Efficient tax rules for contractors bring relief
KUALA LUMPUR: THE government has moved to streamline tax treatment on construction projects, offering a more practical and industry-aligned approach to profit recognition, in a breakthrough welcomed by the construction sector.
The Master Builders Association Malaysia (MBAM) on Dec 6, 2021, formally appealed to the Finance Ministry to review the Inland Revenue Board's (IRB) longstanding practice of using the Certificate of Practical Completion (CPC) as the reference point for recognising profits or losses under the Income Tax (Construction Contracts) Regulations 2007 and Public Ruling No. 2/2009.
MBAM argued that this approach did not reflect real-world business processes, as the CPC only certifies physical completion, while key financial elements such as variation orders, final costs and contractual claims often remain unresolved post-CPC.
Requiring contractors to determine profit or loss at that stage could result in inaccurate tax filings and retrospective adjustments that risk penalties.
To address the issue, MBAM proposed recognising project completion based on finalised accounts — either when no further costs are incurred and all payments are made, or within 18 to 24 months after CPC issuance.
Through the Technical Working Group on Taxation (TWGT) under the Pemudah Special Taskforce to Facilitate Business, multiple engagements between the ministry, IRBM, MBAM and the Chartered Tax Institute of Malaysia (CTIM) were held between December 2021 and September 2023.
This public-private collaboration yielded a practical resolution, where profit or loss recognition could now be deferred to the date final accounts are agreed between contractor and client, or 12 months after project completion — whichever is earlier.
Penalties for revised tax returns arising from retrospective profit/loss adjustments will not be imposed, as confirmed through updated guidelines and future enhancements to IRB's public rulings.
Following this, a Practice Note was issued on IRB's portal on March 29 last year and a comprehensive amendment to Public Ruling No. 2/2009 is underway, expected to be completed this year.
This harmonised tax treatment aligns regulatory requirements with industry operations, supporting the government's Ekonomi Madani agenda to deliver more efficient, affordable housing and infrastructure.
POSITIVE IMPACT
The move has brought tangible benefits for contractors and construction firms, including improved cash flow management due to accurate tax assessments and reduced reliance on external borrowings, thus lowering business costs.
The move also helps to free up financial resources for productivity-enhancing investments and allows greater certainty in tax reporting, reducing administrative and financial risks.
MODEL FOR PUBLIC-PRIVATE PARTNERSHIP
This success underscores the strength of public-private collaboration under Pemudah's framework, which is co-chaired by the economy minister, chief secretary to the government and a private sector industry leader.
The Economy Ministry and the Malaysia Productivity Corporation serve as joint secretariats, while direction is provided by the National Economic Action Council, which is chaired by Prime Minister Datuk Seri Anwar Ibrahim.
The initiative is also seen as a benchmark for effective policy reform that balances regulatory compliance with industry practicality, fostering long-term economic sustainability and competitiveness.
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Efficient tax rules for contractors bring relief
KUALA LUMPUR: THE government has moved to streamline tax treatment on construction projects, offering a more practical and industry-aligned approach to profit recognition, in a breakthrough welcomed by the construction sector. The Master Builders Association Malaysia (MBAM) on Dec 6, 2021, formally appealed to the Finance Ministry to review the Inland Revenue Board's (IRB) longstanding practice of using the Certificate of Practical Completion (CPC) as the reference point for recognising profits or losses under the Income Tax (Construction Contracts) Regulations 2007 and Public Ruling No. 2/2009. MBAM argued that this approach did not reflect real-world business processes, as the CPC only certifies physical completion, while key financial elements such as variation orders, final costs and contractual claims often remain unresolved post-CPC. Requiring contractors to determine profit or loss at that stage could result in inaccurate tax filings and retrospective adjustments that risk penalties. To address the issue, MBAM proposed recognising project completion based on finalised accounts — either when no further costs are incurred and all payments are made, or within 18 to 24 months after CPC issuance. Through the Technical Working Group on Taxation (TWGT) under the Pemudah Special Taskforce to Facilitate Business, multiple engagements between the ministry, IRBM, MBAM and the Chartered Tax Institute of Malaysia (CTIM) were held between December 2021 and September 2023. This public-private collaboration yielded a practical resolution, where profit or loss recognition could now be deferred to the date final accounts are agreed between contractor and client, or 12 months after project completion — whichever is earlier. Penalties for revised tax returns arising from retrospective profit/loss adjustments will not be imposed, as confirmed through updated guidelines and future enhancements to IRB's public rulings. Following this, a Practice Note was issued on IRB's portal on March 29 last year and a comprehensive amendment to Public Ruling No. 2/2009 is underway, expected to be completed this year. This harmonised tax treatment aligns regulatory requirements with industry operations, supporting the government's Ekonomi Madani agenda to deliver more efficient, affordable housing and infrastructure. POSITIVE IMPACT The move has brought tangible benefits for contractors and construction firms, including improved cash flow management due to accurate tax assessments and reduced reliance on external borrowings, thus lowering business costs. The move also helps to free up financial resources for productivity-enhancing investments and allows greater certainty in tax reporting, reducing administrative and financial risks. MODEL FOR PUBLIC-PRIVATE PARTNERSHIP This success underscores the strength of public-private collaboration under Pemudah's framework, which is co-chaired by the economy minister, chief secretary to the government and a private sector industry leader. The Economy Ministry and the Malaysia Productivity Corporation serve as joint secretariats, while direction is provided by the National Economic Action Council, which is chaired by Prime Minister Datuk Seri Anwar Ibrahim. The initiative is also seen as a benchmark for effective policy reform that balances regulatory compliance with industry practicality, fostering long-term economic sustainability and competitiveness.
