An income tax incentive called Reinvestment Allowance (RA) is currently granted to resident companies which, among other qualifying circumstances, undertake certain expansion, modernisation or diversification activities in respect of manufacturing or processing. RA is computed at 60% of designated capital expenditure. The RA thus computed is set against the company's statutory income subject in most cases to a limit of 70% thereof per year of assessment thus decreasing the tax chargeable on the company. Significant changes (highlighted below in italics) have been proposed to the RA provisions. From year of assessment 1998, where a company resident in Malaysia :- a. has been in operation for not less than 12 months; b. has incurred in the basis period for a year of assessment capital expenditure on a factory, plant or machinery used in Malaysia for the purposes of a qualifying project; and c. has shown an increase in productivity in the basis period for that year of assessment or in the basis period for the following year of assessment, there shall be given to the company for that year of assessment a RA of an amount equal to 60% of that expenditure. However, such expenditure shall not include capital expenditure incurred on plant or machinery which is provided wholly or partly for the use of a director, or an individual who is a member of the management, or administrative or clerical staff of that company. RA for the above companies would therefore be restricted to cases where there are increases in productivity. According to the relevant appendix to the text of the 1998 Budget Speech, productivity will be measured using the Process Efficiency Ratio (PER). Total Output - BIMS PER = -------------------------     Total Input - BIMS     Where,     BIMS ('Bought in Materials and Services') is defined as value of materials consumed in the production process (including payment for the transport, tax paid including those on materials) + value of equipment used such as packaging materials, daily used materials (including office stationery, materials for improvement and maintenance) + publication cost + lubricants + cost of goods sold in same condition such as utilities (water, electricity, fuels) + payments to contractors + payment to industrial work done by others + payment for non-industrial services.

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