Manufacturing License and its Relevance for Foreign Investors in the Manufacturing Sector in Malaysia
Government of Malaysia highly promotes the participation of foreign investors especially in the manufacturing industry. Upon fulfilling certain requirements, any company involving in manufacturing sectors are required to obtain manufacturing license. Hence this article explores the regulatory compliance aspect of the manufacturing license and its relevance to foreign investors in Malaysia.
(I) REGULATORY AUTHORITIES ON MANUFACTURING INDUSTRY IN MALAYSIA:
The Ministry of International Trade and Industry (“MITI”) regulates the manufacturing industry in Malaysia. Under the purview of the MITI, a government principal agency namely Malaysian Industrial Development Authority (“MIDA”) was established as a statutory body responsible for the promotion of the manufacturing and services sectors in Malaysia.
MIDA assists companies which intend to invest in the manufacturing and services sectors. Its function is to promote foreign and local investments in the manufacturing and services sectors.
The manufacturing industry in Malaysia is governed under the Industrial Co-ordination Act 1975 (“ICA”). ICA imposes several requirements on companies which are, or intend to, involve in the manufacturing industry. The compliance requirements are imposed to facilitate the proper regulation of the manufacturing industry by those authorities.
(II) ABOUT MANUFACTURING LICENSE
Manufacturing license is a legal premise for a company to conduct manufacturing activities in Malaysia under the provision of ICA. It requires the person(s) who are involved in manufacturing activities to obtain a license from the Secretary-General of MITI. For the purpose of understanding, manufacturing activity, as defined in ICA refers to “the making, altering, blending, ornamenting, finishing or otherwise treating or adapting any article or substance with a view to its use, sale, transport, delivery or disposal; and includes the assembly of parts and ship repairing but shall not include any activity normally associated with retail or wholesale trade.1
For any company involved in the manufacturing activities, and fulfils one of the following criteria, it should obtain the manufacturing license, as imposed in ICA2:
(a) Shareholders’ funds of RM2.5 million and above; (“Shareholders funds” is defined as the aggregate amount of a company’s paid-up capital, reserves, balance of share premium account and balance of profit and loss appropriation account,) or
(b) Engaging 75 or more full-time paid employees; (“Full-Time Paid Employees defined “as all persons normally working in the establishment for at least six hours a day and at least 20 days a month for 12 months during the year and who receive a salary. It also includes directors of incorporated enterprises except those paid solely for their attendance at board of directors’ meetings. The definition encompasses family workers who receive regular salaries or allowances and who contribute to the Employees Provident Fund (EPF) or other superannuation funds.”).
Any manufacturing companies which are not within those criteria, it is eligible to apply for an exemption from the manufacturing license. Those companies that have been exempted from manufacturing license will receive confirmation through an exemption letter assigned to them MIDA. Applications for manufacturing licenses are to be submitted to the MIDA and it will be issued upon the approval from MITI. As provided in ICA, any company who carries on any manufacturing activity without a manufacturing licence, is guilty of an offence and is liable, on conviction, to a fine not exceeding RM2,000 or to a term not exceeding six months, and to a further fine not exceeding RM1,000 for every day during which such default continues.
(III) MIDA’S ADDITIONAL REQUIREMENTS3:
Apart from the abovementioned requirements, MIDA also imposes the following conditions on the manufacturing license holder:
(a) Project’s Capital Investment Per Employee (CIPE) for the project is at least RM140,000.00.
[*Note: CIPE Ratio = Capital investments (÷) total number of full-time employees].
(b) Total full-time workforce of the company comprises of at least 80% Malaysians.
(c) The project must be consistent with the national economic & social objectives and promotes an orderly development of manufacturing activities in Malaysia;
(d) At least 25% of the company’s full-time workforce are managerial, technical, and supervisory staff with degree and/or diploma/certificate; or
(e) Manufacture product’s value added is at least 40%.
(IV) RELEVANCE OF MANUFACTURING LICENSE TO FOREIGN INVESTORS:
Manufacturing license shall entitle the license holder to enjoy several incentives and benefits in Malaysia. The major tax incentives for companies investing in the manufacturing sector are Pioneer Status, Investment Tax Allowance, apart from Reinvestment Allowance and other benefits.
(a) Pioneer Status:
A manufacturing company granted with Pioneer Status4 enjoys a five-year partial exemption from the payment of income tax. It pays tax on 30% of its statutory income, with the exemption period commencing from its production day (the day its production level reaches 30% of its capacity). Unabsorbed capital allowances incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company.5
Accumulated losses incurred during the pioneer period can be carried forward and deducted from the post pioneer income of the company for a period of seven consecutive years. Businesses with “Pioneer Status” can get a “Tax Exemption from 70% up to 100% of Statutory Income For 5 to 10 Years. A company that is granted Pioneer Status will enjoy different degrees of tax exemption depending on the types of promoted products/activities.6
Companies in the manufacturing, agricultural, and hotel and tourism sectors, or any other industrial or commercial sector, that participates in a promoted activity or produce a promoted product may be eligible for either Pioneer Status or Investment Tax Allowance. The company must submit its application to MIDA before commencing operation/production.
(b) INVESTMENT TAX ALLOWANCE (ITA)
As in the case of Pioneer Status, a company granted ITA will enjoy different degrees of exemption depending on the types of promoted products/activities7. As an alternative to Pioneer Status, a company may also apply for ITA.
A company granted ITA under the Promotion of Investments Act, 1986, for manufacturing services and service sector is entitled to an allowance of 60%-70% on its qualifying capital expenditure (factory, plant, machinery or other equipment used for the approved project) incurred within five to ten years from the date the first qualifying capital expenditure is incurred.8
The manufacturing company can “offset this allowance against 70% of its statutory income” for each year of assessment meaning thereby, ITA is granted on 60% qualifying capital expenditure incurred for a period of five years and is utilised against 70% of the statutory income, while the 30% balance is taxed at the prevailing CIT rate. Any unutilised allowance can be carried forward to subsequent years until fully utilised. The remaining 30% of its statutory income will be taxed at the prevailing company tax rate.
(c) REINVESTMENT ALLOWANCE (RA)
RA is provided as an incentive given to Malaysian resident companies engaged in manufacturing activities and selected agricultural activities which undertake any form of reinvestment for the purposes of expansion, automation, modernisation or diversification into any related products within the manufacturing industry. However, this allowance is subject to the condition that such companies have been in operation for at least 36 months.9
Manufacturing license holders are also eligible for the various incentives that have been granted by the Government, such as exemptions from import duties for machinery and equipment and raw materials under Customs Duties (Exemption) Order 2017 and Sales Tax (Persons exempted from Payment of Tax) order 2018, of which under the discretion of Minister of Finance.10
All of the above incentives are available for the manufacturing license holders subject to the respective conditions. The bottom line is MIDA would require the manufacturing license holders to present their manufacturing license to obtain these benefits.
Any company with paid-up capital of RM2.5 million or more or with at least 75 full-time paid employees must obtain a manufacturing licence. As MIDA continuously oversees, promotes, and co-ordinates the development of manufacturing industry in Malaysia, it is extremely important to comply with the conditions and guidelines imposed to entitle the manufacturing company, various incentives and benefits as discussed.
3. 20180521121450_Newsletter-Mac-2018-2.pdf (mida.gov.my).
4. Refer Chapter 1, Sec. 5 Promotion of Investments Act, 1986.
5. Microsoft Word – Promotion of Investment Act 1986.docx (mof.gov.my).
6. Microsoft Word – Promotion of Investment Act 1986.docx (mof.gov.my).
7. Appendix-I-General.pdf (mida.gov.my).
8. FAQ General Accordion – MIDA | Malaysian Investment Development Authority.
9. Chapter-2-Incentives-for-New-Investments.pdf (mida.gov.my) – 1.11 -Additional Incentives for the Manufacturing Sector.
10. Refer S. 52 – 56 – Guide Manufacturing & Import Export.pdf (customs.gov.my).
Charu Singh (firstname.lastname@example.org)