Practice Note No. 2/2021: Deduction allowed under P.U.(A) 5/2021

Practice Note No. 2/2021: Deduction allowed under P.U.(A) 5/2021

In Budget 2020, it was proposed that the tax deduction for issuance cost and further deduction on additional issuance cost of sukuk under the principles of Wakalah be extended for another five years, until the year of assessment (YA) 2025. This proposal was subsequently legislated via the Income Tax (Deduction for Expenditure on Issuance of Sukuk and Retail Sukuk Structured Pursuant to Principle of Wakalah) Rules 2021 [P.U.(A) 5/2021] (see Tax Alert No. 2/2021).

Following the above, the Inland Revenue Board (IRB) has recently issued a two-page Practice Note No. 2/2021 (PN) dated 3 September 2021, titled “Explanation Relating to Expenditure or Additional Expenses for the Purpose of Deduction Allowed in the Income Tax (Deduction for Expenditure On Issuance of Sukuk and Retail Sukuk Structured Pursuant to the Principle of Wakalah) Rules 2021 [P.U.(A) 5/2021]. 

The PN stipulates that the tax incentive under P.U.(A) 5/2021 maintains and extends the incentives which were previously provided under the following orders, which were effective until YA 2020:

•       Income Tax (Deduction for Expenditure on Issuance of Sukuk) Rules 2019 [P.U.(A) 118/2019]

•       Income Tax (Deduction for Expenditure on Issuance of Retail Debenture and Retail Sukuk) Rules 2019 [P.U.(A) 117/2019]

Pursuant to P.U.(A) 5/2021, the following “expenditure” or “additional expenses” incurred by a company on the issuance of sukuk or retail sukuk shall be allowed as a single or double deduction in ascertaining the adjusted income of the company from its business for a YA:

(a)   Single deduction on the expenditure incurred on the issuance of sukuk structured pursuant to the principles of Wakalah comprising mixed asset and debt components:

(i)             Approved or authorized by, or lodged with, the Securities Commission Malaysia (SC) under the Capital Markets and Services Act 2007 (CMSA), or

(ii)            Approved by the Labuan Financial Services Authority (LFSA) and

(b)   Single deduction on the “expenditure” and double deduction on the “additional expenses” incurred on the issuance of retail sukuk structured pursuant to the principles of Wakalah comprising mixed asset and debt components and approved or authorized by the SC under the CMSA

The definition of “additional expenses” is reiterated in the PN. The PN also outlines two examples to demonstrate the tabulation of deductible amounts under different scenarios.