Malaysia: Regulatory Compliance For The Manufacturing Industry In Malaysia

The manufacturing industry in Malaysia is governed by the Industrial Co-ordination Act 1975. The Industrial Co-ordination Act 1975 imposes several requirements on companies that are, or intend to be, involved in the manufacturing industry.

The compliance requirements are imposed to facilitate proper regulation of the manufacturing industry by relevant authorities. It also ensures that companies manufacture products that are not at odds with national economic and social objectives. It further encourages an orderly development of the manufacturing industry and minimises manufacturing activities and practices that would be potentially harmful to society, such as hazardous waste management, pollution and other environmental concerns. This article explores the regulatory compliance aspect of the manufacturing industry in Malaysia.

Manufacturing Activities

The term "manufacturing activity" is defined by the Industrial Co-ordination Act 1975 as follows:

Compliance for the Manufacturing Industry

Regulatory Authority

The Ministry of International Trade and Industry ("MITI") strives to promote and strategize Malaysia's global competitiveness in the international trade industry. The Malaysian Investment Development Authority ("MIDA"), under the purview of the MITI, is the principal agency overseeing, promoting and coordinating the development of the manufacturing industry in the country. MIDA is tasked with evaluating applications for, amongst others, manufacturing licences, and ensuring regulatory compliance with the relevant laws and rules and regulations. The Industrial Co-ordination Act 1975 sets out the requirements to be satisfied for carrying on any manufacturing activity. Any person intending to carry on manufacturing activities in Malaysia must apply for a licence pursuant to the Industrial Co-ordination Act 1975.

Approvals & Licences

Any person intending to carry on any manufacturing activity is required to make an application for a manufacturing licence. Under Section 4 of the Industrial Co-ordination Act 1975, an applicant may submit one application for one or more products manufactured in one or more places of manufacturing activity but a separate licence shall be issued for each place of manufacturing activity. However, the approval of the application will be contingent upon whether it is consistent with the national economic and social objectives and would promote the orderly development of manufacturing activities in Malaysia. The applicant must ensure that any and all information furnished in support of the application is true, correct and accurate.

An application for a manufacturing licence submitted via a normal track will usually take four weeks to receive an approval from MIDA, whereas an application for the same submitted via e-ML will usually take two days to be granted an approval by MIDA.

In addition to the Industrial Co-ordination Act 1975, MIDA has published a Guideline on Application for Manufacturing Licence¹ ("Guidelines") on its website, introducing the following criteria:

1. Companies with shareholders' funds of RM2,500,000 and above or engaging 75 or more full-time paid employees;
2. Projects must have Capital Investment Per Employee (CIPE) of at least RM140,000.00;
3. The total full-time workforce of the company must comprise at least 80% Malaysians. Employment of foreign workers, including outsourced workers, is subjected to current policies;
4. The total number of managerial, technical and supervisory levels (MTS) staff with a degree and/or diploma/certificate is at least 25% of the company's full-time employment or having a product's value-added of at least 40%; and
5. The project must be consistent with the national economic and social objectives and promote an orderly development of manufacturing activities in Malaysia.

The Guidelines are in accordance with the Industrial Co-ordination (Exemption) (Amendment) Order 1986, whereby the Minister has exempted any manufacturer with shareholders' funds of less than RM2,500,000 and with less than 75 full-time paid employees from the requirement to apply for a manufacturing licence.

The terms "shareholders' funds" and "full-time paid employees" are defined in the Guidelines as follows²:

• Paid-up capital shall be in respect of preference shares and ordinary shares and not including any amount in respect of bonus shares to the extent they were issued out of capital reserve created by revaluation of fixed assets; and
• Reserves shall be reserves other than any capital reserve created by revaluation of fixed assets and provisions for depreciation, renewals or replacements and diminution in value of assets.

The guidelines issued by MIDA towards applications for manufacturing licences can be found here.

Interim Approval Letter

An interim approval letter is a document that is issued by MIDA prior to the issuance of the manufacturing licence. The interim approval letter sets out the documents that are required to be submitted to MIDA for the purposes of the issuance of the manufacturing licence. Based on MIDA's Client Charter, the interim approval letter will be issued to the applicant within four weeks after receiving all required information. Following the delivery of the approval letter, the applicant will then be required to provide MIDA with the necessary documents as specified in the interim approval letter, together with the interim approval letter, before the manufacturing licence certificate is issued.

Exemption: Confirmation Letter

A company that does not meet the criteria as mentioned above, and who fall within the ambit of the Industrial Co-ordination (Exemption) (Amendment) Order 1986, may apply for a confirmation letter by submitting an ICA 10 form to MIDA, which provides for an exemption from the manufacturing licence approval. For the avoidance of doubt, the ICA 10 form is applicable for companies engaging in manufacturing activities that do not meet the criteria of shareholders' fund exceeding RM2,500,000 and/or not employing 75 or more full-time employees. The guidelines from MIDA towards the making of an application for the ICA 10 exemption is available here.

Grounds for Revocation of the Licence

There are grounds available to the licensing officer to revoke a manufacturing licence, all of which are as set out under Section 6 of the Industrial Co-ordination Act 1975. These grounds are as follows:

1. The licensed manufacturer has not complied with any condition imposed on the manufacturing licence;
2. The licensed manufacturer is no longer engaged in the manufacturing activity in respect of which the manufacturing licence is issued; or
3. The licensed manufacturer has made a false statement in his application for the manufacturing licence.

It is thus important that any and all licensed manufacturers continuously observe the relevant rules and regulations and the conditions, if any, that are imposed under the manufacturing licence.

Offence and Penalty

Any person who carries on any manufacturing activity without a manufacturing licence issued under the Industrial Co-ordination Act 1975 is guilty of an offence and is liable, on conviction, to a fine not exceeding RM2,000 or to a term not exceeding six months, and to a further fine not exceeding RM1,000 for every day during which such default continues.

Tax Incentives

It is an advantage for manufacturing companies to have obtained their respective manufacturing licences. These companies are required to present their manufacturing licence to obtain an exemption for import duty tax on raw materials and components that were used in the manufacturing and production of the finished goods.

Further to the above, companies that are of Pioneer Status are able to receive an income tax exemption ranging from 70% to 100% of the statutory income for five to ten years. Alternatively, companies that have acquired the Investment Tax Allowance status are entitled to an allowance ranging from 60% to 100% on their respective qualifying capital expenditure incurred within five to ten years from the date the first qualifying capital expenditure was incurred.

Companies in the manufacturing industry may submit their applications for Pioneer Status or Investment Tax Allowance via the InvestMalaysia Portal.

Conclusion

The laws and rules and regulations for the purposes of compliance are enforced strictly in the manufacturing industry by MIDA. As MIDA continuously oversees, promotes, encourages and co-ordinates the development of the manufacturing industry in Malaysia, it is extremely important for all persons engaged in manufacturing activities to be aware of and adhere to the applicable laws and rules and regulations, which include submitting an application for a manufacturing licence or the ICA 10 Confirmation Letter and complying with any and all conditions imposed on the manufacturing licence or ICA 10 Confirmation Letter that was approved or granted by MIDA.

Footnotes

1 https://www.mida.gov.my/wp-content/uploads/2020/07/20190218151715_GD_ML.pdf

2 https://www.mida.gov.my/setting-up-content/approvals-and-licensing/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.