Court of Appeal uphelds Legal Professional Privilege

In a recent grounds of judgment, the Court of Appeal upheld the decision of the High Court in finding that information pertaining to law firm’s client accounts are protected by the veil of legal professional privilege and that such right can only be waived by the Client.

I have previously covered the grounds of judgment by the Learned High Court Judge here but it is worth analysing the difference in the mode of interpretation by the Court of Appeal.

Facts:

The Inland Revenue Board of Malaysia (“IRB”) sought to obtain information pertaining to law firms client accounts. The Malaysia Bar (or Bar Malaysia) vide a judicial review application sought several declaratory orders from the court of law to find that such information were privileged.

The reason for the audit by the IRB was that the IRB alleged that law firms may be understating their income by “hiding” monies in the law firm’s client accounts.

Decision of the High Court:

The High Court found in favour of Bar Malaysia on the following grounds:

1. Privilege is absolute unless it is waived by the privilege holder or falls within the proviso to s 126 of the Evidence Act 1950 (“EA”) and it therefore affords protection to clients and not to lawyers;

2. It is not open for the defendant to have any access to the clients’ account with a view to checking whether the law firms have understated their income without having any reasonable suspicion of any misconduct or criminal conduct on the part of the law firms;

3. The defendant cannot be allowed to use the Income Tax Act 1967 (“ITA”) as an instrument of fraud purportedly to fish for information on the clients of the law firms;

4. The non-obstante nature of s 142(5)(b) of the ITA ought to be read in accordance with the actual words of Parliament;

5. S 142(5)(b) of the ITA, at most, only has the effect of removing privilege in respect of any book, account, statement or other record prepared or kept by ‘practitioners’ such as tax accountants and tax agents with a view to taxing their clients and it does not extend to ‘advocates and solicitors’;

6. In s 142(5)(b) of the ITA, Parliament had clearly used different words as it recognised that ‘practitioner’ and ‘advocate and solicitor’ are different persons;

7. S 142(5)(b) of the ITA does not oust the common law on privilege; and

8. Based on the clear and express language in s 126 of the EA, it cannot be disputed that s 126 of the EA is the specific provision which governs matters pertaining to privilege. The defendant has misunderstood and misapplied the Latin maxim of generalia specialibus non derogant.

Decision of the Court of Appeal

Instead of focusing on whether Section 142(5) of of the ITA oust the privilege under the common law, the Court of Appeal did an in depth excursus on the limitations and interpretation of Section 142(5) of the ITA and the EA.

The questions of law posed by the IRB in this instant case are as follow:

a. Whether Section 142(5) of the ITA 1967 overrides the Solicitor-Client Privilege as provided under section 126 of the EA 1950.

b. Whether the Client’s Account under the Legal Firm’s name and administered by the Firm falls within the ambit of Privilege under section 126 of the EA 1950 as section 126 of the EA 1950 provides Privilege only for communications between solicitors and client.

c. Whether the word “practitioner” in section 142(5)(b) of the ITA 1967 refers to and includes “advocate and solicitor” or it merely refers to other practitioners such as tax agent and accountant.

The IRB argued that since Section 142(5)(a) states that “except provided in paragraph (b)”, Section 142(5)(b) purportedly excludes the application of the said subsection from the EA. in other words, Section 142(5)(b) of the ITA overrides the EA, and hence privilege. Since Section 142(5)(b) employs the words “notwithstanding any other written law”, Section 142(5)(b) overrides Chapter IX of Part III of the EA, and along it, section 126 of the EA.

Bar Malaysia on the other hand argued that privilege cannot be abrogated save by clear and unequivocal language, which is absent in this instant case.

The Court of Appeal started with an analysis of Section 142(5)(a) and found that a part of the EA was singled out as being unaffected by the ITA but also that the same part of the EA may only be affected “as provided in paragraph (b)”.

The Court of Appeal then dissected Section 142(5)(b) of the ITA into three partes, ie: as a non obstante provision, subject matter of the provision and circumstances in which privilege from disclosure may not be invoked, and against whom.

The Court of Appeal noted the differences in the use of the word “practitioner” and “advocate in solicitor” within the ITA. It held that there is no reason to equate “practitioner” with the term “advocate and solicitor” when the term “practitioner” is specifically used in section 142(5)(b) instead of, and after the express use of, the term “advocate and solicitor”. Similarly, the concluding words of Section 142(5)(b) were “any other person” instead of “advocate and solicitor”.

Although the use of the word “practitioner” may be intended to cast a wider net, the Court of Appeal held that the use of two different terms in the same provision would imply that the narrower term would have been carved out of the wider term and excluded.

As such, the Court of Appeal upheld the finding of the High Court that Section 142(5)(b) ITA precludes ITA claim to any privilege from disclosure that are “prepared or kept by” any practitioner or firm of practitioners and the term “practitioner” does not include “advocate and solicitor”.

Client accounts are trust accounts and the monies are not the advocate and solicitors’. The privilege accorded under Section 126 is an ancient and important one. This privilege must remain as close to absolute if possible. The removal of this privilege must be manifest by clear and unambiguous language and anything less will not do.

However, the Court of Appeal noted that if there is basis for the IRB to rely on provisos under Section 126 of the EA i.e. for illegal purpose, the IRB may still do so. If the IRB cannot establish that the proviso under Section 126 applies, it will endure against the IRB.

Finally, the Court of Appeal held that financial information such as data contained in any document and kept in respect of the client’s account for the advocate’s employment would be protected. Hence, client’s account and information falls within the ambit of Section 126 of the EA.

Conclusion

“Privilege is absolute until waived” remains steadfast and the principles enunciated by the Federal Court in the seminal decision of Dato’ Au Ba Chi v Koh Keng Kheng [1989] 3 MLJ 445. Therefore, unless the IRB can prove any of the exceptions under the EA, the privilege accorded to solicitor-client relationship still stands and even information pertaining to clients account are protected.

The case is now pending before the Federal Court.

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Budget 2022

(slightly belated but… ) Budget 2022 was one of the more highly anticipated as it may be the last budget of the current government prior to the national elections next year and also to determine the allocation of funds towards economic recovery.

Whilst some of the measures were expected i.e. “windfall taxes” and the extension of the voluntary to indirect taxes, some measures were a little unexpected such as the introduction of world-wide income tax. This post highlights some of the key areas to look out in Budget 2022.

• Introduction of Prosperity Tax (Cukai Makmur)

Presumably inspired by the large amount of taxes generated by certain industries during the Covid-19 pandemic, the government seek to introduce a 33% income tax rate levied on taxable profits earned by companies above RM 100 million.

Currently, companies taxed under the Income Tax Act 1967 are taxed at a rate of 24%.

The new tax will see companies making extraordinary profits to be taxed at a higher rate.

Comments: Whilst the intention of the tax seems to be to equalize wealth within certain industries during certain times, the outcome maybe less desirable as it is unsure whether the taxes received from extraordinary profits will be diverted to industries more adversely affected (i.e. the tourism industry in this Covid season).

Furthermore, the imposition of the prosperity tax may see very profitable companies to not want to conduct business in Malaysia or set up an regional office in Malaysia due to the higher tax rate than the countries around it. In view that the expected revenue generated from this prosperity tax is RM8.5 billion, it is unlikely that Multinational Corporations or even Malaysian Corporations would sit still without taking corresponding efforts to, perhaps, divert resources to countries around the region.

• Implementation of income tax on income derived from foreign sources but received in Malaysia

Under Section 3 of the Income Tax Act 1967, only income derived in Malaysia will be taxed in Malaysia, “income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia”.

In other words, only income which accrued in and derived from Malaysia will be taxed in Malaysia. The few exceptions are the banking, insurance, air transport or shipping industries.

This new tax may see companies who derive income from other countries to be taxed in Malaysia, subject to the application of the Double Taxation Agreement.

Comments: Similarly, the implementation of bringing to tax foreign sources of income may cause possibly hostile relationships with foreign countries as it appears to bring to tax income earned by companies resident in Malaysia but generated the revenue from foreign countries.

Whilst companies may have the Double Taxation Agreement to shield them from possibly double taxation, the new tax will have its share of complications without adequate drafting and guidelines in place, such as the implementation of withholding tax previously which had a lifeline of less than 2 years.

• Elimination of Real Property Gains Tax from 6th year onwards

At present, disposal of real property from the 5th year onwards is subjected to a real property gains tax of approximately 5%.

The elimination of the 5% real property gains tax may encourage property owners to dispose of their properties after 6 years from the date of acquisition. Taxpayers should be wary of the possible existence of badges of trade which may see the profit generated from disposal of real property to income tax instead.

• Special Voluntary Disclosure Programme for Indirect Taxes 

The Special Voluntary Disclosure Programme was previously only limited to income tax matters. The programme was able to generate revenue amounting to approximately RM 8 billion. The extension of the programme to indirect taxes may encourage taxpayers to revisit their tax affairs to benefit from the lower tax rate.

However, the programme recently came under scrutiny as there were alleged tax audits conducted by the IRB on taxpayers on years of assessment which were covered during the programme.

Assurance would be required to be made in order to ensure that taxpayer’s legitimate expectation that their voluntary disclosure would not form as admission of liability or opening the gates to more tax audits.

• Extension of tax reliefs for individuals

Budget 2022 had also extended various of the additional tax reliefs for individuals introduced in previous years and introduced some new ones. Amongst others:

• Tax relief for individuals and tax deduction for employers on costs associated with taking self-purchased booster vaccines;
• Tax relief for full medical check-up expenses;
• Tax relief of up to RM2,500 for the purchase of mobile phones, computers and tablets is extended until 31 December 2022; and
• Tax relief for up-skilling and self-enhancement course fees of up to RM 2,000.

Final thoughts

Without looking at the Finance Bill 2021, the Budget 2022 appears to take too drastic actions too fast. The implementation of a world-wide based income tax is especially precarious as Malaysia had always practiced territorial income tax since her inception. It is also particularly sensitive as it may affect bilateral relationships with other countries if the determination of taxation is not done properly.