Tax incentive for manufacturers of pharmaceutical products

Tax incentive for manufacturers of pharmaceutical products

In Budget 2021, to encourage manufacturers of pharmaceutical products (including vaccines) to invest in Malaysia, the following preferential corporate income tax rates were proposed (see Take 5: Malaysia Budget 2021):

• 0% to 10% tax rate for the first 10 years
• 10% tax rate for the next 10 years

Thereafter, the Malaysian Investment Development Authority (MIDA) published on its website the “Guidelines for Incentive for Manufacturers of Pharmaceutical Products Including Vaccines Under the 2021 Budget” (Guidelines) dated 27 August 2021 to provide further details on the incentive, e.g., the eligibility criteria and application process (see Tax Alert No. 20/2021). The Guidelines also stipulated that the incentive will be legislated by way of subsidiary legislation under the Income Tax Act 1967 (ITA), to be read together with Section 65B of the ITA.

Following the above, to legislate the proposals, the Income Tax (the Incentive for Manufacturers of Pharmaceutical Products Scheme) Rules 2022 [P.U.(A) 34] were gazetted on 17 February 2022. The Rules provide that a qualifying company which carries on a business in respect of a qualifying activity under the Incentive for Manufacturers of Pharmaceutical Products Scheme (Scheme) shall be taxed at the following rates:

• 0% to 10% tax rate for the first 10 years
• 10% tax rate for the next 10 years

The incentive will commence from the date as determined by the Minister.

A “qualifying company” is a manufacturer of pharmaceutical products whose application for the Manufacturers of Pharmaceutical Products Incentive Scheme has been approved by the Minister. The application must be received by the Minister, through MIDA, between 1 January 2021 and 31 December 2022.

To be eligible for the incentive, a qualifying company approved under the Scheme is required to:

• Incur its first qualifying capital expenditure (excluding land) within one year from the date the approval letter is issued
• Incur the full amount of the qualifying capital expenditure as specified in the approval letter within five years from the date the first qualifying capital expenditure was incurred
• Comply with the conditions outlined in the Schedule of the Rules (refer to the Appendix to this Alert) and any other conditions imposed by the Minister as specified in the approval letter and Guidelines issued or revised by MIDA and approved by the Minister

The following terms have been defined in the Rules:

(a)  Manufacturer of pharmaceutical products

       A company which:

       -    Is a Malaysian-resident and incorporated under the Companies Act 2016

       -    Possesses a manufacturing license (ML) under the Industrial Co-ordination Act 1975 from the Minister of International Trade & Industry (MITI), or a confirmation letter from MIDA providing an exemption from ML     requirements

       -    Manufactures pharmaceutical products including formulation in Malaysia (excluding fill and finish activities)

(b)  Fill and finish activity

       The process of filling vials with vaccine and finishing the process of packaging the medicine for distribution

(c)  Qualifying activity

       Activity prescribed by the Minister as specified in the Guidelines issued and/or as revised by MIDA and approved by the Minister

The Rules also provide that the Minister may allow the qualifying company to surrender the incentive granted, by providing notice in writing to the Minister through MIDA, except in situations where the qualifying company fails to comply with any conditions imposed in relation to the incentive. The surrender of the incentive shall take effect from the first day in the basis period for the year of assessment (YA) in which the application for the surrender of the incentive is received by the Minister through MIDA.

The Rules are effective from YA 2021.

APPENDIX

Conditions for a qualifying company under the Scheme