KUCHING : Forest plantation projects are unique as they require heavy initial capital outlay at the planting period with no interim revenue for the fi rst 10 to 15 years or more depending on the species of tree planted.
“The previous tax incentives for forest plantations were not working very well predominantly due to the long gestation period of the project comprising the planting and harvesting periods,” said the honorary t reasurer of Sarawak Timber Association (STA), Philip Choo Kwong Hui in a press briefing held yesterday at Wisma STA.
In order to promote the establishment of forest plantations, the previous tax incentives granted by the government under both the Promotion and Investment Act 1965 and Income Tax Act 1967, primarily designed for manufacturing activities were considered inadequate, ineffective or even nonapplicable to forest plantation projects.
Some of the tax incentives under the Income Tax Act 1967 had even been repealed. The previous tax incentives were therefore not suitable for the forest plantation projects.
Due to the business environments that are peculiar to forest plantations, any tax incentives from the government must cover the activities from both the planting and harvesting periods.
“Broadly speaking, the tax incentives under the two new gazette orders for tax incentives issued on November 23, 2009 are tailored for both the holding company at the planting period and the plantation company at the harvesting period during the gestation period in connection with the deduction and offset in full for the amount of investment and adjusted loss carried forward respectively,” said Choo.
Choo pointed out that under the two gazette orders ; Income Tax (Deduction for Investment in an Approved Forest Plantation Project) Rules 2 0 09 and Income Tax (Exemption) (No. 10) Order 2009, a holding company and a plantation company were set up to undertake the approved forest plantat ion project for seventy six species specifi ed in the schedule of the two gazette orders.
The rule allows the holding company to deduct in full the value of investment, which is capital in nature, invested in the plantation company for the purpose of determining the adjusted income from the business until the plantation company has its first statutory income.
The investment must be for the purpose of fi nancing the approved forest plantation project.
The deduction of investment will start at the beginning of the planting period and subsequently benefit the lower income tax to be paid by the holding company.
“Based on our understanding, so far, there is no such similar tax incentive for other sectors of industry,” Choo highlighted.
As for the exemption order, it allows the plantation company to offset in full the amount of adjusted loss carried forward during the plantation period with only the statutory income derived from the harvesting period until the adjusted loss is fully utilised in ascertaining the aggregate income for the period of ten consecut ive years for new forest plantation projects and fi ve consecutive years for an expansion of plantation projects.
“Compared with the pioneer s tatus of the plantation project, the plantation company is granted 100 per cent tax exemption of its statutory income for a normal period of five years starting on ‘production day’ which is taken to be the day on which harvesting of the first logging block commences.
“There can be a situation where the plantation company will continue to incur losses during the fi veyear applicable period,” he said.
According to him, the pioneer status is generally ineffective as the benefit will be insignifi cant since plantation projects have long gestation periods and income can only be generated upon commercial harvesting of the trees until after 10 to 15 years later.
“For the investment tax allowance (ITA), the plantation company can claim 100 per cent ITA for qual i fying capi tal expenditure which will only be used in future when the plantation starts to make profi t,” Choo said.
Choo added that the ITA incentive is given over a fi ve-year period and is not an effective encouragement to investors as the expenditure for forest plantations continue to be incurred throughout the entire gestation period which can be 10 to 15 years or more.
The variation proposed by the STA to the exemption order was that the amount of adjusted loss to be offset against the statutory income should be extended to include income from all other sources, particularly from the cash crops.
“The reason is that one of the conditions specifi ed in the licence is to allow the LPF (licenced planted forest) holders to utilise 20 per cent of the licensed area for the establishment of cash crops for the maximum of fi rst 25 years of the licence period in order to generate income to ease the cash flow of LPF holders. Oil palm is the most popular cash crop,” explained Choo.