Tax incentive for the Industry4WRD Vendor Development Programme

Tax incentive for the Industry4WRD Vendor Development Programme (IVDP)

The Industry4WRD policy, launched on 31 October 2018, was developed to propel Small and Medium Enterprises (SMEs) forward to meet the challenges posed by the Fourth Industrial Revolution. The policy was formulated based on three key principles:

(a)   To encourage stakeholders to apply Industry 4.0 (I4.0) technology

(b)  To create a comprehensive ecosystem for I4.0 application by industry

(c)   To transform the manufacturing sector holistically

To achieve the aspirations above, various measures as well as tax incentives were proposed in Budget 2019, including a double deduction on expenses incurred by anchor companies in implementing the IVDP, capped at RM1 million per year for three consecutive YAs (see Special Tax Alert: Highlights of 2019 Budget – Part I).

To legislate the above-mentioned proposal, the Income Tax (Deduction for Expenditure in relation to Industry4WRD Vendor Development Programme) Rules 2022 [P.U.(A) 172] were gazetted on 30 May 2022.

The Rules provide that in ascertaining the adjusted income of an anchor company from its business for a YA, a double deduction shall be allowed for expenditure* incurred by the company in carrying out the following activities in relation to the IVDP in the basis period for that YA:

(a)   Activities in relation to product development, namely product quality upgrading, product innovation or research and development

(b)  Activities in relation to capability upgrading, namely certification programme,assessment programme or business process re-engineering, or

(c)   Activities in relation to human capital, namely hard-skills training, lean management system, financial management practice or capacity upgrading

* Does not include capital expenditure incurred on plant, machinery, fixtures, land, premises, buildings, structures or works of a permanent nature or on alterations, additions or extensions thereof or in the acquisition of any rights in or over any property

The amount of expenditure shall be verified by the Minister charged with the responsibility for international trade and industry and shall not exceed RM1 million for each YA. The double deduction can be claimed for three consecutive YAs, commencing from the YA the first expenditure is incurred.

The Rules stipulate that the IVDP is a programme certified by the ministry charged with the responsibility for international trade and industry (i.e., MITI) or agency, to be implemented by an anchor company in developing a vendor company, as specified in the Guideline for the Implementation of IVDP issued or as revised by MITI and approved by the Minister (Guideline).

The following terms are defined in the Rules:

(a)  Agency

       Agency appointed by MITI under the IVDP

(b)  Vendor company

       A company which:

(i)     Is incorporated or deemed to be registered under the Companies Act 2016,

(ii)    Is a Malaysian-resident,

(iii)    Engages in manufacturing or manufacturing-related services sectors, and

(iv)    Fulfills other conditions as specified in the Guideline

The Rules shall apply to an anchor company which:

(a)   Is incorporated or deemed to be registered under the Companies Act 2016,

(b)  Is a Malaysian-resident,

(c)   Engages in manufacturing or manufacturing-related services sectors,

(d)  Holds a business license issued by the relevant local authority and a manufacturing license issued by MITI, if relevant,

(e)   Has been in operation for a period of at least 36 months,

(f)    Participates in the IVDP,

(g)  Signs a memorandum of understanding with MITI between 1 January 2019 and 31 December 2021, and

(h)  Fulfills other conditions as specified in the Guideline

The Rules are deemed to have come into operation from YA 2019.