Highlights on Budget 2022 Proposals (Part 4) - Extension of Additional Reinvestment Allowance Incentive and Time Limit for Carry Forward of Unabsorbed Business Losses

Highlights on Budget 2022 Proposals (Part 4) - Extension of Additional Reinvestment Allowance Incentive and Time Limit for Carry Forward of Unabsorbed Business Losses

As you may recall, the following proposals, among others, were announced in the Budget 2022 / Finance Bill 2021:-

Extension of Additional Reinvestment Allowance Incentive
Extension of Time Limit for Carry Forward of Unabsorbed Business Losses

With the gazette of the Finance Act 2021 on 31st December 2021, we are pleased to highlight below the salient points of the above subject matters that may have impacts on your company's tax affairs.

1. Extension of Additional Reinvestment Allowance Incentive

As you are aware, qualifying capital expenditure on a factory, plant or machinery incurred by a company for the purpose of expanding, modernising, diversifying or automating its existing business in respect of a manufacturing activity or agriculture activity (excluding rearing chickens and ducks) ["qualifying project"] will be eligible for reinvestment allowance ["RA"] claim. RA is given based on 60% of qualifying capital expenditure incurred for the qualifying project which can be set off against 70% of the statutory business income for each year of assessment or 100% of the statutory business income in the relevant year if a company has achieved the required level of productivity based on a "process efficiency ratio" prescribed by the Ministry of Finance.

The eligibility period for claim of RA on qualifying capital expenditure incurred by companies in respect of their qualifying projects (plus extension of the eligibility period) are as below:-

RA is given for a period of 15 consecutive years of assessment commencing from the year of assessment ["YA"] in which the first RA claim is made.
For companies that have exhausted their eligibility to RA claim upon expiry of the 15-year incentive period, they are entitled to make a claim for Special RA for up to 3 years of assessment i.e. from YA 2016 to YA 2018 (as announced in Budget 2016).
For companies whose 15-year incentive period and/or Special RA period have expired, Additional RA incentive for up to 3 years is available i.e. from YA 2020 to YA 2022 (as announced in the PENJANA Stimulus Package on 9th June 2020).
Based on the recent Budget 2022 announcement / Finance Bill 2021 and the Finance Act 2021 that has been gazetted on 31st December 2021, the above Additional RA incentive given for up to 3 years from YA 2020 to YA 2022 shall be extended for 2 more years i.e. until YA 2024. Thus, the total period eligible for the Additional RA incentive will be for a period of 5 years (i.e. from YA 2020 to YA 2024).

Additionally, we provide below the time limit for carrying forward of unutilised RA:-

Unabsorbed RA can be carried forward for a period of 7 consecutive years of assessment upon expiry of the 15-year incentive period.
Accumulated unabsorbed RA as at YA 2018 (applicable in cases where the 15-year incentive period has expired / Special RA up to YA 2018 has been claimed) can be carried forward for 7 consecutive years of assessment i.e. until YA 2025.
Any unabsorbed Additional RA as at YA 2024 (accumulated during the 5-year period from YA 2020 to YA 2024) can be carried forward for 7 consecutive years of assessment i.e. until YA 2031 [Finance Act 2021].

Any remaining unutilised amount after the end of the 7-year period mentioned above will be disregarded.

2. Extended Time Limit for Carry Forward of Unabsorbed Business Losses

With effect from the YA 2019, the carry forward of the unabsorbed business losses ["UBL"] ascertained in a year of assessment to set off against the aggregate of statutory business income shall be restricted to a maximum of 7 consecutive years of assessment (as announced in Budget 2019). Any UBL remaining at the end of the 7-year period shall be disregarded. Under the transitional provisions (i.e. applicable to those companies with UBL accumulated up to YA 2018), the UBL as at YA 2018 can only be allowed to be carried forward to set off against the aggregate of statutory business income up to YA 2025. Any amount which remains unutilised by YA 2025 shall be disregarded.

In the announcement of the Budget 2022 / Finance Bill 2021, it was proposed that the time limit of 7-year period for carry forward of the UBL be extended to 10-year, which shall take effect retrospectively. Therefore, with the enactment of the Finance Act 2021, the UBL will be allowed to be carried forward as follows:-

UBL as at YA 2018 can be carried forward to set off against the aggregate of statutory business income up to YA 2028. Any amount that has not been deducted at the end of the YA 2028 shall be disregarded.
UBL ascertained for the YA 2019 onwards shall be carried forward for a maximum of 10 consecutive years of assessment immediately following that year of assessment. Any amount that has not been deducted at the end of the 10-year period shall be disregarded.

It is noteworthy that no amendments have been made to Section 25 of the Promotion of Investments Act 1986 which deals with the 7-year limitation for carry forward of unutilised pioneer losses.

For further information on Budget 2022, please refer to our Tax Flash - November 2021 (Special Edition) issue.

Please do not hesitate to contact us if you need any clarification on the foregoing.