MALAYSIA’s Inland Revenue Board (IRB) had in the past taken the view that intangible assets do not qualify as an expense deduction or eligible for capital allowances until 2018 when the courts ruled that intangible asset such as a database containing core deposit and credit card customer information is “plant”. This was short-lived through a change in the law from 2021 to specifically exclude intangible assets from the definition of “plant”.
Having realised the importance of intellectual property for most businesses, especially those in the service industry, the technology sector, and the knowledge-based industries, the authorities have reversed their position and allow intellectual assets to be regarded as “plant”, therefore qualifying for capital allowance. This was announced in the Finance Bill 2023.
This will be welcomed by industries as monies spent in buying intangible or developing intangible assets internally is significant. In the past, taxpayers were denied the right to claim a tax deduction.
What are intangible assets?
They are assets that are not physical in nature but identifiable and provide alue to the business in the long run. Examples of intangible assets will include patents, copyrights, franchises, trademarks, brand names, licences, concessions, customer and supplier lists, know-how, software, business names and connections, etc. There is no definition in the tax law.
Accountants have attempted to recognise intangible assets in the accounts. Their criteria are that the assets must be identifiable, separable from the entity, or it arises from contractual or legal rights regardless of whether those rights are transferable or separable from the entity. The accountants also require the intangible assets to generate future economic benefits, and the cost of the assets can be measured reliably.
The general tax principle is tax liabilities are determined based on the tax law. The accounting treatment is only used as a guidance in interpreting the tax law.
Where are the problems?
If an intangible asset is acquired and it qualifies as plant (i.e. it is an apparatus used for carrying on the business activities), capital allowances will be available. Difficulty will arise where the intangible asset is internally generated because in most cases it will not be recognised in the accounts because it is unable to meet the criteria set by the accounting standards.
However for tax purposes, a separate calculation may be needed to identify the costs of the intangible assets to make the claim. There are no rules to provide guidance. A reasonable approach will be to identify the costs and it is used in carrying on the business to generate income, and there will be a market value for such an asset. The problem here is whether the asset can be separated from the business and sold. If it cannot be separated from the business, there may be difficulty in justifying the claim for capital allowances as plant.
You can expect the IRB, despite the change in the legislation, to challenge claims for intellectual property which is on the borderline, especially internally generated intellectual property.
The change in the legislation will negatively impact the IRB’s current position where it has taken the view that payments made to acquire permanent benefits such as concessions, licences, contracts, etc, are capital in nature and do not qualify for an expense deduction.
The Finance Bill 2023 now allows taxpayers the “room” to claim such payments as intangible assets. This will benefit the taxpayer unless the finance minister specifically excludes such items from being eligible for capital allowances, which is provided for in the Bill.
To reduce conflicts between taxpayers and the IRB, it will be advisable to engage industry and professional bodies to agree the scope of the definition of intangible assets and how it will be recognised for tax purposes.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
