Malaysia Budget 2003
 
INCOME TAX

12.   Tax Exemption of Chartering Services of a Luxury Yacht
     
    Under the Income Tax (Exemption)(No.23) Order 2002, subject to the approval of the Minister of Finance, a company resident in Malaysia is exempted from the payment of income tax in respect of its statutory income derived from the provisions of chartering services of a luxury yacht departing from and ending at any port in Malaysia.

"luxury yacht" means a light sailing vessel propelled by sails, steam, electricity or motive power other than oars equipped with :-

(a) bathrooms, galleys, saloons, cabins and staterooms, which has exotic and expensive furnishings and finishing; and
(b)   recreational facilities.


The luxury yacht so equipped must be verified by the Ministry of Transport Malaysia.

The tax exemption is for 5 consecutive years of assessment commencing from the year of assessment in the basis period in which the approval is in effect. The income exempted is available for a two-tier distribution of tax-free dividend.

This Order takes effect from 20th October, 2001.
     
13.   Tax Exemption on Rental of ISO Containers
     
    The pervious Income Tax (Exemption)(No.17) Order 2002 is revoked by the new Income Tax (Exemption) (No. 24) Order 2002.

Pursuant to the new Order 2002, tax exemption (including withholding tax) is granted on income derived by non-resident persons from the rental of International Standard Organisation containers to a Malaysian resident shipping company who carries on a business of :-

(a) transporting passengers and cargo by sea on a ship; or
(b)   letting out a ship on a voyage or time charter basis.


This new Order is effective from 20th October, 2001.
     
14.   Tax Exemption on Statutory Income of International Trade Exhibition Promoter
     
    Pursuant to the Income Tax (Exemption)(No.15) Order 2002, the statutory income derived by an international trade exhibition promoter from organizing an international trade exhibition which is approved by the Malaysia External Trade Development Corporation (MATRADE) is exempted from tax. The international trade exhibition promoter may be a company, an association or an organisation and the total number of foreign trade visitors brought in by the promoter must not be less than 500 for a year of assessment.

For the purposes of the Order :


"foreign trade visitors" means individuals who are non-Malaysian citizens visiting the international trade exhibition, but does not include individuals who are non-Malaysian citizens who reside in Malaysia;

"statutory income derived from organizing an international trade exhibition" means fees and other payments received by a company, an association or an organisation in performing its duties as an international trade exhibition promoter less allowable expenses for tax purposes and capital allowances, if any.


The amount of statutory income exempted is available for the two-tier distribution of tax free dividend.

This Order is effective from the year of assessment 2002.
     
15.   Tax Exemption on Royalty Received by a Non-Resident Franchisor from a Registered Institution in Relation to an Approved Programme
     
    Pursuant to the Income Tax (Exemption)(No.16) Order 2002, royalty received by a non-resident franchisor from a registered institution in relation to an approved programme is exempted from tax (including withholding tax). The terms "registered institution", "franchisor" and "approved programme" used in the Order are as defined under the Private Higher Educational Institutions Act, 1996.

This Order is effective from 20th October, 2001.
     
16.   Double Deduction for the Promotion of Export of Services
     
    The Income Tax (Deduction for Promotion of Export of Services) Rules 2002 provides for a double deduction of outgoings and expenses incurred by a company for the promotion of export of services.

The qualifying outgoings and expenses are those incurred for :-

(a) feasibility studies for overseas projects identified for the purpose of tender;
(b)   participation in a trade or industrial exhibitions in Malaysia or overseas;
(c)   participation in exhibitions held in a Malaysian Permanent Trade and Exhibition Centre overseas;
(d)   overseas travel by a representative of the company for the promotion of export of services; and
(e)   accommodation and sustenance subject to a maximum of RM300 and RM150 per day respectively.


This said Order is effective from the year of assessment 2002.
     
17.   Double Deduction for the Promotion of Exports of Local Products
     
    The Income Tax (Deduction for Promotion of Exports) Rules 2002 provides for a double deduction of outgoings and expenses incurred by a resident company for the promotion of local products. Outgoings and expenses which qualify for double deduction are those incurred in respect of participation in an international virtual trade show and trade portal for the promotion of local products as verified by MATRADE, and the cost of maintaining warehouse overseas.

The Rules have effect from the year of assessment 2002.
     
18.   Deduction of Expenses in Respect of Patents, Trademarks and Product Licensing Overseas
     
    Under the Income Tax (Deduction for Promotion of Exports)(No.2) Rules 2002, a deduction of outgoings and expenses incurred by a resident company in respect of registration of patents, trademarks and product licensing overseas for the purpose of promoting exports is allowed. The Rules will avoid such expenses being treated as capital or initial expenditure.

The Rules have effect from the year of assessment 2002.
     
19.   Deduction of Expenses in Respect of Hotel Accommodation and Sustenance Provided to Potential Importers for Promotion of Exports
     
    The Income Tax (Deduction for Promotion of Exports)(No.3) Rules 2002 provides for deduction of outgoings and expenses incurred by a company in respect of accommodation (maximum RM300 per day) and sustenance (maximum RM150 per day) provided to potential importers for 3 nights stay in Malaysia.

The visit by the potential importers to Malaysia shall be as a follow-up to the trade and investment mission organized by Government agencies, industrial or trade associations that the company has participated in the 12 months preceding the visit to Malaysia of the potential importer. The company's participation must be verified by MATRADE.

The Rules have effect from the year of assessment 2002.
     
20.   Deduction for Implementation of RosettaNet
     
   

Pursuant to the Income Tax (Deduction for Implementation of RosettaNet) Rules 2002, certain expenses incurred by a qualifying company resident in Malaysia in assisting local small and medium scale manufacturer to adopt and implement RosettaNet would qualify for deduction. The qualifying expenses for purposes of implementing RosettaNet are as follows :-

  • Cost of new computer hardware, software and networking device provided by a qualifying company to RosettaNet Malaysia Berhad.

  • Cost of new office equipment provided by a qualifying company to RosettaNet Malaysia Berhad.

  • Basic salary of employees on secondment from a qualifying company to RosettaNet Malaysia Berhad for a period of not more than 3 years.

  • Basic salary of employees on secondment from a qualifying company to a local manufacturer for a period of 2 to 6 months.

  • Cost relating to fees, traveling expenses, accommodation of trainers and rental of facilities provided by a qualifying company for the provision of training to the employees of a local manufacturer of not more than RM100,000.

For the purposes of the above Rules;

"qualifying company" means

(a) a company which is a member of RosettaNet Malaysia Berhad and which is assisting a local manufacturer to adopt and implement RosettaNet; or
(b)   a company, association or statutory body which is a member of RosettaNet Malaysia Berhad and which is assisting RosettaNet Malaysia Berhad.


"local manufacturer" means a company which is

(a) incorporated in Malaysia and at least 70 per cent of the issued share capital of the company is owned by Malaysian nationals;
(b)   carrying on manufacturing activities; and
(c)   adopting and implementing RosettaNet.


The Rules is effective from year of assessment 2002.

   
21.   Public Ruling (PR)
     
    During the year 2002, the following new rulings have been issued by the Inland Revenue Board.

(a)   PR 1/2002 - Deduction for Bad and Doubtful Debts and Treatment Of Recoveries
    The Public Ruling No. 1/2002 considers the deduction for bad and doubtful debts as provided under Section 34 of the Act and the treatment of recoveries under Section 30 of the Act.
 
i) Debt must be "bad"
     
   

Trade debts written off as bad are generally deductible against gross income in computing the adjusted business income of a business. A debt is "bad" when all circumstances of recovery of the debt as to the likelihood and cost of its recovery have been considered.

All reasonable steps to recover the debt should be based on commercial considerations and supported by evidence such as :-

  • issuing reminder notices;
  • debt restructuring scheme;
  • rescheduling of debt settlement;
  • negotiation or arbitration of a disputed debt; and
  • legal action (filing of civil suit, obtaining of judgement from court and execution of the judgement).

The fact that the anticipated cost of any legal action is prohibitive in relation to the amount of debt can be considered a reasonable basis for treating a debt as "bad". Any reasons for not taking further action to recover debts should be documented.

For deductibility purposes, there must be evidence that each debt is evaluated separately, when and by whom the evaluation was done and the specific information drawn in arriving at the evaluation.

In evaluating a debt as "bad", the following factors should be considered:-

  • the debtor has died without leaving any assets from which the debt can be recovered;

  • the debtor is a bankrupt or in liquidation and there are no assets from which the debt can be recovered;

  • the debt is statute-barred;

  • the debtor cannot be traced despite various attempts and there is no known assets from which the debt can be recovered;

  • attempts at negotiation or arbitration of a disputed debt have failed and the anticipated cost of litigation is prohibitive; and

  • any other circumstances where there is no likelihood of cost effective recovery.


The debts should have been included in the gross income of the person for the basis period for the current or prior year of assessment to be eligible for tax deduction.

In the case of a business of money lending, both the interest (gross income) and the loan (business loan) are considered for write-off as bad debt after taking into account all circumstances.

     
ii)   Deductibility of provision for doubtful debts
     
   

A trade debt considered to be doubtful of recovery should be based on sound commercial considerations and not on personal, private or other reasons.

For deductibility of specific provision for doubtful debts, the following evidence is required:-

  • that each debt has been evaluated separately;
  • how the extent of its doubtfulness was evaluated;
  • when and by whom this was done; and
  • what specific information was used in arriving at that evaluation.

and also consider the factors relating to :-

  • the period that the debt has been outstanding;
  • the current financial status of the debtor;
  • the credit record of the debtor;
  • the person's history of bad debts;
  • the experience for the particular trade/industry; and
  • the age-analysis of the debts.
     
iii)   Deductibility of general provision
     
    Provision for doubtful debts based on a percentage of sales / trade debts is not allowable for tax purposes, even if there is a legal requirement or an accounting convention to do so in that particular industry.
     
iv)   Forgiveness of debts
     
    A decision to forgive or to waive payment of a trade debt by the creditor is not regarded as a valid commercial reason for tax deduction of the debt waived.
     
v)   Non-trade debts
     
    Non-trade debts that are written off as bad or provisions made (both specific and general) are not deductible for tax purposes. Subsequently, any recoveries of non-trade debts are not taxable.
     
vi)   Debt due from related or connected person
     
    Any decision to write-off (or to extinguish by other means) or to make a specific provision for a trade debt due from a related or connected person is subject to stringent examination before it can be considered for tax deduction purposes.

In addition to the conditions in (i) and (ii) above, there should also be evidence to prove that the decision is made on an armís length basis and for valid business and commercial reasons, rather than private, personal or non-commercial reasons.
     
vii)   Recoveries
     
    Tax adjustment is required for the amount of trade debts recovered if a tax deduction for bad debts was obtained previously and the recovery is not credited into the income statement.
     
viii)   Settlement of trade debt with assets
     
    Where a debt is settled by the foreclosure of an asset held as security for the debt or by an asset given in exchange for the debt, the net proceeds from the sale of the asset or the market value of the assets given in exchange is taken as the value for settlement of the debt.
     
(b)   PR 2/2002 - Pre-Operational and Pre-Commencement of Business Expenses for Companies
   

This ruling is applicable only to companies. In other cases, generally, expenses incurred prior to the commencement of a business would not be allowable as a deduction.

The surrounding facts and circumstances have to be considered to determine whether a business has commenced. Activities which are preparatory in nature should be distinguished from those which are integral to the income producing process normally undertaken in the course of a particular business. The PR provides the following instances as indicative of the commencement of business:-

  • manufacturing - purchase of raw materials

  • retailing - purchase of goods for resale

  • agriculture - when planting first began

  • construction - levelling of land

  • property development - purchase of land


Special Deduction for Pre-Commencement Expenses

There are provisions both in the Act and Rules which allows for the following deductions for companies :

  • Income tax (Deduction of Incorporation Expenses) Rules, 1974;

  • Pre-operational business expenditure (Schedule 4B of the Act);

  • Pre-commencement of business expenditure on approved training [Income Tax (Deduction of Approved Training) Rules 1992];

  • Pre-commencement of business training expenses [Income Tax (Deduction of Pre-Commencement of Business Training Expenses) Rules 1996]
   
i) Income Tax (Deduction of Incorporation Expenses) Rules 1974
     
   

Companies incorporated in Malaysia on or after 1st January 1973 with an authorised capital not exceeding RM250,000 would qualify for deduction of the following expenses against gross income from its business source for the basis period in which it commenced business:

  • Cost of preparing and printing the Memorandum, the Articles of Association and the Prospectus, and of circulating and advertising the Prospectus;

  • Cost of registering the company and the statutory documents, together with fees and stamp duties payable;

  • Cost of drawing up the preliminary contracts and stamp duty thereon;

  • Cost of printing and stamping debentures (if any) and of share certificates and letters of allotment;

  • Cost of the seal of the company; and

  • Underwriting commission.

A claim must be made in the tax computation even though the expenses may have been capitalised.

     
ii)   Pre-Operational Business Expenditure Incurred Outside Malaysia (Schedule 4B of the Act)
     
   

Certain pre-operational business expenditure in relation to a proposal to undertake investment outside Malaysia in respect of an approved business venture by a resident company can be claimed as deduction for tax purposes.

The qualifying expenses are :

  • expenses directly relating to the conduct of feasibility studies;

  • expenses directly relating to the carrying out of market research or survey or the obtaining of marketing information;

  • expenses incurred on overseas travel in conducting feasibility study or market survey purposes; and

  • actual expenses on accommodation and sustenance not exceeding RM400 per day.
     
iii)   Pre-Commencement of Business Expenditure on Approved Training
     
   

A manufacturing company is allowed a double deduction for pre-commencement of business expenditure on approved training in arriving at the adjusted income if it satisfies the following :

  • it has incurred the said expenditure during the period of pre-commencement of its business;

  • the expenditure is in respect of training its employees for the acquisitions of craft, supervisory or technical skills which will contribute directly to the future production of its products;

  • the training is provided under a training programme approved by the Malaysian Industrial Development Authority (MIDA) or a training programme conducted by a training institution approved by the Minister of Finance; and

  • the said employees are Malaysian citizens.
     
iv)   Pre-Commencement of Business Training Expenses
     
   

A company providing training to its employees prior to the commencement of business can claim a single deduction on the training expenses in arriving at the adjusted income provided all the following conditions are met:-

  • the training is to impart basic skills to enable the company to commence its business;

  • the training expenses are incurred within 1 year prior to the commencement of its business; and

  • the training expenses are the kind allowable under Section 33 of the Act.
     


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© September 2002