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Tax Deduction on Research and Development (R&D) Expenses in Malaysia

Tax Deduction on Research and Development (R&D) Expenses in MalaysiaIn Malaysia, research and development (R&D) activities are recognized as critical drivers of innovation, economic growth, and competitiveness. The government has implemented various tax incentives to encourage businesses to invest in R&D. These incentives, provided under the Income Tax Act 1967 (ITA), allow companies to claim tax deductions on qualifying R&D expenditures, reducing their overall tax liability. Understanding the conditions and mechanisms for these deductions is essential for businesses seeking to capitalize on these opportunities.

 

 

Overview of R&D Tax Incentives

1. Definition of R&D Activities:

For tax purposes, R&D is defined under the ITA as systematic, investigative, and experimental activities aimed at acquiring new knowledge or improving existing products, processes, or technologies. R&D activities typically include:

  • Basic Research: Theoretical or experimental work undertaken primarily to acquire new knowledge without a specific application in view.
  • Applied Research: Original investigation undertaken to acquire new knowledge with a specific practical application in mind.
  • Experimental Development: Systematic work that draws on existing knowledge gained from research or practical experience, directed towards producing new materials, products, or processes, or improving those already produced or installed.

2. Types of Tax Incentives for R&D:

The Malaysian government offers several tax incentives to encourage R&D investment, including:

  • Double Deduction: A double deduction is available for qualifying R&D expenditures, effectively allowing companies to deduct twice the amount of their eligible R&D costs from their taxable income.
  • Investment Tax Allowance (ITA): For certain types of R&D projects, companies may qualify for an ITA, which allows them to offset a portion of their qualifying capital expenditure against taxable income.
  • Pioneer Status (PS): Companies undertaking R&D activities in promoted sectors may qualify for PS, which provides a tax exemption on a percentage of their statutory income for a specified period.

 

Qualifying R&D Expenditures

1. Operating Expenses:

Operating expenses related to R&D are eligible for tax deduction. These typically include:

  • Raw materials: Raw materials used directly in an R&D activity excludes the purchase of fixed assets used in R&D.
  • Manpower: Expenditure incurred on the basic salary of an employee directly involved in the R&D activity.
  • Technical services: Consultancy fees paid to a particular R&D organisation or individual for obtaining information / advice pertaining to the R&D activity; or payment to particular organisations for the use of testing equipment such as those available in SIRIM, FRIM and the universities; or payment to a particular organisation or individual for analytical services and data evaluation processing.
  • Travelling cost: Travelling cost for visiting R&D stations or attending courses / seminars relevant to R&D activity.
  • Transportation cost: Cost of transporting raw materials used directly in an R&D activity.
  • Maintenance cost: Maintenance costs for motor vehicles, buildings, equipment and machinery used directly in an R&D activity.
  • Rental: Rental of motor vehicles, buildings, equipment and machinery used directly in an R&D activity.
  • Other expenditure: Other revenue expenditure incurred directly for R&D such as water, electricity, telephone, fax, courier, stationery, photocopies of R&D reports or schematic design, ink / toner used to print reports, lab coats and slides or photographs.

2. Contracted R&D Services:

Payments made to approved R&D institutions or Contract R&D company are also eligible for double deduction.

3. Capital Expenditure:

While capital expenditures on assets such as machinery, equipment, and software used for R&D purposes are generally not eligible for direct deduction, they may qualify for capital allowances.

4. Excluded Expenditures:

Not all R&D-related costs are qualified for double deduction. Excluded expenditures include:

  • Non-R&D Activities: Costs associated with activities that do not qualify as R&D under the ITA, such as market research, quality control, or routine product testing.
  • Routine Data Collection: Costs related to routine data collection that is not part of a specific R&D project.

 

Conditions for Claiming R&D Tax Deductions

1. Approval from the Inland Revenue Board of Malaysia (IRBM):

To claim R&D tax deductions, companies must obtain approval from the IRBM. The R&D activities must be certified by the IRBM as qualifying under the ITA. Companies may be required to submit detailed documentation, including project proposals, budgets, and progress reports, to substantiate their claims.

2. Eligibility Criteria:

To qualify for R&D tax deductions, the following criteria must typically be met:

  • Purpose: The R&D activities must aim to acquire new knowledge, create new products, processes, or services, or improve existing ones.
  • Systematic Approach: The R&D must be conducted in a systematic and methodical manner, with clear objectives, methodologies, and evaluation processes.
  • Commercial Intent: The R&D must be undertaken with the intention of using the results in the company’s business operations.
  1. Record-Keeping and Documentation: Accurate and comprehensive record-keeping is critical for claiming R&D tax deductions. Companies must maintain detailed records of their R&D activities, including:
  • Project Documentation: Detailed descriptions of the R&D projects, including objectives, methodologies, and outcomes.
  • Financial Records: Invoices, receipts, and other financial records that substantiate the costs incurred for R&D activities.
  • Personnel Records: Documentation of the time spent by employees on R&D activities, including timesheets and payroll records.
  1. Reporting Requirements: R&D tax deductions must be reported in the company’s tax return. Companies is required to submit relevant application forms to the IRBM before they are allowed to make a claim for special deduction.

 

Compliance and Audit Considerations

1. IRBM Audits:

The IRBM may audit companies claiming R&D tax deductions to ensure compliance with the ITA. During an audit, the IRBM will review the company’s R&D activities, financial records, and documentation to verify the eligibility of the claimed deductions. Companies must be prepared to provide detailed evidence to support their claims.

2. Penalties for Non-Compliance:

Incorrect or exaggerated claims for R&D tax deductions can result in penalties, including fines, disallowance of the deductions, and additional tax liabilities. It is essential for companies to ensure that their R&D activities and associated expenditures are accurately reported and in compliance with the ITA.

 

Conclusion

The Malaysian government’s tax incentives for R&D activities offer significant opportunities for businesses to reduce their tax liabilities while fostering innovation and growth. By understanding the eligibility criteria, maintaining thorough documentation, and ensuring compliance with the ITA, companies can maximize the benefits of R&D tax deductions. As Malaysia continues to emphasize the importance of R&D in driving economic development, these tax incentives will remain a critical tool for businesses seeking to stay competitive in the global market.