Thursday, October 25, 2007

Incentive For the Tourism Industry

Incentive For the Tourism Industry

Tourism projects, including eco-tourism and agro-tourism projects, enjoy tax incentives. These include hotel businesses, construction of holiday camps, recreational projects including summer camps, and construction of convention centres with a capacity to accommodate at least 3,000 participants.

Hotel business refer to the following:
>>Construction of medium and low-cost hotels (up to a three-star category hotel as certified by the Ministry of Tourism)
>>Expansion/modernization of existing hotels

1. Main Incentives For the Tourism Industry

(i) Pioneer Status

A company granted Pioneer Status enjoys a 5-year partial exemption from the payment of income tax. It will only have to pay tax on 30% of its statutory income, commencing from its Production Day which is determined by the Minister of International Trade and Industry.

Applications received from companies located in promoted areas i.e the States of Perlis, Sabah, Sarawak, the Federal Territory of Labuan and the designated ‘Eastern Corridor’ of Peninsular Malaysia are eligible for a 100% tax exemption of their statutory income during the 5 year exemption period. This incentive applies to all applications received by 31 December 2010.

Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product.

Applications should be submitted to MIDA.

(ii) Investment Tax Allowance

As an alternative to Pioneer Status, a company may apply for Investment Tax Allowance (ITA). A company granted the ITA gets an allowance of 60% of the qualifying capital expenditure incurred within five years from the date on which the first qualifying capital expenditure is incurred.

Companies can offset this allowance against 70% of their statutory income in the year of assessment. Any unutilised allowance can be carried forward to subsequent years until the whole amount has been used up. The remaining 30% of the statutory income will be taxed at the prevailing company tax rate.

Applications received from companies located in the promoted areas i.e. the States of Perlis, Sabah and Sarawak, the Federal Territory of Labuan and the designated “Eastern Corridor” of Peninsular Malaysia, will enjoy an allowance of 100% on the qualifying capital expenditure incurred within a period of five years. The allowance can utilised to offset against 100% of the statutory income for each year of assessment. All project applications received by 31 December 2010 will be eligible for this incentive.

Applications should be submitted to MIDA

(iii) Additional Incentives for Hotels and Tourism Projects

Applications received by MIDA from companies to reinvest in the expansion, modernisation and renovation of hotels and tourism projects will be eligible for another round of Pioneer Status or Investment Tax Allowance. However, hotels and tourism projects located in the promoted areas are eligible for the Pioneer Status incentive in accordance with that given to promoted areas:

a) Pioneer Status, with a 100% income tax exemption. Accumulated losses and unabsorbed capital allowances incurred during the pioneer period by companies whose pioneer status will expire on and after 1 October 2005 are allowed to be carried forward and deducted against post-pioneer income of a business relating to the same promoted activity or promoted product; or

b) Investment Tax Allowance of 100%. The allowance can be offset against 100% of the statutory income in each year of assessment. Any unutilised allowances can be carried forward to subsequent years until the whole amount has been fully utilised.

(iv) Incentives for the Luxury Yacht Industry

The luxury yacht industry is promoted as part of tourism product and is eligible for the following incentives:

>>Companies that construct luxury yachts are eligible for the Pioneer Status incentive

Applications should be submitted to MIDA

>>Companies that carry out repair and maintenance activities for luxury yachts in the island of Langkawi, Malaysia are eligible for an income tax exemption of 100% for five years.

Applications should be submitted to the Ministry of Finance

>>Companies that provide chartering services of luxury yachts in the country are eligible for an income tax exemption of 100% for a period of five years.

Claims should be submitted to the IRB.

2. Additional Incentives for the Tourism Industry

(i) Double Deduction on Overseas Promotion

Hotels and tour operators qualify for a double deduction on the expenditure incurred for promotional activities overseas. The qualifying expenditure are:

>Expenditure on publicity and advertisement in any mass media outside Malaysia

>Expenditure on the publication of brochures, magazines and guide books, including delivery costs that are not charged to the oversea customer;

>Expenditure on market research into new markets overseas, subject to the prior approval of the Minister of Tourism;

>Expenditure that includes fares to any country outside Malaysia to negotiate or secure a contract for advertising or participating in trade fairs, conferences or forums approved by the Minister of Tourism. Such expenses are subject to a maximum of RM300 per day for lodging and RM150 per day for food for the duration of the stay overseas;

>Expenditure in organizing trade fairs, conferences of forums approved by the Minister of Tourism; and

>Expenditure on the maintenance of sales office overseas for purposes of promoting tourism in Malaysia

Claims should be submitted to the IRB.

(ii) Double Deduction on Approved Trade Fairs

Companies also enjoy a double deduction on expenditure incurred in participating in an approved international trade fair in Malaysia.

Claims should be submitted to the IRB.

(iii) Tax Exemption for Tour Operators

a) Foreign Tourists

Tour operators who bring in a at least 500 foreign tourists in a group in a year through groups, inclusive of tours that enter and exit the country by air, sea or land transportation, will be exempted from tax in respect of income derived from the business of operating such tours. This incentive is only applicable to tour operators licensed by the Ministry of Tourism.

b) Local Tourists

Companies that organise domestic tour packages for at least 1,200 local tourists per year get a tax exemption on the income earned. A domestic tour means any tour package within Malaysia participated by local tourists (excluding inbound tourists) by air, land or sea transportation involving at least one night’s accommodation.

Effective from 2 September 2006, the incentive is extended for another 5 years from the year of assessment 2006 until the year of assessment 2011.
Claims should be submitted to the IRB.

(iv) Tax Exemption for Promoting International Conference and Trade Exhibition

a) Local companies, which promote international conferences in Malaysia, qualify for tax exemption on the income earned from bringing at least 500 foreign participants into the country.

b) Income earned from organizing international trade exhibitions in Malaysia qualifies for tax exemption as long as the exhibitions are approved by MATRADE and the organizers bring in at least 500 foreign visitors per year.
Claims should be submitted to the IRB.

(v) Deduction on Cultural Performance

Expenditure incurred by companies promoting and managing a musical or cultural group and sponsoring local and/or foreign cultural performance as approved by the Ministry of Tourism, qualifies for a single deduction.

To further encourage the private sector to sponsor local arts, cultural and heritage performances and shows, expenditure incurred in sponsoring such performances and shows be increased from RM300,000 to RM 500,000. However, the ceiling for deduction allowed on foreign performances and shows remains at RM200,000 per year effective from year of assessment 2007.

Claims should be submitted to the IRB.

(vi) Incentive for Car Rental Operators

Operators of car rental services for tourists are eligible for full excise duty exemption on the purchase of national cars.

However, effective 2 September 2006, to enable tourist to explore challenging destinations, tour operators are also eligible for a 50% excise duty exemption on locally assembled 4WD vehicles.

Applications should be submitted to the Ministry of Finance.

Source: MIDA: Malaysia: Investment in the Manufacturing Sector: Policies, Incentives and Facilities
February 2007

The latest updates, please visit http://www.mida.gov.my

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Tuesday, October 2, 2007

Spotlight on Visit Malaysia Year II

Visit Malaysia Year 2007 (VMY) got off to a slow start, says CIMB Research, which started promoting the VMY 2007 theme a year ago. It was confident the country could then easily pull off a 15% rise in tourist arrivals to 20.1million. But the year got off a bad start as floods in Johor deterred some tourists.

VMY 2007 Arrivals

To recap, VMY 2007 is not merely about attracting tourists and their spending power, but also about celebrating Malaysia’s 50th anniversary of independence. The government pulled out all the stops to ensure the event is a success.

It has succeeded by all accounts though earlier in the year, there were serious misgivings about the country’s target of 20.1 million tourists for 2007. Before the start of the year, the target did not seem overly ambitious, being just 15% higher than the estimated 17.5 million arrivals for 2006.

But tourist arrivals in the early part of the year appeared to be somewhat behind expectations, partly because of floods in Johor, which were the worst in 100 years. For a while, we were concerned that VMY 2007 would turn out to be disappointment. Fortunately, our fears were unfounded.

Tourist arrivals have bee n respectable from the very start of the year, with January arrivals up 12% on-month and 18%-year. But the real pick-up was seen in May when arrivals surged more than 30% on-year. First half arrivals of 10.7 million were 25% higher on-year, 10 percentage points higher than the government’s target for full year growth.

Tourist receipts have been even stronger with 1H proceeds rising 46% on-year to RM24 billion or 53% of the full year target of RM 45billion. The jump in tourism is backed by anecdotal evidence of high Kuala Lumpur hotel occupancy of over 90% in July and Aug as tourists packed the capital during the Golden Jubilee Merdeka celebrations.

In fact, tourist numbers for Malaysia recently overtook Singapore’s and are closing in on Thailand’s.

Winning Sectors

Many industries are beneficiaries of the higher tourist arrivals –tourism, airlines, tolled highways, hotels, retail and consumer sectors. Transport companies are winners from VMY as air travel makes up 21% of total transport and domestic airfares amount to 3% of tourist spending.

Airlines

AirAsia’s Malaysian passenger traffic soared 42% to 4.5 million in 1H07, driven by strong demand growth, which was supported by higher capacity.

MAS is also one of the key beneficiaries of increased passenger traffic into Malaysia. In July, MAS’s international passenger load factor rose to 75.6%, against an average of 70.5% in 2Q, reflecting the onset of summer travel demand and heightened sales initiatives.

Tolled Highways

As 75% of tourists coming to Malaysia arrive by road and another 10% of tourism spending goes to local transportation, highway concessionaires will benefit form greater usage. PLUS Expressways’ North South Expressway captures traffic from Singapore and Thailand and is the main highway used for intercity travel.

Traffic on the highway grew 6.9% yoy in the first eight months of 2007 versus growth of only 2.3% in 2006 and 0.35 in 2005. Traffic volume growth on the highway was given a boost this year by the absence of a toll hike and the government’s pledge to maintain petrol prices.

Our forecast of 3% traffic growth for PLUS in 2007 appears to be conservative, as the group’s three highways have recorded double that growth in January – August.

Hotels

KLCC Property’s Mandarin Oriental Hotel has enjoyed a jump in occupancy rates from 80% - 85% a year ago to 90% recently while room rates have surpassed RM 600/night vs RM500-RM550/night last year.

Genting Highlands, which has 10,000 hotels and is a major tourist destination in Malaysia, recorded a 12% on-year increase in arrivals to 10 million I 1H07. This is a record for the highlands, which is an hour’s drive from Kuala Lumpur. As a result of the surge in arrivals, Resort World’s hotel occupancy rates jumped 14% y-o-y to 86% in 1H07.

VMY 2007 Extended to Aug 08

Two factors will sustain the momentum of VMY 07 beyond this year. VMY 07, as its name implies, was supposed to end on Dec 31, 2007. But the government extended the event to a year after the 50th Independence Day celebrations as this year is Malaysia’s Golden Jubilee and celebrations are intended to last an entire year. This means that VMY 2007 will end on Aug 31, 2008.

Also, in the recent 2008 Budget, the Finance Ministry allocated a larger amount of RM858 million for the implementation of various tourist programmes, including the provision and upgrading of tourism facilities as well as the diversification of tourism products. This figure is far bigger that the RM149 million set aside for promotional efforts under the 2007 Budget.

An extended VMY 2007 is certainly good news, not only for sectors that will benefit form continued high inflow of tourists, but also for the overall economy and general sentiment.

As we elaborated in our Nov 6 2006 note, the VMY 2007 programme is not just about economies but also politics. Also, as we explained in the Malaysia Strategy piece we released on June 27, 2007, we are increasingly of the view that general elections will be held later rather than sooner, perhaps in 2H 2008 or even the early 2009 deadline. It is hope that an extended VMY 2007 will buoy spending, corporate profits and consumer sentiment.

Furthermore, the VMY programme will help put the country on the tourist map, furthering Malaysia’s longer-term tourism ambitions.

Best Proxies for VMY 2007

In our view, the best proxies for VMY 2007 include transport companies such as AirAsia, MAS and PLUS Expressway as well as tourism-related companies such as Resorts World and KLCC Prop.

AirAsia’s budget travel business has gained from its capacity expansion that will allow it to accommodate higher demand. MAS has enjoyed a marked increase in its international passenger load factor while PLUS’s traffic volume growth this year is double our expected rate.

A prolonged VMY 2007 will benefit Resorts, which is already enjoying record arrivals. KLCC Property’s Mandarin Oriental hotel and Suria KLCC shopping complex are also direct beneficiaries of increased tourism.

AirAsia

AirAsia’a network around Asean will also benefit from the success of VMY 2007, helping the low-cost carrier to fill more seats as more planes are delivered. AirAsia is also increasing its penetration into southern China, where the boom in travel demand is pushing Chinese tourists all across South-East Asia and beyond.

The impending launch of AirAsia X’s long-haul flights to Australia and China will also ride on the success of the VMY 2007 campaign and bring tourists into AirAsia’s short haul network. Although fuel prices threaten to spoil the party, AirAsia is extremely leveraged to US$ depreciation and very sensitive to higher fuel surcharges.

KLCC Property

The company owns the best real estate in Malaysia, primarily buildings around the Kuala Lumpur City Centre including the iconic Petronas Twin Towers. Other prime assets held by the group include the 5 star Mandarin Oriental Hotel, arguably the best and most popular hotel in Kuala Lumpur, and Suria KLCC shopping mall which is the premier shopping destination in Malaysia.

The Mandarin Oriental and Suria KLCC are both beneficiaries of higher tourist arrivals as profitability of hotels is leveraged to room and occupancy rates while Suria KLCC derives 10% to 15% of its earnings from revenue sharing with tenants.

MAS

As the national airline, MAS is on of the key beneficiaries of increased passenger traffic into Malaysia. On top of that, active yield and load management will begin to show results.

In July, MAS’s international passenger load factor rose to 75.6%, against an average of 70.5% in 2Q, reflecting the onset of summer travel demand and heightened sales initiatives.

High fuel costs are manageable in a strong demand environment as fuel surcharges are raised. The main share price catalyst is a set of strong 2H results, which will increase confidence that MAS is on course for sustained profitability.

PLUS Expressways

We maintain PLUS Expressways as an OUTPERFORM as the company is one of the main beneficiaries of the rise in travel during VMY 2007.

Traffic volume growth for the Jan-Aug period was double our full year growth forecast of 3%. The three domestic highways, coupled with its existing three overseas highway ventures (one in India and two in Indonesia) and two local highway acquisitions (Elite and Linkedua), will transform the group into a regional player with new recurring income streams.

Dividend yields remain a draw at 5%-6%.

Resorts World

Resorts own Genting Highlands resort, arguably Malaysia’s largest tourism attraction, which is expected to attract 20m visitors this year.

With a 10,000 room inventory, Resort is hitting 90% average occupancy, pointing to its appeal to both domestic and foreign tourists.

This is undoubtedly positive for its casino gaming operations, which are riding on higher headcount and spending per head. Improving yield management will underpin bottomline growth.

Other catalysts include potential M&A activity, capital management initiatives and likely upward revision in its dividend policy.

Source: FinancialDaily, Monday, October 1, 2007


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