Malaysian Pioneer Status updates under the OECD's recommendation as of 30 June 2019

Malaysia has acceded to the recommendation of OECD's Harmful Tax Practices (FHTP) and its requirements in fulfilling Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. As a result of the action, MIDA has amended its regulations with regards to the granting of Pioneer Status to Malaysian companies focused on manufacturing activities specifically on High Technology, Contract R&D, Green Technology Services and Principal Hubs. The ICT business which is classed under the mobile category under OECD's recommendation had been addressed by MDEC since 1/1/2019.

Contract R&D and Green Technology services which are categorised under the non-IP (intellectual property) regime were reviewed and amended to ensure that Substance is included as part of the incentive criteria and conditions. Substance requirements such as the number of full-time employment and operational expenditures will be taken into account when granting pioneer status in accordance with OECD's recommendations under the BEPS Action 5 peer review plan.

As such and going forward, all those companies which were granted pioneer status by MIDA and were still enjoying incentives will have to accede to the new requirements or else their pioneer status will terminate by 30 June 2021 (given transitional period). A further condition states that the legislation is required to be amended to exclude Intellectual Property (IP) income. Thus, with the amendment via the Finance Bill 2018 and the Promotion of Investments (Promoted Activities and Promoted Products for High Technology Companies) (Amendment) Order 2018, the Pioneer Status for High Technology incentive is only applicable for the manufacturing income of the qualifying activity while any form of IP income will be excluded from the incentive. However, it must be emphasised here that in order to obtain pioneer status, it would be easier if the company also have an IP. So first get IP, then exclude the IP income from the account book.

From 1 July 2021 onwards, the incentive will only be valid for the exemption of manufacturing income, and any IP income has to be excluded, and a separate account is required to be maintained. Companies are now obliged to identify whether or not there is IP income embedded into the income of their qualifying high technology manufacturing activity and past holders of pioneer status will have to consult with MIDA as to what they can do to follow the new conditions.