pengumuman berhubung draf ketetapan umum … · an appeal must be made by submitting form q not...

PENGUMUMAN BERHUBUNG DRAF KETETAPAN UMUM DIMUATNAIK KE LAMAN SESAWANG HASIL UNTUK MAKLUM BALAS ORANG AWAM (PUBLIC CONSULTATION)

Lembaga Hasil Dalam Negeri Malaysia (LHDNM) dalam usaha untuk menambah baik proses pengeluaran Ketetapan Umum (KU) dengan memuat naik draf KU di dalam laman sesawang LHDNM untuk mendapatkan maklum balas orang ramai berkaitan topik-topik terpilih sebelum KU tersebut dimuktamadkan.

Sebagai permulaan, 2 topik KU yang akan dimuatnaik seperti berikut :

1. Rayuan Terhadap Sesuatu Taksiran Dan Permohonan Relif.2. Insentif Cukai Untuk Syarikat Berstatus Bionexus.3. Layanan Cukai Ke Atas Stok Perdagangan :

Bahagian I - Penilaian Stok Bahagian II - Pengambilan Stok

Tuan/puan adalah dialu-alukan untuk mengemukakan komen atau maklumbalas ke atas deraf Ketetapan Umum tersebut dalam tempoh 14 hari daripada tarikh pengumuman dibuat. Setiap komen /maklumbalas akan disemak dan KU akan dikemaskini / dipinda jika bersesuaian.

LHDNM tidak akan mengeluarkan sebarang laporan atau pemakluman ke atas maklum balas tersebut.

Sila hantarkan komen atau maklumbalas anda beserta cadangan di alamat e-mel berikut :

[email protected]

mailto:[email protected]

INLAND REVENUE BOARD OF MALAYSIA

Translation from the original Bahasa Malaysia text

DATE OF PUBLICATION: 2020

APPEAL AGAINST AN ASSESSMENT

AND APPLICATION FOR RELIEF

PUBLIC RULING NO. /2020




Public Ruling No. /2020 Date of Publication: 2020

Published by

Inland Revenue Board of Malaysia

Third edition Second edition on 29 December 2017

First edition on 22 October 2015

© 2020 by Inland Revenue Board of Malaysia All rights reserved on this Public Ruling are owned by the Inland Revenue Board of Malaysia. One print or electronic copy may be made for personal use. Professional firms and associations are permitted to use the Public Ruling for training purposes only. Systemic or multiple reproduction, distribution to multiple location via electronic or other means, duplication of any material in this Public Ruling for a fee or commercial purposes, or modification of the content of the Public Ruling is prohibited.





CONTENTS Page 1. Objective 1

2. Relevant Provisions of the Law 1

3. Interpretation 1

4. Right of Appeal and Time for Appeal 1

5. Appeal for Partnership Cases 8

6. Appeal Involves an Application for Negotiation on Mutual Agreement Procedure

8

7. Appeal Procedure (Form Q) 9

8. Grounds of Appeal 10

9. Late Appeal Procedure (Form N) 10

10. Review of Assessment 11

11. Disposal of Appeal at IRBM Level 12

12. Representation 12

13. Review of Assessment Through Application for Relief 12

14. Application for Relief Procedure 16

15. Comparison Between Appeal and Application for Relief 17

16. Updates and Amendments 17

Appendix 1 18





DIRECTOR GENERAL'S PUBLIC RULING Section 138A of the Income Tax Act 1967 (ITA) provides that the Director General is empowered to make a Public Ruling in relation to the application of any provisions of the ITA. A Public Ruling is published as a guide for the public and officers of the Inland Revenue Board of Malaysia. It sets out the interpretation of the Director General in respect of the particular tax law and the policy as well as the procedure applicable to it. The Director General may withdraw this Public Ruling either wholly or in part, by notice of withdrawal or by publication of a new Public Ruling. Director General of Inland Revenue, Inland Revenue Board of Malaysia.



Public Ruling No. /2020 INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 2020

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1. Objective

The objective of this Public Ruling (PR) is to explain:

1.1 procedure with regard to appeal and application for relief in line with the provisions of the Income Tax Act 1967 (ITA); and

1.2 Form Q and Form N appeal procedures.

2. Relevant Provisions of The Law

2.1 This PR takes into account laws which are in force as at the date this PR is published.

2.2 The provisions of the ITA related to this PR are sections 97A, 99, 99(1A), 100, 101, 102, 131, 131A and 132.

3. Interpretation

The words used in this PR have the following meaning:

3.1 “Tax agent” means any professional accountant or any person, approved by the Minister of Finance.

3.2 "Notice of assessment" means best judgement assessment, assessment, additional assessment, deemed assessment, notification of non-chargeability (NONC) (section 97A of the ITA), notification of refund of over-payment (section 111 of the ITA) and advanced assessment (section 92 of the ITA).

3.3 "Person" includes a company, a body of persons, a limited liability partnership and a corporation sole.

3.4 "The Special Commissioners of Income Tax" (SCIT) and “the Clerk to the SCIT” refer to the Special Commissioners and the Clerk appointed under section 98 of the ITA.

3.5 “Appeal” means an appeal against an assessment.

4. Right of Appeal and Time for Appeal

4.1 Section 99 of the ITA provides that a person who is aggrieved by an assessment which has been made on him for any year of assessment (YA) by the Director General of Inland Revenue (DGIR) is entitled to appeal against that assessment.

4.2 However, the provision of section 99 of the ITA shall not apply in the following cases:

4.2.1 deemed assessment under subsection 90(1) of the ITA; or




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4.2.2 deemed assessment for amended Income Tax Return Form (ITRF) under section 91A of the ITA

unless the taxpayer disagrees with the tax treatment stated in PR or known stand, rules and practices of the DGIR prevailing at the time when the assessment is made. Examples of known stand, rules and practices are as follows:

(a) private rulings or advanced rulings;

(b) guidelines by the Inland Revenue Board of Malaysia (IRBM);

(c) cases that have been decided by the SCIT and the court; or

(d) any other written evidence.

4.3 Therefore, section 99 of the ITA shall only apply to appeals on notice of assessment made for any YA for cases stated below:

4.3.1 assessment / additional assessment / advanced assessment / NONC which are made by the DGIR as a result of audit or investigation findings;

4.3.2 best judgement assessment made without ITRF or late submission of ITRF under subsection 90(3) of the ITA; or

4.3.3 deemed assessment or deemed assessment for amended ITRF where the taxpayer disagrees with the tax treatment stated in PR or known stand, rules and practices of the DGIR prevailing at the time when the assessment is made.

4.4 Section 99 of the ITA shall not apply to a composite assessment provided under section 96A of the ITA as the assessment is made after an agreement between the taxpayer and the DGIR.

4.5 Appeal Against Assessment / Additional Assessment

An appeal must be made by submitting Form Q not later than thirty (30) days after the notice of assessment has been served as provided under subsection 99(1) of the ITA.

Example 1

Sarah who is a teacher, has furnished the ITRF for the YA 2019 on 2.5.2020. An additional assessment for the YA 2019 was made by DGIR on 10.9.2020 based on field audit findings and it was served on 15.9.2020.




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Sarah may appeal against the additional assessment if she is not satisfied with the assessment made by the DGIR by submitting a Form Q not later than 15.10.2020.

Example 2

Alpha Sdn Bhd is engaged in the business of manufacturing and closes its financial accounts on 31st December each year. In addition, Alpha Sdn Bhd has interest and rental income. The company furnished the ITRF for the YA 2019 on 15.6.2020. Alpha Sdn Bhd complied with all PRs but disagreed with the tax treatment on the interest expenses as stated in PR No. 2/2011.

Pursuant to subsection 90(2) of the ITA, the deemed notice of assessment shall be deemed to have been served on Alpha Sdn Bhd on 15.6.2020. As the company does not agree with the tax treatment on interest expenses as stated in PR No. 2/2011, Alpha Sdn Bhd may appeal against the assessment of YA 2019 by submitting Form Q not later than 15.7.2020.

4.6 Appeal Against Reduced Assessment

Reduced assessment is not defined under section 2 of the ITA. However, an appeal may be made in respect of the notice of reduced assessment if there are issues in the notice that are disputed by the taxpayer.

Example 3

Hamzah Dollah Sdn Bhd is a glove manufacturer and closes its financial accounts on 31st December each year. The company has been granted investment tax allowance in relation to a promoted product for a period of five (5) years. Malaysian Investment Development Authority (MIDA) has determined the effective date of investment tax allowance on 20.5.2017 through a letter dated on 1.4.2018. The qualifying capital expenditure incurred by the company in 2017 is RM2,000,000.

The company was audited by the IRBM on 31.1.2019 on its ITRF for YA 2017. An expense claimed amounting to RM100,000 was not allowed. MIDA has issued compliance letter of the investment tax allowance on 12.2.2019 in order for the company to claim the ITA

When audit adjustments were made, the unclaimed investment tax allowance of RM2,000,000 has exceeded the amount of adjustments added back in the tax computation and notice of reduced assessment was issued.

The company may appeal against the notice of reduced assessment for the YA 2017 if it disagrees with the audit findings.




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4.7 Appeal Against Advanced Assessment

Subsection 99(1) of the ITA provides that an appeal against advanced assessment must be made within the first three (3) months of the YA following the YA in which the assessment was made (or within such extended period as regards those days, or months as may be allowed under section 100 of the ITA).

Example 4

En Daud has ceased his sole-proprietorship business on 30.6.2019. The final accounts are prepared for the period 1.1.2019 to 30.6.2019. Advanced assessment of YA 2019 was made by DGIR on 13.8.2019 for En Daud’s sole-proprietorship business income and it was served on 20.8.2019.

The advanced assessment is made for YA 2019 and the following YA is YA 2020. Therefore, appeals against advanced assessment must be made not later than 31.3.2020.

4.8 Appeal Against Best Judgement Assessment

4.8.1 Effective YA 2019, provision of subsection 99 (1A) of the ITA requires that if the best judgement assessment has been made under subsection 90(3) of the ITA against a company, limited liability partnership, trust body or co-operative who fails to submit ITRF in accordance with the provision of subsection 77A(1) of the ITA, the appeal against the best judgement assessment shall be made by submitting Form Q together with ITRF for the YA involved not later than thirty (30) days after the notice of assessment has been served.

Example 5

A company, LMN Sdn Bhd closes its financial accounts on 31 December each year and did not submit ITRF for YA 2019. The best judgement assessment under subsection 90(3) of the ITA has been made on 21.8.2020 and it was served to the company on 25.8.2020.

LMN Sdn Bhd may appeal against the best judgement assessment if the tax computed by the DGIR exceeds the actual tax payable by submitting Form Q and ITRF for YA 2019 not later than 24.9.2020.

4.8.2 The provision of subsection 99(1A) of the ITA shall only apply to the best judgement assessment made on a company, limited liability partnership, trust body or co-operative society.




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4.8.3 If the best judgement assessment has been made against person other than a company, limited liability partnership, trust body or co-operative society, the appeal of the best judgement assessment shall be made by submitting Form Q not later than thirty (30) days after the notice of assessment has been served as provided under subsection 99(1) of the ITA.

Example 6

Marina is an employee who receives employment income and she did not furnish the ITRF for the YA 2019. Best judgement assessment was made by the DGIR and it was served on 15.10.2020.

Marina may appeal against the best judgement assessment if the tax made by the DGIR exceeds the actual tax payable by submitting Form Q not later than 14.11.2020. Marina shall furnish ITRF for YA 2019 after submitting the Form Q if requested by the DGIR for review purposes.

4.9 Appeal Against a Non-Chargeability Case

4.9.1 Pursuant to the provision of subsection 97A(1A) and 97A(2) of the ITA, an appeal may be made by a person in the following circumstances:

(a) ITRF has been furnished

(i) Within the stipulated period

If a person who has no chargeable income and has furnished an ITRF within the stipulated period in accordance with subsection 77(1) or 77A(1) of the ITA for a YA, the ITRF furnished is deemed to be a notification made by the DGIR to that person on the date the ITRF was furnished. If he is not satisfied with the tax treatment mentioned in any PR or any known stand, rules and practices made by the DGIR, he may appeal against the deemed notification within thirty (30) days from the date of being so notified.




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Example 7

Faz Sdn Bhd closes its financial accounts on 31st December each year. The company has furnished its ITRF for the YA 2019 on 30.6.2020. The company declared two (2) sources of income for YA 2019, which is interest income and losses from business. The company has no chargeable income because the amount of current year loss exceeded the interest income.

The ITRF furnished is deemed to be a notification made by the DGIR on 30.6.2020. Faz Sdn Bhd complied with all relevant PR but disagreed with a specific tax treatment mentioned in the PR No. 2/2011. The company intended to appeal to the SCIT.

The appeal to SCIT must be submitted by the company through Form Q not later than 30.7.2020.

(ii) Not within the stipulated period

If a person has no chargeable income and has furnished an ITRF not in accordance with the stipulated period pursuant to subsection 77(1) or 77A(1) of the ITA, he is not entitled to appeal under section 97A of the ITA.

Example 8

The facts are the same as in Example 7 except that Faz Sdn Bhd only furnished the ITRF for the YA 2019 on 30.9. 2020. Since the ITRF was not furnished within the stipulated period, Faz Sdn Bhd is not entitled to appeal to the SCIT under section 97A of the ITA.

(b) ITRF not required to be furnished

In the case where an individual is not required to furnish an ITRF for a YA under subsection 77(1) of the ITA but intends to appeal on any tax treatment mentioned in a PR or any known stand, rules and practices made by the DGIR, the person shall furnish the ITRF for that YA and submit an appeal in writing to SCIT within thirty (30) days after the submission of the ITRF or after receiving the NONC.




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Example 9

Mr Ganeson, a sole–proprietor has commenced his sundry shop business on 1.2.2016 and closes his financial accounts on 31st December each year. He has no chargeable income for the YA 2016 to YA 2018. As an individual tax payer, he was not required to furnish ITRFs for the three (3) YA. Mr Ganeson complied with all the relevant PRs in preparing his tax computations for three (3) YA but disagreed with a specific tax treatment mentioned in the PR No. 4/2012.

Mr Ganeson intends to appeal to the SCIT. Mr Ganeson furnished his ITRFs for the YA 2016, YA 2017 and YA 2018 on 30.6.2019.

ITRF furnished by Mr Ganeson is deemed to be a NONC under subsection 97A(1A) of the ITA. Mr Ganeson may appeal to SCIT for the YA 2016 to YA 2018 not later than 30.7.2019.

(c) Audit cases

In the case where the result of the tax audit indicates that:

(i) no assessment for a YA needs to be made because there is no adjusted income, statutory income, aggregate income or total income; or there is income but the income is exempted under the ITA or the Promotion of Investment Act 1986 (PIA); or

(ii) an assessment for a YA has been made in respect of that person but the person has no statutory income from the business source;

a written notification will be issued by IRBM on:

a. no assessment shall be made for any YA and calculation in relation to it for subparagraph 4.9.1(c)(i) of this PR; or

b. the adjustment made in respect of the statutory income from the business source and the calculation in relation to it for subparagraph 4.9.1(c)(ii) of this PR.

Any appeal to the SCIT on such notification shall be submitted within thirty (30) days after the notification is served on him.




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Example 10

Evergrow Sdn Bhd has run the manufacturing business since 1.2.2011 and closes its financial accounts on 31st December each year. The company reported interest income and losses from business for YA 2019. The company has no chargeable income as the current year loss exceeded the interest income. The company claimed Reinvestment Allowance (RA) on a qualifying expenditure amounting RM500,000.

Evergrow Sdn Bhd furnished ITRF for the YA 2019 to the DGIR on 29.7.2020. The company was audited by the IRBM on 13.3.2021. As a result of the audit findings, adjustments were made to the computation of RA, but the company still has no chargeable income. A NONC with the computation of RA adjustments for the YA 2019 has been served on Evergrow Sdn Bhd on 10.6.2021.

Evergrow Sdn Bhd disagreed with the adjustments of RA and intends to submit an appeal to the SCIT.

Evergrow Sdn Bhd may submit an appeal to the SCIT for the YA 2019 by using the NONC which has the computation of RA adjustments. Evergrow Sdn Bhd must submit an appeal to the SCIT within thirty (30) days from the date of issuance of the NONC, which is not later than 10.7.2021.

5. Appeal for Partnership Cases

For an appeal in a partnership case, only one (1) appeal is required to be submitted if the issue in dispute is the same for each partner. Whatever decision, whether at the SCIT, High Court, Court of Appeal or Federal Court level shall apply to all other partners in the partnership.

6. Appeal Involves An Application for Negotiation on Mutual Agreement Procedure

6.1 Effective from 24 January 2014, subsection 102(1A) of the ITA allows a postponement of Form Q submission to PKCP if the person who appeals (appellant) has applied for negotiation on Mutual Agreement Procedure with the Competent Authority. The submission of Form Q will not be extended to PKCP until the Mutual Agreement Procedure is finalized.




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6.2 If the appellant disagrees with the decision of the Mutual Agreement Procedure, appelant shall submit an application letter to request the DGIR to foward the Form Q to the PKCP within thirty (30) days from the date of the notification letter of the decision of the negotiation on Mutual Agreement Procedure received from the Competent Authority. The DGIR shall forward the application to the SCIT within three (3) months from the date of receipt of the request.

6.3 The DGIR will not foward the Form Q to the PKCP if it does not receive the application letter from the appellant.

6.4 If the appellant agrees with the decision of the Mutual Agreement Procedure, the appellant must submit an application letter to cancel the Form Q within 30 days from the date the Mutual Agreement Procedure decision is received.

7. Appeal Procedure (Form Q)

7.1 The appellant has to submit four (4) copies of Form Q for each YA and must ensure that at least one (1) copy is an original Form Q whereas the other three (3) copies may be photocopied.

7.2 Form Q and attachments (if any) submitted by the appellant must not be attached with other documents. A completed Form Q with grounds of appeal must be submitted to IRBM’s branch office handling the appellant’s income tax file. Form Q can be downloaded and printed from the IRBM official portal at http://www.hasil.gov.my.

7.3 A completed Form Q must contain the following information:

7.3.1 date and amount of tax payable (amount of tax payable refers to the notice of assessment in dispute);

7.3.2 detailed grounds of appeal containing other particulars as may be required by that form; and

7.3.3 Form Q must be signed by the appellant who is the person assessed and chargeable to tax. In the case of companies and limited liability partnerships, Form Q must be signed by a person authorized under sections 75 and 75B of the ITA respectively.

7.4 Form Q cannot be signed by a tax agent or a lawyer.

7.5 Incomplete Form Q shall be returned to the appellant.

http://www.hasil.gov.my/




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8. Grounds of Appeal

8.1 The appellant shall state the reasons why he disagrees with the notice of assessment. The appellant does not have to submit supporting documents with the Form Q except for appeal against best judgment assessment as stated in paragraph 4.8.1. However, if necessary, DGIR may request the appellant to submit relevant supporting documents when reviewing the Form Q.

8.2 The appellant must submit the evidence related to the known stand, rules and practices of the DGIR which he disagrees together with Form Q.

9. Late Appeal Procedure (Form N)

9.1 If an appeal has not been submitted within the specified period, an application for extension of time for appeal can be made by way of Form N.

9.2 The appellant must give a good reason in the application for extension of time. One of the reasons which may be considered is circumstances beyond the control of the appellant, for example: the appellant has been hospitalised for a long period of time, absence from the country, victim of natural disaster or other acceptable and valid reasons.

9.3 Effective year of assessment 2020, section 100 of the ITA provides the appellant must furnish Form N to the DGIR within 7 years from 30 days after the notice of assessment was served. This provision applies from YA 2020 onwards.

Example 11

Notice of YA 2020 was served on 1.8.2021. The due date for submission of Form N is on 30.8.2028, which is 7 years from 30 days after the date of the notice of assessment was served.

Date of the notice of YA 2020 has been served

Due date of submission Form N

1.8.2021 30.8.2028

30 days Extension of time for appeal are limited to 7 years




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Example 12

Company QRS Sdn Bhd is engaged in the business of transportation and closes its financial accounts on 31st December each year. The company was audited by IRBM on 31.9.2021 and additional notice of assessments for YA 2019 and YA 2020 were served to the company on 31.10.2021. The Company disagreed with the additional assessments but did not submit Form Q within the stipulated period, which is not later than thirty (30) days after the notice of assessments had been served, which is on 30.11.2021.

Company QRS Sdn Bhd may apply for an extension of time to appeal by submitting Form N for YA 2020 not later than 30.11.2028, which is within 7 years from 30 days after the date of the notice of assessment was served. However, there is no time limit for Company QRS Sdn Bhd to file application an extension of time to appeal through Form N for YA 2019.

9.4 Form N must be sent to IRBM’s branch office handling the appellant’s income tax file. The appellant must submit two (2) copies of Form N for each YA and ensure that at least one (1) copy is original Form N while the other one (1) copy may be photocopied. Form N can be downloaded and printed from the IRBM’s website.

9.5 If the application for extension of time is allowed, the IRBM will issue Form CP15A informing the appellant the extended date for submission of Form Q, which is thirty (30) days from the date of CP15A.

9.6 If the application for extension of time is not allowed, Form N together with a statement of the reasons for rejection by the DGIR (Form CP15B) will be forwarded to the SCIT. Once Form N and the statement of the reasons are forwarded to the SCIT, the DGIR will inform the appellant in writing and shall furnish a copy of the statement of the reasons.

9.7 Within twenty one (21) days of receiving the notification, the appellant may make a written representation to the SCIT in respect of his application and the statement by the DGIR.

9.8 If the SCIT agrees to allow an extension of time, the SCIT will notify the appellant and state the date of which Form Q has to be submitted.

9.9 If the application is rejected, the appellant will be notified by the SCIT and the appellant has no right to further appeal. The decision of the SCIT is final.

10. Review of Assessment

10.1 The period of time for reviewing the assessment is within twelve (12) months from the date of receiving the notice of appeal. The Minister of Finance may




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extend the period not exceeding six (6) months if the DGIR requires more time to review.

10.2 For the purpose of reviewing the assessment by the DGIR, the appellant may be required to:

10.2.1 provide further information or books of accounts, records or other documents related to the assessment; and

10.2.2 attend in person or be represented by a representative to give evidence (under oath if necessary).

10.3 As a result of the review, a proposal may be made to the appellant to settle the appeal by confirming, reducing, increasing or discharging the assessment.

10.4 If an agreement cannot be reached, the appeal will be forwarded to the SCIT.

11. Disposal of Appeal at IRBM Level

11.1 The appellant will be notified in writing when the Form Q is forwarded to the SCIT.

11.2 Before the hearing is fixed, the appellant and the DGIR may negotiate to either reach an agreement, or withdraw the appeal.

12. Representation

The appellant may be represented by a qualified lawyer and / or a tax agent appointed under provision of section 153 of the ITA at the hearing of the Form Q appeal at the SCIT and court levels.

13. Review of Assessment Through Application for Relief

13.1 In Respect of Error or Mistake Under Section 131 of the ITA

13.1.1 Apart from an appeal under section 99 of the ITA, a taxpayer may make an application for relief under section 131 of the ITA in respect of error or mistake in the ITRF made by him. The determination whether a taxpayer has made an error or mistake is a question of fact and law.

13.1.2 Definition of error or mistake is not provided in the ITA. Thus, the meaning of error or mistake is interpreted with reference to the literal meaning or from precedent cases.




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13.1.3 The literal meaning of error or mistake are as follows:

(a) an unintentional act, omission, or error arising from ignorance, surprise, imposition or misplaced confidence;

(b) a belief in the existence of a thing which does not exist or ignorance of a relevant thing, or both;

(c) an error, misconception, misunderstanding and erroneous belief.

13.1.4 The meaning of error or mistake from precedent cases can be summarised as follows:

(a) error or omission, such as failure to deduct an allowable expense;

(b) error or omission such as computational or arithmetical error;

(c) error arising from a misunderstanding of the law;

(d) erroneous statement of fact; or

(e) omission made not by design but by mischance.

13.1.5 Some examples of error or mistake made in the ITRF are:

(a) total income reported in the income column;

(b) income for the previous YA is reported in the current YA;

(c) forgot to claim relief under sections 45 to 49 of the ITA such as insurance, children, purchase of books, housing loan interest, etc.; or

(d) did not claim deductions and rebates such as personal tax deductions, zakat, approved donations, levy and so on.

13.1.6 The onus of proving that there is an error or mistake shall be on the taxpayer. The DGIR will review the assessment only if he is satisfied that the taxpayer has made an error or mistake in the ITRF or statement made by him for the purposes of the ITA which is furnished to the DGIR.

13.1.7 The conditions related to application for relief under subsections 131(1) and (4) of the ITA are:




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(a) Application for relief will not be considered if the ITRF is made in accordance with the known stand, rules and practices of the DGIR prevailing at the time when the assessment is made.

(b) The taxpayer must pay all taxes that have been made for the relevant YA.

(c) The taxpayer must make a written application by way of a letter or Form CP15C to the DGIR within five (5) years after the end of the YA in which the assessment is deemed.

Example 13

Maria has furnished her ITRF for the YA 2019 on 30.4. 2020. On 15.8. 2020, Maria realized that she forgot to claim a deduction for the purchase of books amounting to RM920.00 which she incurred in 2019. Maria may apply for the relief not later than 31.12.2025.

Example 14

Aman Harmoni Sdn Bhd has furnished the ITRF for the YA 2019 on 30.6.2020. As the ITRF was furnished without claiming the capital allowance, the company wanted to revise the tax computation for the YA 2019. Aman Harmoni Sdn Bhd may apply for relief under section 131 of the ITA not later than 31.12.2025.

13.2 In Respect of Non-Error or Mistake Under Section 131A of the ITA

13.2.1 A taxpayer may make an application in writing to the DGIR for non-error or mistake in the ITRF made by him.

13.2.2 The conditions for the relief application are:

(a) The taxpayer must furnish ITRF in accordance with subsection 77(1) or 77A(1) of the ITA.

(b) The taxpayer shall pay all taxes that have been made for the relevant YA.

13.2.3 The relief application of the non-error and mistake cases is allowed for the following circumstances:

(a) any exemption, relief, remission, allowance or deduction granted under the ITA or any written law gazetted after the YA in which the ITRF is furnished; or




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(b) approval for any exemption, relief, remission, allowance or deduction is granted after the YA in which the ITRF is furnished; or

(c) a deduction not allowed in respect of payment not due to be paid under subsection 107A(2) or 109(2), section 109A, or subsection 109B(2) or 109F(2) of the ITA on the day the ITRF is furnished.

13.2.4 The period of time for application for relief is as follows:

(a) for subparagraphs 13.2.3(a) and (b), within five (5) years after the end of the year in which the exemption, relief, remission, allowance or deduction is published in the Gazette, or the approval is granted, whichever is later; and

(b) for subparagraph 13.2.3(c), within one (1) year after the end of the year in which payment is made.

Example 15

Muhibbah Jaya Sdn Bhd closes its financial accounts on 31st December each year. The company has applied for pioneer status and a letter of approval was granted on 15.10.2019 for a period of five (5) years starting from 1.4.2017 until 31.3.2022. The company has furnished the ITRF for the YA 2017 on 29.7.2018. Since the ITRF was furnished without claiming the pioneer status, the company intended to revise the tax computation for the YA 2017. Application for relief may be submitted to IRBM before 31.12.2024.

Example 16

Resepi Jenderam Sdn Bhd which closes its financial accounts on 31st December each year did not claim royalty expense payable to Sedap Recipe Ltd. for the YA 2018 because the royalty and withholding tax were paid on 30.9.2019. The company may apply for relief to amend the assessment for the YA 2018 before 31.12.2020.

13.3 In respect of Non-Taxable Case Under Subsection 97A(5) of the ITA

13.3.1 A person who has furnished the ITRF to the DGIR in accordance with the provision of subsection 77(1) or 77A(1) of the ITA and has no chargeable income for that YA may make a written application for relief to the DGIR:




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(a) to amend the ITRF in the event of any errors or mistakes as specified in subparagraph 13.1.4 of this PR; or

(b) in the event of non-error or mistake as specified in subparagraph 13.2.3 of this PR.

13.3.2 The period of time for the above application is as follows:

(a) for subparagraph 13.3.1(a) within six (6) months from the date the ITRF is furnished; and

Example 17

Safiq has furnished ITRF for the YA 2018 on 30.6.2019 where no chargeable income was reported. Since the ITRF was furnished without the allowable donation claim, Safiq may submit an application for relief to DGIR before 30.12. 2019.

(b) for subparagraph 13.3.1(b) within the period as specified in subparagraph 13.2.4 of this PR.

Example 18

MyKleen Corporation Sdn Bhd which commenced business on 1.1. 2018 closes its financial accounts on 31st December each year. The company has furnished the ITRF for the YA 2018 on 31.7.2019 and no chargeable income was reported.

The company has filed an application for pioneer status and approval is only granted on 15.1.2021 for the period from 1.7.2018 until 30.6.2023. The company may submit an application for relief to the DGIR to amend the tax for the YA 2018 before 31.12.2026.

14. Application for Relief Procedure

14.1 An application for relief can be made either by a letter or Form CP15C by stating the reasons in detail relating to the application.

14.2 In the event the letter or Form CP15C is not filled with the correct details, the application shall be returned to the taxpayer and the taxpayer is required to submit a new application.

14.3 If the application for relief is approved by the DGIR, the assessment will be amended and a reduced assessment will be issued.




DRAFT Page 17 of 18

14.4 If the application for relief is rejected by the DGIR, a rejection letter together with the grounds of rejection will be issued to the taxpayer.

14.5 If the taxpayer disagrees with the decision, he may request via a letter to the DGIR to send the application for relief (which was submitted earlier to the SCIT) within six (6) months from the date of the rejection. The DGIR shall forward the application to the SCIT within three (3) months from the date of receipt of the request.

14.6 In cases where a deemed assessment on ITRF or amended ITRF is made in accordance with the known stand, rules and practices of the DGIR prevailing at the time, the taxpayer’s application for relief under sections 97A and 131 of the ITA will not be considered even though the taxpayer can prove that there is an error or mistake unless the error is arithmetical or computational.

15. Comparison Between an Appeal and an Application for Relief

Refer Appendix 1

16. Updates and Amendments

This PR replaces the PR No. 12/2017 dated 29 December 2017.

Amendments

Provide information on amendment / new provisions: i. Limitation of period for application of

extension of time (Form N) effective YA 2020; and

ii. Appeal against best judgement assessment under subsection 99(1A) of the ITA. coming into force from 1.1.2019

Director General of the Inland Revenue Board, Inland Revenue Board Malaysia.




DRAFT Page 18 of 18

APPENDIX 1

Comparison between an appeal under section 99 of the ITA and an application for relief under sections 97A, 131 and 131A of the ITA

Particular Appeal Against an Assessment Section 99 of

the ITA

Application for Relief Section 97A, 131 and

131A of the ITA Forms to be submitted

Within time: Form Q Out of time: Form N

Letter or Form CP15C

Conditions or qualifications

1. Assessment / additional

assessment / advanced assessment / NONC which is made by the DGIR as a result of audit or investigation findings;

2. Best judgement assessment without ITRF or late submission of the ITRF under subsection 90(3) of the ITA; or

3. Deemed assessment or deemed assessment for amended ITRF where the taxpayer does not agree with the tax treatment stated in any PR made under section 138A of the ITA or known stand, rules and practices of the DGIR prevailing at the time when the assessment is made

Deemed assessment for ITRF or amended ITRF or NONC and taxpayers agree with the tax treatment set out in the PR, or the known stand, rulings and practices of the DGIR at the time the ITRF was submitted. An application for relief may be made for the deemed assessment as below:

i. Section 131 of the ITA in respect of error or mistake.

ii. Section 131A of the ITA in respect of non-error or mistake.

For non-taxable cases, an application for relief may be made under section 97A of the ITA.

Payment of tax

Payment of tax must be made (if any)

Tax has been paid for cases under sections 131 and 131A of the ITA.




TAX INCENTIVES FOR

BIONEXUS STATUS COMPANIES



TAX INCENTIVES FOR


Public Ruling No. /2020

Date of Publication : 2020

__________________________________________________________________________________________ Published by Inland Revenue Board of Malaysia Second edition

First edition on 9.10.2018

© 2020 by Inland Revenue Board of Malaysia All rights reserved on this Public Ruling are owned by Inland Revenue Board of Malaysia. One print or electronic copy may be made for personal use. Professional firms and associations are permitted to use the Public Ruling for training purposes only. Systemic or multiple reproduction, distribution to multiple location via electronic or other means, duplication of any material in this Public Ruling for a fee or commercial purposes, or modification of the content of the Public Ruling is prohibited.


TAX INCENTIVES FOR


Public Ruling No. /2020

Date of Publication : 2020

__________________________________________________________________________________________ CONTENTS Page 1. Objective 1


3. Interpretation 1

4. Introduction 3

5. BioNexus Status Company 4

6. Tax Incentives 5

7. 8. 9. 10.

Capital Allowances / Industrial Building Allowance Treatment on Losses Incurred by a BioNexus Status Company Deductions for Promotion of Export Deductions for Research and Development Expenditure

27

29

30

30

11. 12. 13. 14. 15.

Non-application Withdrawal of Tax Exemptions Compliance with the Income Tax Act 1967 Updates and Amendments Disclaimer

31

32

32

32

34

DIRECTOR GENERAL’S PUBLIC RULING Section 138A of the Income Tax Act 1967 (ITA) provides that the Director General is empowered to make a Public Ruling in relation to the application of any provisions of the ITA. A Public Ruling is published as a guide for the public and officers of the Inland Revenue Board of Malaysia. It sets out the interpretation of the Director General in respect of the particular tax law and the policy as well as the procedure applicable to it. The Director General may withdraw this Public Ruling either wholly or in part, by notice of withdrawal or by publication of a new Public Ruling. Director General of Inland Revenue, Inland Revenue Board of Malaysia.

TAX INCENTIVES FOR BIONEXUS STATUS COMPANIES


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Page 1 of 34

1. Objective

The objective of this Public Ruling (PR) is to explain the tax treatment in respect of tax incentives for a Bio Nexus Status Company (BNX) in Malaysia.

2. Relevant Provisions of the Law

2.1 This PR takes into account laws which are in force as at the date this PR is published.

2.2 The provisions of the Income Tax Act 1967 (ITA) related to this PR are sections

2, 8, 33, 34A, 43, 44, Schedule 3 and Schedule 7A.

2.3 The relevant subsidiary legislations referred to in this PR are as follows:

2.3.1 Income Tax (Exemption) (No. 17) Order 2007 [P.U. (A) 371/2007];



2.3.4 Income Tax (Industrial Building Allowance) (BioNexus Status Company) Rules 2007 [P.U. (A) 374/2007];

2.3.5 Income Tax (Exemption) (No. 2) 2009 (Amendment) Order 2018 [P.U. (A) 381/2018]; and

2.3.6 Income Tax (Exemption) (No. 17) 2007 (Amendment) Order 2018 [P.U. (A) 395/2018].

3 Interpretation


3.1 “Qualifying activity” means an activity as set out in the Schedule of the P.U. (A) 371/2007 and approved by the Minister, and the activities are-

(a) industrial biotechnology;

(b) healthcare biotechnology; and

(c) agricultural biotechnology.



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3.2 “Resident” means resident in Malaysia for the basis year for a year of assessment by virtue of section 8 of the ITA.

3.3 “Intellectual property right” means a right arising from any patent, utility

innovation and discovery, copyright, trade mark and service mark, industrial design, layout-design of integrated circuit, secret processes or formulae and know-how, geographical indication and the grant of protection of a plant variety and other like rights, whether or not registered or registrable.

3.4 “BioNexus Status Company” (BNX) means a company incorporated under the

Companies Act 2016 which is engaged in a business of life sciences.

3.5 “New intellectual property right” means an intellectual property right in relation to the qualifying activity of the BNX that -

(a) comes into the ownership of the BNX on or after 1.7.2018; or (b) comes into the ownership of the BNX after 16.10.2017 but before

1.7.2018 as a result of an acquisition by the BNX, directly or indirectly, from a related company.

3.6 “Chargeable income” in relation to a person and a year of assessment (YA), means chargeable income ascertained in accordance with the ITA.

3.7 “Statutory income” (SI) in relation to a person, a source and a year of

assessment, means statutory income ascertained in accordance with the ITA. 3.8 “Adjusted income” in relation to a source and a basis period, means the

adjusted income ascertained in accordance with the ITA.

3.9 “Qualifying Building Expenditure” (QBE) means capital expenditure incurred on the construction or purchase of a building under paragraph 3 of Schedule 3 of the ITA but does not include capital expenditure incurred on buildings used for storage or as living accommodation which are provided wholly or partly for the use of a director or an individual who is a member of the management, administrative or clerical staff.

3.10 “Qualifying Capital Expenditure” (QCE) means capital expenditure incurred on

an asset used in Malaysia for the purpose of a new business or an expansion project, as the case may be-

(a) in relation to manufacturing or manufacturing based research, a factory,

a building used for activity of research and development (R&D), plant and machinery; or



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(b) in relation to agriculture or agriculture based research, the clearing and preparation of land, the planting of crops (first planting or planting of trial crops), the provision of irrigation or drainage system, the provision of plant and machinery, the purchase or construction of a building used for the activity of R&D, or the activity of agriculture (including those provided for the welfare or living accommodation of persons who are working in the farm), construction of access roads, bridge and any permanent structure improvement on land which formed as part of the land used for the business:

Provided that such qualifying capital expenditure shall not include capital expenditure incurred on buildings used as living accommodation, plant and machinery which are provided wholly or partly for the use of a director or an individual who is a member of the management, administrative or clerical staff.

3.11 “New business” means the first qualifying activity undertaken by a BNX.

3.12 “Expansion project” means a project undertaken by a BNX in expanding its existing qualifying activity and that business:

(a) has not been granted [but conversely for P.U. (A) 374/2007, has been

granted] exemption under P.U. (A) 371/2007 or P.U. (A) 372/2007; and”

(b) involves new investment.

3.13 “Life sciences” which fulfills the requirements in subparagraph 3(1A) of the P.U. (A) 371/2007 means any of several branches of science, such as biology, medicine, anthropology or ecology, that deal with living organisms and their organisation, life processes, and relationships to each other and their environment.

3.14 “Related company” has the same meaning assigned to it in subsection 2(1) of

the Promotion of Investments Act 1986.

4 Introduction The National Biotechnology Policy (NBP) for sustainable biotechnology development in Malaysia was launched in 2005. Malaysian Bioeconomy Development Corporation Sdn Bhd (Bioeconomy Corporation), was established as a specialized and professional implementing agency to- (a) lead the development of the bio-based industry in Malaysia, under the purview

of Ministry of Agriculture and Agro-Based Industry (MOA); and



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(b) execute the objectives of the NBP and acts to identify value propositions in both R&D and commerce, and also to support these ventures via financial assistance and developmental services.

5 BioNexus Status Companies

5.1 BioNexus Status

BioNexus Status is a special status awarded to qualified biotechnology companies undertaking value-added biotechnology or life sciences activities. A company which has been awarded the BioNexus Status would be able to enjoy fiscal incentives, funding assistance and other benefits to assist the growth of the company.

5.2 Application for BioNexus Status and tax incentives

All applications for the BioNexus Status and tax incentives must be submitted to Bioeconomy Corporation. Bioeconomy Corporation has been entrusted to assess and certify applications for tax incentives for BNX in accordance with the relevant income tax rules and exemption orders. The BioNexus status and tax exemption incentive is subject to the approval of the Minister of Finance. For further information on Bioeconomy Corporation and the Guidelines for BNX Registration, please refer to the Malaysian Bioeconomy Development Corporation Sdn Bhd website at www.bioeconomycorporation.my.

5.3 Non-intellectual property incentives for BNX

(a) Tax exemption for an approved BNX

A company resident in Malaysia which has been approved as a BNX is exempted from the payment of tax, in relation to a new business or an expansion project either in respect of its:– (i) SI under the P.U. (A) 371/2007 and P.U (A) 395/2018; or

(ii) SI equivalent to an allowance of 100% of the qualifying capital expenditure (QCE) incurred under the P.U. (A) 372/2007,

for a specified number of years of assessment (YAs) in accordance with the relevant above-mentioned Income Tax (Exemption) Orders.



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(b) Further exemption

After the exempt YAs as mentioned in paragraph 5.3 (a) above has ended, the approved BNX may be granted a further tax exemption on its SI from a qualifying biotechnology activity for a period of 10 consecutive YAs under the P.U (A) 156/2009 and P.U (A) 381/2018. The SI that is exempted is computed based on a formula.

(c) Industrial building allowance

A BNX may claim industrial building allowance for buildings used solely for qualifying activities at the rate of 10% annually under the P.U. (A) 374/2007.

6. Tax Incentives

6.1 Tax exemption on statutory income

(a) Statutory income from a new business or expansion project of an approved BNX A company resident in Malaysia which is engaged in the business of life sciences and approved as a BNX may enjoy a tax exemption in relation to -

(i) a new business, for a period of ten (10) consecutive YAs, in respect

of the SI commencing from the first year of assessment (YA) in which the company derived the SI from the new business; or

(ii) an expansion project, for a period of five (5) consecutive YAs, in

respect of the SI from its existing qualifying activity and expansion project, commencing from the first YA in which the company derived the SI from the existing qualifying activity and the expansion project, and that first YA shall not be earlier than the YA in respect of the basis period in which the date of approval from the Minister falls.

However, the exemption for the expansion project is only granted if

the company has not been granted an exemption for its existing qualifying activity under the P.U. (A) 372/2007 and that business involves new investment.

(The ten consecutive YAs or five consecutive YAs is referred to as “the exempt YAs”).



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For the purpose of this PR, “new investment” means additional capital investment for existing qualifying activities that will increase existing production capacity or produce related products in the same industry.

For more information, please refer to the Guidelines on Incentives Accorded to the BNX issued by Bioeconomy Corporation.

(b) Substantial activities requirement

P.U. (A) 371/2007 has been amended by P.U. (A) 395/2018 and the substantial activities requirement was introduced for a BNX to be eligible for an exemption. Effective 16.10.2017, a BNX must fulfil the following substantial activities requirement in order to enjoy a tax exemption:

(i) has an approved adequate number of full time employees and

knowledge workers in Malaysia to carry on a qualifying activity; and (ii) incur an approved adequate amount of annual operating

expenditure to carry on the qualifying activity or an approved adequate investment in fixed asset in Malaysia to carry on a qualifying activity.

(c) Grandfathering rules

For an existing BNX that is already enjoying a tax exemption, grandfathering rules have been provided for the commencement of the substantial activities requirement. These existing BNX would have to submit an application to Bioeconomy Corporation in relation to the substantial activities requirement to be able to continue enjoying the exemption after the grandfathering rules end. The application is to be made six (6) months before the first day of the basis period of the year of assessment in which the substantial activities requirement takes effect. The date of commencement of the application of the substantial activities requirement is as follows: (i) where a BNX has been granted an exemption on or before

16.10.2017, the substantial activities requirement is not applicable to the BNX until 30.6.2021. In other words, the BNX which has been granted an exemption on or before 16.10.2017 would have to fulfil the substantial activities requirement effective 1.7.2021.

(ii) where a BNX carrries on a new qualifying activity after 16.10.2017, the substantial activities requirement is not applicable and the BNX would be granted an exemption in relation to the new qualifying



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activity until 31.12.2018. In other words, the BNX which carries on a new qualifying activity after 16.10.2017 and has been granted an exemption until 31.12.2018, would have to fulfil the substantial activities requirement effective 1.1.2019.

(iii) where a BNX has been granted an exemption after 16.10.2017, the

substantial activities requirement is not applicable to the BNX until 31.12.2018. In other words, the BNX which has been granted an exemption after 16.10.2017 would have to fulfil the substantial activities requirement effective 1.1.2019.

(d) Exclusion of intellectual property (IP) income from the tax incentive

In ascertaining the SI of a BNX for the purposes of a tax exemption, royalty and other income which is derived from IP rights has been excluded from the scope of tax exemption. Royalties or other income is derived from an IP right if it is receivable as consideration for the commercial exploitation of that right. The date of commencement of the exclusion of IP income from the exempted statutory income of the BNX is as follows:

(i) Effective from 1.7.2018 until 30.6.2021

Royalties and other income derived from new IP rights that the BNX owns or where the BNX is the licensee of the right.

(ii) Effective 1.7.2021

Royalties and other income derived from all IP rights that the BNX owns or where the BNX is the licensee of the right.

In other words, the above IP income would not qualify for a tax exemption

but would be subject to tax under the ITA. (e) Illustrations to show the tax exemption that is applicable to a new

business and an expansion project

A. New Business Scenarios

Example 1 : Company commences business

Agro Sdn Bhd commenced its business in 2010 and was engaged in a qualifying biotechnology activity. The company was granted BioNexus Status in the YA 2010 and derived its first SI in YA 2013. The company’s financial year ends on 31 December annually.



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The tax exemption status is as follows: (a) YA 2013

As Agro Sdn Bhd derived its SI from its new business, in relation to a qualifying biotechnology activity for the first time in the YA 2013, the 10 consecutive exempt YAs commences from YA 2013 to YA 2022. The post exempt YA is from YA 2023 onwards.

(b) Effective 16.10.2017 - Substantial activities requirement

With the introduction of the substantial activities requirement, the grandfathering rules provide that where a tax exemption has been granted on or before 16.10.2017, the requirement is applicable effective 1.7.2021. Since the company was granted a tax exemption (from YA 2013 to 2022) prior to 16.10.2017, effective 1.7.2021 it has to comply with the substantial activities requirement as stated in paragraph 6.1(b) of this PR. The company would have to submit an application to Bioeconomy Corporation in relation to the substantial activities requirement that a BNX must fulfil in order to be eligible to continue the tax exemption until YA 2022. As 1.7.2021 falls within the basis period 1.1.2021 to 31.12.2021 (YA 2021), the company would be required to submit the application to Bioeconomy Corporation on / before 1.7.2020. If it does not fulfil the substantial activities requirement from 1.7.2021, the tax exemption ends in the YA 2020. The exempt YAs would be from YA 2013 to 2020. YA 2021 onwards would be considered the post exempt YAs.

Note : If the company closes its account on 31 March

annually, the effective date of the substantial activities requirement i.e 1.7.2021 will fall within the basis period of 1.4.2021 to 31.3.2022 (YA 2022). Hence, the company would be required to submit its application to Bioeconomy Corporation on or before 1.10.2020.



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Exempt YAs and Post Exempt YAs (Substantial activities requirement fulfilled from 1.7.2021)

YA 2010

YA 2011

YA 2012

YA 2013

YA 2014 to

2020

YA 2021

YA 2022

YA 2023

YA 2024

Exempt YAs and Post Exempt YAs (Substantial activities requirement is not fulfilled from 1.7.2021)

YA 2010

YA 2011

YA 2012

YA 2013

YA 2014 to

2020

YA 2021

YA 2022

YA 2023

YA 2024

BioNexus

Loss (1,000)

Loss (1,000)

Loss (1,000)

SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000

Exempt YAs (10 consecutive YAs)

YA 2013 to YA 2022

Post exempt YAs (YA 2023 onwards)

1.7.2021

Substantial activities

requirement fulfilled

BioNexus status

Loss (1,000)

Loss (1,000)

Loss (1,000)

SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000

Exempt YAs (8 consecutive YAs) YA 2013 to YA 2020


1.7.2021 Substantial activities

requirement is not fulfilled



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Example 2 : Company commences a non-qualifying activity and subsequently undertakes R&D in a qualifying biotechnology activity

Same facts as in Example 1 except that Agro Sdn Bhd was not engaged in any qualifying biotechnology activity. In 2011, the company undertook R&D of a qualifying biotechnology activity and applied for BioNexus status which was granted in the YA 2012. The qualifying biotechnology activity would qualify as a new business and the company derived its first SI in YA 2013.

The tax exemption status is as follows: (a) YA 2013

As Agro Sdn Bhd derived its SI from its new qualifying biotechnology activity for the first time in the YA 2013, therefore the 10 consecutive YAs commences from YA 2013 to YA 2022. The post exempt YAs is from YA 2023 onwards.


With the introduction of the substantial activities requirement, the grandfathering rules provide that where a tax exemption has been granted on or before 16.10.2017, the requirement is applicable effective 1.7.2021. Since the company was granted a tax exemption (from YA 2013 to 2022) prior to 16.10.2017, effective 1.7.2021 it has to fulfil the substantial activities requirement as stated in paragraph 6.1(b) of this PR. The company would have to submit an application to Bioeconomy Corporation in relation to the substantial activities requirement that a BNX must fulfil in order to continue to be eligible for the tax exemption until YA 2022. As 1.7.2021 falls within the basis period 1.1.2021 to 31.12.2021 (YA 2021), the company would be required to submit the application to Bioeconomy Corporation on or before 1.7.2020. If it does not fulfil the substantial activities requirement from 1.7.2021, the tax exemption ends in the YA 2020. The exempt YAs would be from YA 2013 to 2020. YA 2021 onwards would be considered the post exempt YAs.



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Exempt YAs and Post Exempt YAs (Substantial activities requirement fulfilled from 1.7.2021)

YA 2010

YA 2011

YA 2012

YA 2013

YA 2014 to

2020

YA 2021

YA 2022

YA 2023

YA 2024

Exempt YAs and Post Exempt YAs (Substantial activities requirement is not fulfilled from 1.7.2021)

YA 2010

YA 2011

YA 2012

YA 2013

YA 2014 to

2020

YA 2021

YA 2022

YA 2023

YA 2024

BioNexus status

Loss (1,000)

Loss (1,000)

Loss (1,000)



SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000



Non-qualifying biotechnology

activity

Qualifying biotechnology

activity – New

Business

BioNexus status

Loss (1,000)

Loss (1,000)

Loss (1,000)


requirement is not

fulfilled

SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000



Non-qualifying Biotechnology

activity

Qualifying Biotechnology

activity – New Business



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Example 3 : Company commences a qualifying biotechnology activity and subsequently undertakes a new additional qualifying biotechnology activity

Same facts as in Example 1 except that Agro Sdn Bhd was not granted BioNexus status in 2010 as it did not apply for the status. On 31.10.2017, the company carried on a new additional qualifying biotechnology activity and applied for BioNexus status. The company was granted the BioNexus status in the same year. The new additional qualifying biotechnology activity which is not related to the existing biotechnology activity constitutes the first qualifying activity and qualifies as a new business. The company derived its first SI in YA 2018.

The tax exemption status is as follows: (a) Effective 16.10.2017 – Tax exemption for new qualifying activity

With the introduction of the substantial activities requirement, the grandfathering rules provide that where a tax exemption has been granted after 16.10.2017 for a new qualifying biotechnology activity, an exemption is only granted until 31.12.2018. The substantial activities requirement is applicable effective 1.1.2019. Since the company carried on a new qualifying biotechnology activity after 16.10.2017 and derived its first SI for the financial year end 31.12.2018, it was granted a tax exemption for YA 2018 only. The exempt YA would be for YA 2018 only.


The company would have to submit an application to Bioeconomy Corporation in relation to the substantial activities requirement that a BNX must fulfil to enjoy the tax incentive in order to continue to be eligible for the tax exemption until YA 2027. The substantial activities requirement is effective from 1.1.2019. As 1.1.2019 falls within the basis period 1.1.2019 to 31.12.2019 (YA 2019), the company would be required to submit the application to Bioeconomy Corporation on or before 1.7.2018. If it does not fulfil the substantial activities requirement from 1.1.2019, the tax exemption would be for YA 2018 only. YA 2019 onwards would be considered the post exempt YAs.



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Exempt YAs and Post Exempt YAs (BNX carries on a new qualifying biotechnology activity after 16.10.2017

and substantial activities requirement is fulfilled from 1.1.2019)

YA 2010 -2016

YA 2017

YA

2018 YA

2019 YA

2020 - 2027

YA 2028

YA

2029

YA 2030

Exempt YAs and Post Exempt YAs

Loss (1,000)

100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000


Post exempt YAs (YA 2028 onwards) Qualifying

biotech-nology activity

New Qualifying biotech-nology activity – New Business

1.1.2019 substantial activities requirement is fulfilled

BioNexus status



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Exempt YAs and Post Exempt YAs BNX carries on a new qualifying biotechnology activity after 16.10.2017

and substantial activities requirement is not fulfilled from 1.1.2019)

YA 2010 -2016

YA 2017

YA 2018

YA 2019

YA 2020 - 2027

YA 2028

YA

2029

YA 2030

B. Expansion Project Scenarios

Example 4 : Company commences a qualifying biotechnology activity and subsequently expands its existing qualifying biotechnology activity

Chromos Industries Sdn Bhd commenced its business in 2010 and was engaged in a qualifying biotechnology activity. In 2014, the company expanded its qualifying biotechnology activity and applied for BioNexus status. The company was granted BioNexus status in the same year. The expansion of the existing qualifying biotechnology activity constitutes an expansion project and qualifies for exemption in respect of SI from its existing qualifying biotechnology activity and expansion project. The company’s financial year ends on 31 December annually. The company derived its first SI in YA 2014.

The tax exemption status is as follows:

Loss (1,000)

SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000

Post exempt YAs (YA 2019 onwards) Qualifying

biotech-nology activity

New qualifying biotech-nology activity – New Business

1.1.2019 substantial activities

requirement is not fulfilled

Exempt YA

(YA 2018)

BioNexus status



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(a) YA 2014

As the company derived its SI from the existing qualifying biotechnology activity and the expansion project from the YA 2014, therefore the 5 consecutive YAs commences from YA 2014 to YA 2018. The post exempt YA is from YA 2019 onwards.


With the introduction of the substantial activities requirement, the grandfathering rules provide that where a tax exemption has been granted on or before 16.10.2017, the requirement is applicable effective 1.7.2021

Since the company was granted a tax exemption before 16.10.2017

(exempt YAs 2014 to 2018), the substantial activities requirement as stated in paragraph 6.1(b) of this PR is not applicable as the tax exemption ends before 1.7.2021 (i.e. YA 2018).


(exempt period ends before substantial activities requirement takes effect) BioNexus

status

YA 2010

YA 2011

YA 2012

YA 2013

YA 2014

YA 2015

YA 2016 - 2017

YA 2018

YA

2019

YA 2020

Loss (1,000)

Loss (1,000)

Expands business and SI 200,000 (1st SI)

SI 300,000

SI 400,000


Post exempt YAs

(YA 2019 onwards)

Qualifying biotechnology activity



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Example 5 : Company commences a qualifying biotechnology activity and subsequently expands its existing qualifying biotechnology activity

Same facts as in Example 4 except that Chromos Industries Sdn Bhd expanded its qualifying biotechnology activity on 18.10.2017 and was granted the BioNexus status in the same year. The company derived its first SI including IP income in YA 2018.

The tax exemption status is as follows: (a) Effective 16.10.2017 – Tax exemption granted after 16.10.2017

With the introduction of the substantial activities requirement, the grandfathering rules provide that where a tax exemption has been granted after 16.10.2017 for a qualifying biotechnology activity, an exemption is only granted till 31.12.2018. The substantial activities requirement is applicable effective 1.1.2019.

Since the company expanded its qualifying biotechnology activity after 16.10.2017, and derived its first SI from its existing qualifying activity and expansion project for the financial year end 31.12.2018, it was granted a tax exemption for YA 2018 only. The exempt YA would be for YA 2018 only.

(b) 16.10.2017 - Substantial activities requirement

With the introduction of the substantial activities requirement, the grandfathering rules provide that where a tax exemption has been granted after 16.10.2017, the requirement is applicable effective 1.1.2019. Since the company was granted a tax exemption (i.e. for YA 2018) after 16.10.2017, effective 1.1.2019 it has to comply with the substantial activities requirement as stated in paragraph 6.1(b) of this PR. The company would have to submit an application to Bioeconomy Corporation in relation to the substantial activities requirement that a BNX must fulfil in order to continue to be eligible for the tax exemption for 5 consecutive YAs until YA 2022. As 1.1.2019 falls within the basis period 1.1.2019 to 31.12.2019 (YA 2019), the company would be required to submit the application to Bioeconomy Corporation on or before 1.7.2018. If it does not fulfil the substantial activities requirement from 1.1.2019, the tax exemption ends in the YA 2018. The exempt YA



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would be for YA 2018 only. YA 2019 onwards would be considered the post exempt YAs.

(c) Exclusion of IP income from tax incentive

Effective 1.7.2021, royalties and other income derived from all IP rights

that the BNX owns or where the BNX is the licensee of the right is no longer exempted. As 1.7.2021 falls within the basis period of YA 2021, any IP income derived in YA 2021 and YA 2022 is excluded from the exemption enjoyed by the company. The IP income would be subject to tax under the ITA from YA 2021 onwards.


(substantial activities requirement fulfilled & IP income is subject to tax)

YA 2010

YA 2011 - 2015

YA 2016

YA 2017

YA 2018

YA 2019 - 2020

YA 2021

YA 2022

YA 2023 YA

2024

Expands business

Loss (1,000)

1.1.2019 substantial activities requirement is fulfilled

SI 200,000 (1st SI)

SI 300,000

SI 400,000


Post exempt YAs

(YA 2023 onwards)


BioNexus status

1.7.2021 IP income excluded

from exemption

IP income from all IP rights for

YA 2021 & 2022 is

excluded from exemption and subject to tax during exempt

YAs

IP income from all IP rights

owned by BNX is subject to tax

during post exempt YAs

IP income from new IP

rights/licensee of rights for YA 2018

to 2020 is excluded from exemption and subject to tax

during exempt YAs

1.7.2018 IP income from new IP rights/licensee of rights

excluded from exemption



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Exempt YAs and Post Exempt YAs (Substantial activities requirement is not fulfilled &

IP income is subject to tax)

YA 2010

YA 2011

YA 2012 - 2016

YA 2017

YA 2018

YA 2019 -2020

YA 2021

YA 2022

YA

2023

YA 2024

6.2 Tax exemption on statutory income equivalent to an allowance of 100% of the

qualifying capital expenditure incurred

A company resident in Malaysia which is engaged in the business of life sciences and approved as a BNX may enjoy a tax exemption in respect of its SI from a new business or an expansion project, which is equivalent to an allowance of 100% of QCE incurred in the basis period for a YA within a period of five years.

Expands business

Loss (1,000)

1.1.2019 substantial activities requirement is not fulfilled

SI 200,000 (1st SI)

SI 300,000

SI 400,000

Exempt YA 2018

Post exempt YAs (YA 2019 onwards) Qualifying biotechnology activity

BioNexus status

IP income from new IP rights/ licensee of rights is excluded from the exemption for YA 2018 and subject to tax during the exempt YA

IP income from all IP rights is subject to tax during post exempt YA

IP income from new IP rights/ licensee of rights is subject to tax during post exempt YA 2019 & 2020

1.7.2018 IP income from new IP rights/licensee of rights excluded from exemption



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The date of commencement of the exemption period is determined by Bioeconomy Corporation and in relation to –

(a) a new business, the date the first QCE has been incurred and that date

is: (i) not earlier than 1.5.2005; or

(ii) three years from the date of approval as a BNX

whichever is later; or

(b) an expansion project, on the date the first qualifying capital expenditure has been incurred and that date is not earlier than the date of application received by Bioeconomy Corporation.

However, the exemption for the expansion project is only granted if the

company has not been granted an exemption for its existing approved business under the P.U. (A) 371/2007 and that business involves new investment.

Example 6 : New business incurred capital expenditure

Same facts as in Example 3 but Agro Sdn Bhd did not apply and was not granted a tax exemption under the P.U. (A) 371/2007. The company incurred capital expenditure amounting to RM500,000 on 1.4.2017. The company applied for BioNexus status and a tax exemption under the P.U.(A) 372/2007 on 15.4.2017 and was approved on 1.5.2017. Bioeconomy Corporation determined the date of the first QCE incurred is on 1.4.2017.



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Exemption Period

YA 2015

YA 2016

YA 2017

YA 2018

YA 2019

YA 2020

YA 2021

YA 2022

As Bioeconomy Corporation has determined the date of the first QCE incurred is 1.4.2017, the allowance of 100% of the QCE against the SI is granted for a five year period i.e. from 1.4.2017 to 31.3.2022. As 1.4.2017 falls in the basis period for the YA 2017, therefore the exemption period falls within YA 2017 to 2022. Example 7 : Expansion project Same facts as in Example 4 except that Chromos Industries Sdn Bhd expanded its qualifying biotechnology activity in 2019 and was granted the BioNexus status in the same year. The company was not granted an exemption under the P.U. (A) 371/2007. The company applied for a tax exemption under the P.U.(A) 372/2007 on 15.2.2017 and was approved on 1.3.2017. The company incurred capital expenditure amounting to RM600,000 on 1.2.2019. Bioeconomy Corporation determined the date of the first QCE incurred is on 1.2.2019.

Loss (1,000)

Loss (1,000)

Loss (1,000)

SI

100,000

Exemption within 5 years (1.4.2017 to 31.3.2022) YA 2017 to YA 2022

Biotechnology activity

New Biotech-nology activity – New Business

Capital expenditure of RM 500,000 incurred on 1.4.2017

BioNexus status



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Exemption Period

YA 2010

YA 2011 - 2016

YA 2017

YA 2018

YA 2019

YA 2020

YA 2021

YA 2022

YA 2023 - 2024

As Bioeconomy Corporation has determined the date of the first QCE incurred is 1.2.2019, the allowance of 100% of the QCE against the SI is granted for a five year period i.e. from 1.2.2019 to 31.1.2024. As 1.2.2019 falls in the basis period for the YA 2019, therefore the exemption period falls within YA 2019 to 2024.

Example 8 ABJZ Sdn Bhd (ABJZ) undertakes an approved biotechnology activity by acquiring plant and machinery on 1.4.2015. ABJZ applied for a Bionexus status on 2.1.2017. The company obtained approval as a BNX and a tax exemption under the P.U. (A) 372/2007 on 1.6.2017. The company’s financial year ends on 31 December annually. Bioeconomy Corporation determined the company’s business commencement date on 1.3.2017 and the date of the first QCE incurred is on 1.4.2015.

Loss (1,000)

1. Expansion project

2. Capital expenditure incurred 1.2.2019

3. SI 200,000 (1st SI)

Exemption period of 5 years (1.2.2019 – 31.1.2024) YA 2019 to 2024


BioNexus status



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ABJZ incurred capital expenditure as follows:

Details YA 2015 RM

YA 2016 RM

YA 2017 RM

(a) Plant & Machinery 2,100,0001 3,000,0002 2,000,0003

(b) Furniture & Fittings 100,000 50,000 20,000

(c) Motor Vehicles 300,000 250,000 200,000

Total 2,500,000 3,300,000 2,220,000 ABJZ’s adjusted income are as follows:

Details YA 2017 RM

YA 2018 RM

YA 2019 RM

Adjusted income /(loss) (2,500,000) 6,250,000 7,000,000

Capital allowance 364,000 580,000 324,000

RM YA 2017 RM

YA 2018 RM

YA 2019 RM

Adjusted income /(loss) (2,500,000) 6,250,000 7,000,000 Less:

Capital allowance - b/f - Current year

Nil 364,000 580,000

Nil 324,000

Statutory income (SI) Nil 5,306,000 6,676,000 Less: Qualifying capital expenditure (QCE) for exemption purposes4

5,306,0005

(restricted)

1,794,0006

SI / Chargeable income Nil 4,882,000

Tax payable @ 24% Nil 1,171,680

4Computation of QCE (P & M) YA 20151

YA 20162 2,100,000 3,000,000

5,100,000

YA 20173 (unabsorbed) 2,000,000

7,100,000

Less: YA 2018 (restricted)

5,306,0005

1,794,000



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Less: YA 2019

1,794,0006

Nil

1,2Note

Bioeconomy Corporation has determined that the company’s business commencement date is 1.3.2017 and the date of the first QCE incurred is on 1.4.2015. Therefore, the QCE is deemed incurred in YA 2017 (YA business commenced).

As Bioeconomy Corporation has determined the date of the first QCE incurred is 1.4.2015, the allowance of 100% of the QCE against the SI is granted for a five year period i.e. from 1.4.2015 to 31.3.2020. As 1.4.2015 falls in the basis period for the YA 2015 and 31.3.2020 falls in the basis period for YA 2020, therefore the exemption period falls within YA 2015 to 2020.

6.3 Further Tax Exemption on Statutory Income

(a) Further exemption on the SI of another new qualifying activity

A BNX that has enjoyed either an exemption of SI or SI equivalent to an allowance of 100% of the QCE incurred during the period of exemption may enjoy a further incentive. The BNX may be further exempted from the payment of income tax by being subject to tax at a rate equivalent to 20% in respect of statutory income derived from a qualifying activity (new business or expansion project) for a period of ten (10) consecutive YAs after the end of the period of exemption. The exempted SI is determined in accordance with the following formula:

A x C B

Where:

A is the amount of tax charged on the chargeable income of the BNX from qualifying activities at the prevailing tax rate reduced by the amount of tax charged on such chargeable income at the rate of twenty per cent;

B is the amount of tax charged on such chargeable income from qualifying activities at the prevailing tax rate; and

C is the amount of such chargeable income from qualifying activities.



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Exempted SI is determined after deducting allowances which fall to be made under Schedule 3 of the ITA although no claim for such allowance has been made.

Where an asset used for the purpose of a qualifying activity is also used for the purpose of a business other than the qualifying activity, then the allowances which fall to be made under Schedule 3 of the ITA shall be deducted as is reasonable having regard to the extent to which the asset is used for the purpose of the qualifying activity.

Chargeable income in relation to a qualifying activity for a YA is the SI after deducting loss brought forward in relation to that activity [subsection 43(2) of the ITA].

(b) Grandfathering rules

Grandfathering rules have been provided for the substantial activities requirement as explained in paragraph 6.1(b) of this PR.

(c) Exclusion of IP income from the tax incentive

The date of commencement of the exclusion of IP income from the exempted statutory income is as explained in paragraph 6.1(d) of this PR.

Example 9

CPCB Sdn Bhd (CPCB) is a BNX and its exemption period under the P.U. (A) 371/2007 ends in the YA 2022. CPCB has obtained a further tax exemption i.e. a concessionary tax rate under the P.U. (A) 156/2009 from the Minister of Finance with effect from the YA 2023 for a new qualifying activity.

For the purpose of this example, it is assumed that the company –

(a) fulfilled the substantial activities requirement effective 1.7.2021;

(b) made the necessary application to Bioeconomy Corporation before the due date; and

(c) enjoys the exemption under the P.U. (A) 371/2007 until YA2022.

CPCB has been granted a further exemption from YA 2023 to 2032 as it had fulfilled the substantial activities requirement.



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Exempt YAs and Further Exempt YAs

YA 2010

YA 2011

YA 2012

YA 2013

YA 2014

YA 2015-2020

YA 2021

YA 2022

YA

2023

YA 2024

CPCB’s adjusted income is as follows:

Details YA 2023 RM

YA 2024 RM

YA 2025 RM

Adjusted income 2,500,000 3,250,000 5,000,000

Capital allowance 100,000 250,000 200,000

Computation of Chargeable Income

Details YA 2023 RM

YA 2024 RM

YA 2025 RM

Adjusted income Less:

2,500,000 3,250,000 5,000,000

Capital allowance 100,000 250,000 200,000 Statutory income Less:

2,400,0008 3,000,00010 4,800,00012

Tax exemption7 400,0009 500,00011 800,00013

Chargeable income 2,000,000 2,500,000 4,000,000

Tax payable @ 24% 480,000 600,000 960,000

Loss (1,000)

Loss (1,000

Loss (1,000)

SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000

SI 200,000


Further exempt YAs YA 2023 to YA 2032





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7Note Current tax rate is 24%.

(a) YA 2023

[(RM2.4m8 x 24%) - (RM2.4m8 x 20%)] x RM2.4m8 = RM400,0009

RM2.4m8 x 24%

(b) YA 2024

[(RM3m10 x 24%) - (RM3m10 x 20%)] x RM3m10 = RM500,00011

RM3m10 x 24%

(c) YA 2025

[(RM4.8m12 x 24%) - (RM4.8m12 x 20%)] x RM4.8m12 = RM800,00013

RM4.8m12 x 24%

Example 10

CPC Sdn Bhd (CPC) had been granted a BNX status in YA 2010 and derived its first SI in YA 2011. Hence, its exemption period under the P.U. (A) 371/2007 ends in the YA 2020. CPC has obtained a further tax exemption i.e. a concessionary tax rate under the P.U. (A) 156/2009 from the Minister of Finance with effect from the YA 2021 for a new qualifying activity. The company closes its accounts on 31 December annually and statutory income of the company includes IP.

The further exemption status is as follows:

(a) YA 2021

CPC need not fulfil the substantial activities requirement for it to enjoy the exemption under the P.U. (A) 371/2007 until YA 2020. This is because CPC has been granted an exemption before 16.10.2017 and the substantial activity requirement is only effective from 1.7.2021, i.e. after the exempt YA 2020. For CPC to be granted a further exemption from YA 2021 to 2030, it has to fulfil the substantial activities requirement.

(b) Exclusion of IP income from tax exemption

Effective 1.7.2018, royalty and other income derived from new IP rights that a BNX owns or where a BNX is the licensee of the right is no longer exempted. As such, CPCB’s IP income is taxable under the ITA.



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Exempt YAs and Further Exempt YAs

YA 2011

YA 2012

YA 2013

YA 2014

YA 2015 -2018

YA 2019-2020

YA 2021

YA 2022

YA

2023 - 2030

YA 2031

7. Capital Allowances / Industrial Building Allowances

7.1 Capital allowances

The SI of a new business or an expansion project in the basis period for each of the exempt YA is to be determined after deducting capital allowances notwithstanding that no claim for such allowances have been made.

Where an asset used for the purpose of the new business or the expansion project, as the case may be, is also used for the purpose of a business other

Loss (1,000)

Loss (1,000)

SI 100,000 (1st SI)

SI 200,000

SI 200,000

SI 200,000


Further exempt YAs (10 consecutive YAs) YA 2021 to YA 2030



Post exempt

YA (YA2031 onwards)

BioNexus status

IP income from new IP

rights is excluded from the

exemption for YA 2018 to

YA 2020 and subject to tax

during the exempt YA

IP income from all IP rights is subject to tax during further exempt YA (YA2021 to YA 2030)

IP income from all IP rights is subject to tax during post exempt YA



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than that new business or expansion project, then the capital allowances shall be deducted as is reasonable having regard to the extent to which the asset is used for the purpose of the first-mentioned new business or expansion project.

In the absence or lack of adjusted income for a YA, the amount of unabsorbed allowance may be carried forward and deducted in the:

(a) first subsequent YA the company has SI from that new business or expansion project; and

(b) subsequent YAs until that total amount is fully utilized.

7.2 Industrial building allowance

A BNX may also claim an industrial building allowance (IBA) at the rate of 10% on the qualifying building expenditures incurred in the basis period for a YA [P.U. (A) 374/2007].

If a qualifying building expenditure is incurred before the commencement of a new business or a new expansion project, it shall be deemed to have been incurred on the date of commencement of the business or project.

The date of the first qualifying building expenditure incurred is determined by Bioeconomy Corporation and the date shall not be earlier than 2.9.2006.

Where the BNX's qualifying capital expenditure is incurred on assets or industrial building which are used for purpose of a new business or expansion project and the assets are disposed of at any time within two years from the date of acquisition of the asset, the amount of allowance allowed for such assets or industrial building would be withdrawn in the year of disposal.

Example 11

On 15.4.2017, Ingrid Research Sdn Bhd (IRSB) an approved BNX company had been granted an incentive and the date of commencement of business for IRSB was on 19.10.2017. On 20.1.2016, IRSB purchased a completed laboratory building with equipment worth RM3.5 million for full use in R&D activities. IRSB accounts are closed on 31st December annually. On 31.12.2018, IRSB disposed of the building for RM5.0 million.

The computation of IBA is from the YA 2017 (year business commenced) and the IBA for YA 2017 is RM350,000 (10% x RM3.5 million). The qualifying building expenditure is deemed to have been incurred in the YA 2017 when the business commenced.

For YA 2018, IRSB is not eligible to claim the IBA. The IBA allowed in YA 2017 is withdrawn and taxed as part of IRSB’s statutory income (by imposing a



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balancing charge in the YA 2018, that is the year when the building was disposed of).

8. Treatment on Losses Incurred by a Bionexus Status Company

Any loss incurred before the exempt YA commences (i.e. after the commencement of a new business or expansion project) and within the period of exemption, may be carried forward to the YA after the exempt period ends and is to be deducted from the statutory income of the new business or expansion project until it is fully absorbed.

The treatment of brought forward losses under Section 43(2) and current year losses under Section 44(2) of the ITA shall not apply to BNX with regard to the losses that have been deducted.

Example 12 Agro Sdn Bhd commenced its business in 2010 and was engaged in a qualifying biotechnology activity. The company was granted BioNexus Status in the YA 2010. The company’s financial year ends on 31 December annually and derived its first SI in YA 2013. Accumulated losses of RM3,000 (YA 2010 to YA 2012) before the exempt YA and the loss of RM1,000 (YA 2014) incurred during the exempt YA may be carried forward to the post exempt YA. The accumulated losses of RM4,000 is to be deducted against the statutory income from YA 2023.


YA 2010

YA 2011

YA 2012

YA 2013

YA 2014

YA 2015 -2020

YA 2021

YA 2022

YA

2023

YA 2024

Loss (1,000)

Loss (1,000)

Loss (1,000)

SI

100,000

Loss (1,000)

SI 200,000

SI 200,000

SI 200,000


Post exempt YAs

(YA 2023 onwards)

BioNexus status





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9. Deductions for Promotion of Export

Any revenue expenditure under section 33 of the ITA incurred in relation to promotion of export under section 41 of the Promotion of Investments Act 1986 (PIA) is eligible for deduction and shall be claimed in the YA the expenditure is incurred.

For the purpose of BNX tax incentives, revenue expenditure under section 33 of the ITA in relation to the promotion of exports listed under section 41 of the PIA is eligible for additional deduction and shall be accummulated to be absorbed in the YA after the exempt period ends.

Example 13

Alexis Sdn Bhd has been granted BioNexus status for a new business on 1.1.2014. The 10 year tax exemption period under P.U. (A) 371/2007 starts in the YA 2014 and will expire in the YA 2023. The company qualifies for deduction for export promotion under section 41 of the PIA as follows:

YA RM 2015 25,000

2017 50,000

2021 15,000

Total 90,000 For the purpose of this Example, it is assumed that the BNX fulfilled the substantial activities requirement on 1.7.2021 to continue to be eligible for the exemption until YA2023. The company is allowed to deduct the above amounts under section 33 of the ITA in the relevant YA. The accumulated amount of additional deduction of RM90,000 may be utilised in the YA 2024, the first YA after the exempt YA and the subsequent YAs until the amount is fully absorbed.

10. Deductions for Research and Development Expenditure

Any R&Dexpenditure incurred in relation to a qualifying R&D activity approved by the Minister of Finance under section 34A of the ITA is entitled for double deduction and shall be claimed in the YA the expenditure was incurred.

For the BNX tax incentive purposes, deductions for R&D expenditure shall be accumulated and be eligible for deduction in the YA after the exempt period ends. This is to ensure that the benefits of tax deduction can be enjoyed by BNX as the deduction given in the YA after the exemption expires will reduce the adjusted



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income for the YA. However, the amount of eligible expenditure deductible is equal to the amount of R&D expenditure incurred.

Example 14

Binbai Sdn Bhd was granted BioNexus status on 1.1.2013. The exempt YAs under P.U.(A) 371/2007 starts from the YA 2013 and will expire in the YA 2022. The company had incurred the following expenditure for R&D activities approved by the Minister:

YA RM 2015 35,000

2017 10,000

2021 15,000

Total 60,000

For the purpose of this Example, it is assumed that the BNX fulfilled the substantial activities requirement on 1.7.2021 to continue to be eligible for the exemption until YA 2022. The company is not allowed to claim the above amounts in the relevant YA. The accumulated amount of RM60,000 may be used in the YA 2023, the first YA after the exempt YA and the subsequent YAs.

11. Non-application

The tax incentive under P.U. (A) 371/2007 and P.U. (A) 372/2007 shall not apply to:

(a) a new business or an expansion project, as the case may be, that commences after one year from the date of approval or after such extended period approved by the Minister;

(b) a company in the basis period for a year of assessment which has been granted:–

i. deduction under the Income Tax (Allowance for Increased Exports) Rules 1999 [P.U. (A) 128/1999];

ii. deduction under the Income Tax (Deduction for Cost on Acquisition of a Foreign Owned Company) Rules 2003 [P.U. (A) 310/2003];

iii. deduction under the Income Tax (Deduction for Investment in an Approved Food Production Project) Rules 2006 [P.U. (A) 55/2006];

iv. exemption on the value of increased exports under the Income Tax (Exemption) (No. 17) Order 2005 [P.U. (A) 158/2005];



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v. reinvestment allowance under Schedule 7A of the ITA;

vi. any incentives (except deductions for promotion of exports) under the Promotion of Investments Act 1986;

vii. exemption for an approved food production project under the Income Tax (Exemption) (No. 10) Order 2006 [P.U. (A) 51/2006];

viii. exemption under the Income Tax (Exemption) (No. 40) Order 2005 [P.U. (A) 307/2005];

ix. exemption under the Income Tax (Exemption) (No. 41) Order 2005 [P.U. (A) 308/2005];

x. exemption under the Income Tax (Exemption) (No. 42) Order 2005 [P.U. (A) 309/2005];

xi. exemption for venture capital company under the Income Tax (Exemption) (No. 11) Order 2005 [P.U. (A) 75/2005];

xii. deduction under the Income Tax (Deduction for Investment in a Venture Company) Rules 2005 [P.U. (A) 76/2005]; or

xiii. deduction under the Income Tax (Deduction for Investment in a BioNexus Status Company) Rules 2007 [P.U. (A) 373/2007].

12. Withdrawal of Tax Exemptions

If a BNX fails to comply with the stipulated conditions imposed by the Minister of Finance in relation to the tax exemptions, the Minister of Finance reserves the right to withdraw all income tax exemptions that have been granted.

13. Compliance with the Income Tax Act 1967 The approved company is not absolved from complying with any requirement to submit any return or statement of accounts or to furnish any other information under the provision of the ITA.


This PR replaces the PR No. 8/2018 dated 9 October 2018.

Amendments

The contents of this PR have been amended and updated as follows:



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Paragraph Explanation

2 Paragraph 2.2 is amended. Paragraph 2.3.5 and 2.3.6 has been inserted.

3 New paragraph 3.5, 3.12 and 3.13 has been inserted. Previous paragraph 3.7, 3.8 and 3.9 has been amended and renumbered as 3.8, 3.9 and 3.10 respectively. Previous 3.5, 3.6 and 3.10 have been renumbered as 3.6, 3.7 and 3.11 respectively.

5 Paragraph 5.3(b) is amended.

6 Paragraph 6.1(a)(ii) is amended. New paragraph 6.1(b), (c) and (d) is inserted. Examples 1 to 4 are amended. New Example 5 is inserted. Previous Examples 5, 6 and 7 are updated and renumbered as Examples 6, 7 and 8. New paragraph 6.3(b) and (c) is inserted. Previous Example 8 is amended and renumbered as Example 9. New Example 10 is inserted.

7 Previous Example 9 is updated and renumbered as Example 11.

8 Previous Example 10 is amended and renumbered as Example 12.

9 Previous Example 11 is amended and renumbered as Example 13.

10 Paragraph 10 is amended. Previous Example 12 is amended and renumbered as Example 14.



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15. Disclaimer The examples in this PR are for illustration purposes only and are not exhaustive. Director General of the Inland Revenue, Inland Revenue Board of Malaysia.




TAX TREATMENT OF STOCK IN TRADE

PART I – VALUATION OF STOCK






Published by


Second edition

First edition on 31.5.2006








3. Interpretation 1

4. Introduction 2

5. Stock in Trade and Its Importance 2

6. 7.

Valuation of Opening Stock in Trade and Closing Stock in Trade Method of Valuing Stock in Trade

7

9

8. Valuation of Stock in Trade on Cessation of Business 13

9. Stock in Trade Obsolescence 17

10. Diminution in Value of Shares as Stock in Trade 17


12. Disclaimer 17



PART I - VALUATION OF STOCK


_______________________________________________________________________

Page 1 of 17

1. Objective

The objective of this Public Ruling (PR) is to explain the valuation of stock in trade in relation to a business carried on by a person in Malaysia.


2.1 This PR takes into account laws which are in force as at the date this PR is

published.

2.2 The provisions of the Income Tax Act 1967 (ITA) related to this PR are sections 2, 21, 21A, subsection 33(1) and section 35.

3. Interpretation


3.1 “FIFO” (first-in, first-out) means the method which assumes that the stock in

trade purchased first are sold first and the remaining stock in trade are from the most recent purchases.

3.2 “Work in progress” means goods in the process of production which will

eventually be put up for sale in the ordinary course of the business.

3.3 “Weighted average cost” means the method which values the stock in trade at the weighted average cost of similar items available for sale at the beginning of the period and purchased or produced during the period divided by the number of units available for sale to obtain a weighted average unit cost. The stock in trade at the end of the accounting period is then valued at this average unit cost.

3.4 “LIFO” (last-in, first-out) means the method which assumes that the stock in

trade purchased last are sold first and the remaining stock in trade are from the earliest purchases.

3.5 “Market value” in relation to anything, means the price which that thing would

fetch if sold in a transaction between independent persons dealing at arm’s length.

3.6 “Person” includes a company, a body of persons, a limited liability partnership

and a corporation sole.

3.7 “Adjusted income” of a person from a business source for a basis period for a year of assessment is the gross income from that business less all deductible




_______________________________________________________________________

Page 2 of 17

expenses incurred in the production of that gross income under the general provisions and specific provisions of the ITA.

3.8 “Business” includes profession, vocation and trade and every manufacture,

adventure or concern in the nature of trade, but excludes employment.

3.9 “Stock in trade”, in relation to a business, means property of any description, whether movable or immovable, being either –

(a) property such as is sold in the ordinary course of the business or would

be so sold if it were mature or if its manufacture, preparation or construction were complete; or

(b) materials such as are used in the manufacture, preparation or

construction of any such property as is referred to in paragraph (a) above,

and includes any work in progress.

3.10 “Year of assessment” means a calendar year.

3.11 “Basis period” in relation to a person, a source of his and a year of assessment, means such basis period, if any, as is ascertained in accordance with section 21 or 21A of the ITA.

4. Introduction

Stock in trade is anything a business acquires, produces or manufactures, for the purpose of manufacturing, selling at a profit or exchanging. The nature of a business has to be established in order to determine whether a particular asset of the business is stock in trade (commonly referred to as inventory). An asset may be stock in trade for one business but a capital asset to another. It is important for stock in trade of a business including work in progress to be valued correctly at the end of a financial accounting period. This is to enable the profits and income tax payable of the business to be ascertained accurately.

5. Stock in Trade and Its Importance

For tax purposes, the value of stock in trade which is taken into account in determining the adjusted income is ascertained in accordance with section 35 of the ITA. The value of the stock in trade at the end of a basis period is the same value as the stock in trade at the beginning of the following basis period. As such, the value of stock in trade is important in determining the adjusted income of a business.




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5.1 Meaning of stock in trade

Stock in trade in relation to a business means property of any description, moveable or immoveable and materials that are used in the ordinary course of the business. Stock in trade would be related to a business that has already commenced its operations. Property of a business – (a) refers to an asset which would be sold in the ordinary course of a trade,

and any stock which is still being manufactured or being made ready for sale. Stock in trade also includes raw materials used up in the manufacturing process; and

(b) is more than just physical things such as land and buildings. It also

includes rights and interests that can be owned and have a value such as shares, bonds and marketable securities.

Work in progress is also included as part of stock in trade.

5.2 Transfer of ownership of property in goods from a seller to a purchaser

When a person purchases goods to be used as stock in trade in a business of his, and if there is a contract between the seller and the purchaser, the transfer of ownership of property in the goods from a seller to a purchaser would generally be in accordance with an agreement or the terms of the contract. Pursuant to the Sale of Goods Act 1957 -

(a) when there is a contract for the sale of specific or ascertained goods the property in the goods is transferred to the purchaser at such time as the parties to the contract intend it to be transferred. (The intention can be ascertained from the terms of the contract, conduct of the parties to the contract and the circumstances of each case);

(b) where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the purchaser when the contract is made, and it is immaterial whether the time of payment of the price, or the time of delivery of the goods, or both, is postponed;

(c) where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them in a deliverable state, the property in the goods does not pass from the seller




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to the purchaser until such thing is done and the purchaser has been notified;

(d) where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated in a contract, either by the seller with the agreement of the purchaser or by the purchaser with the agreement of the seller, the property in the goods immediately passes to the purchaser. Such agreement may be expressed or implied, and may be given either before or after the appropriation is made; and

(e) where there is a contract for the sale of specific goods in a deliverable

state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property in the goods does not pass until such act or thing is done and the purchaser has been notified.

5.3 Ascertainment of adjusted income

If a person has a business source income, the adjusted income would have to be determined. (a) Generally, the adjusted income from a business of a person for the basis

period for a year of assessment is ascertained as follows pursuant to subsection 34(1) and section 5 of ITA :

RM Gross income XX Less: Deductible expenses

XX

Adjusted income XX

(b) In the ascertainment of the adjusted income of a person from a business for the basis period for a year of assessment, the value of the stock in trade of the business at the beginning and at the end of that period has to be taken into account. The value of stock in trade at the beginning and at the end of the accounting period is taken into account as follows:




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RM RM Sales or turnover XX Less: Opening stock in trade XX Purchases XX Cost of production from manufacturing account XX XX Less: Closing stock in trade XX Cost of goods sold XX Gross profit XX Less: Deductible expenses XX Adjusted income XX

5.4 Change in value between opening and closing stock in trade

In ascertaining the adjusted income for a year of assessment, where the value of closing stock in trade at the end of a basis period –

(a) exceeds the value of the opening stock at the beginning of that basis period, the difference would be deducted against the total deductible expenses resulting in an increase in the adjusted income; and

(b) is lesser than the value of the opening stock at the beginning of that basis

period, the difference would be added to the total deductible expenses resulting in the decrease in the adjusted income.

Example 1

Star Sdn. Bhd. has traded in stationery since 2010 and closes its accounts annually on 31 December. For the year ended 31.12.2018, details of the business accounts are as follows: RM Sales 850,000 Purchases 225,000 Opening stock in trade 100,000 Closing stock in trade 180,000 Deductible expenses 250,000




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Computation of Adjusted Income - Year of Assessment 2018

RM RM Sales 850,000 Less: Opening stock in trade 100,000 Purchases 225,000 325,000 Less: Closing stock in trade 180,000 Cost of goods sold 145,000 Gross profit 705,000 Less: Deductible expenses 250,000 Adjusted income 455,000

As the closing stock in trade (RM180,000) exceeds the opening stock in trade (RM100,000), the total deductible expenses is reduced by the excess amount of RM80,000 (RM225,000 + 250,000 – 80,000). Thus resulting in an increase in the adjusted income.

Example 2

Same facts as in Example 1 except that the opening stock in trade is RM180,000 and the closing stock in trade is RM100,000. Computation of Adjusted Income - Year of Assessment 2018

RM RM Sales 850,000 Less: Opening stock in trade 180,000 Purchases 225,000 405,000 Less: Closing stock in trade 100,000 Cost of goods sold 305,000 Gross profit 545,000 Less: Deductible expenses 250,000 Adjusted income 295,000




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As the opening stock in trade (RM180,000) exceeds the closing stock in trade (RM100,000), the total deductible expenses is increased by the excess amount of RM80,000 (RM225,000+250,000 + 80,000). Thus resulting in the decrease in the adjusted income.

6. Valuation of Opening Stock in Trade and Closing Stock in Trade

6.1 Value of opening stock in trade The value of opening stock at the beginning of a basis period, unless it is a

commencement case, must always be the value which has been placed on the closing stock at the end of the immediate preceding basis period.

6.2 Value of closing stock in trade The value of closing stock in trade at the end of a basis period –

(a) is the market value at the end of that period; or

(b) if a person carrying on a business elects that the stock is physically

tangible, is an amount equal to the total cost of acquiring that item (or any materials used in its manufacture, preparation or construction) and including the cost of bringing it to its condition and location at that time.

In other words, a person carrying on a business is allowed to make an election to value a particular item of stock in trade at the total cost of acquiring that item and bringing it to its condition and location. The election will only apply where the items are physically tangible (e.g. goods such as textile, books and stationery). However, for specific items of stock in trade, that is, any item of stock in trade consisting of immovable properties, stocks, shares or marketable securities, the value of these items at the end of the relevant basis period is an amount equal to its cost price or its market value, whichever is lower. No election to value the stock in trade at cost is allowed for the said specific items of stock in trade.

6.3 Valuation of stock in trade at market value Market value in relation to anything means the price which that thing would

fetch if sold in a transaction between independent persons dealing at arm’s length. The replacement cost method to value stock in trade is not acceptable




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as it involves determining a price from a market in which traders transact. This replacement cost method does not fulfill the definition of market value for tax purposes.

There could be instances where traders decide to adopt a conservative method

in valuing their stock in trade at market value. The value taken would be the anticipated price that could be obtained if the business had no choice but to sell the goods at a lower price or when the business is about to cease. This method is not acceptable for tax purposes.

6.4 Valuation of stock in trade at cost An election has to be made to value the stock in trade of a business at cost.

However, for specific items of stock in trade, their value is based on cost or market value, whichever is lower as provided under the ITA.

(a) Acquisition cost

The total cost of acquiring stock in trade would include:

(i) direct expenditure on the purchase of goods bought for resale and

of materials and components used in the manufacture of finished goods;

(ii) other direct expenditure which can be identified specifically as

having been incurred in acquiring stock or bringing it to its existing condition and location (e.g. customs duties, direct labour, transport and packaging); and

(iii) such part of any overhead expenditure as is properly attributable to

the manufacture of the goods (e.g. rental of office, utilities charges, stationery and maintenance services).

(b) Acceptable cost methods The total cost method adopted for accounting purposes should use the principles of first-in-first-out (FIFO) or the weighted average cost formula. Other costing methods such as last-in-last-out (LIFO) are not acceptable for income tax purposes.




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6.5 Valuation of work in progress

Work in progress of unfinished goods should be valued either at cost or market value.

(a) Market value of work in progress Work in progress of unfinished goods if valued at market value must be assumed to be of some use to a potential buyer and cannot normally be valued at less than the cost simply because they are unfinished and there is no actual market for unfinished goods.

(b) Cost of work in progress (i) The cost of work in progress must include not only the cost of raw

materials used in those goods but also any expenditure on bringing the partly finished goods into their state at the end of the basis period. This includes other direct expenditure eg. direct labour cost and the proportion of the overheads such as factory rent and utilities.

(ii) If there is no market for uncompleted goods which can be sold as

raw material of another manufacturer, the uncompleted goods should be valued at cost.

7. Method of Valuing Stock in Trade

The method of valuing stock in trade that is chosen by a business may have a significant impact on its profit and loss account, balance sheet and tax payable.

7.1 Determining the value of stock in trade The value of the closing stock in trade should be determined item by item at

the end of each financial accounting period. However, if it is not practical to do so (especially where individual items are small in size but large in number), the stock in trade should be grouped according to type or nature. The value of the stock in trade should then be determined according to clearly identifiable groups or batches of homogenous or related items.

7.2 Accounting treatment

(a) The recognised accounting standards applicable to stock in trade in Malaysia are MFRS 102 Inventories and section 13 of Malaysian Private Entities Reporting Standards (MPERS) which provide guidance on the




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determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value.The standards also provide guidance on the cost formulas that are used to assign costs to inventories.

(b) According to these accounting standards, inventories are recognised and measured at the lower of cost and net realizable value where –

(i) Cost of the inventory comprises of all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to their present location and condition.

(ii) Net realizable value is defined as the estimated selling price in the

ordinary course of business less estimated costs of completion and the estimated costs necesssary to make the sale. It refers to the net amount that an entity expects to realise for the sale of inventory.

(iii) Fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or most advantages) market for that inventory would take place between market participants at the measurement date.

Net realizable value for inventories may not equal fair value less cost to sell.

7.3 Tax treatment

(a) Subsection 35(3) of the ITA addresses the basis of valuation of stock in trade which is acceptable for income tax purposes. In practice, a business may comply with the generally accepted accounting principles. Where this occurs and the basis of valuation of stock in trade is not acceptable for income tax purposes, an adjustment must be made in the tax computation to bring the valuation of stock in trade to comply with the requirements of the ITA. This is to ensure that the adjusted income is correctly ascertained.

(b) For tax purposes –

(i) Market value of an inventory (stock in trade) would be equal to the fair value or estimated selling price.

(ii) Net realizable value is not acceptable.




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(iii) The value of any particular item of the stock in trade at the end of the basis period should be the market value at that time or a person may elect to value the stock in trade at the total cost of acquiring that item (or any materials used in its manufacture, preparation, or construction) and bringing it to its condition and location. The election of valuing at total cost will apply only in the case where the items are physically tangible (such as textiles, books and stationery).

(iv) In the case of stock in trade consisting of immovable properties,

stocks, shares or marketable securities, the value of the stock in trade at the end of the basis period should be the lower of the cost price or the market value at that time.

(v) Where the net realizable value of the stock is lower than the cost, a

tax adjustment has to be made as follows:

• The value of the inventory from net realizable value has to be reinstated to its market value; and

• The estimated cost to sell or estimated selling cost which has been deducted from the estimated selling price has to be added back in the tax computation.

Selling cost is a cost to promote and market products to customers. It includes expenses such as advertising campaigns, promotional materials distributed, rent of showroom, rent of sales offices, salaries and benefits of sales personnel, sales commission etc. Example 3 Co. X’s accounting period ends on 31 December annually and the company values an item of its stock in trade on 31.12.2018 as follows:

RM Estimated selling price of an item 100 Estimated cost to sell an item 10 Net realizable value of stock reported in accounts

90

For tax purposes, the market value of the item is the estimated selling price i.e RM100 and not RM90. The cost to sell an item of RM10 has to be added back in the tax computation. The opening stock of the following basis period would have to be the same as the closing stock of the immediate preceding basis period.




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(vi) Any acceptable method used in the valuation of stock in trade or work in progress should be applied consistently. If there is a valid reason for a change (such as, to give a more accurate valuation of stock in trade at cost or market value), details of the change should be appropriately documented and disclosed in the statement of accounts and the tax computation.

(vii) If there is a change in the valuation of the opening stock in trade or

work in progress because of a change in the company’s accounting policy in a financial year, the effect of the change on the profits of the company should be reflected in the tax computation for that year. For audit purposes, such changes has to be documented and the change in the basis of valuation of stock in trade and the relevant adjustments has to be shown clearly. Example 4

ABC Sdn. Bhd. closes its accounts on 31 December each year. In 2018, the company decided to change the valuation of stock in trade from cost to market value. The opening stock in trade in 2018 which was originally valued at cost was also changed to market value. The following values are extracted from the final accounts of the company:

Cost

RM Market Value

RM Opening stock in trade 10,000 12,000 Closing stock in trade - 14,000

The change in value of the opening stock in trade amounting to an increase of RM2,000 (RM12,000 - RM10,000) would be taxed. This difference of RM2,000 is to be added to the net profit to arrive at the company’s adjusted income.

Note

(1) If the situation was reversed where the change in value of the

opening stock in trade amounts to a decrease of RM2,000, this difference is an allowable deduction.

(2) For a continuous business, the value of its opening stock must

be the same as the value of the closing stock in the immediate preceding basis period (as explained in paragraph 6 of this PR).




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(viii) For the inventories which are purchased on credit terms, the cost of trading stock must be recorded at the original cost price irrespective of the terms and conditions of payment. If the payment is settled early and a price reduction (discount) is made on the stock, the company has to adjust the original purchase cost to the reduced cost of stock.

8. Valuation of Stock in Trade on Cessation of Business

Where a person permanently ceases to carry on a business, special rules have been provided for valuing the closing stock in trade under the following circumstances [subsection 35(5) of the ITA]:

8.1 Stock in trade sold or transferred on cessation of business

8.1.1 Where a person permanently ceases to carry on his business and -

(a) any stock of the business is sold or transferred on cessation or shortly after cessation for a valuable consideration to another person who intends to use that sold / transferred stock in his business or in another business of his; and

(b) the cost of the purchased / transferred stock is deductible as

an expense in computing the other person’s adjusted income for the basis period for a year of assessment of his business or the other business of his,

the value of the sold / transferred stock at the time the business ceases is taken to be an amount equal to the –

(i) price paid on the sale; or

(ii) value of the consideration,

as the case may be, and is taken as the value of that stock in the final accounts of the business that is permanently ceasing. The sale price or value of the consideration for the trading stock sold / transferred of the ceased business would be the contract price (valuable consideration) and not the market value.




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Example 5

A Sdn. Bhd. ceased its retail furniture business on 31.7.2018. On 10.8.2018 the company sold all its remaining stock in trade to C Sdn. Bhd., also a furniture retailer for RM80,000 although the original cost of the stock in trade was RM120,000. C Sdn. Bhd. purchased the furniture from A Sdn. Bhd. to be used as its stock in trade and the cost of RM80,000 is a deductible expense in ascertaining its adjusted income.

In the final accounts of A Sdn. Bhd. for the period ending 31.7.2018, the company should value its stock in trade sold at the sale price of RM80,000 paid by the purchaser, C Sdn. Bhd. as –

(a) the purchaser intends to use the stock purchased as stock in

trade in his business; and

(b) the cost (RM80,000) of the stock purchased is a deductible expense in arriving at C Sdn. Bhd.’s adjusted income.

Example 6

B Sdn. Bhd. ceased its Korean cosmetics business on 30.9.2018. On 10.10.2018, the company transferred all its remaining stock in trade valued at RM50,000 to K Sdn. Bhd., a cosmetic retailer in settlement of a debt of RM60,000. K Sdn. Bhd. used the stock transferred as stock in trade in its business.

In the final accounts of B Sdn. Bhd. for the period ending 30.9.2018, the company should value the stock in trade transferred at RM60,000 as this is the sale price or the value of the consideration of the stock in trade of the business.

8.1.2 Where a person permanently ceases to carry on his business and

subparagraph 8.1.1 does not apply, the value of the stock in trade of the business shall be taken to be the market value at the time of cessation of the business.

Example 7

Same facts as in Example 5 except that on 31.7.2018, the company transferred some furniture to a director’s sibling at no valuable consideration. The cost price of the furniture is RM10,000 but the market value of the furniture is RM15,000.




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The market value of RM15,000 of the furniture at the time the business ceased would be treated as gross income from the business in the last basis period of A Sdn Bhd.

8.2 Unsold stock in trade on cessation of business

If a business is permanently ceased and the stock in trade of the business remains unsold, then in the final accounts, the stock in hand is taken to be an amount equal to its market value at the time the business ceased.

8.3 Sale of stock in trade with other assets on cessation of business

(a) Where any of the stock in trade and items of business assets are sold or transferred for a consideration in cash or its equivalent, the total consideration is to be apportioned in a just and reasonable manner;

(b) Where any of the stock in trade is transferred (with or without other assets)

for a consideration other than cash or its equivalent, the value of the consideration shall be taken to be an amount equal to the market value of the consideration at the date of the transfer, and if that stock in trade is transferred with other assets, that amount is to be apportioned in a just and reasonable manner.

Example 8 D Sdn. Bhd. carries on a business of dealing in used cars. The company operates its business in an open parking lot situated on leased land. A building erected by the company in one corner of the land is used as an office. As business was slow moving, the company decided to cease operations on 31.8.2018. At the end of the accounting period ending on 31.8.2018, the company decided to sell all its assets, including the stock in trade for RM700,000 to Z Sdn. Bhd., a used car dealer. Z Sdn. Bhd. intends to use the assets purchased as stock in trade in its business. The sum of RM700,000 should be apportioned between all the assets disposed of, such as the stock in trade, building and office equipment. Any method of apportionment is acceptable provided it is just and reasonable. In this example, it was determined that the value of the cars and building was RM600,000 and RM100,000 respectively.




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8.4 Value of stock in trade of a ceased business in the hands of a person buying the stock

Where a person buys stock in trade from a business when the business is

ceased or shortly after its cessation, the person (purchaser) must bring the stock into his business at a value equal to the -

(a) price paid for the purchase of the stock; or

(b) value of the consideration.

This cost of the said stock in trade would be used by the person (purchaser) to ascertain the adjusted income of the business or other business of his, in which he uses or intends to use any of the said stock in trade. Example 9 Same facts as in Example 5 and C Sdn. Bhd.’s financial accounting period ends on 31 December annually. As the value of the consideration received by B Sdn. Bhd. is RM80,000, C Sdn. Bhd. should value the stock in trade purchased at RM80,000 as part of its purchases in the basis period ending 31.12.2018. Example 10 Same facts as in Example 8 except that D Sdn. Bhd. sold all its stock in trade (i.e. the used cars) to X Sdn. Bhd, a sales distributor and all the used cars were purchased to be used as company cars by its sales personnel nationwide. X Sdn. Bhd.’s financial accounting period ends on 30 June annually. The company intends to claim capital allowances for all the used cars purchased. Since X Sdn. Bhd. purchased the used cars – (a) to become capital assets of the company and not as stock in trade of the

company; and (b) the cost of the cars are not a deductible expense under subsection 33(1)

of the ITA in ascertaining the adjusted income of the company

the market value of the cars sold at the time D Sdn. Bhd.’s business ceased (31.8.2018) is to be taken as D Sdn. Bhd.’s stock value at the end of the basis period ended 31.8.2018.




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9. Stock in Trade Obsolescence

A provision for obsolescence of stock in trade is not allowable. An actual write-off of stock in trade which is charged to the profit and loss account is allowable as it is realised. It is required that an adjustment be made to the opening stock in trade in the following year.

10. Diminution in Value of Shares as Stock in Trade

Where a person deals with shares and the shares are part of his stock in trade, any diminution in the value of shares to reflect market value is allowable. The diminution in value of the shares should be based on market value and cost of the particular shares. Any accretion in the value of shares in the event that the provision for diminution in the value of shares is no longer required is taxable. In order to claim a tax deduction for a provision for diminution in value of stocks, the basis in determining the diminution in value of stock would have to be substantiated.


PR No.4/2006 titled Valuation of Stock in Trade and Work in Progress Part I has been amended, updated, rewritten, rearranged and published in two parts as follows: (a) PR No. /2020 titled Tax Treatment of Stock in Trade, Part I – Valuation of

Stock; and

(b) PR No. /2020 titled Tax Treatment of Stock in Trade, Part II – Withdrawal of Stock.

Both PR should be read together. 12. Disclaimer

The examples in this PR are for illustration purposes only and are not exhaustive.






PART II – WITHDRAWAL OF STOCK






Published by


First edition








3. Interpretation 1

4. Introduction 2

5. Withdrawal of Stock in Trade for Own Use 2

6. Withdrawal of Stock in Trade for Other Reasons 4

7. Stock in Trade Parted with by Compulsion 7


9. Disclaimer 7



PART II - WITHDRAWAL OF STOCK


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1. Objective

The objective of this Public Ruling (PR) is to explain the tax treatment of withdrawal of stock in trade in relation to a business carried on by a person in Malaysia.


2.1 This PR takes into account laws which are in force as at the date this PR is

published.

2.2 The provisions of the Income Tax Act 1967 (ITA) related to this PR are sections 2, 4C, paragraph 4(a), sections 21, 21A, 24 and 28.

3. Interpretation


3.1 “Market value” in relation to anything, means the price which that thing would

fetch if sold in a transaction between independent persons dealing at arm’s length.

3.2 “Person” includes a company, a body of persons, a limited liability partnership

and a corporation sole.

3.3 “Adjusted income” of a person from a business source for a basis period for a year of assessment is the gross income from that business less all deductible expenses incurred in the production of that gross income under the general provisions and specific provisions of the ITA.

3.4 “Business” includes profession, vocation and trade and every manufacture,

adventure or concern in the nature of trade, but excludes employment.

3.5 “Stock in trade”, in relation to a business, means property of any description, whether movable or immovable, being either –

(a) property such as is sold in the ordinary course of the business or would

be so sold if it were mature or if its manufacture, preparation or construction were complete; or

(b) materials such as are used in the manufacture, preparation or

construction of any such property as is referred to in paragraph (a) above and includes any work in progress.




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3.6 “Year of assessment” means a calendar year.

3.7 “Basis period” in relation to a person, a source of his and a year of assessment, means such basis period, if any, as is ascertained in accordance with section 21 or 21A of the ITA.

4. Introduction

Proceeds from the sale of stock in trade of a business are treated as gross income from a business. The proceeds can be in the form of cash or its equivalent or by way of a trade debt. Where an item of stock in trade of a business is withdrawn whether for own use or for other reasons by a person carrying on the business, the market value of the item at the time of withdrawal is treated as gross income from the business [subsections 24(2) and 24(3) of the ITA].

5. Withdrawal of Stock in Trade for Own Use

Stock in trade withdrawn from a business for own use has to be accounted for and valued to an amount equal to the market value of that stock in trade [paragraph 24(2)(a) of the ITA]. 5.1 Valuation of stock in trade withdrawn for own use

If a person carrying on a business takes his stock in trade of the business for

his own use, the withdrawal of such stock has to be – (i) accounted for as if the item of stock in trade had been sold; and (ii) valued at the market value at the time of its withdrawal and be treated as

gross income of the person from the business for the relevant period.

Example 1

Harris, operates a sole trader business as a supplier of roasted mutton. He takes 5 kilogram of the stock in trade home for his personal consumption every month. Harris has to account for the stock in trade taken for personal consumption every month as if it had been sold. The market value of the roasted mutton at the time of withdrawal is treated as gross income from the business for the relevant year of assessment. Example 2 Nurul, a sole proprietor for Batik Nurul Enterprise. On 1.12.2018, Nurul took 2 pieces of batik material from her stock in trade and gave it to her relative as a




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wedding gift. No payment for the withdrawal of the stock in trade was made by Nurul. The market value of the batik withdrawn from stock in trade was RM2,000 whereas the cost of the batik material was RM1,000. Nurul had accounted for the stock in trade withdrawn from her business at cost. Although Nurul had accounted for the withdrawal of the 2 pieces of batik material from her stock in trade at cost but for the purpose of tax she has to account for the said withdrawal at an amount equal to the market value of the material i.e RM2,000 and not at cost. The market value of the material is treated as Nurul’s gross income from the business in the year of assessment 2018. Example 3

T Sdn Bhd, a television manufacturer withdraws a television from its stock in trade to place it at the office lobby. This is part of its customer service amenities and marketing strategy. T Sdn Bhd has to account for its stock in trade withdrawn for use in its business. The market value of the television at the time of withdrawal is treated as gross income of the business for the relevant year of assessment. Note The television is a capital asset owned by the company and is in use for the purpose of the business.The company may claim capital allowances if it is owned and used at the the end of the basis period for the relevant year of assessment. The market value at the time of its withdrawal for the relevant years of assessment is taken as the qualifying expenditure.

5.2 Withdrawal of stock in trade for use in a different business activity

(a) Different business activity

A person may carry on two distinct business activities and transfer stock in trade from one business activity to another business activity of his. When the person transfers the stock in trade from one business activity to another, means that at that point of time, he is making a withdrawal of stock in trade for use in a different business activity of his. The transfer of the stock in trade between the two different business activities of the person indicates that the person, as a trading owner has chosen to dispose of the stock in trade without any commercial disposal. Such withdrawal of stock in trade for use in a different business activity would be treated as if it were a transaction of sale or purchase at market value.




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Example 4

EE Sdn Bhd is a fully automated chicken egg producer and owns several farms where chickens are bred for laying purposes. The company also has a chicken hatchery which produces chicks primarily for sale as day-old chicks. Some of the chicks are transferred to the farms to become part of the stock of the farm.

The chicken farm and the chicken hatchery are two different business activities of the company. The chicks are the stock in trade of the chicken hatchery business. When the chicks are transferred to the farm, it is considered a withdrawal of stock from the hatchery business activity to the chicken farm business activity. The withdrawal of stock from the chicken hatchery business are to be valued at the market value and treated as the company’s gross income from the business.

(b) Reclassification

Withdrawal of stock for use in a different business activity includes reclassification from trading to capital or vice versa due to a change of intention of the business. When there is a reclassification from trading to capital, the trading stock is valued at the market value. Similarly when there is a change from capital to trading, the capital asset is valued at market value. However, the change of intention and the timing of the change is a question of fact and has to be substantiated with the relevant documentation for purposes of an audit. As an example, a property developer may transfer his trading stock to fixed assets. For further information on this matter, please refer to PR No. 1/2009 (Amended) titled Property Development.

6. Withdrawal of Stock in Trade for Other Reasons

6.1 Stock in trade withdrawn for other reasons

Where a person withdraws stock in trade from his business (other than on requisition or compulsory acquisition or in a similar manner ) -

(a) without any consideration received; or (b) for a consideration consisting of:

i. any property not being either a debt owing to the relevant person or

a sum in cash or the equivalent of cash;

ii. any such property together with a debt owing to the relevant person or any such sum; or




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iii. any such property together with a debt owing to the relevant person and any such sum

then, the market value of that stock in trade at the time of its withdrawal shall be treated as gross income of the relevant person from the business for the relevant year of assessment.

6.2 Withdrawal of stock in trade without any consideration received

Where any stock in trade of a business is withdrawn,(other than on requisition or compulsory acquisition or in a similar manner), without any consideration received, the market value at the time of withdrawal of the said stock in trade is treated as gross income from the business for the relevant year of assessment. Example 5 Same facts as in Example 2 except that Nurul donated the batik material taken from her stock in trade to an organiser of a charitable event as one of the prizes for a lucky draw. The tax treatment of the stock in trade withdrawn for the purpose of donation is the same as explained in Example 2.

6.3 Withdrawal of stock in trade for a consideration consisting of any property not being either a debt or a sum in cash or the equivalent of cash.

Where any stock in trade of a business is withdrawn for a consideration of any property not being either a debt or a sum in cash or the equivalent of cash, the market value of the said stock at the time of withdrawal is treated as gross income from the business for the relevant year of assessment. In other words, where any stock in trade is withdrawn for a consideration consisting of any property that cannot be reliably estimated, the market value of the said stock at the time of withdrawal is treated as gross income from the business for the relevant year of assessment.

Example 6

Adrian, a sole trader is a used car dealer. On 1.9.2018, he imported 10

reconditioned cars from Japan to be sold in Malaysia. Adrian took one of these imported cars with a market value of RM150,000 and gave it to Damia, an artist as consideration on receiving her collection of paintings. The market value of these paintings cannot be reliably estimated.




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In this case, Adrian has to treat the market value of the car at the price of RM150,000 at the time of withdrawal of the stock as gross income from the business for the year of assessment 2018.

6.4 Withdrawal of stock in trade for other reasons for a consideration consisting of

property together with a debt, or /and any sum in cash

Where a person withdraws his stock in trade for a consideration of property together with a debt, or /and any sum in cash, then the market value of the stock in trade at the time of its withdrawal is treated as gross income of the person from the business for the relevant year of assessment. (please refer to Example 7)

6.5 Market value is reduced under certain circumstances The market value of the stock in trade is reduced under certain circumstances.

Where the stock in trade is withdrawn by the relevant person for a consideration consisting of property together with a debt, or/and any sum in cash, the market value of that stock in trade can be reduced by:

(a) the amount of the debt or any cash sum; or (b) the amount of the debt and any cash sum; [Paragraph 24(3)(a) and subparagraph 24(2)(b)(ii) and (iii) of the ITA] The tax treatment on the amount of debt or /and cash sum and the property are as follows:

(a) The amount of debt would be a trade debt and is taxable when stock in

trade is withdrawn [subsection 24(1) and paragraph 24(3)(b) of the ITA].

(b) The cash sum would be taxable when it is received [paragraph 24(3)(c) and section 28 of the ITA].

(c) The balance would be taxed at the time the stock is withdrawn from the

business [subsection 24(2) of the ITA].

Example 7 Boon, operates Boon Mart as a sole proprietor. He withdrew stock in trade from his business which having a market value of RM3,000 on 1.6.2018 to be given to his neighbour. The withdrawal of stock in trade has created a debt of RM1,000 and a cash sum of RM1,500. In accordance with subsection 24(3) of the ITA –




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(a) The debt of RM1,000 is a trade debt that has to be treated as gross income from a business in accordance with subsection 24(1) of the ITA.

(b) The cash of RM1,500 is to be treated as gross income from a source when it is received in accordance with section 28 of the ITA.

(c) The balance of RM500 is the value of stock in trade withdrawn at the time

of withdrawal and is to be treated as gross income from business in accordance with subsection 24(2) of the ITA.

7. Stock in Trade Parted with by Compulsion

Effective year of assessment 2014, section 4C of the ITA was introduced to provide that gains or profits from a business shall include an amount receivable arising from stock in trade parted with by element of compulsion including on requisition or compulsory acquisition or in a similar manner. The amounts that are receivable will be treated as gross income in the year where the stock in trade is parted with compulsory acquisition.

Stock in trade comprises of moveable or immoveable goods. In the case of a

property development business, where land is the stock in trade, with effect from the year of assessment 2014, any compensation received for the compulsory acquisition of the land would be treated as gross business income under paragraph 4(a) of the ITA for the relevant period.


PR No.4/2006 titled Valuation of Stock in Trade and Work in Progress Part I has been amended, updated, rewritten, rearranged and published in two parts as follows: (a) PR No. /2020 titled Tax Treatment of Stock in Trade, Part I – Valuation of Stock;

and

(b) PR No. /2020 titled Tax Treatment of Stock in Trade, Part II – Withdrawal of Stock.

Both PR should be read together. 9. Disclaimer

The examples in this PR are for illustration purposes only and are not exhaustive.


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