Updates on Tax Treatment of Research and Development (“R&D”) Expenditure

On 29 December 2021, with the issuance of Public Ruling (“PR”) No. 10/2021 - Tax Treatment of Research and Development Expenditure Part II – Special Deductions -, the IRBM updated their guidelines with regard to expenditure that qualifies for special deduction in respect of R&D activities.

The updated ruling specifies that any cash contribution or payment for the use of services that are capital in nature will not qualify for the double deduction under section 34B of the ITA. Revenue expenditure must be incurred for an “approved” qualifying R&D activity in the basis period to qualify for a double deduction under section 34A of the ITA.

In addition, effective 1 January 2021, if the payment for R&D expenditure undertaken outside Malaysia (outsourced) amouonts to more than 30 percent of the total allowable R&D expenditure, the total expenditure incurred will not qualify for a double deduction. If the project is outsourced to any service provider, it is important for the R&D company to find out how the product/process is developed. The R&D and the service provider have to identify and determine any novelty or technical risk involved and the systematic, investigative and experimental (“SIE”) studies for the purpose of claiming the double deduction.

The updated ruling also specifies that payments made by the holding company for the use of the service on behalf of a subsidiary or associate company which is paid to the R&D company will not be allowed as a double deduction under section 34A of the ITA either. R&D companies are also not entitled to claim a double deduction for research expenditure incurred on behalf of a subsidiary or associate company.

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Updates on Tax Treatment of Research and Development (“R&D”) Expenditure

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