WORLD TRADE  
ORGANIZATION  G/SCM/Q2/MYS/10 
10 October 2006 
 
 (06-4851) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
SUBSIDIES 
 
Request from the UNITED STATES to MALAYSIA  
Pursuant to Article 25.8 of the Agreement on  
Subsidies and Countervailing Measures  
    The following communication, dated 6 October 2006, is being circulated at the request of the 
Delegation of the United States. 
 
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GENERAL  
 
1. The United States notes that Malaysia has not submitted a notification of its subsidies to the 
Committee on Subsidies and Countervailing Measur es since 1995.  Certain publicly available 
information indicates that Malaysia maintains s ubsidy programmes that meet the requirements for 
notification under Article 25.  If these programmes should be notified, please provide the information 
required under Article 25.3 of the SCM Agreemen t and other information specifically requested 
below.  If they do not qualify as subsidy progra mmes that should be notified, please provide an 
explanation why.  We do not consider the provisi on of answers to the questions below to satisfy 
Malaysia's obligation to provide a full notification pu rsuant to its obligations  under Article 25 of the 
SCM Agreement and reserve the right to ask additional questions.  Single or Double Deduction for the Promotion of Exports 
 
2. In 1995, Malaysia notified to the Subsid ies Committee under Article 28.1 that it provided 
incentives to exporters through the Double Deduction for the Promotion of Exports and Double Deduction of Export Credit Insurance Premiums programs.
1  Pursuant to Article 28.1, these subsidies 
should have been brought into conformity with th e provisions of the Subsidies Agreement within 
three years of the date of entry into force of th e Agreement.  Information available to the United 
States indicates that Malaysia continues to provid e tax incentives for exporters under these programs.  
Similar incentives provided by the Malaysian g overnment include (1) a double deduction for 
expenditures incurred within the country for ad vertising and professional fees paid to promote 
Malaysian brand names, (2) a double deduction on fr eight charges for manufacturers who ship their 
goods from Sabah or Sarawak to any port in Peninsular Malaysia a nd (3) a single deduction for export 
promotion.  In addition to the information re quested above, please explain how these programmes are 
consistent with Malaysia's  obligations under Article  3 of the SCM Agreement.  
 
                                                      
1 See Document G/SCM/N/2/MYS, 27 April 1995. G/SCM/Q2/MYS/10 
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  Local Content Requirement Attached to Incentives 
 
3. In 1995, Malaysia notified the Subs idies Committee, under Article 28.1 of the 
SCM Agreement, that the use of local content is taken into account in the granting of investment 
incentives, such as those provided under the Pioneer St atus and Investment Tax Allowance programs.  
Insomuch as benefits under these programs are c ontingent upon the use of domestic over imported 
goods, they appear to be inconsistent with the Subs idies Agreement.  Pursuant to Article 28.1, these 
programs should have been brought into conformity  with the provisions of the Subsidies Agreement 
within three years of the date of entry into force of the Agreement.  In addition to the information 
requested above, please explain how these programmes are consistent with Malaysia's obligations 
under Article 3 of the SCM Agreement. 
 
Tax Exemption on the Value of Increased Exports 
 
4. Information available to the United States indicates that Malaysia provides manufacturing 
companies in Malaysia tax exemptions on the va lue of increased exports. Under this program, 
manufacturing companies can receive (1) a tax exemption on the statutory income equivalent of 10 per cent of the value of increased exports, provide d that the goods exported contain at least 30 per 
cent value-added; or (2) a tax exemption on the st atutory income equivalent of 15 per cent of the 
value of increased exports, provided that the goods ex ported contain at least 50 per cent value-added.  
In addition, locally-owned manufacturing companies w ith Malaysian equity of at least 60 per cent can 
receive (1) a tax exemption on statutory income e quivalent of 30 per cent of the increased export 
value, provided the company achieves a significant increase in exports;  (2) a tax exemption on the statutory income equivalent of 50 per cent of  the increased export value, provided the company 
succeeds in penetrating new markets; or (3) a fu ll tax exemption on the increased export value, 
provided that the company achieves the highest level of increased exports.  L astly, companies in the 
information and communication technology sector can  qualify for a tax exemption on the statutory 
income equivalent of 50 per cent of the value of  increased exports.  It appears that these programs 
may be prohibited under Article 3 of the Subsidi es Agreement inasmuch as the tax deductions under 
these programs are contingent upon e xport.  In addition to the information requested above, please 
explain how these programmes are consistent with Ma laysia's obligations under Article 3 of the SCM 
Agreement.  Please also explain whether the "value-added" requirements mentioned require the use of 
domestic over imported goods. 
 
National Automotive Policy Framework 
 
5. Information available to the United States indi cates that in March 2006 Malaysia released its 
new National Automotive Policy (NAP), which replaced  Malaysia's previous National Car Policy.  
This policy sets out objectives for the Malaysian au to sector which, among others, are 1) "to promote 
a higher level of exports of vehicles as well as components and parts that are competitive in the global 
markets;" 2) "to promote a sustainable level of economic value added and enhance domestic 
capabilities" and 3) "to promote a competitive and viab le domestic automotive sector, in particular the 
national car manufacturers" (Proton and Perodua).   In order to achieve the above-mentioned 
objectives, Malaysia has implemented several polic y instruments to support the Malaysian auto 
sector.  For example, the Industrial Adjustment F und provides interest-free loans and matching grants 
for upgrading machinery, automation, component development costs and technology enhancement.  
Incentives are subject to minimum threshold levels on both "the scale and industry linkage criteria."  
Other incentives include R&D grants, incentives to locate in designated production centres, market 
development grants and other "c ustomized incentives." It appear s that several of the incentive 
programs provided under the NAP may be prohibited subsidies as provided under Article 3 of the 
Subsidies Agreement inasmuch as they are contin gent upon export or the use of domestic over 
imported goods.  Please provide the information requ ested above for all types of incentives that will 
be provided to the Malaysian auto industry unde r the National Automotive Policy.  Please also  G/SCM/Q2/MYS/10 
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  explain how this programme is c onsistent with Malaysia's obligations under Article 3 of the 
SCM Agreement.  6. Information available to the United States indicates that, as part of the former National Car Policy, Proton and Perodua along w ith two locally incorporated join t ventures all receive a 50 per cent 
tax rebate on excise taxes.  It appears that th is tax rebate was not av ailable to other foreign 
manufacturers.  It is our understanding that one of the criteria to receive the tax rebate is that 
manufacturers source at least 40 per cent of the car's  parts and components locally.  It appears that 
these excise tax rebates were eliminated under the new NAP.  Please confirm.  
 
Industrial Linkage Programme (ILP ) / Vendor Development Programme 
 
7. Information available to the United States i ndicates that Malaysia provides tax incentives and 
other support to small and medium-sized enterpri ses through the Industrial Linkage Programme (ILP) 
and the Vendor Development programme.   This info rmation indicates that the goal of these programs 
is to "promote the use of [local materials and ser vices] through financial, technical and other related 
assistance."  In addition to the information request ed above, please explain how this programme is 
consistent with Malaysia's  obligations under Article 3 of the SCM Agreement. 
 
Malaysia's National Biotechnology Policy 
 8. Information available to the United Stat es indicates that under Malaysia's National 
Biotechnology Policy, which was announced in April 2005, approved biotechnology companies are eligible for various tax incentives.  The actua l package of tax incentives provided to a given 
biotechnology company under this programme will be customized based on the merits of the project. 
 Exemption from Import Duty and Sa les Tax on Spares and Consumables 
 
9. Information available to the United States indicates that, under this program, companies can 
receive import duty and sales tax exemptions on spares and consumables that are not available locally.  
This exemption is selective and based on several factors, one of which is whether the company 
exports at least 80 per cent of their production.  In  addition to the information requested above, please 
explain how this programme is c onsistent with Malaysia's obligations under Article 3 of the 
SCM Agreement.  
Market Development Grants 
 10. Information available to the United States indicates that, under this program, companies can 
obtain a 50 per cent reimbursable matching grant on the approved cost of eligible activities. One of 
the conditions for a company to qualify for benefits  under this program is an annual sales turnover of 
between RM 10 million to RM25 million or export sales of at least RM 3 million.  In addition to the information requested above, please explain how this  programme is consistent with Malaysia's 
obligations under Article 3 of the SCM Agreement. 
 
Brand Promotion Grants 
 
11. Information available to the United States indi cates that the purpose of this program is to 
develop and promote, in the international market , brand names owned by Malaysian companies for 
products and services originating from Malaysia.  Evalua tion of brands to be selected for the grant is 
based on several considerations, including a comp any's trend in overall sales and exports over past 
3 years.  In addition, in order to encourage comp anies to promote the brand overseas, not more than 
10 per cent of the total grant can be spent on promo tion of the brand in the domestic market.  In G/SCM/Q2/MYS/10 
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  addition to the information requested above, please e xplain how this programme is consistent with 
Malaysia's obligations under Ar ticle 3 of the SCM Agreement. 
 
Tax Exemption for Malaysia International Trading Company (MITCs) 
 12. Information available to the United States indicates that the objective of this program is to 
encourage local companies to be mo re active in international trade as  well as to enhance Malaysia's 
exports.  Approved MITCs will be eligible for ta x exemptions equivalent to 20 per cent of the 
increase in the value of exports.  In addition to the information requested above, please explain how 
this programme is consistent w ith Malaysia's obligations under Article 3 of the SCM Agreement. 
 
Free Industrial Zones 
 
13. Information available to the United States indi cates that Free Industrial Zones (FIZs) are areas 
established for manufacturing companies that produce or assemble products mainly for export.  FIZs 
enable these export-oriented companies to im port duty free machinery and equipment required 
directly in the manufacturing process.  In addition to the information requested above, please explain 
whether companies located in FIZs must pay the a pplicable duties when selling products into the 
domestic market.  
Incentives for Reinvestment in Resource-Based Industries 
 
14.  Information available to the United States indi cates that this incentive is offered to companies 
that are at least 51 per cent Malaysian-owned and are in the rubber, oil palm, and wood-based 
industries, producing products whic h have export potential.  Compani es in these industries reinvesting 
for expansion purposes are eligible for another round of Pioneer Status or Investment Tax Allowance.
 
 
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