Tax Services

Green tax incentives for a sustainable MalaysiaPwC Alert Issue No. 86 October 2010 PP9741/10/2010 (025623)

PwC

With rising energy costs and the threat of global warming, many businesses are now recognising the benefits of using green technology to reduce their carbon footprint and minimise waste with the goal of reducing their impact on the environment.

To address the pressing issue of climate change, the Malaysian Government has also given greater focus to green developments in recent years and is making concerted efforts to encourage Malaysians to embrace green technology. This is evident through some of the measures implemented by the Malaysian Government which reveal the Government’s intention to stimulate the adoption of green technology. These measures include:

Restructuring of the Ministry of Energy, Water and Communications to the •Ministry of Energy, Green Technology and Water (KeTTHA) in April 2009

Launching of the National Green Technology Policy in July 2009 with a •National Green Technology Council, chaired by our Prime Minister, Datuk Seri Najib Razak to accelerate the development of green technology in Malaysia

Introduction of a series of tax incentives to encourage the public and •private sectors to invest in green technology

Establishment of the Green Technology Finance Scheme totalling RM1.5 •billion for companies that supply and utilise green technology

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What is green technology?

Green technology is defined by KeTTHA as the development and application of products, equipment and systems used to conserve the natural environment and resources, which minimises and reduces the negative impact of human activities.

What are the current tax incentives for green technology?

Prior to Budget 2010, tax incentives were given to companies which generate energy from renewable sources and for energy conservation activities. The tax incentives are summarised in Tables 1 and 2 below.

A company qualifying for and wishing to enjoy any of these tax incentives will have to submit an application to the Government authorities (i.e. Ministry of Finance or Ministry of Industrial Development Authority (MIDA)) before 31 December 2010 as these tax incentives expire on that date.

Some potential problems arising from the practical application of tax incentives for companies which incur qualifying capital expenditure for energy conservation for own consumption (energy efficiency project) include:

MIDA is the one stop processing centre for this application while the •Energy Commission carries out the technical evaluation for the energy efficiency (EE) projects and products. However, there is lack of clarity as to the designated authority for certifying the cost for the EE project incentive.

It is also not clear as to what constitutes the qualifying capital expenditure •for the EE project, for example, is it the system (e.g. air-conditioner) or the EE assets (e.g. chillers)?

Table 1: Tax incentives for the generation of energy from renewable sources

Sector / Activity Corporate tax incentives Indirect tax incentives

Companies generating energy from renewable sources

Pioneer status with tax exemption of •100% of statutory income for ten years; orInvestment tax allowance on qualifying •capital expenditure incurred to be set-off against 100% of statutory income for five years.

Import duty and sales tax exemption on •equipment used to generate energy from renewable sources not produced locally; andSales tax exemption on equipment purchased •from local manufacturers.

Companies generating renewable energy for own consumption

Investment tax allowance on qualifying •capital expenditure incurred to be set-off against 100% of statutory income for five years.

Others N/A• Import duty and sales tax exemption on solar •photovoltaic system equipment for the usage by third parties be given to importers including photovoltaic service providers approved by the Energy Commission; andSales tax exemption on the purchase of •solar heating system equipment from local manufacturers.

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In addition, income received from the sale of certified emission reduction would be exempted from income tax. This tax incentive will expire on 31 December 2010.

The Green Building Index (GBI) was launched on 21 May 2009. It is the Malaysian construction industry’s recognised green rating tool, developed specifically for the Malaysian tropical climate for buildings. The GBI was conceived to promote sustainability of buildings and raise awareness among developers, architects, engineers, contractors and the public about environmental issues and our responsibilities to future generations. Buildings will be awarded the GBI rating based on six key criteria:

Energy efficiency1. Indoor environmental quality2. Sustainable site planning and management3. Material and resources4. Water efficiency5. Innovation.6.

Table 2: Tax incentives for energy conservation

Sector / Activity Corporate tax incentives Indirect tax incentives

Companies providing energy conservation services

Pioneer status with tax exemption of •100% of statutory income for ten years; orInvestment tax allowance on qualifying •capital expenditure incurred to be set-off against 100% of statutory income for five years.

Import duty and sales tax exemption on energy •conservation equipment that are not produced locally; andSale tax exemption on the purchase of locally •produced equipment.

Companies which incur capital expenditure for energy conservation for own consumption

Investment tax allowance on qualifying •capital expenditure incurred to be set-off against 100% of statutory income for five years.

Others N/A• Import duty and sales tax exemption on EE •equipment (e.g. high efficiency motors and insulation materials) to importers including authorised agents approved by the Energy Commission; andSales tax exemption on the purchase of •locally manufactured EE consumer goods (e.g. refrigerator, air conditioner, lighting, fan and television).

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Together with the launch of GBI, the Government introduced tax incentives for GBI-certified buildings in Budget 2010 to encourage the construction of buildings using green technology. The tax incentive is summarised in Table 3 below.

Note *Not applicable to a company which has been granted investment tax allowance or pioneer status under the Promotion of Investments Act 1986 [Act 327] in respect of qualifying expenditure incurred on activity for generation of renewable energy or for conservation of energy.

It is noteworthy that there are issues for consideration relating to this GBI tax incentive, which broadly include the following:

Qualifying expenditure – Incidental costs such as GBI registration fees, GBI facilitator cost and consultancy cost are a. not included as the additional capital expenditure incurred to obtain the GBI certificate.

Qualifying expenditure – some green assets are given a reference base cost while others are not. For example: b.

Green assets Reference base cost Comments

Insulated glazing unit Tempered glass Claimable on the difference of glass rates. Base shall be of reasonable thickness and of type of glass which complies with the performance of similar window/curtain walling size.

Wall insulation NIL 100% claimable

Frequently asked questions revolve around the determination of the reference base cost and which the designated authority to determine the said cost is.

c. Qualifying person – Only a person who incurs qualifying expenditure and commences his business at the GBI building would qualify for GBI income tax incentive. Hence, property developers, private house owners who lease GBI residential properties to collect passive rental income, and first property buyers would not qualify for GBI income tax incentive.

d. GBI income tax incentive and/or stamp duty exemption is standard and is not enhanced if the GBI certified building attains a higher category, for example from Silver to Platinum category.

Table 3: Income Tax/Stamp Duty Incentives for GBI certified building

Building expenditure incurred by a person or company(Income Tax (Exemption) (No. 8) Order 2009*)

100% tax exemption on • additional capital expenditure to obtain GBI certificateSet-off against 100% statutory income•Once in a lifetime claim on GBI buildings•Incentive claimed once certificate is issued for new buildings and upgrade of •existing buildingsEffective date: Buildings awarded GBI certificates from 24 October 2009 to 31 •December 2014

Property buyers (Stamp Duty (Exemption) Order 2009)

Stamp duty exemption based on additional cost to obtain GBI certificate•

Buildings and residential properties with GBI certificate•

Applies only to purchases from developers•

First property owner only•

Effective date: Sale and purchase agreements executed from 24 October 2009 •until 31 December 2014.

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Generally, the current tax incentives for green technology in Malaysia may not be sufficiently attractive to the public and private sectors as compared to those given in our neighbouring countries. Nevertheless, the Prime Minister has indicated his commitment to sustainability, having made it a key pillar in the New Economic Model, and by announcing that Green Technology will be one of the priority areas in Budget 2011. Furthermore, following the Prime Minister’s declaration at the United Nations Climate Change Conference in Copenhagen last year to reduce Malaysia’s carbon emissions by up to 40% as compared to 2005 levels, it is clear that green technology will play an increasingly important role.

The government has actively taken initiatives to promote the adoption of green technology as part of the strategy for sustainable development. Besides showing the government's commitment to the green agenda, these initiatives also give rise to many business opportunities which should be grasped before they expire upon lapse of time.

Contacts

If you have any enquiries on Green Technology tax incentives, please contact the following:

Margaret LeeSenior Executive Directormargaret.lee.seet.cheng@my.pwc.com +603 2173 1501

Cynthia NgSenior Consultantcynthia.hh.ng@my.pwc.com+60 3 2173 1438

Where do we go from here?

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