Incentives for food production projects

Incentives for food production projects

Food production projects as approved by the Minister of Finance (MoF) for the planting of vegetables, fruits, kenaf, herbs or spices; rearing of cows, buffaloes, goats or sheep and aquaculture and deep-sea fishing, qualify for certain tax incentives where applications were received by the Ministry of Agriculture and Agro-Based Industry by 31 December 2015 (see Tax Alert No. 11/2011). The incentives are as follows:

• For a company that makes an investment in a subsidiary company undertaking a new food production project, a tax deduction equivalent to the amount of investment made in that subsidiary for that YA;
• For a company carrying out new food production projects, a 100% income tax exemption of the statutory income for 10 YAs; or
• For a company carrying out an expansion of an existing food production project, a 100% income tax exemption of the statutory income for five YAs

In Budget 2016, the Government, recognizing that it needs to continue to support the development and growth of the agro-food industry, proposed to extend the application period of the incentives for another five years, to 31 December 2020. It was also proposed that the list of approved food projects that qualify for tax incentives be extended (see Tax Alert No. 22/2015).

To legislate the above proposals, the following Exemption Order and Rules were gazetted on 24 December 2020 and are deemed to have come into operation on 1 January 2016.

The Order 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)   A new projectNote 1 for a period of 10 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

(b)  An expansion projectNote 2 for a period of five consecutive YAs in respect of its statutory income from the expansion project, 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

Note 1 - New project

A project which involves the following:

(a)   Planting of industrial crops, vegetables, fruits, herbs, spices and cash crops;

(b)  Aquaculture;

(c)   Rearing of honey and urena lobata bees;

(d)  Rearing of cows, buffaloes, goats, sheep and deer;

(e)   Deep-sea fishing; and

(f)    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)

Note 2 – Expansion project

A project:

(a)   For the purpose of expanding the new project (per Note 1)

(b)  Which involves a new area of land; and

(c)   Which is approved by the Minister

The Order applies to:

(a)   A new project:

(i) Where an application for the exemption is made between 1 January 2016 and 31 December 2020 to the Minister through the Minister charged with the responsibility for that project;

(ii) Which has not commenced on the date the application is made to the Minister; and

(iii) Which commences within one year from the date of approval given by the Minister

(b)  An expansion project that is approved by the Minister for the purpose of expanding the new project

The non-application provisos stipulate that the Order will not apply to a qualified person for a YA if the qualified person has:

(a)   Been granted any incentive under the Promotion of Investments Act 1986;

(b)  Made a claim for allowance under Schedule 7A or 7B of the ITA;

(c)   Been granted an exemption under Section 127(3)(b) or 127(3A) of the ITA;

(d)  Made a claim for deduction under any rules made under Section 154 of the ITA except:

(i)   The rules in relation to allowance in Schedule 3 of the ITA;

(ii)  The Income Tax (Deduction for Audit Expenditure) Rules 2006; or

(iii) The Income Tax (Deduction for Expenses in relation to Secretarial Fee and Tax Filing Fee) Rules 2014*

*As these Rules have been revoked, we believe that reference should be made to the Income Tax (Deduction for Expenses in relation to Secretarial Fee and Tax Filing Fee) Rules 2020 [P.U.(A) 162] instead and the Exemption Order should be updated accordingly.

The Rules provide that in ascertaining the adjusted income of a company which has made an investment in its related company 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.

The Order applies to a company resident in Malaysia which is incorporated under the Companies Act 2016 (CA 2016), that has:

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

(b)  Made an application between 1 January 2016 and 31 December 2020 to the Minister through the Minister charged with the responsibility of a new food production project or an expansion project

*Means a company incorporated under the CA 2016 where at least 70% of its paid-up share capital in respect of ordinary shares are directly owned by the company which has made an investment for the purpose of a new food production project or an expansion project

Points (c) and (d) of the non-application provisos as outlined in Income Tax (Exemption) (No. 6) Order 2020 above also apply to the Rules.