Investment Promotion for Aerospace in Malaysia

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Investment Promotion for Aerospace in Malaysia

By Norhisham Abd Bahrin*

  

According to Boeing’s Current Market Outlook 2016-2034, it is forecasted that there will be a need for over 38,000 airplanes valued at USD 5.6 trillion with approximately 40% of all new airplanes being delivered to airlines based in the Asia Pacific region. Out of the 38,000 airplanes, approximately 26,730 new airplanes delivered will be single-aisle airplanes, further stimulating growth for low-cost carriers.

 

Based on latest publicly available figures, the Malaysian aerospace industry generated RM19 billion in revenue, attracted RM4.2 billion in investment and created 19,500 jobs locally in 2014. During the launch of the National Aerospace Industry Blueprint 2015-2030 (“Blueprint 2030”), the Malaysian Government stated that the aerospace industry, which includes aircraft maintenance, repair and overhaul (MRO) services and high-tech components manufacturing, is projected to generate a total revenue of RM55.2 billion and create 32,000 high skilled jobs by 2030. The main objectives of the Blueprint 2030 are as follows:

 

            a)       To make Malaysia the number 1 aerospace nation in South East Asia (“SEA”);

 
            b)      

To capture at least 5% of the global market share of MRO services;

 
            c)      

To capture at least 3.5% of the global market share of engineering and design services;

 
            d)      

To become self-reliant in integration and upgrading of strategic assets;

 
            e)      

 To become the top aerospace training and education centre in SEA by 2020;

 
            f)      

To become the top aerospace manufacturing centre in SEA by 2025.

 

 

 

In order to achieve the objectives set under the Blueprint 2030, there are various initiatives led by the Government through the Ministry of International Trade and Industry (MITI), the Malaysian Investment Development Authority (MIDA) and the Malaysian Industry-Government Group for High Technology (MIGHT). The initiatives encompass the provision of tax incentives to companies in the aerospace industry, construction of suitable infrastructure and modernising current aviation laws.

 

Budget Malaysia 2016

 

Under the Budget Malaysia 2016, MRO services companies will be allowed to participate in the Approved Trader Scheme which exempts qualified companies from paying Goods and Services Tax (GST) on goods imported in the course or furtherance of its business.

 

Besides tax incentives for MRO services companies, it is proposed that Independent Conformity Assessment Bodies (“ICAB”) companies in the aerospace sector receive the following tax incentives:

 

            a)         new ICAB companies: 100% income tax exemption for a period of 5 years or an investment tax allowance (“ITA”) of 60% on qualifying capital expenditure for a period of 5 years which can be offset against 100% of its statutory income; and

            b)        

existing ICAB companies: ITA on 60% on qualifying capital expenditure for a period of 5 years which can be offset against 100% of its statutory income.

 

The incentives for ICAB companies in the aerospace sector is intended to strengthen the ecosystem of testing, inspection, validation and certification processes led by the Standards and Industrial Research Institute of Malaysia (SIRIM) in which the proposed activities are critical to the industry but may not be available in Malaysia.

 

Tax Incentive Packages for Aerospace Industry

 

The 2 main tax incentives for the aerospace industry are as follows:

 

          a)        

Pioneer Status (“PS”)

A company with PS is granted an income tax exemption of 70% up to 100% of statutory income for a period of 5 to 10 years. Unabsorbed capital allowances and accumulated losses incurred during the pioneer period can be carried forward and deducted during the post PS period.

          b)        

Investment Tax Allowance (“ITA”)

A company granted with ITA is given an allowance of 60-100% on qualifying capital expenditure (e.g. factory, plant, machinery or other equipment) incurred within 5 to 10 years from the date the first qualifying capital expenditure is incurred. MIDA recommends companies to opt for ITA especially if the company plans to implement projects which require a long gestation period and high capital expenditure.

 

 

The following table outlines the type of tax incentives available for the aerospace industry according to specific sectors:

 

No.

 

DESCRIPTION

1.

  • Research, design and development
  • Systems Integration
  • Manufacturing and Assembly

Tax exemption for 5 years and up to 15 years subject to evaluation by MIDA in terms of investment level, value added, technology and other criteria.

2.

General Aviation

ITA of 100% on the qualifying capital expenditure incurred within 10 years subject to investment in fixed assets more than RM150 million within 5 years.

3.

  • MRO Services
  • Expansion, modernization or automation of existing business or diversify existing business into any related product within the same industry

Income tax exemption of 100% of statutory income for up to 15 years. Subject to evaluation by MIDA in terms of investment level, value added, technology, level of strategic and economic impact, and other criteria.

ITA of 60% on the qualifying capital expenditure incurred within 5 years.

4.

Aerospace Training

Double deduction on expenses incurred by employers in training their employees.

5.

  • Certification
  • Standard Development
  • Testing & Evaluation
  • Licencing

PS with income tax exemption of 100% of statutory income for a period of 5 years; or

ITA of 60% on the qualifying capital expenditure incurred within 5 years.

 

6.

Non-specific

Import duty & sales tax exemptions on:

  • Aircraft & Aircraft Parts
  • Components Assembler
  • Manufacturer
  • Industry Specific Machinery/ Equipment/ Spare Parts
  • Raw Materials/ Components Investment Aid
  • No restriction on foreign equity ownership
  • No restriction on repatriation of funds

 

Economic Transformation Programme

 

The Economic Transformation Programme (“ETP”) launched by the Government in 2010 was formulated to achieve the Government’s goal to have Malaysia elevated to developed-nation status by 2020.

 

There are 131 entry point projects (“EPP”) listed under the ETP that have the potential to bring significant economic impact to Malaysia. The 2 EPPs related to the aerospace industry are as growing MRO aviation services and making Malaysia the hub for aerospace OEMs in South East Asia (“Aerospace EPPs”).

 

In terms of infrastructure, one of the initiatives under the Aerospace EPPs is the construction of the Asia Aerospace City (“AAC”) which offers a complete business ecosystem to OEM manufacturers through world-class facilities and infrastructure including R&D incubation facilities, an academic campus and a professional development centre.

 

Another major initiative under the Aerospace EPPs is the gradual adoption of European Aviation Safety Agency (EASA) standards by the Department of Civil Aviation Malaysia (DCA). In 2014, the DCA also completed its review of the local aviation laws and will be recommending key amendments to be made in order to bring Malaysia’s aviation regulatory framework to internationally recognized standards.


Highlights of the Malaysian Aerospace Industry

 

As a result of the various initiatives by the Government, the local aerospace industry has managed to attract few key major players in the aviation industry. In 2014, global aircraft giant Airbus began its customer services operations in Malaysia serving as a gateway to all Airbus customers in South East Asia. Swiss-based MRO SR Technics began operations of its aircraft servicing facility in Shah Alam.

 

The facility supports roughly 1,200 component parts and like Airbus, the Shah Alam facility acts as a gateway for the company’s customers in the region.

 

A local high precision component manufacturer, UPECA Technologies Sdn Bhd, was acquired by Senior Plc a British aircraft and auto components manufacturer for RM415 million in 2014.

 

In relation to human capital, Asia Pacific Flight Training Bhd partnered with Lufthansa Technical Training to operate an aircraft maintenance training school which will train at least 400 students by the year 2020.

 

According to the Minister of International Trade and Industry, Datuk Seri Mustapa Mohamed, over RM4 billion investments out of a total of RM8.7 billion was approved in 2015.

 

Datuk Seri Mustapa believes that foreign direct investments will not be affected in 2016 despite Australia’s travel advisory to the country as the Government has taken steps to ensure that Malaysia remains a peaceful and civil country.

 

Conclusion

 

The Blueprint 2030 represents a renewed commitment by the Malaysian Government to further grow the local aerospace industry and global aerospace players are encouraged to take advantage of the open and business friendly environment as well as the strategic location of Malaysia in the aerospace market.

 


 

* Norhisham Abd Bahrin is a partner in Mergers & Acquisitions, Corporate Practice Group in the main office of Azmi & Associates. Norhisham can be contacted at norhisham@azmilaw.com.

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Wednesday, April 26, 2017
Aviation Law, Taxation