RESTRICTED
WORLD TRADE G/SCM/Q2/MYS/9
27January 1997
ORGANIZATION(97-0275)
Original: English Committee onSubsidies andCountervailing Measures
SUBSIDIES
Replies from MALAYSIA to
Questions posed byARGENTINA1,theEUROPEAN COMMUNITY2,KOREA3,
JAPAN4,THAILAND5,TURKEY6andtheUNITED STATES7
Thefollowing communication, dated 21January 1997, hasbeenreceived fromthePermanent
Mission ofMalaysia.
_______________
Where similar questions were posed onthevarious subsidy programmes, asingle reply is
provided forallsimilar questions.
1. Replies toquestions from Japan, Thailand, theRepublic ofKorea, theEU,andTurkey
regarding double deductions ofexpenses forexport promotion
Answer
(i) Double deduction forexports promotion expenses
Theabove incentive isprovided under theIncome Tax(Promotion ofExports) Rules 1986
anditisgiven inrespect ofapproved outgoings andexpenses incurred bymanufacturing, agricultural
andtrading companies onorafter1January 1986. Expenses allowable would include expenses on
publicityandadvertisement,provisionofsampleswithoutcharge,marketresearch,preparationoftenders
forthesupply ofgoods, travelling expenses fornegotiating orconcluding contracts, participation in
trade fairsandexpenses forthecostofmaintaining salesoffice overseas. Even though theincentive
wasintroduced withtheaimofseeking opportunities orcreating orincreasing demand fortheexport
ofMalaysian manufactured goods oragricultural produce theamount ofsubsidy granted doesnot
necessarily guarantee sales.
TheMinistry ofFinance isthefinalauthority responsible fortheincentive butforadministrative
andprocessing ofapplication purposes, thisisdonethrough theInland Revenue Board.
(ii) Eligibility criteria
Ontheeligibility criteria, every company resident inMalaysia forthebasis yearforayear
ofassessment shallbeeligible forthedouble deduction ofexpenses forpromotion ofexports. The
eligible expenses arethose incurred primarily andprincipally forthepurpose ofseeking export
1G/SCM/Q2/MYS/5,2G/SCM/Q2/MYS/4,3G/SCM/Q2/MYS/1,4G/SCM/Q2/MYS/3 &Rev.1,
5G/SCM/Q2/MYS/6,6G/SCM/Q2/MYS/7,7G/SCM/Q2/MYS/2 &Suppl.1.G/SCM/Q2/MYS/9
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opportunities fortheexport ofgoods oragricultural produce manufactured, produced, assembled,
processed, packed, graded orsorted inMalaysia.
(iii) Criteria forgranting theincentive
With regard tothecriteria forgranting theincentives, theyarebased on:-
(a) expenses incurred inrespect ofpublicity andadvertisements inanymedia
outside Malaysia;
(b) expenses directly attributable totheprovision ofsamples without charge to
prospective customers outside Malaysia, including thecostofdelivery ofthe
samples;
(c) expenses directly attributable tocarry outexport market research orthe
obtaining ofexport marketing information;
(d) expenses directly attributable tothepreparation oftenders forthesupply of
goods oragricultural produce (notbeing goods ofthesame kind and
specifications asthose regularly manufactured, produced orsupplied bythe
company) toprospective customers outside Malaysia;
(e) expenses bywayoffares inrespect oftravel toacountry outside Malaysia
byarepresentative ofthecompany orforthepurpose ofparticipating intrade
fairsortrade orindustrial exhibitions approved bytheMinister, andactual
expenses, subject toamaximum ofRM200 perday,foraccommodation and
sustenance forthewhole oftheperiod commencing withtherepresentatives
departure from Malaysia andending withhisreturn toMalaysia;
(f) expenses forgiving technical information topersons outside Malaysia relating
generally togoods oragricultural produce ofthecompany offered forsale,
excludingexpensesforgivingtechnicalinformationtopurchasersafterpurchase;
(g) expenses directly attributable totheprovisions ofexhibits fortrade fairsor
trade orindustrial exhibitions which areheldoutside Malaysia andapproved
bytheMinister;
(h) expenses forservices rendered forpublic relations workconnected withexport;
(i) expenses directly incurred forparticipation intradefairsortradeorindustrial
exhibitions approved bytheMinister other thantheexpenses specified insub
paragraphs "e"and"g"; and
(j) expenses forthecostofmaintaining salesoffices overseas forthepromotion
ofexports from Malaysia.
(iv) Termination oftheprogrammes
Malaysia would comply withtherequirements oftheSubsidies Agreement.G/SCM/Q2/MYS/9
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(v) Trade effect oftheprogramme
Since theincentive isanindirect subsidy ithasnodistortive effect ontrade. Eveniftheincentive
isutilised, itdoesnotguarantee actual export salesbecause itjusthasapromotional effect onexport
sales.
2. Replies toquestions from Japan, EU,Korea, Thailand andTurkey regarding double
deduction forexport credit insurance premium
Answers
(i) Theabove incentive wasintroduced in1986andisgiven withrespect toexport credit
insurance insured withacompany approved bytheMinistry ofFinance, Malaysia.
(ii) TheauthorityresponsibleforthisincentiveistheMinistryofFinanceandtheapplication
isdonethrough theInland Revenue Board.
(iii) Thisincentive isnotanoutright grant given tothecompanies andrecords arekept
onthenumber ofcompanies thatbenefited fromtheprogramme. Theincentive isgiven
inrespect ofpremiums onexport credit insurance taken byMalaysian companies that
export theirgoods inrisky non-traditional markets. Thetrade effect ofthisincentive
isverynegligible. Theamount ofpremium collected in1995 wasRM70.28 million
which isequivalent toUS$28.11 million.
(iv) Onthephase outoftheprogramme, Malaysia would comply withtherequirements
under theSubsidies Agreement.
3. Replies toquestions from theUSandtheEUregarding theIndustrial Building Allowance
Answer
(i) Industrial Building Allowance (IBA)
IBAwasintroduced effective fromyearofassessment 1968anditisgiven toallmanufacturing
companies fortheconstruction orpurchase ofindustrial buildings irrespective ofwhether thefinished
products aremeant fortheexport market orforlocalconsumption. TheIBAisgiven atarateof10%
initial allowance and2%ofannual allowance. Forpurchased buildings theannual allowance iscalculated
based ontheremaining useful lifeofthebuilding (buildings areassumed tohaveauseful lifeof50years)
tostore either finished goods ready forexport orimported inputs. Thisincentive wasnotnotified
because itisgenerally available andisnotspecific within themeaning ofArticle 2oftheSubsidies
Agreement. ‘
TheGovernment ofMalaysia established thebuilding allowance forwarehouses andbulk
installations toreduce theafter-tax effective costofconstructing suchbuildings. Asistrueforalltax
deductions, inMalaysia, thetaxpayers claim thededuction ontheirtaxreturns, andtheGovernment
ofMalaysia thenallows ordisallows theclaim.
Theallowance isgiven notforexport purposes onlybutforthestorage ofallfinished products
irrespective ofwhether theyareforexport orforlocalconsumption.G/SCM/Q2/MYS/9
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4. Replies toquestions from theUSoninvestment taxallowance
Answer
Thisallowance wasintroduced witheffect fromyearofassessment 1987. Theratesarebetween
60%to100% oncapital expenditure deducted against thestatutory income which mayberestricted
between 70%to100%. Since thisallowance isgenerally available, itisnotspecific andMalaysia
isnotobliged tonotify itunder theAgreement.
5. Reply toquestion from theUSonabatement ofapercentage ofnettaxable income based
onthef.o.b. value ofexport sales
Answer
Thisincentive wasintroduced in1987 andhadbeenterminated witheffect from 1.1.1994.
6. Reply toquestion from theUSonabatement of5%oftaxable income duetolocation in
apromoted industrial area
Answer
Thisincentive wasintroduced witheffect from yearassessment 1987 andisonlyapplicable
tomanufacturing companies which were already inoperation inapromoted industrial areaby31
December 1991. Theabatement isgiven forfiveconsecutive years ofassessment commencing from
theyearofassessment inwhich thefactory isinoperation inthepromoted industrial area. Theincentive
willautomatically bephased outbyyearofassessment 1997.
7. Reply toquestion from theUSonabatement oftaxable income offivepercent ofadjusted
income ofcompanies duetocapital participation andemployment policy adherence
Answer
Theincentive wasintroduced witheffect from yearofassessment 1987. Theabatement is
given forfiveconsecutive years ofassessment commencing from theyearassessment inwhich the
policy isbeing adhered to.Theincentive willautomatically bephased outbyyearofassessment 1997.
8. Reply toquestion from theUSonPreferential Financing forBumiputera
Theprogramme referred toisprobably theBumiputera Industrial Fund. TheFund wasset
upinJanuary 1993 withanallocation ofRM100 million (US$40 million). Theobjectives are:
(i) toencourage more Bumiputra (indigenous people) toventure intothebusiness sector;
(ii) tohelpBumiputra companies tosearch fornewmarket niches irrespective ofwhether
theyarefordomestic market orforexport; and
(iii) improve quality, design andtechnology ofproduct.
Themaincriteria toobtain thisfacility arethatthebusinesses havetobeowned (atleast70%)
byBumiputra andtheyhavetooperate under thevendor system, thatis,tosupply inputs orintermediate
products totheparent company.G/SCM/Q2/MYS/9
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Themaximum amount ofloanallowed isRM2.5 million (US$1 million) andtheinterest rate
applicable is5%perannum. Theauthority toadminister thefacility istheparticipating banks such
asBank Industri Malaysia, Bank Pembangunan Malaysia andallCommercial banks inMalaysia.
Thisprogramme isnotnotified asitdoesnotfallwithin themeaning ofArticle 3oftheSubsidies
Agreement.
9. Replies toquestions from Argentina, Japan, theRepublic ofKorea, Thailand, andthe
EUonExport Credit Refinancing Scheme
Answer
(i) Eligibility ofexporter
TheECR facilities consist ofpre-shipment ECR andpost-shipment ECR:
(a) pre-shipment ECR isavailable toadirect andindirect exporter tofundtheir
purchase ofdomestic inputs andoverhead expenses incurred inrelation tothe
production ofeligible goods;
(b) post-shipment ECR isavailable toadirect exporter whoexports eligible
products oncredit orusance terms ofminimum 30days; and
(c) access tothescheme issubject totheavailability ofexporter 'scredit linewith
thecommercial banks.
(ii) Eligible amount offinancing
(a) Theeligible amount offinancing under pre-shipment andpost-shipment ECR
issubject totheRM30 million administrative limitperexporter;
(b) Forthepre-shipment order-based method, theeligible amount is80percent
ofthevalue oftheexport order;
(c) Forthepre-shipment Certificate ofPerformance (CP) method, theeligible
amount offinancing thatanexporter canenjoy would beupto70percent
ofthevalue ofhisexports ofeligible products, forthepreceding 12months.
ACertificate ofPerformance isissued byBank Negara Malaysia toenable
consistentexporterwithgoodtrackrecordtoobtainpre-shipmentECRfinancing
prior toreceipt ofexport order from overseas buyer;
(d) Forthepost-shipment ECR, theeligibility amount offinancing is100percent
oftheinvoice value; and
(e) Boththepre-shipmentandpost-shipmentECRfinancing,musthaveaminimum
nominal value ofRM10,000.G/SCM/Q2/MYS/9
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(iii) Phase-out oftheECR
Answer
Bank Negara Malaysia hasrecently reviewed theECR scheme. Bank Negara Malaysia has
alsorevised theECR rateseveral times tonarrow thespread between theECR rateandother trade
financing products, especially theBanker Acceptance 'srate. Wedonotconsider thisasasubsidy
andtherefore wehavenointention tophase thisout.Theratesareconstantly reviewed toensure that
theyarecomparable tothemarket rates.
(vii) TheRates atwhich theCentral Bank provides theECR refinancing
Answer
TheECR rateispegged totheBanker Acceptance (BA) rate,which ismarket related andit
ismonitored closely byBankNegara Malaysia. Theinterest ratecharged under theECRiscompetitive
andcomparable withtheinterest rateapplicable toother forms ofshort-term trade financing i.e.the
Bankers Acceptance.
(viii) Details onthefinancing system andtheinterest rate
Answer
Apart fromtheECR, other forms oftradefinancing currently available inthefinancial market
aretheBankers Acceptances (BA), termloans, revolving credits, letters ofcredit andoverdrafts. Interest
ratesonthese loans arepegged tothebaselending rates(BLR) oftherespective commercial banks.
TheBAratesofthecommercial banks andtheECR ratesforthepastoneyearareasfollows:
Average ECR Rates
BARate (%p.a)
(%p.a)
June1995 6.95 6.00
July 7.02 6.00
August 7.14 6.50
September 7.36 6.75
October 7.53 6.75
November 7.72 7.25
December 7.85 7.25
January 1996 7.92 7.25
February 8.23 7.25
March 8.19 7.25
April 8.17 7.70
May 8.13 7.70
(ix) Products listed inthenegative listunder theECR Scheme
Products inthenegative listaresome ofthose categorized under:
(i) Mineral products
(ii) Leather products, rawhides &skins
(iii) Wood productsG/SCM/Q2/MYS/9
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(iv) Textile &textile articles
(v) Precious stones, natural orcultured stones
(vi) Basemetals andarticles ofbasemetal
(vii) Allitems under work ofart,collectors 'pieces andantiques.
10. Reply toquestions from theEUregarding theIndustrial Technical Assistance Fund (ITAF)
Answer
(i) Industrial Technical Assistance Fund (ITAF)
TheITAF isintroduced toassist theSmall andMedium Scale Industries (SMIs). SMIs are
those industries having paidupcapital oflessthanRM2.5 million which isequivalent toabout
US$1 million. Thepurpose ofITAF istohelpcompanies improve theirproduction capabilities. These
companies aremostly family operated andarenotreally geared forexport although theexport potentials
doexist. Most oftheSMIproducts aremeant forthedomestic market.
Thefundisavailable toallsmall andmedium scaleindustry companies inthemanufacturing
sector intheform ofmatching grants.
(ii) Types ofITAF
TheITAF isdivided into4types andtheyare:
(i) Consultancy Service Scheme
Thisscheme aimsatassisting theSMIs inengaging consultants services for
project diversification, technical andmanagerial promotion, andquality and
productivity improvement.
(ii) Product Development andDesign Scheme
Thisscheme aims toimprove andincrease thedesign capability oflocal
products, andthetechnological capability forproduct improvement.
(iii) Quality andProductivity Improvement Scheme
Thescheme aims toimprove andincrease theproductivity andquality of
product through acquiring newtechnology andmanagement techniques.
(iv) Market Development Scheme
Thisscheme aimstoassist SMIs toexplore newmarkets overseas through
promotion ofproducts overseas, engaging intrade fairsandtrade missions
andapplication ofcertificate forrecognition overseas.
11. Reply toquestions from theEUregarding the"Industrial Investment Allowance"
Answer
(i) Malaysia doesnothaveanyscheme called the"Industrial investment allowance". What
isavailable isthe"Industrial Adjustment Allowance". Forpurpose oftheseincentives,G/SCM/Q2/MYS/9
Page8
"industrial adjustment" hasbeendefined asanyactivity proposed tobeundertaken
byaparticular sector inthemanufacturing industry torestructure bywayof
reorganisation, reconstruction oramalgamation within thatparticular sector withaview
ofstrengtheningthebasisforindustrialself-sufficiency,improvingindustrialtechnology,
increasing productivity, enhancing theefficient useofnatural resources andtheefficient
management ofmanpower.
These incentives areavailable forindustries which arenotenjoying thepioneer status
ortheinvestment taxallowance. Theytherefore arenotspecific anddonotcome within
themeaning ofArticle 2ofSubsidies Agreement.
12. Replies toquestions from Argentina, Korea, Thailand andTurkey regarding thelocal
content requirements
(i) Whether theprogramme willbeterminated by1999
Theauthority responsible fortheincentive
Answer
TheMalaysianIndustrialDevelopmentAuthority(MIDA)istheagencyresponsibleforevaluating
applications forPioneer Status (PS)andInvestment TaxAllowance (ITA). Local Content isoneof
thecriteria usedinevaluating applications fortheseincentives. Under PS/ITA thelocalcontent criteria
willbephased outwitheffect from 1999.
(ii) Eligible criteria forgranting incentive
Companies proposing toundertake promoted activities ormanufacture promoted products are
eligible forPS/ITA. Thelistofpromoted products andactivities iswide-ranging andcovers abroad
spectrum ofindustries inthemanufacturing sector. Bothforeign anddomestic investors aresubject
tothesame listandcriteria forconsideration under thePS/ITA. Local content isonlyoneofthefour
criteria usedinevaluating applications forincentives. Theother three arethelevelofvalue-added,
theleveloftechnology usedandprospects forindustrial linkage creation. Acompany which desires
toenjoy theincentive canchoose tofulfil anytwoofthefourcriteria.
(iii) Domestic industries/sector benefited
Allindustries thatproduce products orundertake activities promoted under thepromotion of
Investments Act1986, canbenefit from thisincentive.
(iv) Theannual amount ofthesubsidy
Thelocal content requirement doesnotconfer adirect benefit orsubsidy tothecompanies
concerned. Assuch, theannual amount ofsubsidy cannot bedetermined.
(v) Thetrade effect oftheprogramme
Thetrade effect isveryminimal because localcontent isonlyoneofthecriteria though not
anecessary oneingranting theincentive.