pioneer status in the promoted areas (Eastern corridor- Pahang, Kelantan, Terengganu,
Perlis and Mersing, Sabah and Sarawak and Labuan) will be given exemption of 100% of
Statutory Income.

National and Strategic importance will be given 100% of Statutory Income, can be
extended for another 5 years.

High technology companies will be given 100% of Statutory income.

Contract Research and Development companies will be given exemption of 100% of
Statutory income.

Approved Research companies will receive 100% of Adjusted income.
Investment Tax Allowance
Investment Tax Allowance is granted to companies carrying out promoted activities or products
listed by the MIDA (Malaysian Industrial Development Authority). For a company to be eligible
it must also be locally incorporated company. This is a capital-based incentive. It is an alternative
to PS but comes in the form of additional relief of 60% of the qualifying capital expenditure (QCE)
incurred to be set-off against 70% of SI. QCE for ITA is defined in s29 of the PIA (PROMOTION
OF INVESTMENTS ACT 1986).
Unutilized Investment Tax Allowance can be carried forward
indefinitely until it is fully utilized. Capital expenditure that qualifies can be:
 Manufacturing activity – Plant and machinery and Factory including software to operate
machinery.
 Agriculture activity – clearing and preparation of land, planting of crops, irrigation or
drainage system, road and bridges
 Hotel business – hotel building and plant and machinery
 Tourist project – clearing land, planting of trees and plants, road and other infrastructure
facilities, birds, animals and other exhibits.
QCE that is non-qualifying capital expenditure can be capital expenditure that is incurred on
building which is to be used a housing accommodation in society or any plant or machinery which
is to be used by director or member of management, administrative staff.
The 70% statutory income limit is to be extended to 100% for following promoted activities:

Promoted areas (Eastern corridor, Sabah and Sarawak and Labuan)- ITA rate 100% ,100%
Statutory Income

National and Strategic importance (100% of Statutory Income, ITA rate 100%)

High technology company (ITA rate 60%,100% of Statutory Income)

Contract R&D companies (100% of Statutory Income, 70of SI and 10 years)

Approved research company (ITA Rate 100%, 70% of Statutory Income, 10 years)

In-house research (ITA rate 50%, 70% of Statutory Income, 10 years)

Technical and vocational training company (ITA rate 100%, 70% of Statutory Income,10
years)
How Tax incentives especially Pioneer Status and Investment Tax
Allowance create Economic Growth
Government can use Tax incentives to target specific or certain businesses or industries that they
want to encourage businesses to expand and relocate. This targeted or the promoted areas will be
chosen by the government to lower the cost of doing business in that desired industry and to steer
the economy. For example, the PS status and ITA encourage businesses to set up their
manufacturing companies in Sabah and Sarawak and promote economic growth in that area.
Businesses at start have lot of costs as they set up thus this 100% exemptions on Statutory Income
in the Sabah and Sarawak region can give a motive for businesses to set up their plants there.
Tax incentives like PS and ITA provide businesses for around 10 years with 100% exemptions on
Statutory Income. This means that the companies will end up having higher profit and a higher
rate of return which can be attractive to investors to invest in companies in promoted areas and
industries. This will increase investment in areas where Malaysian government is trying to
encourage such as industries like agriculture.
Tax incentives are very important for government as government is able to promote growth in
certain areas without having to lose actual/physical cash. Unlike other ways of promoting growth
in certain industries or areas, government uses subsidies or grants which has a direct impact on the
budget thus use of tax incentives allow government to promote growth without having a direct
impact on revenue. Even though government will loose out revenue for few years but in long run
as the industries who utilize tax incentives grow and become large, they will end up paying taxes.
This allows government to use their budgets to fund a construction project or any other project
rather than giving money to promote private construction. It also gives a political cover for
government.
Tax incentives are a great way for a government to bring a country out from a secondary sector
which is manufacturing towards a tertiary sector which involves more retailing and use of
advanced technologies. By using ITA and PS Malaysian government is able to encourage high
technology company who are given ITA rate 60%,100% of Statutory Income exemption, Contract
R&D companies and approved research company are given 100% of Statutory Income exemption,
70% of SI and 10 years, in the promoted areas (Eastern corridor- Pahang, Kelantan, Terengganu,
Perlis and Mersing, Sabah and Sarawak and Labuan) will be given exemption of 100% of Statutory
Income. With PS high technology companies will be given 100% of Statutory income. Contract
Research and Development companies will be given exemption of 100% of Statutory income.
With these incentives, many companies in Malaysia and as well as international companies will
invest in Malaysia to set up a Malaysian based company to enjoy these incentives. This will
increase FDI in Malaysia and as well as improve the technology available in Malaysia due to more
research being done. These new breakthroughs and technologies due to research can help increase
productivity of Malaysia. (Harju and Kosonen, 2013)
Tax incentives can be used by governments to target areas which lack economic growth such as
Sabah and Sarawak which have high potential but is not seeing enough economic growth thus by
including Sabah and Sarawak in promoted areas, more companies will be aiming to invest in that
region. Malaysian government also provides incentives on goods to exports thus export companies
are likely to set up in this region to achieve maximum incentives and operate for their first 5-10
years with little to no taxes to pay. This will not only increase profits but also increase employment
in the region of Sabah Sarawak. This is the spillover and multiplier effect that government will
achieve. The government gives tax incentives to companies who in turn provide employment
which leaves the people in that region with more income and more money to spend and as they
spend money, they will pay taxes such as GST which will benefit the government.
With the tax incentives government of Malaysia is encouraging investment into the country as
Malaysia will become competitive around the globe. All multinational companies are looking for
cheaper alternative for production thus Malaysia becomes a great hub for FDI. This inward FDI
creates jobs and as well as increase exports of a country because the produced goods will have to
be shipped outside Malaysia to the rest of the world. Thus, incentives can really stimulate
economic growth.
Tax incentives can be used to compensate for any other deficiencies in an economy. An economy
like Malaysia who had a lot of deficiencies before the introduction of Promotion of Investment
Act 1987. The deficiencies in economy such as unreliable or high cost infrastructure,
macroeconomic instability, or a weak legal and judicial system can really make Malaysia or any
other economy an unattractive location to invest. However, with the use of Tax incentives which
are implemented properly can make the investors to ignore the deficiencies and look at the tax
incentives which are very favorable, especially for agriculture industry or tourism, manufacturing
industry. This has completely transformed Malaysia in terms of tourism and manufacturing. Since
1960s and 1970s.
Conclusion
It is obvious how incentives like Pioneer Status and Investment Tax allowances stimulate an
economy towards growth through creating jobs in areas with high unemployment rates and areas
with less development in a country. It has benefited Malaysia to encourage economic growth in
regions of Sabah Sarawak and improve its exports as well. But in my opinion the tax incentives
are only beneficial to companies that would have survived without the incentives. To be able to
earn the incentives a company must achieve 30% according to PS. For this to happen, the
companies need huge capital especially in industries like manufacturing and tourism and research
and development. Only some companies manage to achieve this amount of capital and then enjoy
benefits thereafter. But what about the companies who are relatively small and do not have enough
capital to invest who would not even benefit from these incentives thus there needs to be more
subsidies or grants which can be highly beneficial to companies who want to manufacture but may
lack capital. Government also needs to ease the red tape activities and encourage tax incentives for
foreign companies which can increase FDI. This will promote economic growth as smaller
businesses and international businesses can easily set up in Malaysia and create a highly
competitive industry.
References
Harju, J. and Kosonen, T., 2013. The Impact of Tax Incentives on the Economic Activity of
Entrepreneurs. SSRN Electronic Journal,.
ACCA Global, 2020. Pioneer Status, Investment Tax Allowance, And Reinvestment Allowance | ACCA
Global. [online] Accaglobal.com. Available at: <https://www.accaglobal.com/pk/en/student/exam-supportresources/professional-exams-study-resources/p6/technical-articles/pioneer-status.html> [Accessed 18
August 2020].
INLAND REVENUE BOARD OF MALAYSIA, 2013. PRE-OPERATIONAL BUSINESS EXPENDITURE.
Kluwer, W., 2020. Lowtax - Global Tax & Business Portal | Tax-Efficient Sectors - Double Deduction Tax
Incentives. [online] Lowtax.net. Available at: <https://www.lowtax.net/information/malaysia/malaysiadouble-deduction-taxincentives.html#:~:text=Malaysia%3A%20Tax%2DEfficient%20Sectors&text=Expenses%20incurred%20o
n%20certain%20activities,off%20twice%20against%20taxable%20profits.&text=Disabled%20Persons%2
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[Accessed 17 August 2020].
Taxsummaries.pwc.com. 2020. Malaysia - Corporate - Tax Credits And Incentives. [online] Available at:
<https://taxsummaries.pwc.com/malaysia/corporate/tax-credits-andincentives#:~:text=Reinvestment%20allowance,A%20resident%20company&text=The%20allowance%20is%20given%20for,against%2070%25%20of%2
0statutory%20income.> [Accessed 19 August 2020].
United Nations, 2018. DESIGN AND ASSESSMENT OF TAX INCENTIVES IN DEVELOPING
COUNTRIES. [online] pp.5-7. Available at: <https://www.un.org/esa/ffd/wp-content/uploads/2018/02/taxincentives_eng.pdf> [Accessed 18 August 2020].
PROMOTION OF INVESTMENTS ACT 1986.
Paul Hype Page & Co. 2020. Tax Incentives For Malaysian Tax Resident Companies. [online] Available at:
<https://www.paulhypepage.my/tax-incentives-for-malaysian-tax-resident-companies/>
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