Incentives for food production projects

Incentives for food production projects

In Budget 2016, the Government, recognizing that it needs to continue to support the development and growth of the agro-food industry, extended the application period for the following incentives for another five years, to 31 December 2020 (see Tax Alert No. 1/2021):

• Income Tax (Exemption) (No. 6) Order 2020 [P.U.(A) 373]

The Order provides that a qualifying person will be exempted from the payment of income tax in relation to a new project for a period of ten consecutive YAs or an expansion project for a period of five consecutive YAs.

• Income Tax (Deduction of Investment in New Food Production Project or Expansion Project) Rules 2020 [P.U.(A) 374]

The Rules provide that in ascertaining the adjusted income of a company, which has made an investment in its related company which is undertaking a new or expansion project under the Income Tax (Exemption) (No. 6) Order 2020, there shall be allowed a deduction equivalent to the value of investment (as defined) for the sole purpose of financing the new or expansion project in the basis period for a YA.

To continue to strengthen food security and to reduce reliance on imported food supplies, the Government proposed to expand the scope of the approved food production project and extend the application period for the incentive to 31 December 2022. To legislate this, the following Rules and Order were gazetted on 31 October 2022:

• Income Tax (Deduction for Investment in Approved New Food Production Project) Rules 2022 [P.U.(A) 351]
• Income Tax (Exemption) (No. 6) 2020 (Amendment Order 2022 [P.U.(A) 352]

Under the new Rules and Order, a new food production project is the first project carried out by a qualified person undertaking a food production project approved by the Minister. An approved new food production project is deemed to be a separate and distinct business. The list of such projects is expanded to include high seas fishing and the planting of seeds for agro food:

a)    Planting of industrial crops, vegetables, fruits, herbs, spices or cash crops

b)    Aquaculture

c)     Rearing of honey or urena lobata bees

d)    Rearing of cows, buffaloes, goats, sheep or deer

e)    Deep sea fishing or high seas fishing

f)     Planting of seeds for agro food

g)    Planting of feed mill cultivated in a project which has been identified by the Minister charged with the responsibility of that project and approved by the Minister

The Rules provide that in ascertaining the adjusted income of a company, which has made an investment in its related company which is undertaking an approved new food production project under the Income Tax (Exemption) (No. 6) Order 2020, there shall be allowed a deduction equivalent to the value of investment (as defined) for the sole purpose of financing the approved new project in the basis period for a YA.

The new Rules provide that the deduction can only be claimed for a period of three consecutive YAs, commencing from the YA the application is approved by the Minister. A deduction is also no longer available for investment in related companies that undertake the expansion project under the Income Tax (Exemption) (No. 6) 2020.

The Rules apply to a company resident in Malaysia which is incorporated under the Companies Act 2016, that has:

a)    Made an investment in its related company that undertakes the approved new food production project under the Income Tax (Exemption) (No. 6) Order 2020; and

b)    Made an application between 1 January 2021 and 31 December 2022 to the Minister of Finance through the Minister charged with the responsibility of an approved new food production project.

The Rules are deemed to have come into operation on 1 January 2021.

The Income Tax (Exemption) (No. 6) Order 2020 provides that a qualified person (which includes companies, sole proprietorships, partnerships and associations solely engaged in agriculture or fishery) that is resident in Malaysia is exempted from the payment of income tax in relation to:

• A new project for a period of ten consecutive YAs in respect of its statutory income, commencing from the first YA in which the qualified person derived statutory income in relation to that project; or
• An expansion project for a period of five consecutive YAs in respect of its statutory income from the expansion projects, commencing from the first YA in which the qualified person derived statutory income in relation to the expansion projects, and the first YA shall not be earlier than the YA in the basis period in which the date of approval from the relevant Minister falls.

The application of this incentive is extended to 31 December 2022 in this Amendment Order. The key amendments made in the Amendment Order are as follows:

• Approved new food production project is defined (see above).
• The scope of the exemption for an expansion project is extended to include statutory income from existing projects.
• An expansion of the existing approved food production project is required to be approved by the Minister and must involve a new area of land. The Amendment Order provides that the exemption is only applicable to an expansion project that has not been granted an exemption under the Income Tax (Exemption) (No. 6) Order 2020.

The Amendment Order is deemed to have come into operation on 1 January 2016 and extends the application period for this incentive to 31 December 2022. However, the exemption for approved food production projects in relation to high seas fishing and the planting of seeds for agro feed is only available from 1 January 2021 to 31 December 2022.