Unknown to most, the Income Tax Act 1967 is not the only piece of document that has the force of law. When determining the deductibility of expenses and whether income from a certain source is subject to tax, tax consultants (me) would refer to several places and with reference to various other documents to make a rational judgment for the client. To supplement the Income Tax Act, it is common, amongst others, to refer to the Public Rulings and PU orders.
What are Income Tax Act, Public Rulings and PU orders?
The Income Tax Act requires no extensive introduction. It is the authority which mandates taxpayers to pay taxes, the types of income subjected to tax and where the IRB draws its power and jurisdiction from. It is also perhaps the only Act which is amended almost every single year following the passing of a new Finance Act every year owing to the always highly-anticipated Budget announced by the government each year.
The lesser-known nephew of the Income Tax Act called the Public Ruling can be found on the IRB website. These are guidance to taxpayers on the interpretation of the Income Tax Act and its various treatments. The preamble of every Public Ruling provides that “A Public Ruling is published as a guide for the public and officers of the Inland Revenue Board of Malaysia. It sets out the interpretation of the Director General in respect of the particular tax law and the policy as well as the procedure applicable to it.”
On the other hand, the Income Tax Act’s child called the PU order is a piece of subsidiary legislation that has passed through parliament and has the force of law. PU stands for “Pemberitahu Undangan” or “Legal Notification”. PU(a) contains all Royal Proclamations, orders, rules, regulations and by-laws, whilst the PU(b) contains all subsidiary legislation other than that which is required to be published in the Legislative Supplement A and generally deals with appointments and notifications.
What are the differences between the Income Tax Act, Public Rulings and PU order?
Now that I’ve outlined a very brief description of each, we’ve come to the main crux of this blog post.
- Force of Law
If you had been reading meticulously till here, you would have noticed that I called the Public Ruling as a “nephew” of the Income Tax Act whereas the PU order is the “son”.
This is the first difference: PU order and the Income Tax Act carries the force of law whilst the Public Ruling doesn’t. The PU order is a supplementary legislation of the Income Tax Act hence why it is “child” of the PU order whereas the Public Ruling, whilst deriving its power from Section 138A of the Income Tax Act 1967, is merely an interpretation of the Income Tax Act and a lawyer’s job is to always dispute on “interpretation” of the law. It is a guideline, opinion, point of view or advice by the IRB.
Therefore, whilst the Public Ruling’s interpretation of various issues are non-binding, any deviation from the public ruling would attract a tax audit, tax investigation and tax penalty. If aggrieved or discontent with the Public Ruling, taxpayers will always have the choice of challenging it via the legal route (which if you didn’t know, goes to the Special Commissioners of Income Tax, High Court and ends at Court of Appeal. The Federal Court does not hear tax cases.)
2. The contents
The contents of each document also differ and it is only when a taxpayer reads all three comprehensively would he have a better understanding of whether an item is taxable or not.
The Income Tax Act is first, an outline about the rights and responsibilities of taxpayers, secondly, a source of power for various bodies (most notably the IRB) and thirdly, a provision for institutional mechanisms. It is separated into 2 parts: the main body and the schedules. Just to briefly provide some example of its contents: Section 4 provides the types of income to be taxed, Section 20 conveys the basis period for a year of assessment of taxes, Section 33 is about the deductibility of expenses and encapsulates the “wholly and exclusively”, Section 42 aggregate income, Section 43 statutory income and Section 45 chargeable income. Schedule 6 concerns the deductibility of expenses and Schedule 7 is about capital allowances.
The PU order supplements the Income Tax Act as subsidiary legislation and it provides clarity on certain issues in which taxpayers can be 90% sure that the treatment will be correct (90% because anything can be an issue on interpretation). The contents are usually very short and sweet and deal with one issue per notification.
An example on the interaction between Income Tax Act and PU Order is on the deductibility of certain expenses. For example, under S33 on determining whether an expense is deductible or not, Audit fees, Tax services fees and Secretarial fees are non-deductible. This is because section 33 provides that for an expense to be deductible, it must be “wholly and exclusively in the production of gross income”. Audit fees, Tax services fees and Secretarial fees whilst being a requirement under law to continue operation, is not in itself involved in the “production of gross income” and hence would be added back in the computation of chargeable income. Audit fees, Tax services fees and Secretarial fees can be very substantial especially to a public listed company with various statutory obligations to obliged by. Hence after lobbying by various parties, a PU order called Income Tax (Deduction for Expenses in relation to Secretarial Fee and Tax Filing Fee) Rules 2014 and also Income Tax (Deduction For Audit Expenditure) Rules 2006 to provide for this deduction.
As mentioned previously, Public Rulings are guidelines and interpretations of the Income Tax Act. The contents are simple to read and understandable to the masses. It provides many examples and scenarios, how the treatment of various issues should be and breaks down the statutes into piecemeal by interpreting the statute into common English parlance (that lawyers may or may not agree haha).
3. Relief procedures
If say you made a mistake on your tax returns based on interpretation of the law, appeal against the IRB on their judgement on your tax return or if you wish to object to the treatment of certain items under the public ruling, each would entail a different process.
The relief procedure is more or less the same depending on the type of relief sought.
- Appeal against assessment
Under the Income Tax Act, the IRB has the power to conduct tax audit and perhaps issue a notice of assessment which will increase the tax payable on an entity with the penalty added. This is when the IRB is of the opinion that you have under-declared your income, claimed deductions in excess of what should be permitted etc.
Under Section 99 of the Income Tax Act, a person aggrieved by the decision may make an application to the Director General within 30 days upon service of the Notice of Assessment stating the grounds of appeal (except for Advanced Assessment, the application would need to be done 3 months). Extensions are allowed under Section 100.
However, the right to appeal under Section 99 is disallowed if it is to claim relief against a deemed assessment or deemed assessment on amended return from 24 January 2014 onwards unless it was made in disagreement with the public ruling made under section 138A or any practice of the Director General generally prevailing at the time when the assessment is made. Therefore, according to PR 7/2015, what is allowed to be appealed under this is section are:
- Assessment/ additional assessment/ advanced assessment/ notification of non-chargeability (NONC) by the IRB
- Best judgement assessment made without ITRF or late submission of ITRF
- Deemed assessment and deemed amended assessment where the taxpayer does not agree with the tax treatment stated in any PR made under section 138A of the ITA or known stand, rules and practices of the DGIR prevailing at the time when the assessment is made.
Reduced assessment is also allowed if there are issues in the notice disputed by the taxpayer.
B) Relief on mistake and error
A taxpayer may make an application for relief under section 131 in respect of error or mistake in the in his Income Tax Return Form. The determination of whether a taxpayer has made an error or mistake is a question of fact and law.
The conditions under subsections 131(1) and (4) of the ITA are:
(a) Application for relief under Section 131 of the ITA will not be considered if the ITRF is made in accordance with the known stand, rules and practices of the DGIR prevailing at the time when the assessment is made. (b) The taxpayer must pay all taxes that have been made for the year of assessment in which an application in respect of the error or mistake is made. (c) The taxpayer must make a written application by way of a letter or Form CP15C to the DGIR within five (5) years after the end of the year of assessment in which the assessment is deemed.
Previously, it was assumed that if you willingly and knowingly followed a Public Ruling without knowing that the treatment in the Public Ruling is wrong or challenging it, you are prevented from appealing. This was interpreted under Section 131(4) which provides that “No relief shall be given … in respect of an error or mistake… if the return … was in fact made on the basis of … the practice of the Director General generally prevailing at the time…” where “practice of the Director General” was understood to be referring to the Public Ruling. This was overturned on appeal in RGTSB v Ketua Pengarah Hasil Dalam Negeri where it was held that “practice of the Director General” does not include the Public Rulings. The basis was that the preamble of the Public Ruling does not mention that it is a Practice of the Director General, a distinction between the Public Ruling and practice of the Director is made under Section 99(4) and on the basis of fairness. Therefore, where taxpayers have erroneously followed a public ruling, relief is allowed.
C) Relief other than in respect of error or mistake
Introduced in the Finance Act 2017, Section 131A supplements the Act by providing more avenues for relief for a taxpayer on the basis that the return is excessive by reason where any exemption is approved AFTER the year of assessment in which the return is furnished or issues regarding the deduction of withholding tax.
The conditions under this new provision are: the Tax Return must be in accordance with S77 and S77A (which means the Tax Return must be filed on time) and all taxes for the relevant year of assessment has been made.
To be eligible for the relief, the application must be made within 5 years, after the end of the year, from which the exemption was Gazetted or approval was granted (whichever later) but in the case of withholding tax, 1 year after payment was made. A taxpayer will resort to this provision when he is, for a year assessment, eligible to claim exemption, allowance or deduction but the approval for such is only granted after the end of the year of assessment. For example, Company A ends its accounts on 30 June 2016 and submits it’s Form C (Income Tax Return Form for Companies) on 30 November 2016. It had applied for pioneer status and approval was granted on 30 May 2018 for the period 1.1.2016 to 31.12.2020. The taxpayer may apply for relief under S131A to have its tax paid for YA 2016 and YA 2017 to be reduced accordingly before the end of 5 years from 31st December 2018, which is 31st December 2023.