The Reinvestment Allowance (RA) is an incentive provided to Malaysian resident companies involved in the manufacturing industry and specified agriculture sector.
The purpose of this incentive is to encourage these companies to reinvest and grow their companies.
Eligibility to Claim Reinvestment Allowance
For these companies to be eligible for the RA incentive, they must have been actively engaged in business operations (i.e. manufacturing or agricultural) for a minimum of 36 months.
In addition, to be eligible for RA incentives in the relevant year of assessment, these companies must have incurred capital expenditures in carrying out qualifying RA projects such as Expansion, Modernisation, Automation, and/or Diversification.
The IRB published the following Public Rulings at the end of 2020 to assist Malaysian resident companies that were engaged in manufacturing and agricultural activities in assessing whether or not they were eligible to claim reinvestment allowance (RA):
PR No. 10/2020 - Reinvestment Allowance Part I – Manufacturing Activity dated 6 November 2020
PR 11/2020 - Reinvestment Allowance Part II – Agricultural and Integrated Activities dated 10 November 2020
PRs No. 10/2020 and No. 11/2020 have been issued in their place, superseding PRs No. 9/2017 and 10/2017, respectively, all of which were published on the 22nd of December, 2017.
Practice Note 1/2022
The IRB has also recommended that Public Ruling No. 11/2020 be read in conjunction with Public Ruling No. 10/2020.
The Inland Revenue Board of Malaysia (IRBM) published "The Practice Note 1/2022: Explanation in relation to the definition of 'factory' for RA claims" on the 17th of January 2022. (The Practice Note).
Definition of ‘Factory’ for RA claims
The meaning of ‘factory’ has been reiterated in the Practice Note as follows:
“Factory” means the portion of the floor areas of a building or an extension of a building used for a qualifying project to place or install plant or machinery or to store any raw materials, or goods or materials manufactured before the sale:
Provided that in respect of the portion of the building or extension of the building used for the storage of raw materials, goods or materials, or both, it shall not be more than one-tenth of the total floor area of the building or the extension to that building (i.e. One-tenth Rule).
The use of space for storage of raw materials or other goods or both which exceeds one-tenth of the total floor areas of the factory shall not be considered in calculating RA claim under Schedule 7A of the MITA;
Only the portion used for a qualifying project fulfils the definition of ‘factory’ and may be allowed for RA claim subject to stipulated conditions.
The Practice Note states that the sales office is not included in the ‘factory’ definition in Paragraph 9 of Schedule 7A of the ITA.
Therefore, the total area of the sales office should be taken out to determine the ‘factory’ or space used for a qualifying project.
In this Schedule, under Paragraph 8(a), "Qualifying Project" means—
a project undertaken by a company in expanding, modernising or automating its existing business in respect of manufacturing of a product or any related product within the same industry or in diversifying its existing business into any related product within the same industry;
Back to the two Public Rulings
The new Public Rulings provide information that is, for the most part, consistent with that of the prior Public Rulings.
Both Public Rulings have been updated to explain and provide examples to demonstrate the legislative change enacted via the Finance Act 2018, which states that the carry-forward of unutilised RAs is restricted to seven Years of Assessment, with any unutilised allowances being disregarded after that.
Public Ruling No. 10/2020 - Reinvestment Allowance Part I – Manufacturing Activity, dated 6 November 2020, has been revised to include a new Diagram 2 (see Paragraph 8.2 of the Public Ruling), which depicts the following fact pattern:
a building is not used for manufacturing activities (not a qualifying project);
the building is extended, and the extension is used for a qualifying project (diversification); and
The amount of space dedicated to storage in the extended area accounts for 30% of the extension's total floor area.
According to the illustration of the Public Ruling, RA is not allowed on the total floor area extended as it does not fall under the factory definition as provided under Paragraph 9 of Table 7A of the ITA 1967.
LHDNM Clarification on Their Response to CTIM Technical Issues
Following a meeting with CTIM on the 8th of September 2021, the Inland Revenue Board of Malaysia (LHDNM) has clarified their response dated 15 July 2021 to the technical issues raised by CTIM on the 19th of May 2021.
This clarification was issued on the 16th of September 2021 and is set out in brief as follows:
Where the total floor area of the factory building comprises storage space, sales office space and size used for the qualifying project (expansion purpose), the treatment is as follows: -
Sales office space does not qualify for RA. It is not considered as part of the total floor area of the factory building for RA purposes.
Storage space >10% of the total floor of the factory building for RA purposes, i.e. storage space & area used for qualifying project – expansion) does not qualify for RA.
The area used for qualifying project – expansion qualifies for RA.
25% sales office space does not qualify for RA. It is not considered part of the total floor area of the factory building for RA purposes.
8% storage space also does not qualify for RA. It is considered as 10.7% storage space [8/(8+67) x 100%].
ONLY 67% used for qualifying projects (expansion) - qualifies for RA.