News
Tax holidays slashed for strategic development projects
View(s):The government this week gazetted an amendment to the 2008 Strategic Development Projects Act, reducing the maximum tax holiday period granted to any such project from 25 years to 10 years.
Additionally, the Strategic Development Projects (Amendment) Bill prohibits the extension “under any circumstances” of the tax holiday period, which must commence on the certified date of commercial operations of the project, as confirmed by the Board of Investment (BOI).
The procedure for identifying strategic development projects (SDPs) is also replaced to ensure a more rigorous financial assessment before concessions are granted. While the BOI still identifies a proposed project based on prescribed criteria, it must refer the proposal to the Ministry of Finance for an ex-ante (based on forecasts rather than actual results) cost-benefit analysis.
The Ministry, using technical input from the BOI, must conduct this analysis and submit a recommendation to the BOI within one month. The BOI then grants the tax holiday and concessions only after being satisfied that the project meets the prescribed eligibility criteria and the Finance Ministry’s recommendations.
The changes were likely proposed to pacify the International Monetary Fund (IMF), which has long held that the SDP Act of 2008 should be abolished or suspended until structures and processes are in place to evaluate the effectiveness of the offered incentives—that is, to determine whether incentives previously granted under the law have delivered the intended benefits to the country.
The new provisions also increase accountability, monitoring and sanctions—establishing comprehensive mechanisms for monitoring, compliance and imposition of penalties. The measures provide for the establishment of a transparent and fair procedure for imposing sanctions.
The BOI is required to carry out ex-post (based on actual results rather than forecasts) monitoring of any SDP from time to time and to submit a report to the Finance Ministry, which must disclose the project outcomes and its fiscal impacts to the public by publishing the monitoring report on its official website.
If an SDP fails to comply with the approved key performance indicators, the BOI must issue a notice of non-compliance specifying the nature of the issue and a period for corrective action.
If corrective action is not taken, the BOI, in consultation with the Ministry of Finance, may restrict, suspend, or revoke any or all exemptions, concessions, or tax holidays. Alternatively, or additionally, the BOI may impose administrative penalties to recover the loss incurred. Before sanctions are imposed, the SDP entity must be given written notice to show cause and a reasonable opportunity to be heard.
The proposed amendment significantly restricts prior tax exemptions by mandating tax liability for certain aspects, notwithstanding the provisions of the original Act. Every SDP entity shall file tax returns in line with the Inland Revenue Act and shall be liable to pay income tax with respect to withholding payments.
Meanwhile, the employment income of both resident and non-resident employees from any SDP entity shall be liable to income tax.
The Finance Ministry is required to publish on its official website, for each financial year, an annual report on tax expenditures relating to all SDPs under this amended Act. It may also, in consultation with the BOI, review the continued relevance and efficiency of the exemptions, concessions, or tax holiday granted, beginning upon the expiry of five years from the date the amending section commences.
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