High Court held Exceptional Input Tax Claims are made when GST Forms are submitted

Recently, the High Court held in a judicial review application in relation to an Exceptional Input Tax Claim (“Claim”) made under the Goods and Service Tax Regulations 2014 (“Regulations”) and Goods and Services Tax Act (“Act”) that an Exceptional Input Tax Claim which requires the Director General of Excise and Customs’ (“DGEC”) approval is deemed to be made when the GST Return Form is submitted. The DGEC had rejected the Taxpayer’s Claim by reason that the Claim was time-barred due to enactment of the Goods and Services Tax Repeal Act 2018 (“Repeal Act”).

The Repeal Act mandated all Goods and Services Tax (“GST”) input tax claims to be made before 29 December 2018 (“Prescribed Date”). However, the DGEC failed to appreciate that the Taxpayer was at all times acting in according with instructions directed from the DGEC and the Claim was made within time when the Taxpayer submitted its GST Return Form in September 2019 i.e. before the Prescribed Date.

Upon hearing the respective parties’ submissions, the High Court ordered that the Taxpayer’s Claim be allowed.

Background facts

The Taxpayer is in the business of property development. In 2017, the Taxpayer had purchased a piece of land for RM 91 million wherein RM 5 million was incurred as GST. In July 2018, the Taxpayer sold the land and, as required by the Act, registered to be a GST-registered person.

The Taxpayer proceeded to make the Claim under Regulation 46 of the Regulations. Regulation 46 allows a taxpayer to make an input tax claim in relation to GST incurred before a taxpayer was a GST-registered person. However, such claim would require the pre-approval of the DGEC. Accordingly, the Taxpayer made an application to obtain approval in July 2018.

The Repeal Act came into force on 1.9.2018 which, amongst others, mandated all unclaimed input tax claims to be made before 29.12.2018 (“Prescribed Date”). At the behest of the DGEC, the Taxpayer made its first and only GST return in September 2018 without stating the Claim.

Approval by the DGEC was finally given in March 2019. The Taxpayer then made the Claim vide an Amended GST return (“Amended Return”) as instructed by the DGEC. However, the DGEC subsequently rejected the Taxpayer’s Claim on grounds that the Claim was time-barred as it was made after the Prescribed Date and that the Amended GST return does not fulfill the conditions of Regulation 46 i.e. an Amended Return was not the first return as required under Regulation 46.

Aggrieved by the DGEC’s rejection, the Taxpayer filed this judicial review to seek relief.

Decision of the High Court

The Taxpayer’s main thrust of argument is that the Claim was protected under the Interpretations Act 1967 and 1948 and Regulation 4 of the Regulations. It was submitted that when the Taxpayer had made an application to make the Claim and submitted the GST Return before the Prescribed Date, the Taxpayer had an accrued right which is well protected under statutes and seminal case laws. In the premise, the DGEC ought to be precluded from hiding behind the veil of the Repeal Act to exculpate itself of liability.

Furthermore, in absence of clear and unambiguous language, laws are presumed to be interpreted prospectively and not retrospectively. Reliance was made on the case of La Salle Brothers v Ketua Pengarah Hasil Dalam Negeri [2018] 1 MLJ 376 where the court held:

But the amendment Act A471 did not also expressly provide that Part I of the Interpretation Acts 1948 and 1967 (Act 388) which includes the said s 30 of the Act shall not apply… As there is a doubt the ambiguity must be construed in favour of the tax payer as the said exemption from tax has not been removed by sufficiently clear words to achieve that purpose.

Since there were no words to exclude, extinguish or affect claims which were made pending the DGEC’s approval, such claims ought to be considered as “accrued rights” established when the taxpayers made the GST Return Form. Insofar as the Taxpayer recognised it’s rights and pursued it within time, it ought not be prejudiced by the delay DGEC’s approval.

Secondly, it was also evident from contemporaneous correspondences that the Taxpayer was acting strictly according to the DGEC directions in that the Taxpayer ought not to state the Claim in the GST Return unless and until approval was obtained. It is then irrational and unreasonable for the DGEC to reject the Amended Return which was made after approval was given.

Furthermore, the DGEC had represented to the Taxpayer that the raison d’être of the Claim is that DGEC’s approval was necessary. The blithered fixation on the Prescribed Date without taking into consideration the DGEC’s own representations had therefore violated the Taxpayer’s legitimate expectation when rejecting the Taxpayer’s Claim after approval was granted. Legitimate expectation had been recognised by the Malaysian Courts to be a right protected under the law as held in Majlis Perbandaran Pulau Pinang v Syarikat Bekerjasama-sama Serbaguna Sungai Gelugor Dengan Tanggungan:

“Given the duty of a public body not to fetter its discretion under what circumstances will a legitimate expectation be protected in the face of a change in policy. Clearly, the change of policy must be ‘a lawful exercise of discretion”

The High Court agreed with the Taxpayer and ordered the DGEC to allow the Claim.

Comments

This case affirms the cardinal principle that statutes are presumed to be interpreted prospectively and does not affect anything act done and rights accrued before the implementation of any repeal or amendment.

Furthermore, this decision would hold tax authorities responsible for their own words to maintain public confidence in the government. Instructions ordered by tax authorities of its own volution would now be prevented from canvassing arguments to the opposite effect.

Case Update: Tax authorities’ obligation to give reasons

A recent decision by the Court of Appeal affirms a principle that although taxation laws do not impose a legal duty on revenue officers to provide reasons, there is nevertheless a duty to give reasons as a public decision-making body. In the grounds of judgment of the case Uniqlo (Malaysia) Sdn Bhd v Ketua Pengarah Kastam dan Eksais dated 9-07-2020, the court held that the High Court was wrong in finding that since the Goods and Services Tax Act 2004 (“the Act”) did not impose a legal duty to give reasons, the Director General of Customs and Excise (“Respondent“) is therefore excused from giving reasons.

Facts:

The case concerns a claim for a special refund of sales tax for goods held by Uniqlo (Malaysia) Sdn Bhd (“Uniqlo”) under Section 191 of the Act.

Briefly, Section 191 of the Act was a transitional provision that allowed businesses, especially in the manufacturing and retail sector, to avoid the imposition of 6% GST upon the price of goods which already contained the 10% Sales Tax. If the claim is above RM 10,000, the claim must have the claim certified by a chartered accountant. In this case, Uniqlo’s claim was duly certified by Ernst and Young.

The Respondent requested supporting documents and carried out an audit on Uniqlo’s premises. The Respondent had conducted stock takes and requested details of stock movement in furtherance of its verification of the Uniqlo’s claim.

Vide a letter dated 16-11-2016, the Respondent issued a letter informing Uniqlo that it’s special refund application was rejected due to “Keputusan Ketua Pengarah” (“Decision“). Uniqlo’s request for reasons why the application was rejected was akin to throwing a stone in the ocean as letters went unanswered. Uniqlo then applied for a judicial review to quash the Respondent’s decision.

In the High Court:

The High Court found in favour of the Respondent and held that the Decision was valid in law.

The first ground for rejection was due to inaccurate information provided by Uniqlo. The High Court found that the Respondent’s findings after conducting physical audits were different from the refund application. This allowed the Respondent to reject Uniqlo’s claim.

Secondly, the High Court was of the view that Section 191 of the Act does not make it mandatory for the Respondent to provide reasons for rejection. It favoured the position of Pendaftar Pertubuhan v Datuk Justin Jinggut [2013] 3 MLJ 16 (“Justin Jinggut”) in finding that the GST does not mandate an obligation for the Respondent to give reasons.

Additionally, the High Court considered an undated letter after the filing of the juridical review from the Respondent which stated the reasons for rejection were due to inaccurate information and failure to remove the sales tax element from the selling price for stocks on hand.

Aggrieved by the decision of the High Court, Uniqlo filed an appeal to the Court of Appeal.

In the Court of Appeal:

The Court of Appeal allowed the appeal and overturned the decision of the High Court and quashed the Respondent’s decision.

On the point of inaccuracies, the Court Appeal found:

  1. The Respondent did not challenge the certificate issued by Ernst & Young; and
  2. The verification physical audit was conducted 6 months after the claim was made hence the goods held by Uniqlo as of 1.4.2015 would naturally be different from October 2015.

On the second point, the Court of Appeal distinguished the case of Justin Jinggut and instead found reliance in the case of Kesatuan Pekerja-Pekerja Bukan Eksekutif Maybank Bhd v Kesatuan Kebangsaan Pekerja-pekerja Bank & Anor [2018] 2 MLJ 590. Accordingly, the Court of Appeal held that silence on the duty to give reasons in the Act cannot be equated to the same as no reasons need to be given, and duty to give reasons can be implied. This approach was favoured on the concept of fairness and inculcates transparency and accountability.

Similarly, the Court found that the High Court erred in considering the undated letter as it was filed after the filing of the judicial review.

Conclusion

The Decision is welcome to encourage accountability by public servants and ensure that discretion was exercised properly. The practice to give reasons further instills confidence and provides an opportunity to taxpayers and to remedy mistakes/ discrepancies, if any.

It is noted that the Respondent had since filed an appeal to the Federal Court.

Tax and Covid-19 Part 3

As countries all around the world are slowly opening up their economies amidst declining Covid-19 infection rates, economies nevertheless already have irreparable damage done. At the time of writing, more than 100 hotels have closed down nationwide and well-known names such as MPH, Microsoft and Speedy are scaling down operations.

This post is part of the “Tax and Covid-19” series which serves to provide informative expository of the Covid-19 pandemic on taxpayers affairs. Part 1 addresses potential issues arising from Covid-19 related expenses and Part 2 relates to incentives under the PENJANA scheme. Part 3 now intends to explore the topic of the tax treatment of certain types of income.

** Please note that the deadline for submission of personal tax for YA 2019 is 30 June 2020. Please do file your taxes 🙂

1. Income from the release of bad debt

In challenging times, companies may not have the financial ability to repay sums owed to creditors and occasionally, as a sign of goodwill or due to special relationship between the debtor and creditor, the creditor may write off the debt owed. Whether or not writing off bad debt is a deductible expense had been discussed in Part 1 here, whilst now we deal with the tax treatment of the debt in the hands of the recipient.

As a matter of general principle, release of bad debts is taxable in the hands of the recipient. In dealing with the question of whether the debt ought to be taxed, taxpayers are guided by the principles in Section 34(2) of the Income Tax Act 1967 (“the Act”) which provides that a release of bad debts are to be taxed when:-

        1. The taxpayer had taken a tax deduction under Section 33 of the Act against the taxpayer’s business income; or
        2. The taxpayer had claimed capital allowances under Section 42 and Schedule 3 of the Act.

Where the release of bad debts does not fall into either of the categories above, the release of bad debt is arguably not taxable in the hands of the recipient.

In the case of Felda Trading Sdn Bhd v. KPHDN (“Felda Trading”), the court held that the release of bad debt owing to the holding company was taxable because it was “gains or profits from a business” under Section 4(a) of the Act. In this case, the holding company lent money to the taxpayer to settle debts owing to trade creditors and therefore the Special Commissioners of Income Tax (“SCIT”) considered it to be “gains or profits from a business”.

With respect, the Special Commissioners’ decision is flawed because the governing provision used to bring the release of debt was Section 4(a) and not Section 34(2).

As mentioned above, the governing provision to tax release of debt is canvassed in Section 34(2) of the Act. It is further stressed that this is the only section which addresses the release of debt. Therefore, in applying the interpretation principle of generalia specialibus non derogant, the Special Commissioners ought to have applied Section 34(2) instead of Section 4(a). Further reading on the matter can be found here (spoiler: the decision would’ve been different.)

However, in Bandar Nusajaya Development v KPHDN, the Court of Appeal agreed that the waiver of interest expense for loans taken by the taxpayer against its non-business income was not taxable. The Court relied on, inter alia, the fact that Section 30(4) was the only section which addresses the release of debts and the said section did not envisage that a release of debts against the taxpayer’s non-business income is taxable.

Although the Federal Court subsequently overturned the decision on point of judicial review and had the matter was referred back to the SCIT, this point of law still stands.

2. Income from compensation payments

Whilst Part 1 of the series discusses whether early termination payments/compensations payments are deductible, we now turn to whether they are taxable.

Compensation payments received in the course of business are taxable. Examples include compensation payments made to terminate a business contract prematurely, damages for any breaches of contract or damages to replace profits are revenue in nature and are taxable. In contrast, compensation made due to destruction of a profit-making apparatus and sale of rights are capital.

In the landmark case of Van den Bergh v Clark (Van den Bergh”), compensation payments made to terminate a contract was held to be capital in nature. The taxpayer, in this case, was in the business of manufacturing margarine and similar products. The taxpayer entered into an agreement with a Dutch competitor to work in friendly alliance, inter alia, to share profits, not to compete, territories and ancillary matters. Payments to each other under the contract was treated as revenue for income tax purposes at all material times. Owing to war and other difficulties, the parties were in dispute over the alleged payment ought to be made. The Dutch company wanted to terminate the contract but the taxpayer, who was in disadvantaged, refused to terminate unless £450,000 was paid. The Dutch company paid the sums on the condition, amongst others, that the sums represent final payment of all outstanding claims and there would be no counterclaim.

The taxpayer was assessed on the £450,000 received in income tax. The General Commissioners found that the sums were in relation to “pooling arrangements” and must be brought in for the purpose of arriving at the balance of taxable profits and gains. On appeal to the House of Lords, the sums were held to be capital in nature.

The House of Lords took note of the following:

          1. The taxpayers were giving up their rights under the agreements for thirteen years ahead. The agreements were not ordinary commercial contracts made in the course of carrying on their trade but the agreements related to the whole structure of the taxpayer’s profit-making apparatus.
          2. The contract controlled how the taxpayers conducted their business.
          3. The contracts provided the means of making profits, but by themselves did not yield profits. The profits arose from manufacturing and dealing in margarine.

In Malaysia, we have imported Van Den Bergh in the case of MSE Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri and Toxicol Sdn Bhd v KPHDN (“Toxicol”). The latter, being higher in authority, will be discussed.

In Toxicol, the taxpayer entered into a contract with Kualiti Alam Sdn Bhd where Toxicol was to be a special purpose vehicle whose only obligation is to carry out obligations under the contract and is not allowed trade with any other businesses. There was a change in UEM management which frustrated the taxpayer and thereafter, entered a novation agreement to transfer all its rights to a transferee. In return, Toxicol was paid a sum of RM23mil. The bone of contention was whether the RM23mil was revenue or capital in nature.

In holding that the compensation payment was capital in nature, the court held that the novation agreement fundamentally crippled the whole structure as Toxicol could not be involved in Waste Management anymore as it was incorporated solely for the purposes of Waste Management. The taxpayer was also not in the business of selling contracts. The novation contract essentially destroyed the taxpayer’s profit-making apparatus and hence was capital in nature.

Therefore, the cases illustrated the fundamental understanding that if the compensation payments were made pursuant to the termination of a contract which materially affects the taxpayer’s profit-making structure, it is capital. Where the taxpayer is able to absorb the shock of termination, it is incident to the taxpayer’s business only had a minor impact, it is arguably revenue.

On the employment side of things, compensation payment for termination of service contracts is taxable. However, Para 15 Schedule 6 of the Act gives an exemption of RM10,000 for each completed year of service with the company or companies in the same group.

3. Income from government subsidies

Under the PRIHATIN Stimulus+ Package, the federal government introduced the wage subsidy program to encourage companies to retain employees and assist in overhead costs burden. The subsidy comes within the purview of the Income Tax (Exemption) (No. 22) Order 2006 (P.U.(A) 207/2006) (“the Order”) which exempts from tax subsidies given from the government but corresponding deduction/capital allowance for expenses incurred are allowed.

Although the application seems straight forward, taxpayers are reminded to always comply with the requirements to qualify for the wage subsidy and maintain adequate documentation.

Till date, the only case which dealt with the Order substantially is Chantika Kelang Beras Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri. In this instant case, the taxpayer was in the business of rice miller. The taxpayer received a subsidy from the Ministry of Agriculture & Agro-Based Industry Malaysia for rice and paddy seedling. However, the taxpayer mistakenly declared the subsidy as part of the taxpayer’s income. The taxpayer then applied for relief under Section 131(1) of the Act but was denied.

In agreeing with the IRB, the SCIT and the High Court took the view that the taxpayer was not the targeted group as the subsidy was given to paddy farmers to purchase good quality paddy seedlings at a subsidised priced rice at ceiling price. Rice millers were therefore not part of the targeted audience.

On appeal to the Court of Appeal (no written judgment), the decision was overturned. There was no room for intendment that the Order did not apply to the taxpayer because it was not a condition contained within the provision of the subsidy that it was intended for paddy farmers only. The MOA will pay the subsidy after inspecting the taxpayer’s premises to confirm that it met their conditions. Only when the MOA was satisfied that the taxpayer met their conditions and would the subsidy be released.

Therefore, taxpayers are reminded to maintain adequate documentary evidence of the factors which would affect their claim under the Wage Subsidy Program such as the number of employees, the amount of income of each employee and the (mandatory) at least 50% fall in revenue.

Conclusion

The debate of whether an income is revenue or capital in nature is subjective and is often highly dependent on the facts of the case. To prevent ambiguity, parties should record the intentions of the party at time the contract was made in clear and unequivocal language (Lower Perak Cooperative Housing Society Bhd v KPHDN).

税务与新冠肺炎 第二部

于 6月7日2020年,大马首相宣布有条件行动管制令将于6月9日结束,取而代之的是复苏期行动管制令落实于6月10日至9月31日。大马首相也发表了人民对于经济逐渐下降的情况以而介绍了国家经济重建计划(Penjana)(“计划”)。该计划包含了许多不同的计划与激励措施来帮助提振经济基础。计划的意向可以简单的用六个字来形容:解决,韧性,重新启动,修复,振兴和改良。

这文章宗旨提供计划中的税收优惠从企业所得税,个人所得税,印花税,不动产利得税, 销售与服务税等等的角度。

  1.  企业所得税

 

a) 特别再投资税收津贴

在所得税法1967 附表7A内, 仅有制造业企业和特定的农业核准的活动可有资格索求特别投资税收津贴。所得税提供企业可索取再投资减税收津贴高达15年连续课税年。

在计划内: 

如果该企业可索取再投资税收津贴已结束,企业可继续索取多两课税年的特别再投资税收津贴。然而,特别再投资税收津贴是否与再投资税收津贴一致可需要政府誊清。

b) 扣除与资本津贴与控制新冠肺炎关联的费用

大马政府已在上任的经济振兴配套之中允许了与控制新冠肺炎关联的费用一律可得扣除或采用资本津贴。当中,这包括了个人防护装备, 热扫描仪以及测试工具。

在计划内: 

这看起来是重复政府已先期提供的税收优惠为了鼓励企业遵守卫生部的标准操作程序

c) 采用弹性工作制税收优惠

即使条件性行动管制令即将结束,政府呼吁人民保持社交距离以及鼓励企业采取弹性工作制以避免众人在公司集会。

目前,纳税人在所得税(扣除谘询与培训费用于执行弹性工作制税收)条规2015之下可以在获得大马人才机构(TalentCorp)的批准后可扣除与执行或增进弹性工作制相关的谘询与培训费高达3个课税年。

在计划内:

纳税人可从1.6.2020扣除与弹性工作制相关的费用。有关详情与条件需澄清。

d) 中小型企业税务优惠

在计划内: 

如有中小型企业在于1.7.2020 和 31.12.2021 之间开始营业,该企业可索取特别所得税扣税高达RM20,000 给予高达3个课税年。

(请在之下参考给中小型企业的印花税优惠) 

e) 税务津贴为了鼓励聘用雇员

在计划内: 

为了鼓励聘用雇员,政府以介绍了以下的税务津贴:

        1. 雇佣青年在学徒制之下:可获得RM600 每月长达6个月

2. 雇佣>40岁以及失业超过6月:可获得RM800 每月长达6个月

3. 雇佣>40岁以及残障人士:可获得RM1,000 每月长达6个月

4. 被裁员的了的雇员但没有缴纳社会保险:一次性的RM4,000培训练津贴

f) 其他税务优惠

在计划内: 

政府延长了一些近期会到期的税务优惠

I. 降低租给中小型企业至少30%的特别税务扣除延长至30.9.2020 。

II. 电脑软件工具的加速资本减免率延长至31.12.2021。

III. 装修与翻新贸易建筑的特别税务扣除高达RM300, 000 延长至31.12.2021。

IV. 工资补贴计划延长多3个月。

 

  1. 个人所得税

a) 购买手机,电脑或平板的个人可获得所得税减免

目前,每个人都可获得个人所得税减免高达RM2,500在用于生活方式兴趣费用例如购买书籍,个人电脑,智能手机或平板(非商业使用),运动工具,健身房会员以及支付网络订阅。

在计划内: 

如果收到得一架手机,电脑或平板高达RM5,000,纳税人可用来抵减个人所得。

纳税人可另外获得RM2,500 减免在购买了手机,电脑或平板的费用。

政府必须澄清这一措施了是否提高了所得税法令之下的限额还是另外运转,例如是否一个人可获得RM5,000的减免为了购买1个平板,还是每个资产的减免额限制于RM2,500.

b) 对于育兒的个人所得税减免

目前,每个个人纳税人都可获得支付育儿费用高达RM2,000的个人所得税减免。前提是该育儿中心必须已注册还有儿童的年龄不超过6 岁。

在计划内:

该所得税减免额被提高至RM3,000. 育儿中心必须与社会福利局或教育局注册

c) 于旅游的个人所得税减免

在之前的经济配套之中,政府给予了在本地旅游行程在酒店和入门票之类的开支高达RM1,000的个人所得税减免为了促使马来西亚居民帮助旅游产业从1.3.2020至31.8.2020.

在计划内: 

减免时期已延长至 31.12.2021.

  1. 印花税

a) 对于并购过程的合同或文件的特别豁免印花税

在计划内: 

中小型企业可享受豁免特别印花税征收在并购过程的合同或文件从1.7.2020至30.6.2021. 

b) 购买房屋豁免印花税

在计划内: 

为了重振地产市场,政府一再次的介绍了房屋拥有权活动以及提供税务优惠。从1.6.2020至31.12.2021, 如果发展商处给予至少10%折扣在价值RM300,000 – RM2,500,000住宅物业,其相关的买卖合约以及贷款协议都可获得所得税豁免。

购买者可获得的印花税豁免如下:

买卖合约:限于首RM1,000,000。

贷款合约: 全额免税。

  1.  产业盈利所得税

在产业盈利税法1976,出售房屋或土地的产业盈利必须支付5 – 30% 的产业盈利税。产业盈利税率根据纳税人购置与出售的时间来定。

在计划内: 

从1.6.2020 至 31.12.2021,出售房屋或地产可豁免产业盈利税,但此优惠只限至于3间房屋或土地。

注意:仅有如果出售房屋或地产会招致产业盈利税可豁免。如果出售房屋或地产会招致所得税,该盈利是应税所得。

  1. 间接税

a) 旅游税

外国游客必须为每晚住宿在酒店支付RM10 的旅游税。

在计划内: 

从1.7.2020 至 30.6.2021, 酒店可豁免旅游税。

b) 豁免汽车销售税

根据销售税(税率)法令2018,本地组装车以及进口车会招致为 10%的销售税。

在计划内: 

从15.6.2020 至31.12.2020, 本地组装车全额免销售税而进口车免50%。

c) 豁免服务税

在之前已介绍的经济配套之中,政府豁免酒店支付服务税在住宿和相关的服务从1.3.2020 至 31.8.2020. 

在计划内: 

豁免服务税的时期延长至30.6.2021. 

d) 豁免出口关税

毛棕榈油、棕榈油仁油和加工棕榈仁油都会招致 0 – 30% 的出口关税。政府已降低5月和6月的出口关税至分别4.5% 和 0%,

在计划内: 

从1.7.2020 至 该国出口的毛棕榈油、棕榈油仁油和加工棕榈仁油将免除出口关税。

e) 减免迟缴销售与服务税罚款

亚皇家海关局已宣布任何迟缴销售与服务税而引起罚款一律全额减免如果该销售和服务税在30.6.2020 前缴纳给应纳税期在29.2.2020, 31.3.2020 和 30.4.2020结束. 

在计划内: 

从1.7.2020至31.9.2020,任何迟缴销售与服务税在和纳税期在30.6.2020, 31.7.2020 和 30.8.2020结束的的罚款将会减免50%。至于给纳税期在31.5.2020 必须缴纳的销售与服务税应纳税期是否会必须如期(30.6.2020)支付,减免50% 还是100%则不清。

  1. 其他税务优惠

a) 为了鼓励外国直接投资的税务优惠

目前,促进投资法1986定为新兴工业地位的企业可享受法定收入全额免税高达10年以及政府介绍的各种税务优惠。

在计划内: 

搬迁制造业至马来西亚的外资企业以及投入新资本投资进制造产业。根据直接投资额,这会影响外资企业在马来西亚可享受的收入免税时期:

在RM3亿至RM5亿之间:10年

高于RM5亿:15年

如有兴趣,企业可在1.7.2020 至 31.12.2021 之间向马来西亚投资发展局申请批准。该企业必须在获得批准后的一年之内搬迁以及开始制造业。

b) 搬迁制造业至马来西亚的马来西亚企业

在计划内: 

凡是搬迁制造业至马来西亚的居民公司和马来西亚投资发展局的批准后可获得可以获得高达5年100%的再投资津贴。

企业可在1.7.2020 至 31.12.2021 之间向马来西亚投资发展局申请批准。

 

Tax and Covid-19 Part 2

(This post will be updated as more clarification comes to light)

On 7 June 2020, the Prime Minister of Malaysia had announced that the Conditional Movement Control Order (“CMCO”) will come to an end on 9 June 2020 and be replaced with Recovery Movement Control Order (“RMCO”) which is set to take effect from 10 June 2020 to 31 August 2020. During his speech, the Prime Minister addressed the public’s concerns about reopening the economy and also introduced various measures to stimulate the economy with the introduction of the National Economic Recovery Plan (otherwise known as “PENJANA”) which encapsulates the Government’s initiatives in 6 words: Resolve, Resilience, Restart, Recovery, Revitalise and Reform.

This Article aims to provide a summary of the tax initiatives under PENJANA from the corporate income tax, personal income tax, stamp duty, real property gains tax, indirect tax and other incentives perspective.

1. Corporate Income Tax

(1) Special Reinvestment Allowance (“SRA”)

Under Schedule 7A of the Income Tax Act 1967 (“the Act”), only manufacturing companies and selected agricultural activities are eligible to claim for Reinvestment Allowance (“RA”). Furthermore, the Act provides that a company may claim for RA only for up to 15 consecutive Year of Assessment (“YA”).

Under PENJANA:

Where the company’s eligibility to claim RA has expired, the company can continue to claim SRA for up to 2 YAs. However, it is unclear whether the SRA would be the same rate as the RA and whether there are any further conditions to comply.

(2) Deduction and capital allowance for expenses incurred in relation to prevention of Covid-19

The Government had previously announced in the first stimulus package that taxpayers are allowed to claim tax deductions or capital allowances in relation to expenses incurred on Covid-19 prevention measures such as personal protective equipment (“PPE”), thermal scanners and testings.

Under PENJANA:

This seems to be a repetition of the same incentive to ease the cost burden of adopting measures under the SOPs issued by the Ministry of Health

(3) Incentives to adopt Flexible Work Arrangements (FWA)

As social distancing measures are encouraged, the government aims to further incentivise companies to have in place FWA to prevent a gathering of large number of employees.

Currently, under the Income Tax (Deduction for Consultation and Training Costs for the Implementation of Flexible Work Arrangements) Rule 2015 allows taxpayers to claim double tax deductions for consultation fees and costs of training in implementing or enhancing FWAs for up to 3 consecutive YA and a cap of RM500,000 per year subject to approval by Talent Corp.

Under PENJANA:

Tax deduction for FWA will begin from 1 June 2020 onwards. Further clarification on the type of expenses and corresponding conditions will be required.

(4) Small and Medium Enterprise (“SME”) tax incentives

Under PENJANA:

Where an SME commences operation between 1 July 2020 to 31 December 2021, a special annual income tax rebate of up to RM20,000 will be given for up to 3 YAs.

(Please refer to stamp duty relief available to SME below)

(5) Incentives to encourage employment

Under PENJANA:

To further encourage employment, the Government had announced the following tax incentives:

      1. Employment of youth for apprenticeships: RM600 per month for up to 6 months
      2. Employment of person >40 years old and been unemployed for 6 months: RM800 per month for up to 6 months
      3. Employment of persons >40 years old or persons with special abilities: RM1,000 per month for up to 6 months
      4. Employees retrenched but are not covered under the Employment Insurance Scheme: one-off RM4,000 training allowance.

(6) Other incentives

Under PENJANA:

The Government further announced the extension of various incentives currently already in place but due to expire soon.

      1. Special tax deduction for rental reduction for business premises rented to SMEs of at least 30% to be extended to 30 September 2020.
      2. Accelerated capital allowance of 40% for ICT equipment to be extended to 31 December 2021.
      3. Special tax deduction for renovation and refurbishment expenses of business premises up to RM300k to be extended to 31 December 2021.
      4. Extension of the Wage Subsidy Program to be extended for a further 3 months.

2. Personal Income Tax

(1) Personal income tax reliefs for purchase of handphone, notebook and tablet

At present, individuals may claim income tax relief of up to RM2,500 for lifestyle expenses such as the purchase of books, personal computer, smartphone or tablet (not for business use), sports equipment, gym membership payment and monthly bill for internet subscription

Under PENJANA:

      1. From 1 July 2020 onwards, individuals who receive a handphone, notebook or tablet can claim personal income tax relief of up to RM5,000.
      1. Similarly, individuals can claim further claim a tax exemption of RM2,500 for purchase of handphone, notebook and tablet.

Further clarification is required whether a claim under the PENJANA tax incentive operates exclusively to the current tax relief or in addition i.e. can a person claim for a total of RM5,000 for purchase of 2 tablets?

(2) Personal income tax relief for childcare

At present, individuals can claim an income tax relief of up to RM2,000 for child care expenses at a registered child care centre/kindergarten for a child aged 6 years and below

Under PENJANA:

The income tax relief is increased to RM3,000 for YA 2020 to 2021.

The child care centre must be registered with the Department of Social Welfare or the Ministry fo Education.

(3) Personal tax relief for travelling expenses

Previously, a special personal income tax relief of up to RM1,000 allowed for resident individuals for expenses incurred domestic travelling between 1 March 2020 to 31 August 2020.The expenses eligible for tax relief are accommodation fees with registered accommodation providers and entrance tickets to tourist attractions spots.

Under PENJANA:

The period is extended to 31 December 2021.

3. Stamp Duty

(1) Special stamp duty exemption for instruments executed in connection with Mergers and Acquisition for SMEs.

Under PENJANA:

For any instruments executed between 1 July 2010 and 30 June 2021 by SMEs, there will be a stamp duty exemption if it is for the purpose of mergers and acquisitions.

(2) Stamp duty exemption for instruments executed in connection with the purchase of residential properties

Under PENJANA:

With the reintroduction of the Home Ownership Campaign, a stamp duty exemption will be given for the purchase of residential properties between the value of RM300k to RM2.5million ON THE CONDITION THAT at least a 10% discount is given by the developer & the instrument was executed between 1 June 2020 to 31 December 2021.

The stamp duty exemption given is:

      1. Instrument of transfer: Restricted to the first RM1million of the property price
      2. Loan agreement: Full stamp duty exemption

4. Real Property Gains Tax (“RPGT”) Exemption

At present, taxpayers are subject to an RPGT at the rate of between 5 – 30% depending on the period in which the taxpayer acquires and subsequently disposes of the property.

Under PENJANA:

Taxpayers are exempted from RPGT for properties disposed between the period of 1 June 2020 to 31 December 2021 for up to 3 units of residential property.

Note: caution must be taken as the exemption appears to apply only where the disposal of real property is subjected to RPGT and not income tax. Where the disposal of real property is subject to income tax instead, the exemption may not apply.

5. Indirect Tax

(1) Tourism tax exemption

Currently, a tourism tax of RM10 is charged on foreign travellers on a per room per night basis.

Under PENJANA:

Hotels are exempted from charging the tourism tax between 1 July 2020 to 30 June 2021.

(2) Sales tax exemption on automotive vehicles

Under the Sales Tax (Rates of Tax) Order 2018, a sales tax of 10% is imposed on the sale price of locally assembled cars and final price of imported cars.

Under PENJANA:

A full sales tax exemption (100%) on locally assembled passenger vehicles and a 50% sales tax exemption for imported passenger vehicles purchased between the period 15 June 2020 to 31 December 2020.

(3) Service tax exemption

At present, hotel operators are exempted from imposing service tax on accommodation and related services for the period 1 March 2020 to 31 August 2020.

Under PENJANA:

The service tax exemption is to be extended up to 30 June 2021.

(4) Export duty exemption

Currently, an export duty of between 0-30% is imposed on the export of crude palm oil, crude palm kernel oil and refined bleached deodorised palm kernel oil. The Government had previously announced that the export duty for crude palm oil had been reduced to 0% for June from 4.5% in May.

Under PENJANA:

There will be a full export duty exemption on the export of the aforementioned commodities between the period 1 July 2020 to 31 December 2020.

(5) Remission of penalties for late payment of Sales and Service Tax

The Royal Malaysia Customs Departments had previously announced that any penalty imposed on late payment of Sales and Service Tax due at the end of the month between the period of March to May will be fully remitted if the payment is received on or before 30 June 2020 for the taxable period ending 29 February 2020, 31 March 2020 and 30 April 2020.

Under PENJANA:

There will be a 50% remission on penalty for late remission of Sales and Service Tax due and payable between the period 1 July 2020 to 31 September 2020, which correlates to the taxable period ending 30 June, 31 July and 30 August 2020. 

However, further clarification is required for the taxable period ending 31 May and tax due on 30 June whether any remission on penalty for late payment is given. 

6. Other incentives

(1) Incentives to encourage Foreign Direct Investments (“FDI”)

At present, there are various incentives available in addition to the Promotion of Investments Act 1986 where companies with a Pioneer status may enjoy a full income tax exemption of the statutory income for a period of up to 10 years.

Under PENJANA:

Foreign companies can enjoy a full income tax exemption of 0% if they relocate their manufacturing business operations into Malaysia and make new investments in the manufacturing industry. Depending on the amount of the FDI made, this will affect the corresponding period in which the company can enjoy the income tax exemption:

      1. For FDI between RM300mil to RM500mil: 10 years
      2. For FDI above RM 500mil: 15 years

Applications must be made to the Malaysia Investment Development Authority (MIDA) for approval between 1 July 2020 to 31 December 2021. The company must shift and commence manufacturing operation within 1 year after approval.

(2) Relocation of manufacturing operations by Malaysian companies

Under PENJANA:

If a resident company moves its manufacturing operations from overseas into Malaysia, the resident company would be eligible to claim a 100% investment tax allowance for a period of up to 5 years, subject to approval by MIDA.

Applications can be made between 1 July 2020 and 31 December 2021.

Tax and Covid-19 Part 1

As the Covid-19 pandemic’s effect on the global economy is predicted to last for another year, taxpayers may be forced to take extraordinary measures in handling their business affairs during these extraordinary times. When making any financial decisions, taxpayers should take note that there may be tax repercussions arising from these decisions.

鉴于新型冠状病毒肺炎疫情蔓延而在国际经济上所造成的停滞不前的情况预测将持续至下一年,纳税人或被迫在这个异乎寻常地时间里采取特殊的措施。在做任何商业决定时,纳税人应意识到商业政策是否会对税务实务造成影响。 

This article aims to lay out some applicable principles of deductibility of different types of expenses that a taxpayer may incur during this period. The types of expenses to be explored are compensation for early termination, bad debts, compensation for retrenchment, subsidy received by the government and donations.

此文章旨在说明纳税人在这期间或将产生的一些费用的相关税务扣除制度。其中会进一步探讨的费用包括提前终止合约赔偿金、坏账、遣散费、政府给予的工资补贴计划以及捐献。

Under Section 33(1) of the Income Tax Act 1967 (“the Act”), the conditions in order to qualify for a tax deduction are:

  1. The expense was incurred in the basis period; and
  2. The expense is wholly and exclusively for the production of the taxpayer’s gross income.

根据所得税法1967 第33(1)条,获得扣税的条件如下:

  1. 该费用在此准基期限招致;以及
  2. 该费用是完全以及专门用于产生收入。

However, Section 39 of the Act provides that notwithstanding an expense fulfils the conditions under Section 33(1), no deduction is allowed. For example, Section 39(1)(c) provides that expenses incurred which are capital in nature are not tax-deductible.

无论如何,第39条说明就算有些费用满足第33(1)条的条件,该费用不允许扣税。例如,第39(1)(c)条陈述资本支出是不允许扣税。

1.Deductibility of compensation expense for early termination

1。扣除提前终止合约赔偿金

Parties seeking to put a contract to an end unilaterally may be required to compensate the counterparty for early termination. Before Covid-19, parties may have entered a contract in the course of trade with the vision that the contract would be profitable. If the contract now proves to be more a liability than an income source, any compensation payments made to terminate the contract generally ranks for a deduction.

假设合同当事人想单方提前终止合约,该合同当事人也许必须赔偿对方。在新型冠状病毒肺炎疫情爆发,合同当事人也许预期该合作会产生利润。如果该合同是明显的无法企及反而成了一个累赘, 为了提前终止合约所导致的赔偿金是可以扣除的。

However, if the early termination compensation is capital in nature, it is not tax-deductible. For example in CH & Co (Perak) Sdn Bhd v DGIR, the taxpayer had claimed a deduction for compensation expense to compensate the ground floor tenant for trade fixtures and fittings and loss of business as the taxpayer had a prospective tenant who wanted to lease the entire building for 14 years. The court found that the compensation was a capital expense. The reason for the court’s finding was twofold:

      1. The termination was to remove of a disadvantageous asset; and
      2. To make the building more advantageous and beneficial.

然而如果此赔偿金是资本支出,该赔偿金是不可扣除的。在CH & Co (Perak) Sdn Bhd v DGIR,该纳税人扣除了支付给在一楼的租户与所有固定装置和可拆除设备以及营业亏损所造成的赔偿金。为了提前解约的原因是因为有另一位准租户有意租用纳税人所属的楼宇长达14 年。法庭裁定该支出是中资本支出因为

    1. 纳税人终止合约是为了去除不利的资产;以及
    2. 为了使楼宇更有利和增加吸引力。

Generally, if the termination gave the taxpayer an enduring benefit, compensation for the early termination may not be deductible. Courts will scrutinize the surrounding circumstances and events that led to termination to determine the purpose of compensation payment and thereafter decide if it is revenue or capital in nature.

如果终止合约给予该纳税人持久的利益,所交付的赔偿金是不可扣除的。法庭在决定该赔偿金是资本支出还是公司营运费时会根据周围情况和提前终止合约的目的进行评估。

2. Deductibility of bad debt

2. 坏账的税务扣除

As demand for goods and services slumps amidst economic uncertainty, many companies may be in a precarious position where they are unable to pay creditors for goods. If parties have a cordial business relationship, it is common to write off debts as a sign of goodwill. However, in doing so, creditors inevitably expose themselves to the risk of being challenged that the bad debt expense is not deductible.

随着经济衰退以及消费者对货物与服务的需求逐渐下降,许多企业或许会因为面对现金流量的问题而至无法支付债权人。若双方是拥有和谐的关系,注销该债务是个常见的现象。然而,在注销债务时,债权人也许会面临被税务局挑战该坏账是不可扣除的。

It is trite law that when taxpayers take a deduction for bad debt incurred, he would need to demonstrate that there were efforts to recover the debt and any waiver of debts were based on sound commercial reasoning. The Public Ruling 1/2002 (“Public Ruling”) defines bad debt as “a debt that is considered not recoverable after appropriate steps have been taken to recover it”. The Public Ruling also suggests that reasonable steps taken to recover debts include debt restructuring scheme, legal action or reminder notices. Therefore, reasons such as “goodwill” or “personal relationships” will likely be insufficient.

当纳税人要扣除坏账时,他必须证明他已采取适当努力以追回债务以及任何坏账是基于合理的商业理性。在税务局所发布的公共裁决 1/2002 (“公共裁决”)对于坏账的定义是 “采取合理的步骤后还是无法追回的债务”。公共裁决也提出为了追债的合理步骤包括了债务重组计划,采取法律行动以及提醒同知。因此,理由犹如 “信誉“和”人际关系” 是不足以获取税务扣除。

Based on our body of case law, the Malaysian courts had held along the same tune as the Public Ruling. Taxpayers must take reasonable steps to recover sums owed such as timely legal action, referring matters to dispute resolution and/ or settlement agreements.

根据我国的判例法, 马来西亚法院的裁定和公共裁决是一致的。纳税人应采取适当的步骤来追回债务例如尽快采取法律诉讼,提交仲裁或和解协议。

3. Deductibility of compensation expense for retrenchment of employees

3.税务扣除员工裁员的赔偿金

In efforts to reduce cost, companies may be forced to undergo a retrenchment exercise in endeavours to keep afloat. According to the respective employment contracts, the company may be required to pay compensation to the employees for loss of employment. Taxpayers would need to evaluate whether such payments are deductible or otherwise.

为了减低营业费用,企业或许会为了保持营业而被迫进行裁员行动。根据各自的劳动合同,该企业必须根据合约条件给予赔偿金。纳税人必须鉴定任何赔偿金是否可税前扣除。

If compensation payments paid to employees are part of the taxpayer’s strategy to reduce cost and sustain business continuity, the payments are deductible. In Kulim Rubber Plantations v DGIR, the Federal Court held that where a taxpayer makes a payment “in order to get rid of … a servant whose continuance in service is undesirable in the company’s interest”, it should be treated as a revenue payment and a deductible expense. Accordingly, compensation payments made to employees pursuant to a restructuring exercise are deductible if the purpose is to keep the company in operation.

如果裁员行动是为了减低营业费用和业务可以持续性发展,相关的赔偿金时可在税前扣除的。在 Kulim Rubber Plantations v DGIR,联邦法院已裁定如果纳税人支付赔偿金“为了摆脱…… 一个从公司的利益的角度想不理想的员工” 该赔偿金是属于公司营运费用和可扣除的。因此,如果裁员的目的是为了确保公司可以继续营业, 因企业重组所致的赔偿金是可扣除如果。

However, if the compensation payments are made due to the cessation of business, such payments are not deductible. The rationale is due to the fact that these payments were not made in the production of the taxpayer’s gross income but were made to put an end to the business. The court in Ampat Tin Dredging Ltd v DGIR held that it was not sufficient that the expense incurred is related to the production of income, but it must be wholly and exclusively incurred in the production of income. In this case, the retrenchment due to closure of business was found to have nothing to with the production of gross income.

然而,如果该赔偿金是为了停业而造成的,该赔偿金是不可扣除。原理是因为这赔偿并不是用于产生收入而招致的费用,而是为了停业的费用。法院已在 Ampat Tin Dredging Ltd v DGIR 指出任何费用不仅必须和产生收入有关系,该费用必须是完全以及专门的产生收入。在该案例里,为了停业而裁员所支付的赔偿金和产生收入毫无关系。

Taxpayers are advised to maintain contemporaneous documentation by stating the purpose and reason of any compensation payment made. Where retrenchment benefits were made to save the taxpayer from extinction, it would qualify for a tax deduction as expenses incurred in the production of gross income.

纳税人应当存同期文档并且注明赔偿金的目的以及理由。如果该裁员赔偿金是为了避免企业倒闭,该费用是属于用于取得所得收入的费用方可在税前扣除的。

4. Deductibility of employee wages under the govt grant

4. 政府雇员工资补助的税前扣除

On 6 April 2020, the Prime Minister of Malaysia had announced the Additional PRIHATIN SME Economic Stimulus Package (“PRIHATIN SME+”) in efforts to stimulate the Malaysian economy with emphasis placed on maintaining the sustainability of SMEs. In Malaysia, SMEs accounted for more than 98.5% of all business establishments but compared to larger multinationals, they are often strapped for cash and have lower liquidity ratios. With that in mind, the PRIHATIN SME+ had, amongst others, offered a wage subsidy program to assist in maintaining the job security of its employees and reduce the burden on expenses (“Program”).

于 4 月 6 日,马来西亚首相宣布了经济振兴中小企配套(增加版)(“配套”)来协助企业可持续发展。在马来西亚,中小企业占了所有企业的98.5% ,可是与大型企业相比,中小企业通常拥有较为紧张的现金周转压力而且拥较低的流动性比率。考虑到这方面的苦扰,政府在配套里介绍了万众期待的工资补贴计划目以提供雇员的保障以及减低企业开支的消费。

The Program would fall within the scope of the Income Tax (exemption) (No.22) Order 2006 (P.U.(A) 207/2006) (“Exemption Order”). Under the Exemption Order, where eligible persons receive income in the form of a grant or subsidy from the State or Federal Government, such sums received are exempted from tax. In light of the foregoing, the subsidy received by an SME company having fulfilled necessary conditions would be tax-exempted.

该配套应在所得税法令(豁免) (第。22) 2006 (P.U.(A) 207/2006) (“豁免法令”)。在该豁免法令,当有资格的纳税人获得由州政府或联邦政府给予的补助或补贴形式的收入,该收入是免税的的。正因如此,中小企业从配套里收到的工资补贴是,在满足了所有的条件后,将是免税的的。

However, expenses spent using the sums received under the Program is also not deductible. Therefore, if the taxpayer received RM50,000 under the Program, expenses incurred for its employees’ wages to the value of RM50,000 is not deductible.

然而,任何使用了配套中的补贴所支付的的费用是不可扣除的。因此,假设纳税人在配套中领取了RM50,000的补贴,相等于RM50,000 的雇员工资是不可扣除的。

Taxpayers should be aware that Clause 4 of the Exemption Order imposes an obligation to maintain separate accounts for income received as a grant or subsidy. With this in mind, taxpayers must maintain appropriate records detailing the amount of subsidy received under the Program and amount of deduction claimed in respect of expenses on employee wages.

纳税人应意识到豁免法令的第4条规定获得补助者必须在企业账户中另行记录所领取的补助或补贴。因此,纳税人应该保持适当的记录仔细说明纳税人从配套中收到的补贴以及相关的雇员工资费用。

5. Deduction for donation to Covid-19 fund

5. 捐献给冠病基金的税前扣除

In endeavours to raise funds to combat the pandemic, the Malaysian Government has announced that donations to the Covid-19 fund will qualify for a tax deduction. Taxpayers may choose to donate by cash or in-kind to the Covid-19 fund set up by the Prime Ministry Department and Ministry of Health (“Tabung Covid-19”), Organisations with Section 44(6) status or other approved community and charitable projects. The Act has various provisions which allow for deduction hence taxpayers must accurately identify which provision is relevant to their form of donation.

为了筹募基金助于对抗新型冠状病毒肺炎疫情,马来西亚政府已宣布任何为捐给了冠病基金可税前扣除。纳税人可选择以金钱还是以实物的方式捐款给首相署和卫生部的冠病基金,所得税法 第44(6)条认可的任何组织或合格机构将享受减免。所得税法拥有多个相关的条规所以纳税人必须准确的鉴定哪条与他们捐款形式一致。

Scenario 1: Cash donations made to Tabung Covid-19

      • Treatment: Section 34(6)(h) OR Section 44(6)
      • Condition: Approval required if claiming under Section 34(6)(h)

Scenario 2: Donation in kind to Tabung Covid-19

      • Treatment: Section 34(6)(h)
      • Condition: Approval required

Scenario 3: Cash donation to Organisations with Section 44(6) status

      • Treatment: Section 44(6)

Scenario 4: Donation in cash or in-kind to approved community and charitable projects

      • Treatment: Section 34(6)(h)
      • Condition: Approval required

范例 1:现金捐款给冠病基金

      • 待遇: 第 34(6)(h) 条规 或 44(6) 条规
      • 条件: 如果是 第34(6)(h) 条内,纳税者必须获得批准

范例 2:实物捐赠给冠病基金

      • 待遇: 第 34(6)(h) 条规
      • 条件: 纳税者必须获得批准

范例 3:现金捐款给第44(6)条认可的组织

        • 待遇: 第 44(6) 条规

范例 4:现金或实物捐赠给合格机构

      • 待遇: 第 34(6)(h) 条规
      • 条件: 纳税者必须获得批准

Conclusion

Taxpayers would need to reassess whether expenses incurred makes commercial sense, revenue or capital in nature or disallowed for deduction under the Act. Although case laws have been helpful in clarifying rules on deductibility such as which expenses are revenue and capital in nature, the question of whether tax deduction is allowed is often a question of fact as cases on the same facts but with different purposes may have different tax implications.

结论

纳税人应该慎重考虑任何费用的商业合理性,是公司营运费还是资本支出或是否在所得税法里的条规是不被允许扣除的。虽然判例法有助于誊清扣除原则例如费用是否是资本费用,但是某个费用是否可扣除经常是事实问题因为同一个开销可因不同的目的而对所得税务有不同的影响。

Note: If there is any inconsistency between the English and Chinese versions, the English version shall for all intent and purposes prevail. 

特别注明:英文版和中文版上倘出任何歧义,概以英文版本为准。上述仅供阅读参考。

Finance Bill 2019 and Budget 2020 highlights for the millenials

The highly anticipated Budget 2020 was announced by the Pakatan Harapan Government on 11 October 2019. This was a momentous event not only because it was a budget created where the government of the day had a full year of being in power but also to address the elephant in the room – debt crisis. The Budget’s theme was “Shared prosperity: Sustainable and inclusive growth towards high-income economy” and although there were not as many changes as anticipated compared to the previous budget, it was a well-thought one.

The Budget 2020 includes policies and recommendations as well as the allocation of funds into various parts of the country. On the other hand, the Finance Bill 2019 addressed the more legal side of things where it involves amendment in, amongst others, the following acts: Income Tax Act 1967, Real Property Gains Tax Act and Stamp Duty Act.

Below includes some of the policies recommended to be in place for the year 2020:

1 Policies affecting the labour market

Under the Budget

  • The minimum wage in major cities will be increased to RM1,200 from the current RM1,100.
  • Maternity leave will be increased to 90days from the current 60 days effective 2021
  • Eligibility to overtime will be extended to those earning less than RM4,000 from the current RM2,000 per month
  • Disabled persons and singles above the age of 40 and earning less than RM2,000 will receive RM300 Bantuan Sara Hidup aid.
  • To encourage women participation in the workforce, the current tax exemption for women returning to work is extended for another four years.

 

2 Improving traffic accessibility and cost

Under the Budget

  • RM450mil will be spent on electric buses for public transport.
  • A Targeted Subsidy Programme will be implemented and aimed at individuals who do not own more than 2 cars and 2 motorcycles. The subsidy will be allowed on only one motor vehicle.
  • Plus Highway tolls are to be reduced by at least 18%.
  • The cost of passing through highways will be dependent on the time of travel with the implementation of a congestion charge which will be lowered by up to 30% from the present charge rate whilst travelling outside peak hours will be free.

3 Reducing property overhang

Under the Budget

  • Foreign ownership of highrise properties will be reduced to Rm600k from the current RM1mil.
  • RM10billion Rent to Own financial scheme will be implemented where the individuals will rent the property for 5 years and thereafter decides if he wants to purchase the property.

 

4 Affecting corporate tax

Under Finance Bill 2020

  • It is recommended that the threshold of chargeable income for SME for enjoying a lower tax rate of 17% will be increased to RM600,000 from the current RM500,000 before being charged the higher rate of 24%. (effective YA 2020)
  • Special allowance for small value assets will be increased to RM2,000 from the current RM1,300 and the collective amount of special allowance claimed will be restricted to RM20,000, higher than the current RM1,300. (effective YA 2020)
  • Previously, the P.U. (A) 336/2014 Income Tax (Deduction for expenses in relation to secretarial fee and tax filing fee) Rules 2014 allows a maximum deduction of RM5,000 on secretarial fees and RM10,000 on tax fees. Currently, it is proposed that a resident company is entitled to a deduction of not exceeding RM15,000 collectively of both secretarial and tax fee.
  • For players in the electrical & electronics (E&E) industry and in line with the government’s vision of Industry 4.0, the Budget proposes an income tax exemption for up to 10 years on investments in selected knowledge-based services. The Budget further proposes for a special investment tax allowance to encourage E&E players to continue investing in Malaysia after exhausting the Reinvestment Allowance.
  • Accelerated Capital Allowance and automation equipment capital allowance for the manufacturing sector on the first RM2 million and RM4 million incurred on qualifying expenditure to be extended to YA 2023. Currently, this incentive is due to expire in YA 2020.
  • Technology-based companies and SMEs listing on the ACE Market or the LEAP Market (but not the Main Market) of Bursa Malaysia will be allowed to claim a tax deduction of up to RM1.5 million for listing fees to the authorities, professional fees and underwriting, placement and brokerage fees for from YA 2020 to YA 2022. Such expenses are currently not eligible for a tax deduction when computing the corporate tax.
  • Adopting the Modified Nexus Approach (which supersedes the previous one expiring 31 December 2018), the Bill proposes that 100 per cent of income tax exemption up to 10 years on income derived from patent and copyright of qualifying activities. The added restriction is that this only applies to intellectual property in Malaysia.

 

5 Affecting personal tax

Under the Finance Bill

  • There will be a new tier of personal income rate of 30% to be imposed on those earning RM2mil and above. The highest tier currently is 28%.

 

6 Affecting real property gains tax

Under Finance Bill 2020

  • For real property acquired before 2013, the market value of the property as of 2013 will be deemed to be the acquisition cost of the property for the purposes of calculating real property gains tax.
  • Companies incorporated outside of Malaysia who disposes of real property will be subjected to the same real property gains tax rate as an individual.
  • Companies incorporated inside of Malaysia and trustee of a trust will be subjected to the prevailing real property gains tax rate. Previously, there was no such distinction of companies incorporated in Malaysia or outside.

 

8 Affecting stamp duty

Under Finance Bill 2020

  • Only Malaysian citizens will qualify for a 50% remission of stamp duty for transfer of real property between parents and children and vice versa for natural love and affection. Currently, it applies to both citizens and non-citizens.
  • To assist in Malaysians acquiring their first home, it is proposed that there will be a stamp duty exemption under the Rent-to-Own scheme on the following instrument of transfer of property valued up to Rm500k subjected to obtaining approval.

 

7 Affecting other legal implications

Under Finance Bill 2020

  • Section 103 of the Income Tax Act 1967 is amended by removing further penalties on non-compliance of delay in making tax payment after the due date. It is proposed that the penalty remains 10% regardless of the time span of delay from the current increase of 5% if payment is delayed after 60 days.
  • Persons who understated its tax payable and makes an amendment return will be penalised 10% of the amount understated regardless if the amendment was made 60 days before or after the date of deemed assessment. This is different from the current additional penalty of 5% if the amendment is made after 60 days but before 6 months after the filing of a deemed assessment tax return.
  • A time restriction of 7 years is imposed for taxpayers wishing to apply for an extension of time to appeal against assessments made by the IRB. Currently, there is no time restriction.
  • Assessment under the Mutual Agreement Procedure will not be subjected to any time limitation.
  • The Special Commissioner of Income Tax and the Customs Appeal Tribunal will merge to form the Tax Appeal Tribunal which is expected to be in operation in 2021.

Focus update: Reinvestment allowance

 

  1. KPHDN v Nulogitec Industries Sdn Bhd (High Court)

 

This case concerns the taxpayer’s claim for reinvestment allowance (RA) used to purchase a factory and machineries. The taxpayer had in the year 2004 relocated to a new and larger factory to house its manufacturing business.

  1. The RA was refused as the factory was a first-time purchase of a factory by the taxpayer

The overall contention by the tax authorities was that the factory does not sit well with its view of the circumstances in which a factory is eligible for RA. Pursuant to Public Ruling 2/2008, the tax authorities were of the view that “a company moving from a rented factory to its own factory… does not qualify for RA”.

The flaw in the above argument is threefold. Firstly, the operative and governing words in para 8(a) of Schedule 7A are the words “its existing business”. Therefore, reinvestment must be made in the existing business and not the existing factory. This is fulfilled as the taxpayer had invested in the business for many years by operating in an alternate factory prior to this purchase.

Secondly, the Public Ruling is inapplicable as it was stipulated in para 13 that “This Ruling is effective for the year of assessment 2008 and subsequent years of assessment.” Therefore, the Public Ruling does not apply to the taxpayers as the acquisition was made in 2004.

  1. The RA should be refused as the revenue did not rise but plummeted after the acquisition

Although agreeing on the point that there were automation, modernization and expansion, the tax authorities raised the objection of whether RA should be allowed since sales did not increase after the acquisition.

To this, the Court stated that there was no statutory provision that expressly stipulates proof of increased sales post-reinvestment. It would be unfair to impose such a burdensome condition in the vaguer of the economic climate.

 

  1. Lavender Confectionery and Bakery Sdn Bhd v KPHDN (High Court):

 

The case involves the claimant’s claim for RA and Industrial Building Allowance (IBA). For the claim under RA, the claimant made the claim on the following items:

  1. Sinmag spiral mixer – RM16,000
  2. Sinmag autobun divider – RM40,000
  3. 2 units of electric donut fryers – RM4,590
  4. 2 units of electric donut fryers – RM3,500

Paragraph 1 of Schedule 7A of the Income Tax Act 1967 stipulates the conditions for a company to qualify to claim RA:

  1. In operation of not less than 36 months
  2. Had incurred capital expenditure on a factory, plant and machinery used in Malaysia for the purposes of the qualifying project.

Qualifying project would, in turn, mean a project undertaken in expanding, modernising, or automating its existing business of manufacturing. Public rulings further clarify that not all plant and machinery are eligible for RA such as those for packaging purposes.

  1. The RA was refused due to illegality

The basis in which the RA was refused is due to the fact that they were not used in the factory but rather they were used in one of the claimant’s outlets, the 1 Utama outlet did not carry a license for manufacturing pursuant to Industrial Co-ordination Act 1975 (‘ICA 1975’) and/or they were not part of a qualifying activity. Therefore, the RA should be refused according as it should not be regarded as “business of manufacturing” due to an element of illegality.

In determining whether it is a factory, the court alluded to the use of the “functionality test” in determining the word “factory”. The test then becomes the functionality of the claimed items in the overall context of production in the manufacturing process ought to be taken as a valid factor. The requirement for a license under the ICA 1975 has no application in the instant case as the IRB should not be reading into the act to impose further conditions.

  1. The RA was refused due to the fact that the machineries were not used in the factory

The court held that RA is not limited to ‘production area’ as such criteria was not stipulated within the act but only as internal guideline of the IRB. As long as the plant and machineries were used for expansion, modernisation, automation or diversification, the RA claim should be allowed.

Additionally, reinvestment allowance should be allowed as long as it is used in the taxpayer’s existing business as in Nulogitec Industries Sdn Bhd.

Additionally, the relevant statute provides that RA is available where it is incurred on “a factory, plant and machinery” which suggests that each element is independent. Therefore, in so far as the expenditure is made on either a factory OR a plant OR a machinery and it is for the purposes of a qualifying project, RA should be allowed.

Based on the above points, the taxpayer’s claim for RA was allowed. The decision was upheld in the Court of Appeal as well.

Comments:

In 2012, the word ‘factory’ was given a new definition vide the Finance Act 2012, which provides that

“factory” means portion of the floor areas of a building or an extension of a building used for the purposes of qualifying project to place or install plant machinery or to store any raw material, or goods or materials manufactured prior to sale”

I am of the opinion that the definition does not materially affect the both taxpayer’s ability to claim Reinvestment Allowance as the taxpayer is entitled to claim as long as it is a qualifying project in the business.

I think Lavender Bakery is a good example of how, for the purposes of claiming RA, the plant and machinery need not be used in the factory as long as it is used to expand the business. Additionally, RA is also available where a continuing part of the manufacturing process albeit in a different place from the factory.

Development of the law in Malaysia on deposits and Liquidated Agreed Damages clauses

 

Image result for contract law

(Note: this blog post discusses the movement of law on deposits pursuant to Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd and also Liquidated Agreed Damages under Cubic Electronics, Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui and Golden Approach v Lau Seng Leong)

Previously, the law provides that for a plaintiff to be entitled to damages, he must prove actual damage (Selva Kumar v Thiagarajah). This rule was laid down by the Federal Court where it held that the strict burden of proof is on the claimant to not only succeed in proving the elements of his case ie breach, negligent or misrepresentation but he must prove that he has indeed suffered to some degree and that damages are reasonable (Section 74 Contract Act 1950).

Unfortunately, this means that even if a contract contains a Liquidated Agreed Damages (LAD) Clause, i.e. a clause that entitles a party to recover money should the happening of some event occur, if the claiming party cannot prove that he has suffered anything, the court will only award nominal damages.

The Federal Court took the opportunity to revisit this area the law encompassing Section 74 –76 Contracts Act 1956 and laid down a different principle of law on burden of proof in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunication.

The facts of the case are as follows:

  1. Cubic electronics was wound up and the assets (more notably are the land and machineries in this case) were put up for sale.
  2. Mars Telecommunication offered to purchase the assets for RM90 million and hence the sale continued by private sale instead of tender exercise.
  3. Mars paid a sum of RM1 million as earnest deposit which according to the conditions of the Memorandum of Sale that the amount would be forfeited should Mars fail to pay the remaining amount within 90 days as LAD instead of penalty. This was accepted.
  4. Mars was not able to meet the 90 days deadline and requested for an extension of time. Mars asked for a total 3 extensions and along with each extension, they paid an earnest deposit which amounted to RM3.04 million in total (including the RM1 million earnest deposit and an addition Rm40,000 being interest).
    1. It is worth noting here that with every extension provided by the Liquidators of Cubic Electronics, the liquidators repeatedly stated explicitly that failure to abide by the extension deadline will result in forfeiture of the relevant sum as LAD and not as penalty.
  5. When failing in their fourth attempt to ask for an extension, the liquidators of Cubic Electronics forfeited the total amount of RM3.04million and the assets were sold to a third party in an open tender (which Mars Telecommunication did not participate).

Aggrieved by the forfeiture of their deposit, Mars brings this claim to retrieve the whole RM3.04 million back if not forfeiture only of the first RM1 million. Cubic Electronics instead counterclaimed for rentals and utilities.

In the High Court, the claim for refund of deposit was refused and counterclaim allowed.

In the Court of Appeal, the court found that only the sum of RM1 mil was forfeitable deposit whilst the remaining should be returned following Selva Kuma and Johor Coastal as there was no evidence to show that the amount was suffered by the breach and neither was it a genuine pre-estimate of loss under Section 75.

In the Federal Court, the court held that the whole of RM3.04 mil was forfeitable.

Although the case concerned mainly about a deposit, the Federal Court took the opportunity to revisit the law on LAD and deposit altogether.

  1. On deposit payment

The general principle is that if a deposit is to be a part-payment of a contract, it is recoverable. However, if the deposit serves a dual purpose to guarantee performance and also as part payment, it is not recoverable (Howe v Smith). The primary purpose of what is deposit is that the purchaser means business (Sun properties v Happy Shopping Plaza) and this is a matter of interpretation of the law.

Furthermore, earlier decisions in the UK and India perpetuated the idea that the law of forfeiture of deposit and the law of penalties were mutually exclusive. Once the party could prove that it is a deposit, it can be forfeited without resorting to the law on damages clauses. This too was the default position in Malaysia, until Cubic Electronics.

It was now held that the current approach is to follow the English cash of Cavendish Square Holding BV v Talal El Makdessi. The innocent party forfeiting the amount must show that he has “legitimate commercial interest” to protect and in order to protect that interest, forfeiture is “proportional”. Once these are proven, the burden of proof shifts to the opposite party to show why the forfeiture deposit was excessive. Similarly, the law on penalties can be applied to the law on relief against forfeiture and the Federal Court is inclined to adopt the same approach.

Here, as Cubic Electronics was already in part of the winding-up process, the liquidators had a duty to realise the assets to the best possible price to maximise the amount due to creditors of the company. The failure on the part of the Plaintiff to complete the transaction and resulting the SPA dragged on for four months affected the Defendant financially in terms of increased liquidators fees, depreciation of movable assets and deprived of an opportunity to complete the sale with another party (which offered a higher purchase price). These were all the legitimate interest which the forfeited payments were meant to protect.

The court then assessed whether the amount of deposit was proportional to the damage suffered. Here, the additional RM2 million was not disproportionate as the total value of the Sale and Purchase Agreement is worth RM90 million hence the total deposit forfeited represented only 3.33% of the purchase price. Therefore, the deposit was proportional.

Once this is established, the burden of proof then shifts to the Plaintiff to prove on the balance of probabilities on why the deposit was excessive. The Plaintiff did not adduce any proof on the deposit being exorbitant but only insisted that the Defendant did not prove actual loss and damage. In the absence of evidence to prove the contrary, the sum is still reasonable.

The parties were aware and knew well that the additional deposit payments were to show Mars Telecommunication intention to continue the contract, keep Cubic Electronics abstaining from the sale of the assets and the two were in an equal bargaining position.

On the sum of RM40,000 as interest payment, the court held that since the amount would be forfeited regardless of whether the contract went through, it fell outside the scope of Section 75 hence was not refundable.

2. On Liquidated Agreed Damages (with added points under Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui and Golden Approach v Lau Seng Leong)

The current law on the assessment of damages in the absence of a LAD clause is that the claiming party must fulfil the Hadley v Baxendale rule which was included into the law of our country under Section 74 Contracts Act.

However, where there is a LAD clause, the clause is prima facie enforceable but Selva Kumar states that party cannot arbitrarily rely on the LAD clause and must prove actual loss or damage or else the court will only award nominal damages. He must prove the actual damage unless his case falls within the limited situation where it is difficult to assess such losses.

Once this is proved, the party is entitled to an amount not exceeding the LAD and the burden shifts to the opposite party to show that the LAD is excessive.

This can be a very heavy burden on the innocent party must prove the elements on which the claim is based. They have an added obligation to prove actual loss and damage despite there being a mutually agreed LAD clause.

Now, Cubic Electronics v Mars Telecommunication changes the law on allocation of the burden of proof. In Para 65, the court held that “there is no necessity for proof of actual loss or damage in every case where the innocent party seeks to enforce a damages clause”. As such, the court has endorsed the concepts of ”legitimate interest” and “proportionality” as above applies to the law on LAD and relevant in deciding what amounts to “reasonable compensation”.

Therefore, the law post-Cubic Electronics is that the burden of proof first lies on the party seeking to rely on the LAD clause. That party has to show that there is a breach of contract and that the contract contains a LAD clause. Once these two are proven on the balance of probabilities, the party is prima facie entitled to a sum not exceeding the LAD sum.

The burden now shifts to the opposite party to show that the clause is unreasonable or to show what ought to be reasonable. Failing to adduce cogent evidence to show the contrary, the court will uphold the LAD clause where the parties in an equal bargaining position (para 71).

“Reasonable compensation” is can be determined by comparing the LAD clause and actual loss that the plaintiff would sustain. However, proof of actual loss is not the sole conclusive determinant although evidence of such is a useful starting point. An unreasonable compensation would be if the amount is extravagant and unconscionable in amount in comparison with the highest conceivable loss which could possibly flow from the breach.

2.1 Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui & Another

A few months later from the Cubic Electronics v Mars Telecommunication came this case in the Court of Appeal which dealt with the issue of LAD clause under the Housing Development (Control and Licensing) Regulations 1989.

The instant case concerns the LAD clause found in Schedule H of the Housing Development Act on which this action is anchored on. It provides that in the event that the housing developer delays in handing over the property to the purchaser from the statutory deadline, the purchaser is entitled to damages not less than 10% of the purchase price annually, which amounted to RM38,732 here. There was no evidence adduced and yet the Tribunal for Homebuyers allowed the LAD sum of RM32,012.

The appeal by the housing developer was restricted to the question of whether Section 75 Contracts Act applies to a statutory contract under the Housing Development Regulations 1989. There are case laws going both ways with Sakinas v Siew Yik Hau and Outlet Rank v MBB which followed Selva Kumar which held that the statutory contract is incapable of overriding Section 75 whereas Hariram v Sentul Raya and Brisdale Resources v Law Kim held otherwise.

If the statutory contract is subject to Section 75 CA, this means it would also now be under the scrutiny of Cavendish’s “legitimate expectation” and “proportionality” tests as laid down in Cubic Electronics v Mars Telecommunication despite itself carrying the force of law.

However, the Court of Appeal did not follow Cubic Electronics v Mars Telecommunication’s methodology since it opined that the case relates to applying Section 75 to deposit payment under a contract and hence is of no relevance to the instant case. Instead, the court held the approach to interpreting a LAD clause under Section 75 is as follows:

  1. Where a LAD clause is in dispute, section 75 presumes that a LAD clause is a penalty clause unless the innocent party proves otherwise (different from English position).
  2. If the innocent party fails to prove his claim, the court is obliged to give a reasonable compensation (as contrasted to a nominal compensation in Selva Kumar) not exceeding the stipulated sum (different burden of proof as compared to Cubic Electronics).
  3. If the innocent party is able to prove his claim, the law does not permit him to recover more than the stipulated sum. (different from English position).
  4. In deciding what is reasonable, the court will take into consideration various factors such as in para 52, where 10 per cent of the total value is reasonable or according to market practice and where the contract is governed by an act or reputable institutions of the industry, the courts will give due weight unless compelling reasons not to do so.
  5. As a matter of policy, the court should not put the innocent party to strict proof at the expense of the public pursuant to benefit the defaulting party.

The appeal was dismissed as 10% was reasonable and in absence of the purchasers proving damages, the LAD in statutory contracts should be sustained as reasonable compensation, not only because the parties have agreed to be bound by the statutory contract but also because in the courts view it reflects a sum to be awarded as reasonable compensation.

2.2 Golden Approach v Lau Seng Leong

The Federal Court held that the cause of action to sue for LAD under the LAD clause under the Housing Development (Control and Licensing) Regulations 1989 is the date of expected delivery and not actual delivery.

Previous case law had supported the notion that there is no cause of action on the part of the purchaser to claim for LAD until and unless vacant possession is delivered. This case, however, now holds that the cause of action arises on the date of expected delivery and the time under the Limitation Act 1953 runs from then.

Conclusion

Recent cases have shown a shift in judicial trend and reluctance of the court to interfere with the parties who enter into a contract freely and well-informed. This is a much-celebrated movement the law as it upholds the sanctity of contract and preserves the doctrine of Laissez Faire. Not only in this area but also in the area of laws regarding indemnity, parties need not prove actual damage and losses before it could claim compensation.

Although Selva Kumar and Johor Coastal are said to not apply in Cubic Electronics v Mars Telecommunications, the court did not explicitly state that the cases are now overruled and irrelevant to current laws but stated that it ought not to be interpreted as a straightjacket that proof of actual loss is the sole conclusive determinant of reasonable compensation.

However, the case has also alluded to some idea of penalty clauses despite the holding that the laws on penalty clauses do not apply to the laws of this country (Linggi Plantations). Since LAD are still subject to the rules of “reasonable compensation” using the Cavendish test, has the Court re-introduced the law of penalties back into our jurisprudence?

With regards to Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui, my concern is that it had reverted the law to pre-Cubic Electronics era as now the burden of proof lies back unto the plaintiff to prove that it is not a penalty clause albeit Macvilla gives the Plaintiff some benefit of the doubt. It is my humble opinion that I prefer the approach under Cubic Electronics as I do not think Section 75 is necessitates a presumption a “penalty clause” as understood under Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd but rather a different use of terminology of the word “compensation” since the title reads “Compensation for breach of contract where penalty stipulated for”. The section also includes “if a sum is named in the contract as the amount to be paid in case of such breach” in addition to “penalty”. Therefore if the court reads “penalty” as “penalty” understood under English law, the burden of proof should still not apply to the innocent party to disprove as it can be “a sum… to be paid in case of such breach”. The differences between the two are almost indistinguishable unless ultimately proven by evidence hence it would be fairer to allocate the burden of proof according to the methodology in Cubic Electronics.

With regards to Golden Approach v Lau Seng Leong, I have mixed feelings for the outcome of the case. Whilst I welcome the decision of the court, my opinion is that there should be statutory intervention to stipulate when does cause of action arise since case law has been going both ways, it negatively affects housing purchasers who will be receiving incorrect advice and would not be able to claim for damages, especially if the action is time-barred.

To give more context, the LAD under the HDA reads “If the Vendor fails to deliver vacant possession … within the time stipulated … the Vendor shall be liable to pay … the rate of ten per centum (10%) per annum of the purchase price … until the date the Purchaser takes vacant possession of the said Parcel.” The clause provides that the purchaser is entitled to 10% per annum of the purchase price until vacant possession is delivered but is ambiguous as to when the purchaser can bring an action for the compensation. Is it when vacant possession is delivered or without waiting for vacant possession?

In a different case in the United Kingdom in Triple Point Technology, Inc v PTT Public Company Ltd, where LAD was sought against the contractor “per day of delay from the due date for delivery up to the date [the employer] accepts such work”. The court found that LAD was dependent on the completion of works and hence unless work was completed, the LAD clause is unenforceable. This was the status of the law pre-Golden Approach.

The perplex situation of law on Liquidated Agreed Damages has yet to be fully resolved despite decisions by the apex court and the Court of appeal as both has seemingly different views on the application of Section 75 towards deposits, LAD and prepayment. It would be interesting to observe future developments of the cases in this area of law.

Working as a tax consultant in a Big 4

Ever since I have started working in KPMG Tax back in September 2018, I’ve gotten quite a fair bit of questions from my learned friends of legal background about working how is it like working in a professional service firm as opposed to working in a law firm.

Joined with me in this write-up for the first ever joint blog post is Tan Ai Jin who works at Deloitte as a tax consultant as well. Ai Jin and I are both law graduates who are currently pursuing the commercial route but the difference is that Ai Jin is in the Transfer Pricing whereas I am in Corporate Tax.

Disclaimer: The views and opinions expressed in this post are personal and those of the authors and the authors only. They do not in any way reflect the views and opinions of the people, institutions or organizations that the authors may or may not be associated with in a professional or personal capacity.

  1. Aren’t you a lawyer? Why are you working there?

Sophia (KPMG, Corporate Tax): I think Ai Jin and myself are in agreement that this is the most asked question during our first few weeks in office. I think I am the only non-accounting graduate on my whole floor.

The reason behind why I’ve decided to work here is very much driven by a personal desire to explore other career opportunities beyond the Bar Granted this practice may not be as commonplace in Malaysia, there is an upward trend in this practice with an increasing amount of my friends taking a go in a professional service firm. (Also because I was precluded from taking the CLP exam due to a misunderstanding about LSE’s course structure.)

Ai Jin (Deloitte, Transfer Pricing): My first exposure to tax was a module I took in my final year of university which touched on tax evasion and avoidance. I was quite drawn to the subject and was keen to learn more, given I have no prior knowledge of tax, which led me to choose tax as my assignment topic. This was exciting for me because I enjoyed the process of learning something completely new, particularly after 2 years of more traditional law modules.

From my research, I read quite a bit that people who work in the field of tax often have a law background. Having not much interest to continue with the BPTC, I considered the option of furthering my learning of tax through a Masters but decided I would need work experience first.

2. Do you have any prior experience in Tax?

Sophia (KPMG, Corporate Tax): My personal experience of working in tax dates back to July 2015 when I interned in Tax Department in Lee Hishammuddin Allen & Gledhill. I took a tax module and an accounting module in my degree so that really helped a lot. Upon graduation, I interned in the PwC Malaysia under Tax Reporting Strategy.

Ai Jin (Deloitte, Transfer Pricing): In my final year of university in the UK, I had a brief stint volunteering for a lady who inherited a cottage and wanted to utilise it as temporary housing for refugees. Mine and the other volunteer’s role was to research for tax implications and the feasibility of running her idea as a charity or business. I guess this helped cement my impression of tax and gave me confidence that there is a place for law graduates in tax.

3. So, what do you do as a Tax Consultant?

Sophia (KPMG, Corporate Tax): For easy reference, I shall insert an excerpt from the KPMG careers website:

The Corporate tax department is separated into 2 indistinct groups: Tax compliance and Tax advisory. Why I say “indistinct” is because you’ll end up doing both. However, most likely than not, you will be doing the work of either one group more than the other. For me, I hold a dual portfolio of being in both Tax compliance and Tax advisory in Corporate Tax.

Tax Compliance: Part of my day-to-day routine involves the computation of the company’s tax returns. Filing of tax returns requires constant referral to the Income Tax Act, have a strong foundation of the rules of deductibility of expenses and claiming tax incentives adequately.

Another bulk of work of my tax compliance is reflected under point 2 and 3 which relate to managing our corporate client’s tax affairs. Depending on the size and the business of the company, there are various issues you might need to iron out with the Malaysian Inland Revenue Board (MIRB) such as the return of overpayment of taxes of the clients, enquiry of the tax affairs as well as other queries and unclear points of law.

I would say that tax compliance work is quite individualistic because each consultant is responsible for their own client listing. The only person responsible for you is the Manager-In-Charge for the client. There is a senior for guidance but you are expected to be independent, know what you need to know and do what you need to do.

Tax Advisory: As for Tax Advisory, my work is pretty ad-hoc because it depends as and when I am required to assist. To put it simply (and to prevent infringing any rules of confidentiality with KPMG), it is to inform clients about the tax implications of any corporate restructuring, due diligence, M&A or other exercises they intend to undertake. For example, if a German company intends to set up a company in Malaysia, we can help in informing the various tax incentives in Malaysia available for that industry or we can also brief them on what happens if they intend to take over a Malaysian company and conduct a due diligence exercise.

Ai Jin (Deloitte, Transfer Pricing): Without getting too technical, the bulk of my task involves drafting transfer pricing reports for companies which fulfil the revenue and related party transaction threshold. (For more information on related party transactions, read up on Sophia’s post about it here.) The report need not be submitted with the tax return but should be available upon IRB’s request.

I see the transfer pricing report as a ‘health check’ of sorts. It contains details of the holding company, description of the company’s business nature and the purpose each function serves within the company in relation to their controlled transactions, and the risk assumed by the functions. We then use transfer pricing methods to assess the company’s profit margins and benchmark it against comparable companies. This process involves a lot of information exchange between the client as we need to thoroughly understand the company’s business to draft a comprehensive report.

When the company is making a loss and their profit margins do not mark up to the comparable companies, it could lead to being selected by IRB for audit. We generate margin analysis to justify the company’s result, which could be due to various reasons, ie. fluctuating market conditions, expansion of business, or one-off extraordinary losses. The audit process is arduous and has high stakes because if either party is unsatisfied with the outcome, it could mean settling the case in court which is far more taxing (pun intended).

There are areas of transfer pricing like Country-by-Country Reporting, Master File and transfer pricing disputes which are covered under Advanced Pricing Agreement and Mutual Agreement Procedures as well.

4. What are some distinct points of your work that is only found in your company?

Sophia (KPMG, Corporate Tax): For one, KPMG is next to 1 Utama which is a big plus when it comes to deciding what to have for lunch. Secondly, parking is relatively cheaper. Thirdly, and on a more serious note, KPMG does a lot of classroom training which entails a great deal of personal interaction and adequately prepare employees to perform more confidently. I had a month half training before I actually started doing any work. We also have very regular updates whenever different matters arise i.e. National Budget, Tax Townhall, changes in Tax treatment and others.

Ai Jin (Deloitte, Transfer Pricing): I appreciate the diversity of the workforce in the company. Just my department alone, we have different Service Groups to cater to specific markets ie. Japan, Korea, and China Service Groups respectively have a native speaker to manage the cases and facilitate our communication with the clients. I belong in the Japan Service Group and was able to handle cases involving Japanese conglomerates which is quite a unique market.

Adding to the diversity, we also have more than 8 different nationalities in the department to share their expertise and tasty treats from their respective hometowns!

5. Lastly, do you enjoy doing what you’re doing?

Sophia (KPMG, Corporate Tax): During my past 6 months stint, I can say with conviction that I’ve learnt a lot in my time at as it had kindly offered me a clearer picture of a tax consultant job to help me with my future career choices. I’m sure millennials will be entering that quarter life crisis where you’re unsure of what you want to do and don’t know if you’re going to continue. I’d say give it a shot because you’ll never know it until you try it.

Granted it is (very) difficult to be working with many amazing talents and severely lacking on the relevant skills and knowledge as the person beside me, it gives you that added advantage of being able to learn at expedited speed because if you’re the smartest person in the room, you’re obviously in the wrong room.

Ai Jin (Deloitte, Transfer Pricing): I think I have a long way to go before I can be completely confident and satisfied with my experience. It is especially difficult having to pick up accounting principles as I carry out the job without any (I mean zero, zilch, I didn’t even take accounting for SPM) foundation on accounting and finance. I also felt a bit alone in my struggles compared to my peers who are chambering and getting to practise what they learned in law school. Getting to meet people like Sophia in a similar predicament was really inspiring and encouraging.

So I always tell myself I’m in this path with a reason and will continue to stay in it for as long as I can go. Besides, I enjoy challenging myself outside my comfort zone and looking back to appreciate the progress I have made. It’s cheesy but I’ll end with a poem which inspired me:

“So wear your strongest posture now

And see your hardest times

As more than just

The times you fell,

But a range of mountains

You learned to climb.”