Tax Incentives for Pharmaceutical Manufacturers in Malaysia: How Can Businesses Qualify?
Malaysia will continue to accept applications for tax incentives from pharmaceutical manufacturers until December 31, 2022, as the government looks to strengthen the country’s position in the global pharmaceutical value chain and promote its healthcare industry as an attractive foreign investment destination.
To be eligible, manufacturers must fulfill a variety of requirements ranging from collaborating with local higher learning institutions, incurring the first qualifying capital expenditure within a year of approval, hiring a minimum number of local employees, and undertaking research and development (R&D) activities, among others.
400 million ringgit (US$94 million) in approved investment, surpassing the previous highest full-year figure in 2017. In addition, exports of pharmaceutical products increased around 24 percent in 2021 from 2020, totaling 2.42 billion ringgit (US$570 million).
What are the available tax incentives?
Both new and existing qualified manufacturers will benefit from the following tax incentives:
- An income tax rate of zero to 10 percent income tax rate for the first 10 years; and
- A 10 percent income tax rate for the next 10 years.
How can businesses qualify?
To be eligible for the tax incentives, manufacturers will have to comply with several requirements.
First qualifying capital expenditure
The company must incur its first qualifying capital expenditure within one year from the date of approval. This excludes land.
Qualifying capital expenditure
The company must incur the full amount of its full capital expenditure within five years from the date of the first qualifying capital expenditure.
The company must possess a manufacturing license from the Ministry of International Trade and Industry. Moreover, the manufacturing of pharmaceutical products must be conducted in Malaysia, including product formulation.
Companies that carry out fill and finish activities are not eligible for this incentive.
Company incorporation should be in line with the Companies Act of 2016.
Development of drug formulation
Pharmaceutical manufacturers are to carry out drug formulation and submit their drug formulation registration to the Malaysian National Pharmaceutical Regulatory Agency within 10 years of being approved for the incentives.
Research and development activities
Recipients of the incentives must undertake R&D activities. The company must also establish and develop R&D programs with higher learning institutions in Malaysia.
The company’s full-time employees must be at least 80 percent, Malaysian citizens. Further, at least 20 percent of the employees are to hold a degree or diploma in science or technical fields.
A minimum of 15 percent of the full-time employees must be paid at least 5,000 ringgit (US 1178) per month.
Collaboration with local higher education institutions
Apart from collaborating in R&D activities, the company must develop and provide internship programs in cooperation with local higher education institutions such as universities or polytechnics. At least six Malaysian interns per year with a training period of three months are to be taken throughout the incentive period.
The manufactured product’s value-added is at least 40 percent.
Corporate social responsibility activities
The manufacturers have to undertake corporate social responsibility activities (CSR) with at least one hospital or health institution in Malaysia recognized by the Ministry of Health.
How do the incentives benefit Malaysia’s pharmaceutical industry?
Developing local talent
The qualifying criteria for the tax incentives aim to push pharmaceutical manufacturers to hire and develop the local workforce, particularly in the field of science and engineering.
Malaysia’s well-educated and skilled workforce is the foundation of its economic growth. There are over 1,400 vocational schools, and more than 20 and 50 public and private universities respectively. Moreover, English proficiency levels are high and the government’s Education Blueprint 2015-2025 allows industrial sectors to assist in developing the curriculum design in addition to partnering with programs like internships/apprenticeships, specialized training, and real-life simulation programs.
Such initiatives can help enhance labor productivity to rival the more established manufacturing hubs such as Singapore and Thailand.
High-value local manufacturing hub
Malaysia’s pharmaceutical industry is one of several new growth areas being targeted by the government for promotion and development. The increasing demand for medical services in the country, particularly with the onset of COVID-19, has driven more developments in the pharmaceutical industry. As such, the tax incentives can support Malaysia’s transition up the global pharmaceutical supply chain.
Malaysia has also been successful in attracting multinational pharmaceutical and medical devices firms who are outsourcing their manufacturing operations in Southeast Asia. For instance, Biocon, a biopharmaceutical company, established a US$350 million insulin manufacturing facility in 2010 which made it the highest foreign pharmaceutical investment at that time.
New areas of growth in addition to pharmaceuticals include the production of medical imaging devices, such as magnetic resonance imaging (MRI) machines, x-rays, computed tomography (CT) scanners, and nuclear imaging systems.
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