Court of Appeal clarifies the definition of “engaged in agriculture”

In a recent grounds of decision given by the Court of Appeal (accessible here), the Court of Appeal reversed the decision of the learned High Court Judge who decided in favour of the taxpayer. In essence, the Court of Appeal ruled that although the taxpayer was eligible to claim industrial building allowance, the taxpayer was not allowed to claim reinvestment allowance as the taxpayer was held to not be “engaged in” agriculture.

Facts:

The taxpayer, Classic Japan (M) Sdn Bhd, (“Taxpayer”) was engaged in the collection, processing and shipment of cut fresh flowers for export to Japan since 2006. The Taxpayer purchases fresh flowers from several contract growers.

Additionally, the Taxpayer had claimed increased export allowance under the Income Tax (Allowance for Increased Export) Rules 1999 (“the Rules”).

Upon a tax audit, the Inland Revenue Board (“IRB”) disallowed the allowance claimed under the rules, the industrial building allowance on the Factory and imposed penalty.

When the matter was heard before the Special Commissioners of income Tax (“SCIT”), the SCIT’s decision was as follows:

• The Taxpayer was not allowed to claim the increased export allowance allowance under the Rules;
• The Taxpayer was allowed to claim the industrial building allowance for the Factory: and
• The penalty was correctly imposed.

Both the Taxpayer and IRB appealed to the High Court.

At the High Court, the learned Judicial Commissioner’s decision was as follows:

• The Taxpayer was allowed to claim the increased export allowance under the Rules;
• The Taxpayer was allowed to claim the industrial building allowance for the Factory; and
• The penalty should not be imposed.

The IRB appealed to the Court of Appeal whereby the following questions of law were posed:

(i) whether the decision of the Judicial Commissioner of the High Court in deciding that the respondent is entitled to claim the increased export allowance under the Rules was correct in law and facts;

(ii) whether the Judicial Commissioner was correct in law and facts in deciding that the Factory is an industrial building as defined under paragraph 63 Schedule 3 of the ITA 1967; and

(iii) whether the Judicial Commissioner was correct in law and facts in deciding that the Revenue has no legal or factual basis to impose the penalty under section 113(2) of the ITA 1967.

1. Whether the Taxpayer should be entitled to claim increase export allowance under the Rules

The relevant provisions of the 1999 Rules provide as follow:

“Rule 2:

For the purposes of these Rules- “agricultural produce” means fresh and dried fruits, fresh and dried flowers, ornamental plants, and ornamental fish;

Rule 3:

Allowance for increased exports Subject to rules 4 and 5, where a manufacturing company or a company engaged in agriculture, resident in Malaysia, exports manufactured products or agricultural produce in the basis period for a year of assessment, there shall be given to the company an allowance to be determined in the manner as prescribed in rule 4.

Provided that an exemption on exports of manufactured products is only given to manufacturer.

Rule 4:

Determination of allowance

The allowance mentioned in rule 3 refers to-

(a) …

(b) …

(c) 10 percent of the value of increased exports of agricultural produce by the company”

To be eligible to claim increased export allowance, the following conditions ought to be met:

• The taxpayer must be a company engaged in agriculture;
• The taxpayer is resident in Malaysia; and
• The Taxpayer exports agricultural produce.

In coming to the determination of whether the taxpayer was “engaged in agriculture”, the Court of Appeal extensively relied on the dictionary definitions of the words “engaged” and “agriculture” of is reproduced as follow:

No.	Dictionary	Engaged	Agriculture
1	Black’s Law Dictionary	To employ or involve oneself, to take part in, to embark on.	The science or art of cultivating soil, harvesting crops, and raising livestock. Agriculture is a broader meaning than ‘farming’; and while it includes the preparation of soil, the planting of seeds, the raising, and harvesting of crops, and all their incidents, it also includes gardening, horticulture, viticulture, dairying, poultry, bee raising, and ranching.
2	Oxford English Dictionary	Become involved in.	The science or practice of farming, including the growing of crops and the rearing of animals.
3	The Longman Dictionary of Law 7th Edition	To be engaged in an occupation is to be occupied therein. It connotes such a degree of employment as occupies the whole or at least a substantial part of the time.	Includes horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadowland, osier land, market gardens, and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agriculture purposes.
4	Osborn’s Concise Law Dictionary 12th Edition		Includes horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping
5	Words, Phrases & Maxims – Legally and Judicially Defined (Anandan Krishnan) (Lexis-Nexis)	To employ oneself in.	Agriculture connotes the raising of useful or valuable products which derive nutriment from the soil with the aid of human labour and skill, 43 MLJ 191. The term ‘agriculture’ has much wider import than the term ‘cultivation’. Consequently, a purpose may be connected with agriculture, such as, grazing on the lands of the holding but not necessarily ancillary to cultivation. Agriculture, in the Board of Agriculture Act 1889 (52 & 53 Vic C 30), s 12, includes horticulture The ordinary meaning of ‘agriculture’ is the raising of annual or periodical grain crops through the operation of plowing, sowing, etc. The term ‘agriculture’ is of wider import than the term ‘cultivation’. As is pointed out in the Oxford Dictionary, ‘agriculture’ means the science or art of cultivating the soil including the allied pursuits of gathering in the crops and rearing livestock; tillage, husbandry, farming (in the widest sense).
6	Jowitt’s Dictionary of English Law, 2nd Edition by John Burke	–	Includes horticulture, fruit growing, seed growing, dairy farming and livestock breeding and keeping, the use of land as grazing land, meadowland, osier land, market gardens, and nursery grounds, and the use of land for woodlands where that use is ancillary to the farming of land for other agriculture purposes.
7	Judicial Dictionary 14th Edition by KJ Aiyar	The word ‘engaged’ would not mean an isolated act or transaction. What it contemplates is that the person carries on the business as a continuous process of purchase, sale, and storage for the sale of the food grains. In order that a person is engaged in the business of purchase and sale of the foodgrains, it is necessary to show that he was carrying on business as a continuous process as normal trading activity.	The primary sense in which the term ‘agriculture’ is understood is ‘ager’, a field and ‘cultural’ – cultivation i.e. the cultivation of field and the term as understood only in that sense, agriculture would be restricted only to the cultivation of the land in the strict sense of the term meaning thereby, tilling of the land, sowing of the seeds, planting and similar operations on the land. [Commissioner of Income-Tax v Benoy Kumar Sahas Roy AIR 1957 SC 768, (1957) SCJ 740, (1957) 2 Mad LJ (SC) 145]. Agriculture is the art or science of cultivating the ground especially in fields including the preparation of soil, the planting of seeds, the raising, and harvesting of crops, management of livestock; village; husbandry, and farming.

In arriving at the conclusion that the Taxpayer was not “engaged in agriculture”, the salient points of the Court of Appeal’s decision are:

• Rule 3 of the Rules has the connotation of involvement in the planting or growing of the fresh flowers and the mere act of purchasing the flowers does not satisfy this;
• These flower growers were independent growers and not the Taxpayer’s employees
• In the terms of the agreement, there is nothing to indicate that the Taxpayer was involved in the agriculture activity;
• The Taxpayer’s main activity is collecting and exporting cut flowers and in its ‘cost of sales’ and there was nothing indicative that the Taxpayer was “engaged in agriculture”; and
• the photographs and invoices tendered before the SCIT by the respondent do not show that the respondent was engaged in agriculture activity.

The Court of Appeal opined that the Taxpayer must display direct involvement such as planting the said flowers in order to fall under the Rules.

2. Whether the Taxpayer was eligible to claim industrial building allowance for the Factory

In echoing the sentiments of the SCIT and the High Court, the Court of Appeal ruled this in the affirmative and held that the Factory is an industrial building under Paragraph 63 Schedule 3 of the Income Tax Act 1967.

The Court of Appeal held that even the act of repacking carried out in the factory constitutes a “process”. Reliance was placed on the case of Kilmarnock Equitable Co-operative Society Ltd v IRC 42 TC 675 whereby Lord Clyde held that “the breaking of bulk coupled with the separating out of the dross by screening and subsequent packaging of the coal into paper bags involves a “process” within the meaning of Section 271(1)(c)” in deciding that the taxpayer in that instant case was also a factory.

3. Whether the penalty was correctly imposed?

The Court of Appeal affirmed that the IRB’s discretion in imposing the penalty of 45% was correct in law.

Comments and Conclusion:

In contrast to the grounds of decision given by the High Court, the High Court had adopted a more liberal approach in deciding what amounts to agriculture by holding that the law ought to evolve with modern modes of agriculture:

“I disagree because the science for agriculture has grown by leaps and bounds and we should not be shackled by such an ancient concept when farms can now be housed in multi-storied buildings or vertical farms instead of being merely on open land. This can be done without even the need for the use of soil as in hydroponics which is defined by the Concise Oxford English Dictionary (Thumb Index Edition) as “the process of growing plants in sand, gravel or liquid with added nutrients but without soil”. (emphasis added and see also https://www.winsightgrocerybusiness.com/fresh-food/worlds-largest-hydroponic-farm-open-dubai)

…..

Alternatively, the other reasonable construction would be that Parliament has deemed it fit that the 1999 Rules have served their purpose of increasing exports of agricultural produce and that such a restriction is now put in place to better exploit the land whereby the party with the technical know-how would have to apply for land or team up with the landowners for purposes of obtaining such an exemption. “

However, the Court of Appeal was not with the High Court on this as the Court of Appeal considers that as the Taxpayer failed to prove a direct nexus with the act of agriculture i.e. itself was not engaged in the planting of the flowers, the Taxpayer could not be “engaged in agriculture”.

This point of law, whether right or wrong, remains to be the law until a case on the same question is posed before the Court of Appeal or the Federal Court.

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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.

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.

High Court dismissed Collector of Stamp Duties’ assessment by failing to consider relevant factors

Stamp duty is a form of tax payable on certain instruments as listed in the Stamp Act 1949. Depending on the nature of the document, the stamp duty payable may range from nil to ad valorem which depends on the value of the transaction. For sale of real property, the stamp duty payable is under Paragraph 32(a) of the Stamp Act 1949 (“the Act”).

The said paragraph provides that “(o)n sale of any property (except stock, shares, marketable securities and accounts receivables or book debts of the kind mentioned in paragraph (c): For every RM100 or fractional part of RM100 of the amount of the money value of the consideration or the market value of the property, whichever is the greater— (i) RM1.00 on the first RM100,000; (ii) RM2.00 on any amount in excess of RM100,000 but not exceeding RM500,000; (iii) RM3.00 on any amount in excess of RM500,000.”

In the case of Parkwood Palms Sdn Bhd v Pemungut Duti Setem (2021) MSTC ¶30-460, the issue surrounding the determination of what amounts to “market value” under the aforementioned paragraph. The Collector of Stamp Duty (“Collector”) valued the land at a price of RM107 million whereas the taxpayer valued the land at RM61 million. The High Court found in favour of the taxpayer in finding that in arriving at its decision, the Collector had failed to take into account relevant consideration.

Facts: The taxpayer had purchased a piece of land for a consideration of RM57 million and executed a Memorandum of Transfer. When the taxpayer submitted the Memorandum of Transfer, a valuation was conducted upon the land whereby the value of the land was valued at RM107 million which resulted in a stamp duty payable of RM 4.25 million. The taxpayer had submitted its own valuation reports which stated that the value of the land were RM61.4 million and RM61 million each.

Aggrieved, the taxpayer submitted a Notice of objection under Section 38A of the Act and the matter was referred to the High Court for trial.

In coming to the decision and finding for the Plaintiff, the High Court had taken heed of the below:

• Market value

The definition of market value was not defined in the Act hence reference is made to the cases of Collector Of Stamp Duties v Ng Fah In & Ors [1981] 1 MLJ 288 and Hoe Guan Investment v Collector of Land Revenue, Batu Pahat [1978] 2 MLJ 115 which provided that:

“It is common ground that in determining the market value, nowhere defined in the Ordinance, the courts should be guided by the principles that apply under the Land Acquisition Act — namely, market value is the price which a willing seller not obliged to sell, might reasonably expect from a willing purchaser with whom he was bargaining for sale and purchase of the land (Nanyang Manufacturing Co v CLR Johore [1954] MLJ 69) and this amount can best be determined by looking at recent sales of comparable lands in the vicinity.”

Similarly, the paragraph 1(1A) of the First Schedule to the Land Acquisition Act 1960 provides that “prices paid for the recent sales of lands with similar characteristics” and “to the last transaction on the scheduled land within two years from the date” are relevant considerations.

The Defendant had failed to comply with principles of land acquisition in that during cross-examination, the Defendant’s witness had admitted that 4 of the 6 comparables considered by the Defendant were transacted more than 2 years from the date the Plaintiff acquired the land. Furthermore, the 2 of the comparables were located within the Central Business District whereas the Plaintiff’s land was located within the fringe of the area.

Counsel for the Plaintiff further contended that the Defendant had failed to consider that the land was within close proximity to a funeral parlour, crematorium and cemetery which had led to unfavourable surrounding and poor market condition. The Federal Court in Collector Of Stamp Duties v Ng Fah In & Ors had already held that the existence of a cemetery is “an understandable aversion” and “may have a depressive effect on the value of lands in the vicinity”. The Plaintiff’s witnesses also considered the poor market condition in the year 2018 was contributory to the low market value of the land.

The Plaintiff’s valuation reports all took into account the negative adjustment owing to the existence of the cemetery whereas the Defendant had failed to consider the same. The Defendant’s witness also did not consider the oversupply had affected the value of the land. On this ground, the High Court had considered that the Defendant’s valuation was flawed as being inconsistent with trite principles of the law.

The High Court noted that the officer who produced the report stating that the value of the land to be RM107 million was a crucial witness but the Defendant’s witness was instead had no involvement in the valuation reports.

The Defendant’s explanation was that the then preparer of the report had retired and could not be present to testify. The Defendant’s witness instead merely reiterated the statements prepared and due to the lack of familiarity with the subject matter and was informed of the reply reports prepared by the Plaintiff’s valuers on the morning of the trial.

Based on the above, the High Court did not find the Defendant’s witness to be a credible one.

Conclusion

The High Court was of the view that the Plaintiff’s witness which valued the land at RM61.4 million to be the most accurate value and rejected the Defendant’s valuation of RM107 million. As seen above, although the law presumes in the favour of the Defendant as held in the case of Majlis Perbandaran Subang Jaya v The Alice Smith Schools Association [2011] 2 MLJ 442, they are by no means free to disregard trite principles established in case law.

As such, hearsay evidence is clearly inadmissible and that relevant considerations such as oversupply and existence of unfavourable circumstances ought to be taken into account in determining the market price of the land transaction.

Case Update: Court of Appeal upholds “deeming” provision for a Real Property Company

In a recently released ground of decision, the Court of Appeal affirmed the High Court decision in Continental Choice Sdn Bhd & CB Ventures Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri in relation to the interpretation of Paragraph 34A Schedule Real Property Gains Tax Act 1967 (“RPGTA”).

Facts:

It is undisputed that one Syarikat Bioford Development Sdn Bhd (“Bioford”) was a controlled company within the context of the RPGTA and Income Tax Act 1967 (“ITA”). Bioford acquired a piece of land in 2004 which represented 99% of Bioford’s total tangible assets. Shortly after the execution of the sale and purchase agreement of the said land, the Appellants acquired Bioford shares. In 2005, the Appellants disposed of their shares in Bioford.

It was contended that Bioford was intending to venture into the property business vide the acquisition of the land. Evidence advanced to prove this included permission to development the land into a mixed development and engaging with professionals to complete the project.

The Director General of Inland Revenue (“DGIR”) then raised Notices of Assessment unto the Appellants which stated the amount of Real Property Gains Tax (“RPGT”) payable by each of the Appellant.

Relevant laws:

Under Paragraph 34A of the RPGTA, a company is deemed to be a real property company if:

• It is a controlled company:

  1. Controlled by not more than 5 members; and
  2. Has not more than 50 members.

• Owns real property or shares or both;
• The defined value is more than 75% of the company’s total tangible assets.

Submissions:

Counsel for the Appellants submitted that as in the case of Binastra Holdings Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2001] 5 MLJ 481, Bioford was not a real property company within the spirit of the RPGTA. Bioford is a property development company instead of a “real property company” hence it falls outside the purview of the RPGTA:

‘…RPGT is not payable because the Appellants acquired Bioford’s shares with the intention to be involved in the property development market and Bioford was and is in the business of property development so therefore Bioford is a property development company and not a “real property company” within the ambit of Paragraph 34A Schedule 2 RPGTA 1976’.

Counsel for the Appellants further relied on the explanatory statement in the Finance Bill 1988 which stated that the introduction of Paragraph 34A was to “ensure that individuals do not use companies to acquire land and then dispose of shares in such companies thereby avoiding payment of real property gains tax.” As the land in Bioford was in fact stock in trade and not used as means to avoid paying RPGT, Bioford is a property development company and not a real property company as “the application of paragraph 34A should be limited to real properties that are held as investment properties by the subject company.”

In Binastra, the High Court distinguished the difference between a “chargeable asset” and “chargeable gain”:

“The policy of para 34(6) of Sch 2 of the Act is to bring within the provision of the Act disposal of shares, ‘deemed to be chargeable assets’. The crux of the matter here is that before one treats the shares as deemed to be ‘chargeable assets’, one has to determine whether there is a ‘chargeable asset’ within the meaning of s 3 of the Act. As the ‘chargeable gain’ falls within the ambit of income tax law, the gain does not fall under s 3 of the Act to be treated as ‘chargeable gain’, and hence the asset is not a ‘chargeable asset”

Counsel for the Respondent responded that the distinction between a “real property company” and “property development company” is not provided for under the RPGTA. Bioford is a controlled company that meets the definition of a ‘real property company’ provided under paragraph 34A(6) of Schedule 2 and as such the acquisition of shares in Bioford is ‘deemed’ an acquisition of a ‘chargeable asset’ and their subsequent disposal was clearly a disposal of a ‘chargeable asset’

Counsel for the Respondent held that as Binastra was overturned by the Court of Appeal, Binastra is no longer good law.

Decision

The Court of Appeal dismissed the appeal and upheld the notices of assessment.

The Court of Appeal agreed with the Respondent that nowhere within the RPGTA “, that only a company that is used by its shareholder and intended as a device or means to avoid RPGT may be regarded as a ‘real property company’ falling within the ambit of Paragraph 34A.” The Court held that the object of Paragraph 34A was to deem as chargeable asset something that was not regarded as a chargeable asset prior to the introduction of Paragraph 34A.

In particular, the Court of Appeal found that if the Parliament intended restrict Paragraph 34A to only circumstances where there is alleged avoidance of RPGTA, there is already in place Section 25 for such purposes. Section 25 is the anti-avoidance provision within the RPGTA

However, the Court of Appeal agreed that Bioford, as a property development company, disposes of real property, it would be subjected to the ITA instead of the RPGTA.

Comments

The position of Paragraph 34A within the scheme of the RPGTA is a peculiar one. This is because it deems the disposal of shares within a real property company to be subjected to RPGT whereas disposal of real property by the real property company is subjected to income tax.

Before the introduction of Paragraph 34A, individual taxpayers were using companies as means to acquire and dispose of real property without being subject to any taxes. Instead of selling the land itself, taxpayers would sell the shares within the company holding the land. The introduction of Paragraph 34A was to remedy the loophole under the RPGTA regime.

That being said, it is generally understood that property development companies are not real property companies or else it would lead to confusion as to the application of ITA or RPGTA. The corollary of Paragraph 34A is that although the sale of real property by a property development company is subject to income tax, the sale of real property shares within a property development company is subjected to real property gains tax instead.

Case update – position of judicial review post-Bintulu Lumber

If one may recall, in August 2020, the apex court of the country held in the case of Bintulu Lumber Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri that the question of palm oil fruit is considered as a “fruit” within the context of the Schedule 7A of the Income Tax Act 1967 (“the Act”) is a question of fact and not suitable of judicial review. As such, the Federal Court remitted the case back to the Special Commissioners of Income Tax to determine this point.

Fast forward a few months later, many judicial review cases involving a dispute of taxes have appeared before the High Court and/or Court of Appeal for determination. Notwithstanding the Federal Court’s decision in Bintulu Lumber, subsequent cases had demonstrated that the doors for judicial review involving tax cases are not closed. In a recently released Grounds of Decision of Kind Action (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, the High Court of Johor allowed the taxpayer’s application for judicial review and allowed an application for a stay pending the disposal of the judicial review application.

Facts:

The taxpayer was initially in the plantation business. Following a change in the ultimate holding company, a strategic decision was made to withdraw from the plantation business altogether and focus on the chemical manufacturing business. The taxpayer sold several plots of land following its intention to exit the plantation business.

The Director General of Inland Revenue (“DGIR”) was of the view that the disposal of land was subject to income tax instead of real property gains tax (“RPGT”). The taxpayer was disagreed with the DGIR’s position and stated, amongst others, that the land sold should be subjected to tax under RPGT instead because the taxpayer actively produced income from the plantation activities and the Respondent accepts that the taxpayer was carrying on a plantation business and the disposal was following a strategic decision to exit the plantation business.

The DGIR proceeded to issue Notices of Additional Assessment against the taxpayer worth more than RM81 million. The taxpayer appealed to the DGIR to have the taxes and penalties under the Notices of Additional Assessment to be paid, under protest, via instalments.

The DGIR allowed the Applicant’s instalment payment requested to have the Notices of Additional Assessment to be paid via 60 instalments. However, the DGIR disallowed the amount payable under the Notices of Additional Assessment offset against the RPGT already paid by the taxpayer previously.

This taxpayer then applied for judicial review as the Respondent’s decision in disallowing the taxes under Notices of Additional Assessment to be offset against the RPGT already paid offends the principle that the same income should not be taxed twice. By disallowing the offset, the DGIR has thereby subjected the same income, i.e. profit from the disposal of land, to both income tax and RPGT.

Decision:

The Court allowed the taxpayer’s application for leave for judicial review.

Following the cases of QSR Brands Bhd v Suruhanjaya Security & Anor [2006] 3 MLJ 164 and Flextronics Shah Alam Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2018] 7 CLJ 487, a wide interpretation is to be taken when deciding whether or not a taxpayer is “adversely affected” by a decision of a public authority under Order 53 of the Rules of Court 2012.

In this case, the requirement to pay RM 81 million within a very short period (normally 30 days from the day of the assessment) was an “unequivocal demonstration” of being “adversely affected” and “serious financial prejudice”.

The Court allowed the leave of judicial review and for the DGIR to respond at the merits stage of the judicial review application.

On the point of the availability of a domestic remedy i.e. an appeal to the Special Commissioners of Income Tax under Section 99 of the ITA, the High Court was of the view that these should only be considered during the merits stage and not at the leave stage. This is in line with our body of case law which had held in similar tune.

Comments:

Whilst the Federal Court in Bintulu Lumber said that based on the facts of its case, the case ought to be determined by judicial review, the Federal Court did not shut the doors for judicial review for tax cases.

This is especially the case where the taxpayer has good grounds to prove that judicial intervention vide judicial review is warranted, i.e. where there are:

• A clear lack of jurisdiction;
• A blatant failure to perform some statutory duty; or
• A serious breach of the principles of natural justice.

As such, judicial review remains open for tax cases and the availability of an alternate remedy, i.e. an appeal to the SCIT, is not a permanent bar to such.

The Court of Appeal upheld privileged against the IRB

Recently in a landmark ruling, the Court of Appeal in the case of Ketua Pengarah Hasil Dalam Negeri v Bar Malaysia upheld the doctrine of privilege and held that the Inland Revenue Board (“IRB“) was estopped from requesting disclosure of documents relating to client’s account by raising Section 142(5) Income Tax Act 1967 (“ITA“). The Court of Appeal upheld the High Court’s decision and dismissed the IRB’s appeal.

This case serves as a timely reminder that although the IRB is armed with wide powers under the ITA to, amongst others, request for documents for inspection, the doctrine of legal privilege cannot be abridged.

Facts:

The Malaysian Bar (“MB“) received complaints from its members that the IRB’s officers raided the several law firms with a view to auditing their clients’ accounts and issuing notices insisting on being given access to, amongst other, all books and records pertaining to such clients’ accounts. In particular, the IRB was invoking Section 142(5)(b) ITA in stating that the IRB has powers is foists with the power to conduct such raids.

The MB wrote a letter informing DGIR that such actions by the IRB are in breach of legal privilege and that Section 142(5) does not override privilege.

In reply, the IRB stated that the principle of privilege on the ground that Section 142(5) of the ITA overrides the provisions in the Evidence Act 1950 and Legal Profession Act 1976 with regards to privilege.

Aggrieved, the MB filed a judicial review to appeal against the DGIR’s position.

Legal Analysis

The relevant provision of Section 142(5) ITA is reproduced herein for it’s full effect:

The doctrine of privilege is provided under Section 126(1) Evidence Act 1950 which provides as follow:

The thrust of the MB’s argument was that are as follows:

1. The IRB cannot utilise the ITA to go on unlawful expeditions

According the IRB’s affidavit, the intention behind invoking Section 142(5) ITA in auditing the clients’ account was to ensure that law firms were reporting their income tax accurately. The IRB was more concern of law firms hiding funds in the client’s account and not the client’s hiding funds from the IRB. In other words, it was utilising Section 142 (5) against the law firms as oppose to the clients.

Privilege is for the protection of the client’s and not lawyers. Only lawyers have the right to waive privilege and not lawyers. In applying the doctrine “equity will not permit statute to be used as an engine of fraud”, the fundamental principle of privilege must prevail as it would cause untold violence to administration of justice.

2. Doctrine of Privilege remains undisturbed under statute and common law

In the seminal case of Bullock v Correy [1878] 3 QBD 356, it was held that privilege is absolute unless waived hence the infamous quote “once privileged, always privileged“.

Further reference was made to the case of R (on the application of Morgan Grenfell & Co Ltd) v Special Commissioners of Income Tax [2002] UKHL 21, the House of Lords described legal privilege as a “fundamental human right long established in the common law“.

Under Section 126 EA and case laws, there are only limited circumstances in which privileged is waived, such as express consent by client, for the furtherance of any illegal purpose or if the lawyer has observed any fact in the course of employment which shows a crime or fraud has been committed since the commence of his or her employment.

3. A “practitioner” under Section 142(5) ITA does not refer to advocate and solicitor.

The last part of Section 142(5) reads “prepared or kept by any practitioner or the firm or practitioners in connection with any client or clients of the practitioner or firm of practitioners or any other person.

In applying the strict interpretation, the words “practitioner” should not apply to “advocate ” as different words were employed in the ITA where reference was made. The words “advocate” was said to appear only 6 times within the ITA whereas the word “practitioner” only appears at Section 142(5). Although the Legal Professions Act used the word “legal practitioner”, the deliberate use of different terms of “advocate” and “practitioner” clearly indicates 2 different meanings.

The use of the word “practitioner” without the word “legal” does not refer to a lawyer but could include a person engaged in the practice of professions such as account, tax agent or tax consultant.

Decision

The High Court answered the question of whether Section 142(5) ITA overrides Section 126 EA to the negative and accordingly held that Section 142(5) does not exclude the application of legal privilege.

The High Court adopted an interesting interpretation in that finding that: “my view is as far as other written law which prohibit the disclosing or producing any document, thing or information to a court, the Special Commissioners, the Special Commissioners, the Director General, such protection or privilege does not apply. Para (b) overrides that Chapter or those provisions in that written law. Paragraph (b) saves Chapter IX of Part Ill of the Evidence Act 1950 from operation of ITA 1967.”

The High Court found that the operation of the non-obstante clause cannot be beyond the ITA. In the spirit of the ITA, the High Court found that “practitioners” to refer to tax accounts and tax agents and not advocates and solicitors. The use of the different words was Parliament’s recognition that “practitioner” and “advocate and solicitor” are two different persons.

Secondly, the High Court found that the words “notwithstanding the provisions of any other written law” does not exclude the application of common law. The Supreme Court in Manilal & Sons (M) Sdn Bhd v M Majumder [1988] 2 MLJ 305 defined this position by holding that “unless the statute expressly or by necessary implication excludes the common law remedy, the latter still remains“.

Therefore, the Court held the Parliament did not intend Section 142(5)(b) to affect common law on privilege. At most, it may apply to possible secondary cases.

Thirdly, the High Court held that Section 126 was a specific provision which governs privilege hence applying the principle Generalia Specialibus Non Derogant, it takes precedence over the general provision of Section 142(5). Section 126 of the EA embodies every privileged communication, including the Client Communications. However, Section 142(5)(b) of the ITA merely makes reference to the term “in connection with any client”. The terminology of “in connection with” is far from specific and is extremely general as to its meaning as well as its applicability.

Finally, the Court was convinced that the audits carried out were in the guise of a fishing expedition to unlawfully fish for information on the clients of the law firms. The conduct of the IRB in seeking to use Section 142(5) ITA as an engine of fraud is abusive, unlawful and illegal.

Conclusion

One can be reminded of the case of Syarikat Ibraco-Peremba Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2014) MSTC 30-084 where a tax advice from a tax consultant was not offered privilege. The same ruling was made in the case of R (on the application of Prudential plc and another) (Appellants) v Special Commissioner of Income Tax and another (Respondents) [2013] UKSC 1 where the House of Lords also found that legal privilege is not accorded to tax advice on given by a person in the accountancy profession.

In the converse, legal privilege is one of the most sacred principle and remain sacrosanct and cannot be sacrificed on the altar of the purported exercise of the statutory powers conferred by the ITA. Invoking the ITA cannot be used as subterfuge to conduct a “fishing expedition” and exculpate itself of the requirement of obtaining advance consent from the client.

Section 140 and 140A – cousins or siblings?

Section 140 and Section 140A of the Income Tax Act 1967 are common provisions used by the Inland Revenue Board (“IRB”) in investigating transactions between related/unrelated persons and in finding whether the arrangement is a tax avoidance scheme. Section 140 empowers the Director General of Inland Revenue (“DGIR”) to disregard or vary a transaction and make such adjustments where the DGIR is of the view that the transaction was a means of tax avoidance. Section 140A on the other hand allows the DGIR to substitute the price where he is of the view that a transaction is not reflective of the arm’s length principle.

At first glance, it appears that Section 140 is wider than Section 140A in that the DGIR is empowered to disregard or vary a transaction whereas Section 140A only allows the DGIR to vary the price. However, there is case law that held that the two sections are to a certain extent mutually exclusive of each other.

With the amendment of Section 140A introduced in the Finance Act 2020, the question is whether the lines between the two sections are blurred.

(I) Section 140

For ease of reference, Section 140(1) reads as follows:

“(1) The Director General, where he has reason to believe that any transaction has the direct or indirect effect of—

(a) altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person;

(b) relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return;

(c) evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by this Act; or

(d) hindering or preventing the operation of this Act in any respect,

may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the transaction and make such adjustments as he thinks fit with a view to counteracting the whole or any part of any such direct or indirect effect of the transaction.”

In simple words, where the DGIR is satisfied that a certain transaction was entered for tax avoidance, the DGIR is allowed to make any adjustment to the transaction which would be (ideally) reflective of a genuine and legitimate transaction.

In the case of Syarikat Ibraco-Peremba Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, the Court of Appeal upheld the findings by the IRB that a certain arrangement entered into by the taxpayer served no purpose other than tax avoidance. In this case, the taxpayer, a property development company, had identified certain lots of land (the lands) as being suitable for long-term investment. The plan was to build shophouses and a complex on the lands and then lease the developed units for a period of time before selling the same in its entirety or units. The taxpayer approached its tax consultants which gave the following advice:

“we have considered a structure which, if implemented, could result in the sales proceeds being treated as capital gains and hence, be subject to RPGT. That is, the lands will be transferred to a 100% realty company of Ibraco. Real property gains tax is payable on the market surplus of the lands. Stamp duty exemption should be available under Section 15A of the Stamp Act. As the developed properties will be held for rental for a relatively long period, say 5 years, there is a valid argument that the gain (or loss) of the investment properties is on capital account and subject to real property gains tax.”

In reliance on the above advice, the taxpayer did the following:

• the taxpayer formed a subsidiary that transacted with the taxpayer to develop the project;
• the principal activity of the subsidiary was investment holding and property development;
• After the sale of the land from the taxpayer to the subsidiary, parties entered into a turnkey contract to develop the project;
• Upon completion of the project, the taxpayer undertook a corporate restructuring exercise whereby the taxpayer’s shares in the subsidiary was sold to a related company; and
• The subsidiary and the related company were all wound up.

 

The Court of Appeal rules that the above transaction was invalid. In reliance of cases such as W T Ramsay Ltd v Inland Revenue Commissioners [1981] 1 All E.R.865, [1982] AC 300 H.L., the Court of Appeal found that there was tax avoidance when the transactions entered into by the taxpayer through shell companies revealed the factual situation that the tax position was altered and that the taxpayer had implemented a scheme following the advice of the tax consultant in perpetuating one original intention of selling of the properties as it intended to do from the start.

However, in the case of Ensco Gerudi (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported), the arrangement entered via a Labuan company was held to be valid. Pursuant to the Court of Appeal’s dismissal of the IRB’s appeal, several legislative changes were introduced which introduced substance requirements for Labuan companies (see Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018)

In this case, the taxpayer was in the business of providing offshore drilling services to the petroleum industry in Malaysia. The taxpayer does not own any drilling rigs hence it would enter into a leasing agreement on a bareboat basis with a rig owner within the Ensco group of companies. A Labuan company was set up to facilitate easier business dealing for the taxpayer. It must be noted that Labuan Offshore Financial Services Authority and Bank Negara Malaysia had approved the Labuan company – ENSCO Labuan Limited (“ELL”).

The IRB invoked section 140(1)(c) and disregarded the transaction between the taxpayer and ELL. The IRB alleged that the arrangement between ELL and the taxpayer amounts to tax avoidance as:

• ELL had no economic or commercial substance;
• The economic and absolute rights over the assets were not transferred to ELL;
• ELL is a company under Ensco plc;
• ELL only does business with the taxpayer to benefit from the tax incentive; and
• There was a purported increase in rental rate compared to before, providing the impression that the taxpayer is shifting profits through ELL to Ensco Plc.

The High Court ruled in favour of the taxpayer and held the transactions between the taxpayer and ELL were legitimate and did not attract withholding tax. The unilateral imposition of requirements requiring employees in Labuan, maintaining a Labuan bank account, own the assets that will be leased, and that the Labuan company must enter into leasing business with several entities was ultra vires. In particular, the High Court held that “there is nothing artificial about the payments, and there is no circularity of payment”. In echoing the sentiments in the case of Sabah Berjaya Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [1999] 3 CLJ 587, taxpayers have the freedom to structure transactions to minimise their incidence of tax. Section 140(1) does not apply where the taxpayer obtains a tax advantage by reducing his income or by incurring expenditure in circumstances in which the taxing statute affords a reduction in tax liability.

The Court of Appeal dismissed the IRB’s appeal.

It should be noted that the Income Tax Act 1967 also places legal restrictions on the IRB to adhere to principles of natural justice. In the case of Port Dickson Power Bhd v Ketua Pengarah Hasil Dalam Negeri, the High Court found that the absence of specification of which subsection of Section 140 to be relied upon and particulars of the notice of additional assessments since Section 140 does require the DGIR to have “reasons to believe”.

(II) Section 140A

Section 140A is often related as a transfer pricing provision whereby the section mandates that transactions between related persons must be conducted at arm’s length. Ideally, the transfer price should not differ from the prevailing market price which would be reflected in a transaction between independent persons.

Section 140A(3) provides as follow:

“(3) Where the Director General has reason to believe that any property or services referred to in subsection (2) is acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm’s length, he may in determination of the gross income, adjusted income or adjusted loss, statutory income, total income or chargeable income of the person, substitute the price in respect of the transaction to reflect an arm’s length price for the transaction.”

In the case of SPSASB v KPHDN, the taxpayer’s principal activity is to provide shared central function services to companies within the group of companies. The taxpayer is part of a contractual arrangement for the sharing of services and resources within the scope of a Cost Contribution (“CCA”) within the group of companies.

Pursuant to a tax audit, the IRB imposed a mark-up on the costs recovered by the taxpayer from its related companies for services provided under the CCA. The Respondent’s basis for such is consequent to the position that the arrangement between SPSASB and its related companies is not a CCA but instead an intra-group services arrangement.

 

Aggrieved, the taxpayer applied for judicial review. Amongst others, the taxpayer alleged that Section 140A does not allow the Respondent to recharacterise the CCA into an intra-group services group arrangement. Based on the Supreme Court’s decision in the Hup Cheong Timber case, where if the DGIR was of the view that a transaction/arrangement had been entered into to avoid taxes, the DGIR should invoke Section 140(1) to make the adjustment, and, in doing so, must provide particulars of the adjustment made. There was failure by the IRB to observe the importance of applying OECD standards as in the case of Damco Logistics Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2011] MSTC 30 – 033.

The High Court dismissed the taxpayer’s judicial review application but the Court of Appeal reversed this ruling.

Amendment to Section 140A in Finance Act 2020

The Finance Act 2020 amended Section 140A with, amongst others, the insertion of (3a) or (3b):

“(3a) The Director General may disregard any structure adopted by a person in entering into a transaction if—

(a) the economic substance of that transaction differs from its form; or

(b) the form and substance of that transaction are the same but the arrangement made in relation to the transaction, viewed in totality, differs from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the Director General from determining an appropriate transfer price.

(3b) Where the Director General disregards any structure adopted by a person entering into a transaction under subsection (3a), the Director General shall make adjustments to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regard to the economic and commercial reality.”

Essentially, the above amendments allowed the DGIR to disregard any structure and make adjustments such that it would be reflective of independent persons dealing at arm’s length. This would most likely include the power to recharacterise the nature of an agreement into another.

Vide the amendment, the differences between Section 140 and 140A are now blurred. Previously, the DGIR was only empowered to substitute the price of a transaction not deemed to be at arm’s length. However, the amendment now accords with the DGIR with wider powers to carry out other means of adjustment than mere substitution. Whether or not the ability to “disregard any structure” under Section 140A is synonymous with the DGIR’s powers to disregard or vary transactions that had the effect of altering the incidence of tax, relieving from tax liability, evading or avoiding tax, or hindering or preventing the operation of the Income Tax Act under Section 140 is an issue to be deliberated through future case laws.

 

PERMAI Assistance Package Tax Highlights

Earlier this week, the Prime Minister of Malaysia announced another economic stimulus package called the “Perlindungan Ekonomi & Rakyat Malaysia (“PERMAI”) Assistance Package”. This would be the 4th stimulus package announced by the government to cushion and stimulate the economy amidst rising concerns of the COVID-19 pandemic. 

The PERMAI Assistance Package is anchored in 3 main objectives: combating the COVID-19 outbreak, safeguarding the welfare of the people and supporting business continuity. In precis addition to the extension of the Temporary Measures for Reducing the Impact of COVID-19 Act 2020, the PERMAI Assistance Package provided several interim relief measures to alleviate the impact of the newly announced Movement Control Order. 

This post set out herein the key highlights from the PERMAI Assistance Package.

1/ Cash assistance

A one-off provision of RM500 to healthcare frontliners and RM300 to other frontliners will be paid in the first quarter of the year. The Prime minister stated that the special monthly allowance of RM600 to healthcare frontliners and RM200 to other frontliners will be given until the end of the COVID-19 pandemic. 

Additionally, a one-off financial assistance of RM500 to tourist guides and drivers of taxis, school buses, tour buses, rental cars and e-hailing vehicles. 

2/ Tax relief for COVID-19 screening (personal)

As stated in the Budget 2021, the tax relief for full health screening has increased twofold, from RM500 to RM1,000. The government announced that this relief includes COVID-19 screening as well.

3/ Moratorium on loans and installment reduction

The government announced that throughout this Movement Control Order 2.0, moratorium facilities such as the extension of the moratorium, restructure of loan payments and reduction of loan repayment installments will continue.

4/ Special tax relief for technology products 

Last year, the government announced a special personal income tax relief for the purchase of mobile phones, computers and tablets to ease the industry in adapting to the Work From Home arrangement. In this PERMAI Assistance Package, the government announced the extension of the special tax relief of up to RM2,5000 for the purchase of mobile phones, computers, and tablets until the end of 2021.

5/ Expenses incurred for COVID-19 testing

Under the PENJANA scheme, it was announced that tax deduction will be given for expenses incurred for COVID-19 testing. Under PERMAI, employers who bear the cost of COVID-19 screening for its employees are entitled to claim a double deduction for the payment screening costs made during the year 2021.

6/ Sales tax exemption

To boost the automotive sector, the government had announced a sales tax exemption for locally assembled and imported passenger vehicles until 31 December 2020 under the PENJANA package. This exemption will continue until 30 June 2021 to stimulate and drive momentum in the automotive sector.

7/ Revised Wage Subsidy Programme

A revised Wage Subsidy Programme called the Wage Subsidy Programme 3.0 is introduced and applies to all employers operating in areas affected by the Movement Control Order, irrespective of the industrial sector operating. For one month, employers will receive a wage subsidy of RM600 for each employee earning less than RM4,000. The number of employees for the wage subsidy limit is also increased from 200 to 500. 

8/ Special deduction for reduction of rental on business premises

During the implementation of the 1st Movement Control Order last year, the government gave a special tax deduction to a company that reduces the rental rate on business premises rented to Small and Medium Enterprises (“SME”) by at least 30% between the period 1 April 2020 to 31 March 2021. It is announced that this special deduction will be extended until 30 June 2021 and applies to rental reduction for non-SME as well.

9/ Exemption on excise duties and sales tax 

The government announced a reduction in the number of years qualified for exemption from excise duty and sales tax from seven years to five years for the transfer, disposal and private use of taxis. 

Conclusion

The introduction of the PERMAI Assistance Package aims to revitalise the economy and boost consumption. With a budget of RM3 billion for the COVID-19 Vaccination Programme, it is hoped that this will instill momentum for businesses to navigate towards economic recovery. 

7 tax cases in Malaysia in 2020

Within the blink of an eye, we have come to the end of 2020. Although the greater part of 2020 was spent in quarantine, it has not stopped the Inland Revenue Board (“IRB”) from conducting tax audits and neither has it prevented the Courts from conducting hearings of tax cases via Zoom or Skype.

With that being said, there are a few noteworthy tax cases that laid down important principles and applications of the law. This post outlines 7 influential tax cases in 2020.

1. IBM Malaysia Sdn Bhd v KPHDN

This case concerns the legal status of an advance ruling under Section 138B of the Income Tax Act 1967 (“the Act”).

Briefly, the taxpayer executed a software distribution agreement with a related company which allowed the taxpayer to distribute the software programs produced by the latter in Malaysia. The taxpayer made an application for an advance ruling to the IRB for a determination on whether the distribution payment is subjected to withholding tax as being “royalty”. The IRB issued its decision and stated that payment was considered royalty and hence was subject to withholding tax. Aggrieved, the taxpayer filed a judicial review application to appeal against the IRB’s decision.

The entire edifice of the objection made by the IRB was that the judicial review application was filed prematurely. The High Court allowed the judicial review application. However, the Federal Court and Court of Appeal overturned it but no grounds have been issued by the Federal Court. In the grounds of judgment, the Court of Appeal agreed with the IRB and held that the judicial review was premature as an advance ruling “has not adversely affected the (taxpayer) until the (taxpayer) has filed its tax return and tax was assessed.”

With all due respect, I find doubt in the decisions by the Court of Appeal and Federal Court and a fortiori the High Court position. It is apposite to note that the tax administration regime in Malaysia is a self-assessment system. The taxpayer decides the appropriate treatment of a certain transaction under the pre-existing laws. If in doubt, taxpayers may apply for an advance ruling to obtain clarification. This is the purpose of the advance ruling system. An advance ruling further behoves the taxpayer to be bound by the ruling with no remedy.

One of the arguments advanced by the IRB was premised upon its “Guidelines on Advance Rulings” which stated that the taxpayer may appeal under Section 99 of the Act if aggrieved by an Advance Ruling decision. A closer inspection of Section 99 does not allow for an appeal of an Advance Ruling. Therefore, there ought not to be any other remedy available to a taxpayer other than judicial review. The Court of Appeal’s decision is flawed in this perspective.

Nevertheless, unless the waters are tested once again by the apex court in Malaysia, the case as it stands, whether rightly or wrongly decided, is the law.

2. G Sdn Bhd v Ketua Pengarah Kastam Dan Eksais

This case was significant as it was a landmark decision by the Court of Appeal in recognising the application of the principle of De-minimis rule in tax cases.

In this instant case, the taxpayer was in the business of operating a chain of supermarkets and hypermarkets. Due to the change in the indirect tax regime from Sales and Service Tax to Goods and Service Tax, Section 190 and 191 of the Goods and Services Tax Act 2014 was enacted to prevent double taxation. The taxpayer made a Special Refund Application under Section 190 (“Application”) with the accompanying required documents. The Director-General of Customs refused the Application because of alleged errors made in the Application. The margin error allegedly made by the taxpayer was around the ballpark figure of 0.001388% – 0.015%. The High Court disallowed the Application and dismissed the judicial review application due to non-compliance.

The Court of Appeal reversed the decision of the High Court and allowed the claim. This is the first tax case in Malaysia that recognised the cardinal principle of De minimis Non Curat Lex This case now imbues revenue officers to exercise discretion proportional to the alleged mistakes made and are restrained from raising meagre non-compliance as grounds to reject refund claims in the entirety.

3. Uniqlo (Malaysia) Sdn Bhd v Ketua Pengarah Kastam Dan Eksais

Uniqlo was a decision by the Court of Appeal which enumerated the duty to give reasons by tax officers. The case is currently under appeal to the Federal Court.

The taxpayer in this case was retail business and imports garments. Similar to the above case, the taxpayer made an application for the special refund of sales tax under Section 191 of the Goods and Service Tax Act. The Customs Officer rejected the claim and the only reason given was “Keptusan Ketua Pengarah” and nothing else. Aggrieved, the taxpayer applied for judicial review to challenge the decision. The High Court rejected the taxpayer’s claim.

Relying on the case of Kesatuan Pekerja-pekerja Bukan Eksekutif Maybank Bhd v Kesatuan Kebangsaan Pekerja-pekerja Bank, the Court of Appeal held that there is a duty to give reasons for decision notwithstanding that the said duty is absent in statute. The guise of exercising absolute discretion offends the principle of natural justice.

This case confirms that tax officers cannot, without justifiable and express reasons, raise assessments, refuse refunds or vary transactions which prejudice the taxpayer who is left in the lurk to search for the reason. Discretion by public officers must be exercised judiciously to instill public confidence in the administration of governmental functions. The absence of providing reasons to be averse to interference and exculpate itself of liability will do more harm than good to the law-abiding citizens.

4. GCVSB v Ketua Pengarah Kastam Dan Eksais

A full analysis of the case can be found in an earlier analysis of the case here.

In essence, the case concerns the timing in which the taxpayer made its claim for the exceptional input tax claim. The taxpayer was in the business of property development and had purchased a piece of land (GST-inclusive) and thereafter sold the land on. Due to the sale of the land, the taxpayer registered to be a GST registered person and made an application (“Application”) to claim Exceptional Input Tax Claim for the refund of input tax incurred for the purchase of the land.

The GST Repeal Act was enacted which mandated all input tax claims to be made before 29 December 2018. However, the Respondent instructed the Applicant to not make an application for the Exceptional Input Tax Claim in the GST Return Form unless and until the Respondent had approved. The taxpayer obediently held its hands and submitted the first and only GST return form in September 2018, without stating the claim.

Approval was only given in March 2019 and the taxpayer accordingly claimed. However, the claim was denied on the ground that the claim ought to have been made in December 2018 as under the GST Repeal Act.

The High Court granted relief to the taxpayer and ordered that the taxpayer’s Exceptional Input Tax Claim be allowed. The Court found that the Applicant was acting at the behest of the Respondent and it would not be unconscionable for the Respondent to take a U-turn and required that the application be made before approval was given, in defiance of its own instructions. The Court established that the Taxpayer had made its claim to the Exceptional Input Tax Claim when it had submitted its tax return, therefore it was protected as an accrued right.

5. Prima Nova Harta Development Sdn Bhd v KPHDN

The taxpayer was in the business of property development. The taxpayer had applied to release housing units reserved for Bumiputera to be available for sale to non-Bumiputera. In return, the taxpayer had to pay a sum equivalent to the bumiputra discount to the state government and claimed the aforementioned payment as a deduction. The IRB and SCIT disallowed the sum as a deduction by finding that the payment was penal in nature for breaching the Bumiputra Quotas.

The High Court reversed the decision by the SCIT and allowed the payment to be deducted. In reliance of the case British Insulated and Helsby Cables Limited v Atherton, the Court found that the main purpose of the developer’s application was to allow the additional sale of houses. Without making the payment, the taxpayer would not earn any income and therefore the payment was closely connected to the generation of income of the taxpayer’s business.

6. BX Steel Posco Cold Rolled Sheet Co Ltd v Minister of Finance and others

This was a decision by the High Court in the determination of export prices to impose anti-dumping duties.

BX Steel Posco Cold Rolled Sheet Co Ltd was a company incorporated in the People’s Republic of China and exports Flat Rolled products to Malaysia. Various discussions between the parties were unfruitful and the Investigative Authority recommended an anti-dumping duty of 5.47% and this came into realisation vide Customs (Anti-Dumping) Duties Order 2019 P.U.(A) 69. Aggrieved, BX Steel applied for judicial review to quash the decision.

In allowing the judicial review application, the High Court found that there was no evidence to support the imposition of the 5.47% anti-dumping duty. It was admitted by the Respondents that the said rate had arrived using a wrong formula but no action was taken to reduce it accordingly. In the premise, the Ministry of Finance fell into error in failing act upon the uncontroverted admission when it was made known.

Furthermore, the High Court favoured BX Steel’s submission that the export price is the price paid by Malaysian importers based on a plethora of commentary support. In this case, a lower export price was used and as such artificially inflated the dumping margin.

Finally, the Ministry of International Trade and Industries’ (MITI) actions of signing the Notice of Affirmative Determination before a Final Determination Report was released falls as being Wednesbury unreasonableness. This was due to the lack of consideration given to relevant circumstances and MITI had unreasonably pre-judged the matter.

7. Bintulu Lumber v DGIR

I’ve discussed the case of Bintulu Lumber previously in this post.This case concerns the interpretation of the word “fruit” and whether it includes “palm oil fruit”. The taxpayer applied for judicial review which was dismissed by the apex court of the country.

The Federal Court held that there were no grounds appealable by way of judicial review and the matter was not a matter of public importance that would give rise to exceptional circumstances.

It is important to note that this case did not shut the doors to judicial review for tax matters. Many subsequent tax cases demonstrated that judicial review is an available relief if the taxpayer could prove that the assessments were illegal, irrational, and procedural impropriety. In this instant case, there was previous case law which held that palm oil fruit was not a fruit eligible to claim reinvestment allowance and therefore the statutory appeal to the Special Commissioners of Income Tax is the suitable forum to ventilate this matter.