Companies enjoy so much tax incentives as opposed to individual income taxpayers. Hopefully with the sharing of these types of information will motivate people to start their own business to enjoy such benefits unattainable on an individual level.
There are several reasons why a company would even consider to invest large sums of money into Renewable Energy, in this case, Solar Energy in Malaysia:
- The company wants to brand themselves as being on board with the green energy movement, especially if they are selling eco-related products to enhance their corporate image to win a competitive edge in a saturated market.
- The local government encourages companies to purchase solar systems by allowing solar asset purchases to be deducted from chargeable income tax under Capital Allowances (CA) and Investment Tax Allowance (ITA).
- The solar system saves companies so much money in terms of electricity bills that it pays itself after a couple of years.
- The solar system continues to save the company money in electricity bills for at least 25 years.
At the end of this section, there will be an example of tax-saving calculations for a company that purchases a solar system vs without.
Finance Lingo Recap
But first, In order to get everyone on the same page and fully understand the tax benefits, here are the simplified explanations for the financial lingo that will be used in this subject:
Earning Before Interest and Taxes. Which simply means the operating profit after deducting all costs except interests and taxes.
Capital Allowance (CA)
Selected business asset purchases that can deduct chargeable income for tax.
In Malaysia, if your company purchases a solar asset that costs MYR 1,000,000, the full asset cost can deduct your EBIT to reduce taxable income over a period of 6 years with the following formula:
|Year||Year 1 (20% + 14%)||Year 2 (14%)||Year 3 (14%)||Year 4 (14%)||Year 5 (14%)||Year 6 (10%)|
Is your income after allowable tax deductions, in this example, Capital Allowance (CA) can deduct your chargeable income.
EBIT – CA is your Statutory Income.
On a personal POV, this equates to take-home pay after all deductions.
Investment Tax Allowance (ITA)
Quick recap: Statutory Income is EBIT – CA.
For Solar, 100% of ITA (solar system price) can be used to offset 70% of Statutory Income (SI) for that year, whichever is lower.
The excess value of the system price beyond 70% of Statutory Income will be carried forward for ITA to the following year(s).
Here is a layman’s term example for the first year with a solar system price of RM 1,000,000:
|Capital Allowance Deductions (34% of system price, first year)||-340,000|
|Investment Tax Allowance (ITA). 100% of the ITA can be claimed in a year not exceeding 70% of SI.||70% of RM 2,760,000 is RM 1,932,000. However, this value is more than the asset price of RM 1,000,000. So the ITA, in this case, is only RM 1,000,000|
In the above sample, 100% of the value of the system price (RM 1,000,000) is utilized in ITA within the first year. So 2nd year onwards until the 6th year, there will be no more ITA deductions, only CA.
This is the amount to be charged for income tax after ALL tax deductions.
For a frame of reference, the max for personal income tax bracket is 28%.
Chargeable Income for companies (sdn bhd) with paid-up capital not more than RM 2.5mil:
|Chargeable Income||Company Income Tax Bracket|
For companies with paid-up capital more than RM 2.5 mil, chargeable income will be taxed at a flat rate of 24%. Source: Deloitte Malaysia.
Tax Savings With and Without Solar Asset Purchase
Here is a sample tax calculation for a company that purchased a solar system vs one without.
This company is assumed to have more than RM 2.5 mil paid-up capital (income tax flat rate at 24%).
|Purchased Solar||Did not Purchase Solar|
|EBIT||RM 3,000,000||RM 3,000,000|
|Capital Allowance (34% of |
system price for the first year)
|Statutory Income (SI)||RM 2,660,000||RM 3,000,000|
|Investment Tax Allowance (ITA). |
100% of the ITA can be claimed
in a year not exceeding
70% of SI.
|70% of RM is |
RM 1,862,000 which
is more than the solar
system price of RM 1 mil,
therefore, for ITA,
we will deduct
the full RM 1 mil
within the first year
|Chargeable Income||RM 1,862,000||RM 3,000,000|
|Income Tax Payable (24%)||RM 446,880||RM 720,000|
In this sample, the tax saved for the first year alone is RM 273,200.
Since 100% of the system price of the Solar System is claimed as ITA within the first year itself, ITA will no longer be claimed from year 2 onwards. Only CA will be claimed from year 2 to year 6.
If a company didn’t purchase a solar system, it would’ve paid RM273,000 in taxes to the government anyway for that year.
A simplified calculation to get total money saved that would otherwise be spent on paying tax: Tax saved, 1st year: 24% x (System Price + System Price x 34%)
Sample Total Tax Savings over 6 Years
The sample above was only for the first year. To figure out the total tax savings over a period of 6 years (because 100% of the solar asset price is tax-deductible under Capital Allowance spread over a period of 6 years).
Below is the detailed calculations for the entire 6 years:
- 100% of the project cost is tax-deductible within the first year itself.
- The total tax savings over that 6 year period amounts to a savings of 48% of the system cost.
There is a clear monetary advantage of purchasing a solar system for a business in Malaysia.
In my coming articles:
- I will calculate an example of how many years does it take for the tax savings to breakeven with the system purchase price. Typically it is less than 5 years for a factory.
- How much can the electricity bill be lowered with the installation of a solar system?