A.

Tax Incentives

1.

Review of tax incentives for companies relocating operations to Malaysia and making new investments

The existing tax incentives for companies in the manufacturing sector relocating their operations to Malaysia to be revised as follows:

• The period for applying to the Malaysian Investment Development Authority (“MIDA”) for the manufacturing sector is extended by one year, to 31 December 2022; and
• The scope of the tax incentives is expanded to companies in selected service sectors, including companies adapting Industrial Revolution 4.0 and digitalisation technology, with investment that contributes to a significant multiplier effect in the following services:

1. provision of technology solutions, or more typically a technology company which develops technology and provides technology solutions based on substantial scientific or engineering challenges;
2. provision of infrastructure and technology for cloud computing;
3. research and development/design and development activities;
4. medical devices, testing, laboratory and clinical trials; and
5. any services or manufacturing-related services as determined by the MOF.

The tax incentives provided are:

• For a new company:
  • Income tax rate of 0% to 10% for a period of up to 10 years.
• For an existing company with a new services segment:
  • Income tax rate of 10% for a period of up to 10 years.

The period for applying to MIDA for the tax incentives for the services sector is from 7 November 2020 until 31 December 2022.

2.

Tax incentive for Global Trading Centre

To enhance and simplify the tax incentive for trading activities previously covered under the Principal Hub incentives which was subject to higher eligibility criteria, it is proposed to introduce a new incentive scheme known as “Global Trading Centre”.

A 10% income tax rate for a period of five years, which is renewable for another 5 years, is given under this tax incentive.

Applications must be received by MIDA between 1 January 2021 and 31 December 2022.

3.

Tax incentives for companies manufacturing pharmaceutical products including vaccines

The manufacturers of pharmaceutical products including vaccines (especially COVID-19 vaccine) to be given the following tax incentives:

• Income tax rate of 0% up to 10% for the first 10 years; and
• Income tax rate of 10% for the subsequent period of 10 years.

In addition, strategic investments by such companies may be considered for other benefits, including grants, import duty/sales tax exemption for machinery and equipment, as well as raw materials.

Applications for this incentive must be received by MIDA between 7 November 2020 and 31 December 2022.

B.

Corporate Tax

1.

Definition of plant

Currently, “plant” is not defined in the Income Tax Act, 1967 (“the ITA”).

With effect from the year of assessment (“YA”) 2021, plant is defined to mean an apparatus used by a person for carrying on their business, but does not include a building, an intangible asset, or any other asset used and functions as a place within which a business is carried on.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

2.

Withholding tax on the distribution of income of a Real Estate Investment Trust (“REIT”)

Currently, withholding tax at the following rates are imposed on the distribution of income by a REIT to its investors:

• 24% for non-resident corporate investors.
• 10% for foreign institutional investors.
• 10% for non-corporate investors.

With effect from YA 2021, the above withholding tax represents the final tax.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

3.

Research and Development (“R&D”) expenditure

The following deduction on R&D expenditure is given to tax residents only:

• Single deduction under Section 34(7) of the ITA
• Double deduction under Section 34A of the ITA
• Double deduction under Section 34B of the ITA

The double deduction under Section 34A in respect of R&D expenditure incurred outside Malaysia shall not be more than 30% of the total R&D expenditure for a YA. Where the 30% limit is breached, only a single deduction is given on the R&D expenditure incurred.

The above are effective upon coming into operation of the Finance Act 2020 which was gazetted on 31 December 2020.

C.

Individual Tax

1.

Review of income tax rate for resident individuals

With effect from YA 2021, the income tax rate for resident individuals to be reduced by 1% for the chargeable income band of MYR 50,001 to MYR 70,000.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

2.

Increase in income tax exemption on compensation for loss of employment

With effect from YA 2020 to 2021, the income tax exemption for compensation for loss of employment to be increased from MYR 10,000 to MYR 20,000 for each full year of service with the same employer or companies within the same group.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

3.

Extension of tax incentive for Returning Expert Programme (“REP”)

The application period for the REP incentive to be extended for another three years and revised as follows:

• Flat rate of 15% on employment income for a period of five consecutive YAs; and
• Exemption on import duty and excise duty for purchase of a CBU vehicle or excise duty exemption for purchase of a CKD vehicle (total duty exemption limited up to MYR 100,000).

Applications must be reviewed by the Talent Corporation Malaysia Berhad between 1 January 2021 and 31 December 2023.

D.

Transfer Pricing

1.

Failure to furnish Contemporaneous Transfer Pricing Documentation (“TPD”)

With effect from 1 January 2021, a penalty to be imposed for failure to furnish contemporaneous TPD upon request by the Inland Revenue Board (“IRB”) as follows:

• Section 113B(1) – On conviction, liable to a fine of between MYR 20,000 and MYR 100,000, or imprisonment for a term not exceeding six months, or both. Companies may still be required by the Court to furnish the TPD within 30 days or such other period as the Court deems fit.
• Section 113B(4) – Where no prosecution was instituted, the taxpayer may nevertheless be subject to a penalty between MYR 20,000 and MYR 100,000.
• Section 113(5) – An appeal can be submitted to the Special Commissioners of Income Tax within 30 days.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

2.

Surcharge on transfer pricing adjustment

With effect from 1 January 2021:

• Section 140A(3C) – A surcharge of up to 5% will be imposed on all transfer pricing adjustments, and this will apply irrespective of whether there is tax payable on the adjustments.

• Section 140A(3D) – Collection of the surcharge as if it was tax payable.

• Section 124(3) – Director General has the powers to abate or remit the surcharge.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

3.

Power to disregard structure in a controlled transaction

Rule 8 of the Income Tax (Transfer Pricing) Rules 2012 (“Malaysian TP Rules”) gives the Director General power to disregard and re-characterise the structure in a controlled transaction where:

• The economic substance differs from form; or
• The arrangement lacks commercial rationale.

With effect from 1 January 2021, a new Section 140A(3A) and Section 140A(3B) to be introduced to insert Rule 8 into the ITA.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

E.

Real Property Gains Tax

1.

Real Property Gains Tax (“RPGT”) rate applicable to a society

Currently, the RPGT rate applicable to a society for the disposal of a chargeable asset is not specified in the Real Property Gains Tax Act, 1976 (“RPGT Act”). With effect from 1 January 2021, the following RPGT rate to be imposed on societies registered under the Societies Act 1966:

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

2.

Travel restriction imposed on director of company

With effect from 1 January 2021, a director of a company who is concerned in the management of the company’s business or directly or indirectly controls not less than 20% of the ordinary shares of the company, can be prevented from leaving Malaysia, where tax is owed by the company.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

3.

Duty of acquirer to retain and pay part of the consideration

With effect from 1 January 2021, where a disposer is an executor of the estate of a deceased person who is not a citizen and not a permanent resident, the acquirer is only required to retain the whole amount of money or a sum not exceeding 7% (compare to the current rate of 3%) of the total value of the consideration, whichever is lower.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

F.

Stamp Duty

1.

Review of stamp duty exemption for the purchase of first residential home

Full stamp duty exemption is currently given on the instrument of transfer and loan agreement for the purchase of a first residential home priced at up to MYR 300,000 by Malaysian citizens, for sales and purchase agreements executed from 1 January 2019 to 31 December 2020.

The stamp duty exemption limit on the residential home price is to be increased from MYR 300,000 to MYR 500,000, and the duration of this exemption be extended for sales and purchase agreements executed from 1 January 2021 to 31 December 2025.

2.

Extension of period of stamp duty exemption for trading of Exchange Traded Funds (“ETF”)

The period of stamp duty exemption is extended for contract notes executed for trading of ETF approved by the Securities Commission Malaysia from 1 January 2021 to 31 December 2025.

The Stamp Duty (Exemption) (No.2) 2017 (Amendment) Order 2020 has been issued on 31 December 2020 which reflects the above amendment.

3.

Extension of period of stamp duty exemption to revive abandoned housing projects

The period of stamp duty exemption is extended for the following instruments executed from 1 January 2021 to 31 December 2025 in respect of abandoned housing projects certified by the Minister of Housing and Local Governance:

A) For the rescuing contractor/developer:

1. loan agreements to finance the revival of the abandoned housing projects; and
2. instruments of transfer of title for land and houses in abandoned housing projects.

B) For the original house purchaser in the abandoned project:

1. loan agreements for additional financing; and
2. instruments of transfer of the houses.

The Stamp Duty (Exemption) (No.5) 2013 (Amendment) Order 2020 and the Stamp Duty (Exemption) (No.6) 2013 (Amendment) Order 2020 were issued on 31 December 2020 which reflect the above amendments.

G.

Labuan

1.

Definition of “Chargeable Profits” under Section 2B(1A) of the Labuan Business Activity Tax Act 1990 (“LBATA”)

With effect from YA 2020, “chargeable profits” is defined as the net profit as reflected in audited accounts for the purpose of imposing the tax rate of 24% for the relevant YA in which a Labuan company fails to comply with the substance requirements.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

2.

Substance requirements in respect of Labuan non-trading activity

With effect from 1 January 2021, the substance requirements in respect of a Labuan company carrying out a Labuan non-trading activity are expanded to include compliance with any condition in relation to control and management in Labuan.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

3.

Limitation of deduction on payments to Labuan companies

Currently, there is a limitation in terms of deduction given to a Malaysian tax resident in respect of payments made to any Labuan company. The Income Tax (Deduction Not Allowed for Payment made to Labuan Company by Resident) Rules 2018 provide that 33% of interest or lease rental payments to a Labuan company is not allowed as a deduction, whereas 97% of other payments made to a Labuan company are not allowed for deduction.

With effect from 1 January 2021, the limitation of deduction applies to payments made to Labuan entities as mentioned in Section 2B(1)(a) of the LBATA.

The above seems to suggest that the limitation of tax deduction applies to payments made to Labuan entities, regardless of whether the Labuan entities fulfil the substance requirements.

The above has been enacted under the Finance Act 2020 and gazetted on 31 December 2020.

H.

Indirect Tax

1.

Imposition of excise duty for all types of electronic and non-electronic cigarette devices including vape

With effect from 1 January 2021, excise duty to be imposed as follows:

• For all types of electronic and non-electronic cigarette devices, including vape, at an ad valorem rate of 10%; and
• For liquid or gel used in electronic cigarettes, including vape, at a rate of MYR 0.40 per millilitre.

2.

Increase of sales limit for value-added and additional activities carried out in the Free Industrial Zone (“FIZ”) and Licensed Manufacturing Warehouse (“LMW”)

The current 10% limit on the value-added and additional activities to be increased to 40% of the company's annual sales value.

The above rules would apply for new applications for FIZ and LMW and the applications to increase the sales value limit can be submitted to the Royal Malaysian Customs Department from 7 November 2020 onwards.