III. MECHANISMS FOR INTEGRATING ENVIRONMENTAL CONSIDERATIONS INTO AGRICULTURAL POLICY

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B. Agricultural incentives

[ B | B-1 | B-2 | B-3 | B-4 ]

3. Specific incentives

The government places a strong emphasis on research and development activities including those in the agricultural sector. Those incentives and support programmes, which are aimed at further promoting greater research and development by the private sector, are detailed below.

(i) Encourage in-house research and development

This incentive is intended to encourage companies to undertake in-house research and development and technological innovation as part of their activities and not as a separate outfit. In-house research means research and development carried out in Malaysia within a company for the purposes of its own research. Manufacturing and agricultural companies undertaking in- houseresearch and developmentcan obtain the following incentives:

• Capital expenditure incurred in respect of clearing and preparing land;
• The provision of irrigation or drainage systems;
• The provision of plant and machinery used in Malaysia in connection with, and for the purpose of, an activity related to research and development;
• The construction of access roads including bridges, the construction or purchase of buildings (excluding those provided for the welfare of persons or as living accommodation per person) and structural improvements on land for the purposes of activities related to research and development.

In general, capital expenditure eligible for ITA includes expenditure on buildings, machinery and equipment used in research. Such expenditures, however, do not qualify for the double deduction incentives granted for approved research as mentioned above. As such, Malaysian companies undertaking in-house research and development should explore the possibilities of benefiting from both the double deduction and ITA, as these incentives complement each other.

(ii) Encouraging independent research and development

Contract research and development companies comprise firms that provide research and development services to companies other than related companies. They are eligible to apply for pioneer status for a period of five years or ITA of 100 per cent on the qualifying capital expenditure incurred within a period of 10 years. In the case of pioneer status, full tax exemption of statutory income will be granted; for ITA, the allowance will be abated from the statutory income and abatement for each year of assessment will be limited to 70 per cent of the statutory income.

Research and development companies that provide such services both to related and non-related companies are eligible to apply for ITA of 100 per cent on the qualifying capital expenditure incurred within a period of 10 years. That allowance will be abated from the statutory income, and abatement for each year of assessment will be limited to 70 per cent of statutory income. Related companies do not enjoy double deduction for payments made to the research and development company.

Contract research and development companies or research and development companies that do not take advantage of the incentive under the Promotion of Investment Act, 1986, can apply for the fulfillment of definition as contract research and development companies or as research and development companies to enable them to enjoy the double deduction incentive under Section 34B of the Income Tax Act, 1967, when receiving payment for services rendered. That stipulation is also relevant to research and development companies which decide not to avail themselves of ITA, in order to allow their related companies to enjoy the double deduction incentive. In such a case, each applicant should also fulfill the criteria for eligibility (i.e., comply with the definition of a contract and research and development company; independent research and development company; or related company).

The research undertaken should be in accordance with the needs of the country and it should be of benefit to the Malaysian economy. At least 70 per cent of the revenue of the company should be derived from research and development activities. For agriculture-based research and development, at least 5 per cent of the workforce of the company must be appropriately qualified personnel performing research and technical functions.

Other incentives granted to encourage research and development activities include exemptions from import duty, excise duty and sales tax on machinery/equipment, materials, raw materials and samples used for research by contract research and development companies and manufacturing companies undertaking in-house research.

Under Section 4B of the Income Tax Act, 1967, double deduction of expenditure that is not capital expenditure is given on expenses incurred by companies for the use of facilities and for services provided by approved research companies or institutions. The term "approved research companies" implies contract research and development companies, while the list of approved research institutions must be approved by the Ministry of Finance. Companies which use the facilities and services of approved research companies or institutions qualify automatically for the double deduction incentive. Such companies can then claim the double deduction directly from the Department of Inland Revenue without having to make a separate application to MIDA for approval. Under section 34B also, double deduction is granted for contributions in cash to approved research institutions. Application for research and development should be submitted to MIDA.

The government has also introduced specific incentives to encourage high technology industries in the both the manufacturing and agriculture sectors. High technology companies that are defined as companies engaged in promoted activities or in the production of promoted products in areas of new and emerging technologies are eligible to apply for the following incentives:

• Full tax exemption at statutory income level for a period of five years;
• ITA of 60 per cent on qualifying capital expenditure incurred within a period of five years. The allowance can be set-off against the statutory income for each assessment year without any restriction.

The list of promoted products or promoted activities is highly biased towards the manufacturing sector. The Ministry of Agriculture is working to include a number of agriculture activities which can be considered as high technology.

For the granting of incentives, a high technology company must fulfill the following criteria:

• Local research and development expenditure from gross sales should be at least 1 per cent on an annual basis. However, companies are allowed a period of three years from the date of operation/commencement of business to comply with that requirement;
• The percentage of science and technical graduates in the total workforce should be at least 7 per cent.

Several other incentives are available to Malaysian exporters including exporters of processed and non-processed agricultural products. Those incentives are detailed below.

Certain expenses incurred by resident companies in promoting their products in overseas markets are eligible for double deduction. Those expenses include:

• Overseas advertising;
• Supply of free samples abroad;
• Export market research;
• Preparation of tenders for the supply of goods overseas;
• Services rendered for public relations and work connected with exports;
• Exhibits and/or participation in local or international trade or industrial exhibitions approved by the Ministry of International Trade and Industry;
• Fares in respect of business travel overseas by company employees;
• Accommodation and subsistence expenses subject to a maximum of M$ 200 per day incurred by Malaysian businessmen going overseas for business;
• The cost of maintaining sales offices overseas for the promotion of exports from Malaysia;
• Double deduction for export credit insurance premiums.

To encourage exports to non-traditional markets, premium payments in respect of export credit insurance insured with local insurance companies are eligible for double deductions.

Approved buildings used as warehouses, bulk storage installations for storing goods for export are eligible for the Industrial Building Allowance, which comprises an initial allowance of 10 per cent and an annual allowance of 2 per cent. Applications for double deductions and the Industrial Building Allowance have to be submitted to the Department of Inland Revenue.

Under Section 99 of the Customs Act, 1967, manufacturers including agro-based companies who have to pay customs duty on imported raw materials, components and/or packing materials used in the manufacture of finished products for export are entitled to claim duty drawback.

Under Section 29 of the Sales Tax, 1972, and Section 19 of the Excise Act, 1976, manufacturers who have to pay sales tax/excise duty on raw materials, components and packing materials used in the manufacturing of finished products for export are entitled to claim tax/duty drawback.

The government offers incentives for companies to provide training for their employees with the objective of developing and upgrading skills as well as improving productivity and quality. Agriculture and agro-based companies are also eligible for such incentives, which include:.

• ITA of 100 per cent for a period of 10 years is given to companies intending to undertake technical or vocational training. The allowance will be abated from the statutory income but abatement for each year of assessment will be limited to 70 per cent of the statutory income. Existing companies that provide technical or vocational training and incur new investment costs in upgrading their training equipment, or expanding their training capacities, are also eligible for the incentive;
• Single deductions for contributions in cash to a technical or vocational institution established and maintained by the government or a statutory body;
• The granting of the Industrial Building Allowance to a company that incurs expenditure on buildings used for technical or vocational training;
• Eligibility of machinery, equipment and materials used in training for exemption from import duties, sales tax and excise duties.

In addition to the above new incentives, the existing double deduction incentives for approved training will continue. Under that incentive, manufacturing companies employing less than 50 Malaysian workers and having a paid-up capital of less than M$ 2.5 million will enjoy a double deduction or further deduction on approved training expenses.

Approved training means training aimed at developing and upgrading craft, supervisory and technical skills, and improving quality and productivity. Automatic approval on double deduction is given if employees are trained at designated approved training institutions.

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