(Tax Update) Reinvestment Allowance Common Mistakes

The Reinvestment Allowance (RA) offers a significant tax incentive for Malaysian companies committed to reinvesting in qualifying projects related to agricultural, manufacturing, and integrated activities.

Here are more common mistakes businesses make when claiming the Reinvestment Allowance (RA), based on detailed findings from the Inland Revenue Board of Malaysia (IRB):

Insufficient Supporting Documentation:

Lack of comprehensive documentation

Many businesses rely solely on purchase invoices. The absence of project papers, feasibility studies, business plans, budgets, directors' resolutions, and other relevant documents supporting the project can lead to disqualification of the RA claim.

Documentation retention

Failure to keep supporting documents for at least seven years as required by Malaysian tax law.

Misalignment of Investment and Usage

Mismatch of entities

Sometimes, the company that incurs the investment is not the same as the company that uses the plant and machinery, leading to ineligible RA claims.

Related party transactions

Claiming RA on the transfer of assets from related parties who have previously claimed RA on the same assets is a significant error, as it can be seen as double-dipping into tax benefits.

Improper Allocation of Expenditures

Benefit to related companies/directors

Claiming RA on assets incurred for the benefits of related companies or directors, rather than for qualifying business activities.

Non-Qualifying activities

Businesses sometimes mistakenly claim RA on activities or assets that do not qualify under the RA guidelines.

Issues with Payment Records

Absence of payment records

Not maintaining proper payment records to support the acquisition and use of qualified assets can lead to RA claims being rejected during audits.

Concurrent Claims with Other Tax Incentives

Overlap with other incentives

Businesses often err by claiming RA concurrently with other tax incentives like Pioneer Status (PS) or Investment Tax Allowance (ITA), without understanding the exclusivity clauses that might apply.

Lack of Detailed Project Documentation

No written or pictorial production flow

Failing to provide a written or pictorial representation of the production flow for the qualifying project, which is essential to demonstrate the direct application of the investment towards eligible activities.

Final Words

These common errors underscore the complexity of tax planning and compliance. Businesses should ensure thorough documentation, accurate allocation of expenses, and clear understanding of the IRB's regulations regarding RA.

Engaging with a tax professional can provide the necessary guidance and support to navigate these challenges effectively.

Source

Public Ruling 10/2022 Reinvestment Allowance Part 1 - Manufacturing Activity
Public Ruling 11/2022 Reinvestment Allowance Part 2 - Agricultural and Integrated Activity

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