Research & Development is essential to a company’s long term growth. It is not only applicable for a company, but to each country as well. Malaysia aims to be a high-income country by 2020, and this can only be achieved if most companies in Malaysia embark in R&D activities. Similar to a company, a country also study their competitors in the likes of other countries in the same region and across other regions and identify its unique selling proposition (USP) to be able to stay ahead. Countries like the USA, South Korea, Japan and Taiwan did not just become developed countries just like that. They had very well-planned strategies. They first used the approach of adapting technologies from other countries as this is the fastest way to grow. They will copy and learn technologies from other countries and work on the improvements to suit new problems. Countries like Japan and South Korea are able to break away from this stage and enter the stage whereby they perform their own R&D to create their own technologies. This is the real and ONLY solution to becoming a high income country because it is sustainable. Malaysia is still embarked in the adaptation stage and only a few start-ups companies or mid-sized companies really step into the R&D stage. Most R&D activities in Malaysia now are concentrated in the universities and government related research centers whereby they have ample government grants. However, this is still not sustainable because the government cannot keep on supplying them with financial help. They have to keep their R&D activities financially independent.
Looking into the industry’s mindset, the main reason behind not embarking on R&D activities within the company is mainly due to financial reasons and the mindset of the need to see fast returns. Many companies that I have talked to mentioned that they do not have much money to perform R&D activities, or they’d rather spend the money on “more pressing matters”. Others will tell me that doing R&D takes a long time to see any results, and furthermore, will not necessarily produce any results, hence not a good investment to make. They would rather use the “safe” approach of copying already available products and “hope” to get returns from price wars or cheaper production cost, hence the need for so many foreign workers.
This article will be focusing on the first obstacle to perform R&D, which is the financial hurdle. There are two methods to provide financial assistance to companies to promote R&D activities: grants or loans; and tax incentives. In Malaysia, there are many grants and loans from various government agencies and private lenders to promote not only R&D activities, but also to develop prototypes, product marketing, process improvement, product export, etc. For more information about grants or loans available in Malaysia, please do contact us.
However, the focus of this article is on tax incentives for companies performing R&D activities. According to PwC’s report on tax incentives to promote innovation in 2011, companies in Malaysia were eligible for a five year gradual claim for expenditure incurred on the acquisition of intellectual property while small and medium enterprises (SMEs) were eligible for a tax deduction for expenditure on registration of patents and trademarks from 2010 to 2014.
According to PwC’s 2014 Budget special edition report dated 25 October 2013, companies that invest to acquire technology platform in bio-based industry is eligible for tax deduction. Incentives also included in the biotechnology field are import duty exemption on R&D equipment for pilot plants for pre-commercialization in Malaysia and special incentive for human capital development for Centre of Excellence for R&D.
According to the Malaysian Science and Technology Information Centre (MASTIC), companies are eligible for double deduction for proceeds generated from R&D activities that is approved by the Ministry of Finance (MoF). Companies who provide contribution in cash to approved research institutes; or provide payment for service from approved research institutes, companies or contract R&D companies can also claim for double deductions from the business’ income.
According to Deloitte Tax Expresso dated October 2013, 2014 also provides tax incentive for anchor companies under the Vendor development programme (VDP), whereby double deduction is eligible for activities such as product development, R&D, innovation and quality improvement; obtaining ISO/Kaizen/5S certification to increase vendor capabilities; and vendor skills training, capacity training and financial management system. These anchor companies need to sign an MoU with the Ministry of International Trade and Industry (MITI) under VDP and cost will be capped at RM300,000 per year. This scheme was from 2014 to 2016.
It is important for companies to take advantage of the tax incentives given for activities related to R&D and intellectual property in order to start embarking in R&D activities and provide long term business and technology sustainability to stand out among competitors. All companies, be it SMEs, enterprises or public listed companies need to look into their respective strength, leveraging on their existing resources, to perform real R&D activities to launch world class products. Companies need to look at other global players rather than just within Malaysia in order to come up with world class products. Don’t just take existing products in the market, call up some engineers and ask them to improve the existing products and call it as an R&D activity. Real R&D activity should involve more strategic market research, competitor analysis, and basic technology research in order to come up with products which are really unique.
It is important to note that the above tax incentives are meant for information purposes. For latest information about tax incentives, please consult your respective tax consultant.