Economic Impact of R&D Tax Incentives in Malaysia: A Detailed Analysis

This report provides a comprehensive analysis of Research and Development (R&D) tax incentives in Malaysia. It begins with an abstract highlighting the government's focus on enhancing economic-centered creativity and innovation through policies like industrial4WRD and R&D incentives. The introduction traces the history of R&D tax incentives in Malaysia, starting from 1982. The report then details the various types of R&D tax incentives, including double deductions for in-house and contract R&D, pioneer status, investment tax allowances, and tax exemptions. It explores the specific targets of each incentive type, such as companies undertaking in-house R&D and those investing in commercialization. The report also discusses the potential benefits, such as tax savings and investment allowances, and potential problems, such as application requirements and limitations. A comparison with other countries reveals Malaysia's wide-ranging incentives. The conclusion emphasizes the role of these incentives in encouraging scientific research and enhancing economic activities. The report references several academic sources to support its findings.

Running head: R&D TAX INCENTIVES 1
R&D Tax Incentives in Malaysia
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Abstract:
The government of Malaysia continues to appreciate quality investments, which enhance the
quality of infrastructure in the country. Therefore, focus is provided for the purpose of
enhancing the aspects of economic-centred creativity and innovation. These aspects improve
the country’s level of industrial productivity and competitiveness. For the purpose of staying
on top of the competition using advanced technology, the government launched the National
policy applicable in the industry 4.0, which is referred to as the industrial4WRD. This policy
framework was introduced in 2018 and targeted to enhance the intensification of investment
and digital revolution of industries in the country’s manufacturing department and related
sectors. This is the sector in the country government’s incentives, which support the
economic development sustainability and technological induction through Research and
Development (R&D). Thus, R&D is meant to accelerate industries into applying the latest
automations and technology to facilitating investments. Other than that, the country’s
governing body is focused on preparing the organization for the economic development and
cooperation profits shifting and base erosion initiatives.
This paper evaluates one of the recent fundamental changes, which were the issuances of
major guidelines and regulation on tax incentives. This regulation is aimed at amending the
new legislation, which is inclusive of the substantive necessities of the pertinent tax
incentives. In the Malaysian Tax Regime, continual refining and updating of tax incentive
will be evident considering the adherence to the set international taxation standards. There are
benefits that are evident from the tax incentives and thus the government is expected to
launch specific measures meant to assess long-lasting quantitative and qualitative costs,
including various forms of projects which are eligible for tax incentives. Lastly, this paper
will evaluate and compare the tax incentives in Malaysia and other countries considering the
intensive and systematic study conducted on the country’s economy.

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Introduction
The Malaysian government initiated an R&D tax incentive framework in 1982, which
was a 133% elevated inference that progressively increased the merits to welcome globally
competitive double deductions (200%) in 1986. The rate of the corporate tax for industries
residents in the country is 25%, which imply that the double rate deductions afford the
standardized tax saving level represented by 25% relevant on the taxpayer R&D expenditures
(Desai, Dharmapala & Singhal, 2010). In that regard, this report will identify the various
types of tax incentives for the R&D offered by the government of Malaysia. Moreover, this
research will evaluate the effectiveness of the incentives and their social and economic
benefits. Lastly, the paper will compare the incentives with other countries.
Types of R&D Tax Incentives
The R&D tax incentives in Malaysia are:
- The double deduction, which are applicable to the in-house and contract R&D.
- The pioneer status that givens complete income tax exemptions for a decade.
- Investment taxation allowance, and
- Tax exemption that entails the exemption from the import duty, sales tax, income tax
and the excise duty.
These types of R&D tax incentives are applicable broadly in the Malaysian business
activities, including the in-house and contract R&D (Gaertner, 2011). Moreover, the
importation of materials for research and development aims and commercialization of
findings are also government by these incentives.

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Target
Different R&D tax incentives have various targets. The double deduction that
includes the in-house R&D has its target audience in the companies that undertake the in-
house research and development (Kelders & Koethenbuerger, 2010). The double deduction,
which includes the contract R&D, focusses on industries which execute the distribution of
funds, payment and donations to the utility of service of accredited research companies or
institutions, contracting R&D organizations and R&D industries. The tax exemption
representing the pioneer status has its target audience on contracting R&D industries and
R&D organizations.
The indirect taxation exemption dedicated on the machinery importation and material
utilized for research obligations has its target audience on industries undertaking the in house
research, including other acceptable research activities (Kraal, 2019). The tax deductions and
the pioneers’ status for business commercialization on research findings target the investors
who invest in secondary industries specialized in commercialization of R&D findings,
including the subsidiaries industries that specialize in the commercialization of these
findings.
Potential Benefits and Problems
The R&D tax incentives have a number of benefits and possible problems. One of the
benefits is the industries can possibly deduct about 2005 of eligible research and development
expenditures considering the number of approves research tasks in reference to the
organizational financial health. The eligible industry can also decide to consider the ITA
composing the 50% on acceptable capital funds realized within a decade. This is the benefit
which can offset over 70% of a company’s statutory financial income (Shazmin, Sipan &
Sapri, 2016). An application need to be conducted to the MIDA and industries may then be
eligible for an alternative ITA incentive imposition considering the MIDA’s approval.

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Another benefit to the government is that the expenditure of the revenue which has
been realized by an organization for research effort undertaken for the company needs
approval by the government. Since these research activities are carried out in the country, the
government benefits from the business operations. Basically, an industry applying for
research double deduction needs to prepare adequately and liaise with the relevant authorities
to complete management of the overall R&D application procedure (Liakhovets, 2014). The
main reason for this is that the R&D double deductions application needs to be lodged
following the end of the present financial year. A total taxation exemption on the available
statutory income for a period of five years, which represents the contracting R&D industries
of the ITA rates at 100% on capitation expenditures capitalization realized in a decade, is
offset over 70% of the statutory income.
A problem with the R&D tax incentives is that when an organization fails to avail
itself for an incentive (e.g. ITA), the other related industries will enjoy the double deduction
on payment having been made for the research project. Industries can be eligible for an
alternative round of the ITA incentive with the approval of the MIDA only. The contracting
R&D industry is noted as the sector which provides research services in the country to non-
related industries. Contrary to that, the R&D sector delivers R&D services in the country to
the relevant related company. Approximately 70% of the industry’s income needs to be
obtained from the research activities and about 50% meant for the manufacturing industry
and 5% for the agricultural department (Reynolds & Rohlin, 2013). Moreover, the research
workforce needs to have competent and qualified individuals fit to perform R&D and other
technique obligations.
Comparison with Other Countries
Malaysia has a wide-range of R&D tax incentives compared to other nations, which
encourage investments and re-investments in the country. Resultantly, the country encourages

R&D TAX INCENTIVES 6
foreign direct stakeholders and domestic stakeholders in various business sectors. The tax
incentives are applicable in the induction and facilitation of critical governmental, economic
and social activities. These incentives facilitate the behaviour of various businesses desirable
in the Malaysian economy and society. The government has enacted a considerable number
of tax incentives, which encourage various forms of economic activities in the country (Lin &
Lo, 2012). Different tax incentives in the county eliminate part of a business’s burden during
transactions. In the country, the corporate rate of taxing is capped at approximately 25%,
which is globally accepted. Companies are eligible for a particular tax incentive that might
only cater for an average possible rate of tax at 7.5%, which about 30% of the industry’s
profits subjected to taxation.
The emergent economic health of the Asian Pacific regions implies that many
industries are making it a priority to launch business in Malaysia hence creating regional
hubs. Nonetheless, complexity and diversity in Asian Pacific region poses a significant
challenge for other international business. This is mostly evident in the operation of the
region’s R&D tax standards and regulation frameworks. In the internationally mobile
business, research and development investment is considered as a fundamental factor that
enhances economic growth, skills and job development. The Malaysian government
recognizes the relevance of tax benefits in encouraging organizations to invest significantly in
intensive technologies.
The following developments are available in Malaysia compared to other countries:
- The state has extended R&D tax incentive framework for more than 3 years
- Readiness of the government to introduce need R&D grants schemes.
- Introduction of additional benefit for medium and small companies

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Conclusion
In conclusion, the R&D tax incentives provide a recommendable deduction from the
company’s expenditure, which is non-capital in nature. Moreover, the evident benefits of the
country’s incentives enable industries to conduct a scientific research connected to business
activities and undertaken by respective taxpayers. This evaluation is fundamental to enhance
business operation in Malaysia, including the enhancement of the value chain and quality of
exports of manufactured products. The Malaysian government has significantly encouraged
and promoted R&D activities in various business sectors.

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References
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