Is waiver of debts taxable?

 

 

Companies write off bad debts for a multitude of reason: the debtor has gone bankrupt or is under liquidation, disproportional effort to recover the money owed or just simply to recover as much as possible and get on with life. For the debtor, there are 2 ways that this write off might affect them: it can be taxable and it can also not be taxable.

The difference is what makes a write off debt to be taxable is normally if it is revenue in nature and trade-related whilst it is not if the reverse applies. Under Section 30(4) Income Tax Act 1967, where a taxpayer had previously claimed a tax deduction or capital allowance and the amount of debt is then released, it would be treated as being part of the debtor’s gross income and hence taxable in the Year of Assessment in which the debt was forgiven. Similarly, if the taxpayer had not claimed a tax deduction or capital allowance previously, the release of debt should not be brought to tax.

  1. FT v MIRB 

In FT v MIRB, the waiver of loan was taxable as an income. The loan given was used to fund the operational expenses of the company and hence when it was waived, it should have been rightly brought to tax, which the taxpayer failed to do. Salient facts of the case are as below:

  • FT was given a loan totalling RM30mil by the holding company in 2004.
  • The money was used up within minutes to pay off the trade creditors.
  • In 2006, the holding company agreed to waive the debt.
  • The purpose for the loan was stated as to be “utilised exclusively … for the purpose of financing the accounts payable of the company”

The contention made by FT was that it should not be considered as s4(a) as it is not a gain or income as it was used to pay off the creditors, it was a form of support to the subsidiary, it had recorded the man as contribution to capital and thus had been credited into the Appellant’s capital reserve and not subject to tax.

The IRB questioned that the loan was contributed as capital because there was no increase in the FT’s share capital and that the loan is a gain because it was used to fulfil FT’s business obligations and is, therefore, part of its business gains and profits under s4(a) ITA.

Held: it was taxable. It was found that the loan was never intended to be treated as capital or to be converted and is written off as operating expense by the holding company. When the loan was waived, FT’s obligation to repay the loan did not arise any more and thus following the House of Lords decision in HM Inspector of Taxes v Lincolnshire Sugar Co Ltd, the loan ought to be rightly taken into account when computing the adjusted income.

The loan was also not a gift which was unconnected with FT’s business activity but was part of the income-producing activity and hence part of its operating expenses.

  • Comment: Personally, I find it quite bizarre why the IRB did not pursue the case under section 30(4) which is a more specific provision for taxing waiver of debts but went under the general provision of s4(a) as gains and profits. Nevertheless, the case decision is in line with the spirit of the Income Tax Act that waiver of debt from a business source income is taxable in the year that it was waived. To prevent this, taxpayers should distinguish on the facts by properly documenting the purpose of the loan and capitalising the said loan.

 

2. KPHDN v Bandar Nusajaya Development

However, a contrasting outcome is seen in KPHDN v Bandar Nusajaya Development which went up all the way to Court of Appeal on point of tax law but to Federal Court on point of judicial review (Federal Court generally do not entertain to tax cases). In this case, the IRB sought to have the waiver of debt to be taxed under section 22(2)(a) instead of section 4(a) as falling under “any sums receivable or deemed to have been received”.

In Bandar Nusajaya, the holding company provided a loan to the taxpayer in which the taxpayer took a deduction for the interest against two types of income: business and non-business pursuant to section 33(1). However, the holding company then waived the interest expense payable and as such, the taxpayer brought a part of it to income tax pursuant to section 30(4) but did not bring RM181 million as it was of the view that it did not fall under section 30(4). Section 30(4)(a) reads: “Where a deduction has been made under subsection 33(1) in computing the adjusted income of the relevant person… the amount released shall be treated as gross income of the relevant person from that business for the relevant period.” The question was whether section 22(2)(a) enabled the IRB to compel the RM181 million to be taxed despite the fact that it was waived against its non-business income.

A heated debate was what interpretation should’ve been taken when interpreting Section 22(2)(a). Section 22(2)(a) reads: “the gross income … shall include any … insurance, indemnity, recoupment, recovery, reimbursement or otherwise” The IRB claimed that the word “otherwise” is wide enough to capture the waiver of debt in the non-business income of the taxpayer. However, the taxpayer contested the IRB’s understanding of the word “receivable” and “otherwise”. It contended, amongst other disagreements, that the word “receivable” included a debt which was, in common sense, not something to be “receivable” and the word “otherwise” was limited to payments of similar nature as the words used before it.

On the first point of whether a debt is something “receivable”, both the High Court and Court of Appeal answered in the negative. They referred to the natural definition of the “receivable” as “capable of receiving” (Oxford English Dictionary) or “awaiting receipt of payment (accounts receivable)” (Black’s Law Dictionary). It should mirror the characteristics of an income that “comes in” and not something that is saved from (Tenant v Smith). The common treatment of when a creditor waives a debt, the Court of Appeal agreed and a purposive approach ought not to have been taken which will render the section superfluous and redundant and Parliament does not pass law in vain.

On the point of whether the word “otherwise” is wide enough to claw back the RM181 million to income tax, the High Court and Court of Appeal agreed that it isn’t. The High Court held that the word “otherwise’ must be confined to things of the same kind as the preceding words. In the case of section 22(2)(a), the preceding words shared a common character connoting a receipt, something “receivable”. On the other hand, a release of debt is a discharge of an obligation. The case relied upon the IRB for the interpretation of the word “otherwise” was also inconsequential in the present case. In Norliana bte Sulaiman (the cited case by IRB), the word “otherwise” under Section 114 of the CPC was preceded by only the word “caution”. In the present case, the word “otherwise’ is preceded by five other words which can form a genus. Therefore, otherwise should also be understood in light of the words before it and not standalone to be a “capture all” net. (It should be noted that the Federal Court overturned the decision on the basis that the taxpayer ought to have commenced from the Special Commissioners of Income Tax and not by way of judicial review.)

  • Comment: A holding that I find to be particularly compelling by the High Court was that “there is no other section that deals with the release of debt in the ITA”. I find this to be slightly at odds with the previous case above which proceeded the taxing of debt under section 4(a). Although it would not produce a different outcome, it would’ve been clearer had IRB been more consistent in their approach.

However, tax being tax, it’s not the most easily understandable subject in the world. It was noted that the IRB has also acknowledged that section 30(4) is not relevant to the present factual circumstances and as such, proceeded to bring it to tax under another section. I wouldn’t call this a frivolous demand but rather a taxing statute, being one that imposes an obligation, must be understood in its plain and natural meaning. Furthermore, Section 30(4) is a specific provision which ought to take precedence over a general provision like section 4(a) or section 22.

 

Conclusion

I personally find these cases to be very useful in shedding light on the issue of whether a waiver of debt is considered as a form of income in the books of the debtor. It also reinforces the underlying understanding that only a release of debt in the business income of the taxpayer, and not in the capital account/ capital reserve or non-business income, is taxable. Section 33 allows deduction of expense wholly and exclusively incurred in the production of gross income, it does not specify that it must specifically be income from a source of business. Therefore, a deduction pursuant to section 33 but subsequently forgiven in the non-business income of another is not taxable.

The differences between Income Tax Act, Public Rulings and PU order

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.

  1. 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.

  1. 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.

Budget 2019 Malaysia for the Malaysian Millenials

Last Friday, 2 November 2018, marks the first national Budget by the new government ever since the independence of Malaysia. As much as this is a historic and monumental event it is, it is also a day which would affect 32 million people coupled with a balancing act to solve the growing national debt hence many eyes and pressure are on this Budget. With the Budget being revealed, there were many mixed reactions as some were surprised with certain changes being made whilst others were disappointed.

This is an overview of some points in the Budget 2019 that may or may not affect you as a Malaysian Millennials.

  1. RM100 unlimited travel pass

There was a study done by Cent-GPS on a study of the MRT which highlights the problems about public transport namely that the locations were not strategic, cost relating to travel using the MRT is too high which discourages consumers from switching from their private cars as a mode of transport.

I strongly welcome this initiative by the government to encourage people to take the public transport more and ease the traffic on the roads. The current status quo is that the opportunity cost of driving instead of commuting to work is not significant enough for people to abandon their cars and squeeze themselves into the tight train carriage for an hour’s ride. With this, the citizens can have more disposable income to spend with approximate RM200 savings on transportation and also it would lighten the traffic on the road.

However, the government would need to increase the number of trains available during peak time as from personal experience, it is currently insufficient to meet demand. To meet the expected surge in demand next year, more trains is urgently necessary to have the desired effect or any positive effect at all.

Note: there are several reports where the Transport Ministry intends to team up with Grab to solve the “last mile” problem but nothing solid has been given so far.

2. PTPTN

PTPTN has its own fair share of criticism by the nation especially on the topic of loan default. According to NST, only half of loan PTPTN are repaying their loans and the total outstanding debt is around RM39 billion. The government has time and time again tried to incentivise PTPTN repayment but the needle has not shifted significantly.

Finance Minister YB Tuan Lim Guan Eng had announced that the deferment of the PTPTN loans until borrowers earn RM4000 and above is too much of a strain on the country’s financial burden and as such, a scheduled deduction of 2% – 15% would go towards repayment of their debt when they earn more than RM1000.

Additionally, no more discounts staring 2019 will be given to PTPTN borrowers. However, discounts will be given to B40 households who have successfully obtained first class honours as compared from the previous government’s regime where students were exempted from repaying their PTPTN loans upon earning first-class honours for their bachelor’s degree, upon meeting certain conditions.

3. First House Buyers

The government endeavours to encourage Malaysians to purchase their first home and to curb the problem of overhang in residential properties and thus several initiatives have been launched as a means of solution.

First, there is a 100% stamp duty exemption for properties up to RM300k on the instrument of transfer and loan agreement. For properties above RM300k but below RM500k*, the 100% stamp duty exemption is limited to the first RM300k of home price on the instrument of transfer and loan agreement. For properties above RM300k but below RM1mil, the 100% stamp duty exemption will only apply on the instrument of transfer.

* Purchase of first residential home from housing developers.

Additionally, the government has launched the FundMyHome, the peer-to-peer (P2) home financing exchange platforms. This is a crowdfunding platform which serves as an alternative source of financing for first-time home buyers. Under this scheme, the purchaser will be able to acquire a property whilst paying only 20% of the price of the property and the remaining 80% will be borne by potential investors, mainly financial institutions. In this case, the purchaser need not source for a loan from the beginning since it is understandably difficult should the purchaser lack the financial capabilities to do obtain one. However, after 5 years, the property is either sold off and the proceeds are divided according to a prescribed ratio or the purchaser can then obtain a loan to service the remaining amount. (There is an interesting discussion on this circulating social media here where it highlights problems about this system.)

4. Sugar Tax

We Malaysians consume large amounts of sugar daily without most of us even knowing. From the morning’s Teh Tarik to break time’s kueh to dessert’s cendol, it’s no wonder that in 2017, Malaysia was dubbed most obese in the region. It is reported that one in two Malaysians is overweight or obese.

Starting April 2019, a new excise tax known as “sugar tax” of RM0.40 per litre will be imposed on sugar-sweetened beverages. This will be on beverages that contain sugar exceeding 5g per 100ml, as well as juices that contain more than 12g per 100 ml.

My only concern about this is inflation and that demand for sugar-sweetened beverages in Malaysia is very inelastic but we’ll see how this plays out.

5. Digital Tax

I’ve talked about Digital Tax in a brief in a blog post earlier here. Basically, it’s a tax on services provided online which escapes most countries’ taxation regulatory framework. To ensure the competitive level of local players, governments across the globe have trying to tax this intangible economy that exists in the clouds.

It is proposed that the current Sales and Service Tax regime would be extended to include imported services such as digital advertising (Facebook advertisement and Google advertising), online streaming platforms (Netflix and Spotify) and downloaded software. For consumers, service tax imported by individuals will be effective 1.01.2020 whilst it is a year earlier for Malaysian businesses.

6. Minimum wage

Let’s just say that if you’ve graduated from a tertiary education and is currently earning more than RM3000, congratulations! You’re already well above the median of Malaysian employees which was last recorded at RM2160 in May 2018. That means, there are plenty of those who are earning well below RM2160 and at the national minimum wage.

In the Budget 2019, the government proposes to increase the national minimum wage to be raised to RM1,100 nationwide effective 1 Jan 2019. This is an increase of 10% from the previous administration. This is a measure by the government to reduce the income gap which has doubled for the B40s and T20s between 1995 and 2016. It was reported by The Star that households earning less than RM2000 will only have RM67 in savings after paying for daily expenses just to get by.

In my humble opinion, this is a good step to reduce income inequality by increasing B40s income at a rate faster than income level increase, I’m slightly sceptical about the fact that the amount applies nationwide which ignores the different cost of livings and also the fact that this will contribute to more inflation for 2019.

7. Personal Tax relief

Starting from the Year of Assessment 2019, Budget 2019 proposes that the combined tax relief for EPF contributions and life insurance premium/ Takaful contributions would be increased by RM1,000 to RM7000. However, the relief is now broken down and separated into 2 distinct amounts whereby a maximum of RM4,000 is given for EPF and RM3,000 for Takaful & Life insurance premiums. This would result in a lower tax relief where the individual does not make any Takaful/ Life insurance premium.

 

Personal comments:

YB Lim Guan Eng first described the Budget 2019 as one being of “sacrifice” and it does appear to be so to a certain extent. There are some tax hikes, for example, the Real Property Gains Tax, Digital Tax and Sugar Tax but overall, the Budget seems promising but hopefully, we will see a better Debt-GDP ratio next year. The only concern I have is that it may have a snowball effect which results in a high inflation next year due to rising business cost.

Understanding RPGT

Most of us at some point in life would like to own a house(s). Most of us would also have moved house at some point in our life now. However, do you really know what are some of the tax implications of moving houses and selling off the previous residence?

 

Real Property Gains Tax (RPGT) in Malaysia is a tax levied upon disposal of a real property, mainly to do with land, paid to the IRB. Since it is paid upon disposal, it is applicable to the vendor of the transaction.

  1. Introduction

Under section 3 of the RPGT Act 1976, it states that

Real property is defined as “any land situated in Malaysia” and any interest, option or other rights in or over such land”. If you have any knowledge of the National Land Code, this includes leases, licenses and charges where you have “disposed” of them.

Depending on when you sell the piece of land, you will be charged different RPGT rates:

Cr: MahWengKwai & Associates

2. How is RPGT calculated?

In arriving the tax payable upon disposal, the following three-step equations are used.

Step 1: Chargeable Gain = Disposal Price – Purchase Price – Miscellaneous Charges

Step 2: Net Chargeable Gain = Chargeable Gain – Exemption waiver (RM10k or 10% of chargeable gain, whichever is higher)

Step 3: RPGT payable = Net Chargeable Gain x RPGT Rate

3. Items exempted from RPGT

Since RPGT is charged upon a gain from disposal, it is important to first determine when the acquisition and disposal actually happened, at what consideration both events were completed and whether a loss or gain was made. This is to prevent any fraud/ tax evasion because parties may purposefully conduct the transaction at below market value price to make what is actually a profitable transaction to a loss-making one and for the party to claim allowable losses. There are a few instances where you can get RPGT exemptions or deductions.

(a) Allowable loss is defined as under section 7 subsection (4)

And subsection (b) deals with where you have no gains to be reduced, it will be brought forward to subsequent years until the allowable loss has been fully absorbed, even if it was done 5 years after acquisition.

(b) Incidental cost: The RPGT Act 1976 allows certain incidental costs of the acquisition of the property and disposal of the property to be taken into account. This is where expenditure wholly and exclusively incurred by the disposer for the purposes of the acquisition or the disposal such as legal fees for the acquisition and disposal of the property and estate agency fees.

(c) No gain no loss: You also do not need to pay RPGT where acquisition cost equals disposal cost at which you are in a no gain no loss situation.

(d) Private residence: Accordingly, every citizen in Malaysia (and also PR residence) is entitled to a “once in a lifetime” exemption on disposal of a private residence. A private residence is a building or part of a building in Malaysia owned by an individual and occupied or certified fit for occupation as a place of residence.

Only residence/ persons are able to claim for this exemption. This does not apply to companies holding private residence.

(e) Transfer of property between family members as gifts

Transfer of real property as gifts between parent/ children, husband/ wife or grandparents/ child is also exempted.

For the donor, if he is a Malaysian citizen, he is deemed to have received no gain and suffered no losses.

For the receiver, if the gift is made within five years after the date of acquisition by the donor, the recipient shall be deemed to acquire the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor.

4. How is RPGT paid?

Upon disposal of a property, it is the duty on the part of the acquirer’s lawyers to retain and remit 3% of the purchase price from the deposit to the Inland Revenue Board (IRB) within 60 days upon disposal. If the 3% is found to be higher than the tax payable, the IRB will refund; If the 3% is lower than the tax payable, the vendor might be charged an additional penalty of 10% of the amount outstanding upon failure to furnish the outstanding amount within time.

It might be noteworthy to add that owing to the Finance Act 2017, the amount to be retained by the acquirer had increased from 3% to 7% of the purchase price where the vendor is not a Malaysian citizen nor a permanent resident.

Where a transaction is conducted consists not wholly in money, the acquirer shall either retain the whole of the money or a sum not exceeding 3% of the total value of consideration, whichever is lower.

Conclusion:

After listening to a podcast on RPGT on BFM89.9, it is noted that RPGT contributes only 0.7% of the total revenue received by the government. That being said, it is reported that Capital Gains Tax will not include gains on shares in Budget 2018. This is to keep Bursa Malaysia competitive and attractive for investors thus the only Capital Gains Tax in Malaysia is only on Real Property at the moment.

To be honest, I am very much surprised by how little RPGT contributes to the government’s revenue considering that land prices can be very steep at times. I think this is the reason why there are many case law on even if people hold real property for more than 5 years, they may be charged the income tax rate of 24% as oppose to RPGT rate of 5% because they are deemed to be trading properties instead of investing. Note that the IRB does not consider 5 years to be a substantially long period for an investment. So take note of this if you plan to invest in real property in the future or else you might end up having to pay more than you think.

Post–Uber/ Grab merger: Better or worse?

A few days ago, my friend and I decided to head to Sri Hartamas from KL Sentral for a healthy brunch at lunchtime. Prices during lunch hour are often higher because (of course) demand/ supply so we weren’t expecting it to be cheap but neither did we expect it to be so high. For Grab, it was RM20 which made us reconsider if the brunch was worth the trip (it’s the price of an entire meal!) For MyCar (another ride-hailing app), it was only RM11 so we were still able to get our smoothie bowls without a major heart pain. Comparing the price between Grab and MyCar, it was a massive 81% increase! Additionally, Grab used to offer many discounts and rebates in the past through text messages to its users but however, these are now nowhere to be seen.

However, as we were planning to head to Bukit Bintang for tea time after brunch, we could not book a MyCar and were forced to book a Grab which the price was higher compared to the former. This may be due to the fact that the area we were in was relatively secluded and not very convenient so the availability of MyCar was very scarce. However for Grab, being the bigger player in the market, it has more drivers hence higher coverage area so we had to use Grab instead.

I am sure many Grab passengers were disappointed with how Grab is now compared to how it was pre-merger. The price had increased but Grab claims that the prices were due to multiple factors such as surge pricing during peak hours, the algorithm to set the price based on driver availability and the number of bookings from a particular location. Weather is also an important factor taken that it was previously claimed that Malaysians would only take metered taxis during raining days or else it would be too expensive.

So what did the merger do?

In Malaysia, the MyCC has (belatedly) announced an intention to study the merger. Currently, Putrajaya is studying the risk of monopoly within the country’s ride-hailing market, which has been triggered by the merger between Grab and Uber.

A new player called Diffride has an interesting operating strategy which appears to be different from the conventional ride-hailing strategy where the company says it will only charge drivers a fee of RM5 per day to use the platform, and no commission. It will be interesting to see if this model is sustainable for the company considering that they only have 2000 drivers at the moment with an anticipated 4000 to join by the end of the year.

As reported previously, the Competition and Consumer Commission of Singapore (CCCS) and Vietnam Competition Commission had both stalled the merger citing “anti-competitive concerns”. Our counterpart across the border has done much more scrutiny and checks which has led to the CCCS to provisionally determine that ride-hailing firm Grab’s acquisition of American rival Uber’s South-east Asian business is an infringement of competition laws. On 24th September 2018, they have imposed a combined fine of S$13million of their infringement! (It was also revealed that the Uber/ Grab had even provided for a mechanism to apportion eventual antitrust financial penalties so it can be said that they saw this coming).

Honestly, it should have been a shining red light in the face of competition authorities that such a merger would cause competition concerns so I am *very very* glad that the CCCS finds that the merger had substantially lessened competition. Some of the provisional findings by the CCCS were interesting such as:

  • Uber would not have left the Singapore market in the near to medium term in the absence of the Transaction.
  • Uber had entered into an agreement to collaborate with ComfortDelGro with the introduction of UberFlash to compete with Grab, and the collaboration was only withdrawn after the Transaction.
  • Market share of taxi booking service was only at 15%. Grab holds a market share of 80%.
  • Fares have increased between 10-15%.
  • Parties have not been able to show that the Transaction gives rise to efficiencies that would outweigh the harm to competition.

Potential remedies and penalties

Reading the press release, I was particularly intrigued where the CCCS boldly said “CCCS may require the Parties to unwind the Transaction”. Such a move is often threatened but rare in practice but it is within their jurisdiction. Under Singapore’s merger notification regime, the Parties had the option of notifying the Transaction for CCCS’s clearance or seeking CCCS’s confidential advice prior to completing the Transaction. In the EU, parties were required to inform any intention of a merger which had an EU dimension.

Measures were ordered by CCCS to allow lower barriers to entry and improve market contestability which includes:

a. The removal of exclusivity obligations on all drivers who drive on Grab’s platform including rentals

b. The removal of Grab’s exclusivity arrangements with any taxi/CPHC fleet

c. The maintenance of Grab’s pre-Transaction pricing algorithm & commission rates until competition

d. Requiring Uber to sell all or part of Lion City Rentals assets to any potential competitor who makes a reasonable offer and preventing Uber from selling to Grab without CCCS’s prior approval.

Furthermore, CCCS said it may suspend the measures on an interim basis if a rival could garner over 30% of total rides in the ride-hailing services market in a month. It would remove the restrictions if the rival could maintain it for 6 months.

In Vietnam, the deal remains under competition authorities review which has warned that it could be blocked if the firms’ combined market share in Vietnam exceeds 50%.

In the Philippines, where the merger has been approved, the competition authorities will continue to monitor Grab’s compliance with conditions intended to improve the quality of service, with any breaches possibly resulting in fines.

Conclusion:

For now, worse. I find it hard to believe that Grab would charge an outrageous 81% higher than a smaller market player (where are the economies of scale theory here?). This also proves that the larger the firm, the more they likely they will consider consumer welfare. I echoed my previous post about the benefits a merger can bring: better resources, saving failing firms, barriers to exit and more. However, mergers have a much more, almost irreversible, impact on the competition market than say an abuse of dominant position. You can then later penalise an undertaking for an abuse post-merger, but not having a dominant position is always better because “prevention is always better than cure” so preventing the root of the problem is more ideal.

I would like to say that I am very impressed with CCCS’s media release by detailing the theory of harm and specifying the remedies that should be undertaken by Grab. Competition authorities are always trying to balance whether should they on one-hand empower smaller entities to raise competition or encourage growth and innovation by having less scrutiny over larger enterprises. Regardless, I am still of the view that it’s better to be safe than sorry and that the competitive levels are more contestable in the near future.

Can I say no?

A recent decision issued by the Malaysia Competition Commission (MyCC) imposed what I saw one of the heftiest penalty on a single entity for an infringement of Section 10 of the Competition Act 2010 – RM17mil. For some reason, this is much lower than the collective sum of RM33k in the earlier proposed decision on 7 tuition and day care centres for price fixing conduct, you can read my post on it here (which I am still waiting for any updates/ appeal/ decision *cough cough*).

The recent decision concerns the MyCC proposing to fine Dagang Net Sdn Bhd for abuse of its monopolistic decision (full proposed decision can be read here). Dagang Net seems to intend to challenge the Commission’s’ proposed decision and has also indicated to MyCC its intention to make an oral representation before the commission.

  1. The alleged infringement

Dagang Net Technologies Sdn Bhd is a wholly-owned subsidiary company of Dagang NeXchange Berhad (“DNeX”) and has a dominant position for Trade Facilitation under the National Single Window. According to the website, its’ e-services for trade facilitation include as follow:

Dagang Net Technologies is in the business of eService Trade Facilitation in which the exchange of trade documents among businesses and approving authorities and agencies is done electronically. An initiative by the Government in 2009 was to launch the National Single Window in order to simplify clearance procedures, facilitate the electronic exchange of trade-related data, reduce the cost of doing business and thereby enhancing trade efficiency and national competitiveness. Dagang Net Technologies had a contract and is now extended to 31st August 2019 for the said trade facilitation business.

Under the proposed decision, Dagang Net had provisionally infringed section 10 CA 2010 which subsection 10(1) reads: “ An enterprise is prohibited from engaging, whether independently or collectively, in any conduct which amounts to an abuse of a dominant position in any market for goods or services.” The proposed decision assumes a “monopoly” position by Dagang Net with restrictive conducts such as refusing to supply and imposing barriers to entry.

2. Refusing to supply

Normally the first step is to identify the relevant market to determine its’ market position to determine if it really is in a monopoly position as claimed. However, based on this phrase taken from their website: “In Malaysia, the NSW for Trade Facilitation system is developed, operated and managed by Dagang Net Technologies Sdn Bhd (Dagang Net).” I think I am safe to say that it is in a monopoly position for most of the process.

(Disclaimer: I don’t have hard evidence to prove or determine if they are indeed abusing their dominant position but merely analysing if they are based on the proposed decision and stating out the relevant law to it. Ps, I am waiting for MyCC cases judgment to be substantial enough to be quoted in each other’s cases…)

On Refusing to Supply, the Commission claims: The investigation has provisionally found that “Dagang Net … (refused) to supply new and/or additional electronic mailboxes to end users who utilized front-end software from software solutions providers which were not considered to be Dagang Net’s authorised business partners.” It was established in Commercial Solvents v Commission that a refusal to supply could amount to an abuse of dominant position as the reasons given for the refusal is often anti-competitive such as affecting competition on another market, dealings with a rival firm etc.

However, Refusal to supply is also difficult hard to be claimed as anti-competitive because there are equally good reasons as well. In Bronner, Advocate General Jacobs pointed out that the right to choose one’s trading partners and freely to dispose of one’s property are generally recognised principles in the laws of the Member States and incursions on those rights require careful justification. Hence the laissez-faire economic system dictates that parties are free to contract with whomever they choose and the terms to contract on.

→ Dagang Net currently holds a monopoly position and parties, therefore, have no other party to obtain the required services.

Secondly, sometimes duplication of facilities of a network is not feasible and may result in a loss-making situation for both parties. This is why most of the more regulated industries in the country such as water in Selangor is provided only by Air Selangor, electricity is only by Tenaga Malaysia and others.

→ This is unclear as the NSW for Trade Facilitation is still relatively new and it is not an essential facility per say since corporations may still use the longer and more tedious manual process.

Thirdly and most importantly, stated also in Bronner, it decentivises corporations to innovate and improve if it means that they would need to share it to ‘free riders’. In the Guidance, an obligation to supply and provide information or service may undermine an undertakings’ incentive to invest and innovate, even for a fair remuneration.

→ As provided in Dagang’s website, “the NSW for Trade Facilitation system is developed…. by (Dagang Net)” hence by forcing it to supply more may be detrimental to Dagang Net who perhaps invested a lot into developing the system and platform in which the NSW now runs on.

3. Deeper analysis

Now, onto the facts of the case. The basis that the Commission had identified as the reason for refusal to supply is because the “end users who utilized front-end software from software solutions providers which were not considered to be Dagang Net’s authorised business partners”. On a plain reading with no other facts given, this is prima facie an abuse of dominant position because

(1) It restricts what end users can choose as being their front-end software,

(2) It wants to affect the competition in another market by using its’ monopoly position in the trade facilitation market and

(3) it may or may not be a situation of tying/ bundling where only if the end users used software solution providers which were Dagang Net’s authorised business partners would Dagang Net provide new or additional mailboxes.

In Commercial Solvent, the factors leading to the finding of abuse were (amongst others):

  1. Using its dominant position on the raw material market to affect competition in the derivatives market
  2. Refusing to supply to an existing customer because it wanted to compete it downstream and the refusal risked eliminating the customer from the downstream market.

This seems to be quite apt to the current situation where Dagang Net where it seems to refuse to supply to again, affect competition in the front-end software by only providing services where the entities use their business partners services and it risked eliminating competition downstream. The distinguishing factor, however, is that in Commercial Solvent, it had a subsidiary who was also competing in the downstream market as the complainant and it refused to supply so that the complainant could not continue to produce a drug-related to the treatment of tuberculosis but its’ subsidiary could. In Dagang Net, the downstream was by its business partners hence not the same entity. Regardless, it seems pretty convincing to me that Dagang Net wanted to restrict competition perhaps because it was obtaining monetary benefits.

3.1 Essential facility doctrine

Also, “With great power comes great responsibility” (yes, I just quoted Uncle Ben from Spiderman) A quote apt to describe what monopoly players should note about the market obligations and responsibilities their position puts them in. Entities in a dominant position generally have an unspoken special obligation to maintain, protect or improve competition.

Currently, Dagang Net holds an “essential facility”. In Sealink, ‘essential facilities’ were defined as ‘a facility or infrastructure without access to which competitors cannot provide services to their customers’. This definition provides only a starting point. The challenge is to uphold the right of the undertakings under contracts and ensuring competition levels is maintained. In determining whether a refusal to supply amounts to abuse, a few issues must be addressed:

  • Is there a refusal to supply?
  • Does the accused undertaking have a dominant position in an upstream market?
  • Is the product to which access is sought indispensable to someone wishing to compete in the downstream market?
  • Would a refusal to grant access lead to the elimination of effective competition in the downstream market?
  • Is there an objective justification for the refusal to supply

And more.

Most often, this doctrine comes into play in the realm of patent and infrastructure. Dagang Net’s refusal to supply is very much like Bronner where it wanted to have access to the highly developed home-delivery distribution system of its much larger competitor, Mediaprint. The court preferred to use the term “indispensability” instead of “essential facility”. It stressed that the refusal must be likely to eliminate all competition from the undertaking requesting access, not merely making it harder to compete. Access must also be indispensable, not desirable or convenient and there must be no actual or potential substitute for the requested facility (Jones & Sufrin). It might be arguable that Dagang Net’s services were not “indispensable” because it was merely a simplification of the process from application to approval under the NSW system. Corporations and enterprises may still use the preceding method to obtain approval.

3.2 The balance between promoting competition and upholding contractual rights

On the contrary, other situations to consider are whether it is justifiable to force Dagang Net to provide new/ additional mailboxes for end-users who utilized front-end software who are not their business partners? There may be reasons such as to provide a more holistic and integrated to improve user experience because they are more familiar with business partners services and maybe some functions are catered to the needs of their business partners.

A prime example of streaming end-to-end processes is that you will never find an iPhone which runs on an Android system or an Android phone running on the iOS system. This is because Android phones are catered to maximise the user experience by only using the Android system whilst Apple users who prefer the iOS system will opt for the iPhone instead. One complements the other hence it makes sense to not deviate from the current business strategy.

Secondly, MyCC should not be concerned is because what Dagang Net holds is a contractual right given by the government for its’ exclusivity. In return for this exclusivity, Dagang Net may have invested a lot of money, manpower and time to develop the Trade Facilitation system in which forcing it to share with others might frustrate its’ incentives for further innovation.

However, it is not so straightforward and these arguments can fail. There is clear logic why the intervention of competition law to mandate shared access to a property is controversial. For example in Magill, only a hypothetical secondary market was affected but despite this, the courts ruled against its’ intellectual property rights and granted access. Magill is like the Genesis of Refusal to Supply under Competition law. Really, it all comes to where a balance can be obtained.

So… Can I say no?

Maybe (The most truthful answer you’ll get from every lawyer). In law, there is no hard and fast answer. This is even more where there are other elements such as economics and intellectual property rights into play. Competition law being the watchdog over the conduct of all industries will have to balance various stakeholders’ concerns and determine is a fair and just manner whether there was an infringement.

Monopoly or not, most corporations are profit-seeking but not all profits are obtained with an infringement of competition law. Here, I think there was an infringement if the Commission could prove that the infringement was due to the non-usage of business partners product. Additionally seeing as the monopoly position was ‘granted’ by the government, Dagang Net should not that it is not completely shielded by contract and impose restrictions to its’ whims and fancies.

I anticipate seeing more development in the case in the coming months/ years and also for the outcome of My E.G. Services Bhd & My E.G. Commerce Sdn Bhd’s infringement of Section 10 CA 2010.

Related or not related?

Identifying a related party transaction (RPT) is similar to playing detective and spotting the difference. If you’ve ever watched Suits (or the ongoing case of 1MDB), these transactions go from bank accounts to bank accounts, countries to countries and ending up settling in an offshore bank account. Tracing the chain of transactions is challenging at its simplest and are complicated to weave through the webs of thousands of transactions.

RPT is not always damaging to the companies as they might mutually benefit. For example, the principal company might award a contract to its subsidiary because of financial reasons and to save cost. However, RPT’s bad reputation and connotation stem from the fact that it is the most common way Directors and Trustees syphon out money from the company for personal benefit and money laundering.

  1. What is Related Party Transaction

As a basic and simple definition, a related-party transaction refers to any transaction involving the acquisition or disposal of interests in securities/assets by a company or any of its subsidiaries from or to a related party. The interest need not be financial or monetary interest. The Companies Act 2016 loosely defines “related” between corporation as:

Read that 3 times and see if you understand. Especially subsection (c ).

Interpretation:

  1. A and B are deemed related because A is the holding company of B (assuming full control). Nothing difficult.
  2. A and B are deemed related because A is the subsidiary of B. Nothing difficult.
  3. C and B are deemed related because C is the subsidiary of the holding company A of another corporation B.

(C ) is obviously the most contentious one because the question is then how far can you stretch this concept? Is C’s subsidiary’s subsidiary’s subsidiary deemed related to B? This would be the moot point of most RPT.

2. Who are related parties?

In addition to the above, transactions between the corporation and individuals/ other corporations which the directors of the company or substantial shareholder are connected to are considered a Related Party Transaction. Companies Act 2016 defines the how a person can be connected:

However, under section 221(3), a director shall NOT be deemed to be interested in any contract or proposed contract by reason only (a)relates to any loan to the company that the director has guaranteed or party to the loan; or (b) for the benefit of a corporation by virtue of section 7 is deemed to be related to the company that he is the director of that corporation.

As mentioned earlier, RPT are dangerous and are scrutinized because directors may enter into certain transactions at a grossly overvalued or undervalued price in which the director gets a personal benefit to the companies’ detriment. For example, Director A sells a piece of land to Individual B at 40% the market price who then sells it to Individual C at market price and splits the profit with Director A. This transaction, however, will be caught under the following provision:

This means that the transaction would be void unless shareholder approval is obtained at a general meeting or company approval at a Board meeting.

3. When and how is approval needed and obtained?

By default, RPT of any value requires a shareholders’ approval. At the general meeting,

  • An interested director in a RPT, must inform the Board of Directors of the Company the details of the nature and extent of his interest, including all matters in relation to the proposed transaction that he is aware or should reasonably be aware of, which is not in the best interest of the Company.
  • The director with interest, direct or indirect must abstain from deliberation and voting on the relevant resolution in respect of the RPT at the Board meeting. In a general meeting to obtain shareholders’ approval, a director or major shareholder, with any interest, direct or indirect, or person connected to them must not vote on the resolution approving the transaction.
  • Votes are to be taken on poll.

A similar provision to section 228 is encapsulated under section 223 Companies Act 2016. This deals with substantial transactions rather than RPT but I’m including this if RPT also happens to be a substantial value transaction which has additional requirements.

What approval procedures to follow would depend on the type of company involved in the transaction.

  1. Where a company’s shares are listed on the stock exchange

Under Chapter 10.08 of the Listing Requirements, “where any one of the percentage ratios of a related party transaction is 0.25% or more, a listed issuer must announce the related party transaction to the (Bursa Malaysia) as soon as possible after terms of the transaction have been agreed”. The valuation for the percentage ratio is calculated from the value of the assets compared to the net assets of the corporation so for example, the value of a piece of land a company intends to sell to the net asset of the corporation.

However, exceptions apply where the value is less than RM0.5mil or that it is a Recurrent Transaction.

If the percentage ratio is more than 5%, the corporation must announce the transaction to Bursa Malaysia + send a circular to shareholders + obtain approval at a general meeting + appoint an independent advisor before the transaction is agreed upon.

If the percentage ratio is more than 25%, the corporation must, in addition to the above requirements, also appoint a Principal Adviser who, inter alia, advise whether such transaction is carried out on fair and reasonable terms and conditions, ensure that such transaction complies with the relevant laws & regulations, ensure full disclosure and all the necessary approvals have been obtained, that it has discharged its responsibility with due care in regard to the transaction.

More regulations apply where it is a very substantial transaction (close to 100%) and where the company is a property developer with core business in development and real estate with development potential,

B. Where it is an unlisted subsidiary whose holding company is a listed company

Directors of the Holding company would obtain a shareholders’ approval in a general meeting in addition to shareholders’ approval of the unlisted subsidiary.

C. “Dan Lain-lain”

A substantial value undertaking or property or a substantial portion is when it either:

  1. Exceeds 25% of the value of the assets of the company
  2. The net assets attributed to it amounts to more than 25% of the total net profit
  3. The value exceeds 25% of the issued share capital

Whichever is highest

For this, approval procedure for substantial value transaction and RPT are the same– shareholders’ approval at a general meeting.

4. What is not a RPT?

Under the Chapter 10.08 of the Listing Requirements, the below are not normally regarded as RPT:

  • The payment of dividend, issue of securities by the Company by way of a bonus issue or for cash
  • An acquisition or disposal by the Company or its subsidiaries, from or to a third party, of an interest in another corporation, where the related party holds less than 10% in that other corporation other than via the Company;
  • The provision or receipt of financial assistance or services by a licensed institution upon normal commercial terms and in the ordinary course of business;
  • Directors’ fees and remuneration
  • the entry into or renewal of tenancy of properties of not more than 3 years, the terms of which are supported by an independent valuation

…. And more.

The case is less clear for “Dan Lain-Lain” but we can gain some inspiration from the Listing Requirements about what is expected.

Conclusion:

RPT particularly acute hence it is highly regulated and scrutinised to ensure the company has its’ checks and balances on its’ directors under the required rules and regulations. A breach of these regulations entails not only civil liability but also under criminal law where the director can be imprisoned and have a heavy fine upon them. Corporations must ensure that they are conducting business in an ethical, moral and legal manner hence the Companies Act 2016 places much more responsibility and liability on directors compared to Companies Act 1965.

4 facts about Malaysia’s Tax that you probably didn’t know

2 things are definite in this world: Tax and Death. Even after you die, if you owe the government tax payable, you would still need to pay it, without a doubt. After all, taxes are what funds the low-cost medical services (tooth extraction in government dental clinic is RM1.00 by the way), building of roads and highways, provision of public transport and as well as means to mitigate income inequality.

There are various types of taxes: Personal Income Tax, Corporate Tax, Goods and Service Tax, Real Property Gain Tax and Road Tax. Loosely speaking, tax could be divided into two categories: progressive tax and regressive tax. Progressive tax is a tax that takes a larger percentage of a larger income and a smaller percentage of a smaller income. ie Income Tax and Corporate Tax whereas Regressive Tax is a tax that takes a larger percentage from low income-earners and less from high income-earners i.e. Goods and Service Tax.

Here are some facts about Malaysia’s Tax that you probably may or may not know!

Fun fact 0.5: Malaysia is the first country in the world to be repealing an indirect tax act! (albeit being replaced by another soon in September 2018).

1. Who is taxed?

The straightforward answer is everyone. When you purchase a car, you pay consumption tax; when you sell a house, you pay capital gains tax; when you renew your car license, you pay road tax. However, not everyone pays income tax.

According to NST, Malaysia with a population of 32 million people, shockingly only 2.3 million people contribute to income taxes. Presently, employees who earn RM 3,100  or more each month, their employer will deduct an amount of income tax from the monthly salary.

For the larger proportion of the population whose income is not accounted for, correctly reported or under the threshold, GST and SST is a way to gain some income for the government from them as it would be very onerous if 2 million people had to shoulder most of the tax income from the 32 million population.

2. Amount of tax revenue

In the year 2017, the Inland Revenue Board (IRB) was able to collect a total of RM123.33bil, an 8.2% or RM9bil increase compared to the same period in 2016. This means that tax accounts for 56% of the nations’ RM220.406bil revenue.

From the RM123.33bil tax revenue, the-soon-to-be-repealed-GST contributed RM44bil (35%). In comparison, the SST fared quite behind at only RM20bil historically.

3. Malaysia doesn’t have a “Netflix tax” regime yet.

Presently, most countries are looking into the implementation and design of a new tax regime called “Netflix tax” aka digital tax. The rise in internet users and the simplicity of using the internet for various entertainment and services has made it much easier for any entrepreneur to sell their goods and services across the globe. However, on the topic of tax, they are mostly subjected to the tax of the country they’re in rather than the country they’re selling to, many of which go unreported. Corporations which might be affected by this include Netflix, Uber, Grab, Amazon to name a few. According to the government, this untapped segment is worth “billions of ringgit.

According to section 9 of the GST act (will update accordingly once the SST Act has come back into force), “A tax known as goods and service tax, shall be charged and levied on

  1. Any supply of goods and services made in Malaysia, including anything treated as a supply under this Act; and
  2. Any importation of goods into Malaysia

As above, services are only taxed where they are made in Malaysia and this requires a place of business in Malaysia. However, if the place of supply is outside Malaysia, they won’t be taxed. The prime example is Netflix. Netflix, unlike Astro, exists on the internet and in an intangible sphere beyond the reach of current regulations. There is a fixed membership fee to pay to enjoy their streaming services but they do not charge any GST if you bought a membership in Malaysia.

In fact, the government has been looking into taxing the digital economy for a while now but due to the change in government, we’ll wait and see what happens. Countries which has successfully implemented the regime includes Australia, Japan, Korea and the UK.

4. What to expect for the transition from GST to SST

I think the number one concern when the government announced that all corporations must reduce their prices pending repealing the GST is whether there will be enforcement and how effective enforcement will be. Larger corporations had been reducing prices post-GST (which led to abnormally weird price figures i.e. RM4.67 for a sandwich) but it’s the SMEs which will be reluctant to reduce prices.

Under the Section 14 Anti-Profiteering Act, “any person who, in the course of trade or business, profiteers in selling or offering to sell or supplying or offering to supply any goods and services commits an offence” where ‘profiteer” means “making profit unreasonably high”. Now, what means unreasonably high is not in the Act but in the regulations. During the transition specifically, it is an offence to profiteer where your profit margin is higher on 1st June than they were before 1st June. If your cost is RM5 whereas the selling price of the product is RM10, your profit margin is 50%. If you did not reduce your price but the cost goes down to RM4.30, your profit margin is now (5.7/10) 57%. Therefore, you profiteered. However, the mathematical equation and economic analysis and taking inflation into consideration allow for some leeway. (The equation is >50 pages long but just know it’s not very straightforward)

Consumers are always welcome to report any case of suspected profiteering to the Domestic Trade, Cooperatives and Consumerism Ministry.

Conclusion:

Tax regimes are necessary to provide resources for the government to carry out various projects i.e. MRT 2 and LRT 3 but also an economic tool to prevent too much economic disparity between citizens. Personally, I prefer the GST regime instead of SST because the latter has many loopholes which were solved by the implementation of the GST. Example: Under the SST regime, fraudulent claims and forged cheques are common occurrences and the GST dispelled all of these. GST is also more straightforward in its implementation and enforcement with only one threshold across all industries whereas SST has various threshold across different ones.

Furthermore, the Anti-Profiteering & Price Control Act 2011 may require some amendments and diligent enforcement to have any positive impact on the economy. The problem also lies in the penalty provided in the act which states:

In a hypothetical situation where such person is a body corporate, and he commits and is convicted for an offence under the Act but makes a profit of RM10mil, he is only liable to pay RM0.5mil on the first offence and RM1mil on any subsequent offence. To the body corporate, he might as well happily pay the penalty and continue to profiteer and just sign a cheque to the court for each offence. There isn’t a deterrent element such as if such person were NOT a body corporate i.e. imprisonment to prevent any rampant behaviour of a body corporate under this Act.

Rumours have it that the SST to abolish the GST will be tabled next Monday so stay tuned!

Protecting shareholders’ rights

In light of recent events, this would be a good time to refresh and get relevant about Company Law and as the title suggests, shareholders’ rights in a company. Shareholders, being investors of the company, pour their money into a company in hopes to get a return on investment from the company so what can they do if they find RM2.6 billion appear in one of the directors’ bank account?

At its most fundamental level, the determination of shareholders’ rights depends on the types of shares they hold but this needs to be spelt out in the constitution. The type of shares they hold may confer preferential rights to distributions of capital or income, confer special, limited or conditional voting rights and also not confer voting rights (known as preferential shares).

Section 71 of the Companies Act 2016 provides that a company share, other than preference shares, confers on the shareholder the following rights:

(a) the right to attend, participate and speak at a meeting

(b) the right to vote on a show of hands on any resolution of the company

(c) the right to one vote for each share on a poll on any resolution of the company

(d) the right to an equal share in the distribution of the surplus assets of the company, or

(e) the right to an equal share in dividends.

  1. The right to vote at the AGM

By law, all public companies are required to have an Annual General Meeting once a year and failure to do so is a contravention to the law (s340). The change to the Companies Act 2016 has done away with the compulsory need for private companies to have one.

This is perhaps the most fundamental and powerful right of a shareholder– the power to influence the decisions of the company (#GE14). No shareholders should be denied the right to vote unless the share held doesn’t give the right to do so or other extraordinary reasons.

A key case dates back to the 19th century in Pender v Lushington wherein the Articles of Association, no one is allowed to vote on more than 100 shares in any meeting. Mr Pender who held 1000 shares split his votes and registered them under the names of a number of nominees. The Directors refused to have his votes counted. The court allowed an injunction for the votes to be counted. In a meeting, the company cannot look behind the ownership. A right to vote is a property right and an individual right in respect of which the member can sue. (Ps, this also allows a personal claim against the Directors for refusing to let the shareholders to vote).

(2) Statutory derivative action

A derivative action is made by a member of the company in respect of a cause of action vested in the company and in which relief is sought on behalf of the company. This is because the company is incapable of taking action against the directors who are controlling the actions of the company hence an action is brought by the concerned shareholders. As with the rule under Foss v Harbottle, the proper plaintiff in the action is the company and not individual shareholders.

Of course, the courts have been creating exceptions to the Foss v Harbottle rule where it assumes the appropriate body to decide whether litigation should be brought is the shareholders in a general meeting and leaves minimal scope for shareholders to commence derivative litigation (Kershaw). However, the new Company Act 2016 has done away with Common Law Derivative action and we only have the Statutory Derivative Action under the Act under section 347.

Therefore, Derivative proceedings can only be brought with leave of court and it will consider if (a) the complainant is acting in good faith; and (b) it appears prima facie to be in the best interest of the company that the application for leave is granted. Complainant is defined under s345.

It appears to give wide discretion to the courts whether leave will be granted. In Mohd Shuaib Ishak v Celcom (Malaysia) Berhad (the first reported case under S181A Companies Act 1965 which was the statutory derivative action then) Indeed there was no need to prove ‘wrongdoer control’, doesn’t exclude negligence and no set bar to the claim. This case serves as a wake-up call for directors to carefully consider how they handle a company’s affairs as their decisions can be subject to scrutiny by minority shareholders who have a statutory right to challenge the same in court if the requirements under section 181A of the Act are satisfied.

However, as seen in the Federal Court case of Perak Integrated Networks Services Sdn Bhd v Urban Domain Sdn Bhd & Ors, Section 347 have since abrogated the common law derivative action. Any derivative actions can now only be done by way of statutory derivative action as canvassed under Section 347. However, the case was useful in highlighting that even where there are no minority shareholders, a case of derivative action can still be brought i.e. 50/50 in this case.

(3) Oppressive action

The difference between Oppressive action and Derivative action is that for the latter, any damages reaped after litigation will go to the company instead of the member of the company. In other words, a derivative action is brought when the member does it (out of the goodness/ anger/ dissatisfaction of his heart OR) when the company is unable to sue for any wrongdoings done against itself.

An oppressive action is where the rights and interests of a shareholder are affected and hence the aggrieved shareholder would want to bring an action to protect those rights. An action of this nature is that the shareholder would bring a claim in its own name and any damages goes to the shareholder directly.

This means that the shareholder can bring an action against the directors of the company (or whoever is exerting the oppressive force). First, the shareholder would be required to prove 2 things to the court: that there was an element of unfairness and that it has affected interests as members, shareholders or debenture holders of the company.

This is a remedy that allows shareholders to bring an action when they had suffered a personal wrong. The courts will also scrutinize at any agreements between the shareholders and the directors to see if there had been any understandings or legitimate expectations. If there are any, the shareholders would have a stronger case for proving oppression.

Whilst there is no one rule for all test as to what amounts to oppression, Kumagai Gumi Co Ltd v Zenecon-Kumagai Sdn Bhd [1994] 2 MLJ 789 has the following to say: “With the wide wording employed in the statute, it is clear that the categories or examples of actions which would constitute oppression are not closed or limited. Having said that, oppression of minority shareholders usually occurs when an act of the majority infringes upon the rights of the minority shareholders. Usually, this involves actions which are unfair or actions which depart from standards of fair dealing“.

Simply put, it is where the directors (or similar) was aware of the complainant’s rights and interests but had deliberately chosen to ignore or act against those interests. Examples include where the director has breached its obligations under the company constitution to call an AGM, to allow a shareholder to vote or non-disclosure of company affairs and even non-payment of dividends.

Just note the case of Ng King Chong & Anor Nation Park Sdn Bhd & 2ors that the name of the oppressors must be named as a party to the action as the court finds that it gives them an opportunity to defend themselves.

Brady Part: 113280 | STOP Sign | BradyID.com

(4) Statutory Injunction

The Companies Act 2016 now has inherited Section 368A of the Companies Act 1965 under Section 351 which allows for statutory injunction relief.

An injunction relief carries traits of an equitable relief hence parties claiming injunction must come with clean hands, must contravention or attempts to contravene of the law and that the Honourable Court is of the opinion that such relief is in the interest of justice.

Winding up of a Company - Meaning, Modes and Effect - Free BCom Notes

(5) Winding up

If all attempts to properly settle the matter had failed, a shareholder may apply to the court for just and equitable winding up.

A just and equitable winding-up situation is not a primary remedy given by the Courts as the general approach is that the majority shareholders should buy out the minority shareholders for sustainability of the business. Actions of this nature often connote elements of legitimate expectation, shareholders’ deadlock, breakdown of mutual trust and confidence among the shareholders and/or management of the company which may justify the request to wind up the company.

Being an equitable relief, Lord Wilberforce explained in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360. that through the just and equitable clause, certain obligations common to partnership relations may come in; the analogy to partnership is convenient because the concepts of probity, good faith, and mutual confidence, developed in partnership law, become relevant considerations once the elements stated above are found to exist

Conclusion

The Companies Act 2016 has provided for vast improvements in protecting minority shareholder rights such as lower thresholds to amend the Articles of Association and shareholders meeting and gained the right, inter alia, for management review.

In conclusion, the law does give shareholders remedies for when their rights are being infringed and those rights were illegally exercised. It will be also useful to know about what director’s duties are such as promoting the success of the company, duty to exercise independent judgment and duty to exercise reasonable care, skill and diligence are amongst the core duties of company directors. Active participation on the part of shareholders will ensure that directors are held accountable and will not accumulate RM38 billion debt. (Illustrations are inspired by real-life stories hence any similarities may be coincidental).

 

Too much of a google thing is a bad thing?

People use Google for one of two things: to search something online or to check if their internet connection is working. If you’re the first, you may or may not have seen products being displayed on the top bar when you search for an object, for example:

Google generates about 0.3 billion USD daily and most of that revenue comes from advertising as you may see. Google shopping is no stranger to the world of shopping (indicated by the symbol sponsored) but in June 2017, Google was asked to change its ways on google shopping by the EU Competition Commission and was slapped with the largest fine imposed on a single entity in EU Competition history– €2.4bn fine. There are several reasons as to why this is justified but others argue that it is disproportionate and harms product innovation. Google search engine is used by 90% of worldwide internet users and to prevent exploitation of customers and preserving competition, someone needs to start sending a wakeup call to dominant players that doing as they please will be heavily penalised.

Facts:

In 2010, the EU Competition Commission decided to open an investigation as to whether Google Shopping was a violation of competition rules. Google shopping allows consumers to compare products and prices online and find deals from online retailers of all types, including online shops of manufacturers, platforms (such as Amazon and eBay), and other re-sellers.

The opening of formal proceedings follows complaints by search service providers about the unfavourable treatment of their services in Google’s unpaid and sponsored search results coupled with an alleged preferential placement of Google’s own services. Google’s internet search engine provides for two types of results. These are unpaid search results, which are sometimes also referred to as “natural”, “organic” or “algorithmic” search results, and third party advertisements shown at the top and at the right-hand side of Google’s search results page.

In its media statement, the Commission mentioned that it will investigate whether Google has abused a dominant market position in online search by allegedly lowering the ranking of unpaid search results of competing services which are specialised in providing users with specific online content such as price comparisons and by according preferential placement to the results of its own vertical search services in order to shut out competing services.

After 7 years, the case has come with a €2.4bn fine.

The theory of harm

So what the Courts have told Google is that Google Shopping cannot favour its own product ads (where Google gets its revenue from) over those of other competitors. To illustrate what this means, a useful analogy may be to think what the Commission is doing is the equivalent of asking a newspaper company to carry/publish the advertising service of competing newspapers and in equal conditions whatever that means and without getting the revenue.

This might be shocking to some who don’t understand Competition Law but it is founded on the very rationale that its existence is to prevent “market exploitation”. Companies in a dominant position (such as Google with a whopping 90% market share in internet search engines in the EU) owe a “special obligation” to not distort and obtain an extra advantage from another market compared to other entities already existing in the secondary market.

Example: Windows was fined in the year the 2000s for having pre-installed the Windows Media Player into computers running the Windows system. Other media player companies lodged a complaint that this was an abuse of dominant position by using a pre-existing dominant position in one market (computer software market) to impute and create a dominant position in another market (the media player market). The Court agreed.

Some might argue that this is illogical because as consumers, we want convenience and reasonable price so by forcing Windows to remove the Windows Media Player (which it gave for free!!) isn’t it creating more trouble for consumers to have to search and download another media player? Also, what’s wrong with using what you’ve successfully created (through blood, sweat, tears and a lot of money) to promote something else you’re working on?

It is a little counterintuitive, but the argument on the flip side of the coin is that well, would you like it if one company dominated your whole life? It was to prevent a company from creating too many dominant positions that consumers are compelled if that dominant position became a monopoly position. Also, there are many considerations such as maintaining the level of competition, “too big to fail” and promoting consumer choices.

Back to Google, the EU Competition Commissioner, Margrethe Vestager, describes Google as obtaining an “illegal advantage by abusing its dominance in general Internet search” by promoting its own comparison shopping service in organic search results and demote rival comparison shopping services. The basis of the Commission’s decision is not spelt out on any relevant established anti-competitive practices such as constructive refusal to supply, price discrimination or tying but it was based on an overarching jurisprudence of competition law that dominant firms owe a “special obligation” as I’ve mentioned earlier.

Evidence of the foreclosure involved an in-depth analysis of Google Shopping’s effects on the market. It was found that as a result of Google’s illegal practices, traffic to Google’s comparison shopping service increased significantly, whilst rivals have suffered very substantial losses of traffic on a lasting basis.

  • Google’s comparison shopping service has increased its traffic 45-fold in the United Kingdom, 35-fold in Germany, 19-fold in France, 29-fold in the Netherlands, 17-fold in Spain and 14-fold in Italy.
  • The Commission found specific evidence of sudden drops of traffic to certain rival websites of 85% in the United Kingdom, up to 92% in Germany and 80% in France. These sudden drops could also not be explained by other factors. Some competitors have adapted and managed to recover some traffic but never in full.

Therefore, the theory of harm lies in that it was using its dominant platform (Google Search) to help establish another dominant position (Google Shopping) and this is supported with the exponential increase of traffic to Google Shopping and a fall in competitors. Also, it distorts reduces the level of relevancy in search results by displaying certain products over others.

Commentary:

I must admit first-hand that I am not a big fan of market liberalisation because it creates lesser competition and lowers competitive pressure. I am especially an opponent to the thought that “less is more” in the context of competition. For example, a self-sufficient country like China which holds one of the largest economies in the world has only a few companies running the bank by the billions/trillions: Tencent, Alibaba and Baidu to name a few. Competition is pretty dire there with only a handful of *very strong* players.

However, this decision is one where I am unconvinced of but understand the underlying rationale (and desperateness) of the decision. It’s a good decision but the explanation part leaves more to be desired.

Firstly, it stifles product innovation and improvement. The whole reason for the integration of the price comparison function into Google shopping is so that consumers like you and me need not individually check Amazon, Zalando, Asos, Missguided, Ebay to find the cheapest place to buy a shirt. A function which disadvantages rivals is not automatically anticompetitive practices but a balancing process needs to be taken place before it can be called an infringement of competition laws. Through improving and updating its price comparison function, Google was able to obtain a solid market standing which is not a “Google privilege” but maybe it offered something other price comparing websites don’t– the added convenience. But as seen in Windows/ Windows Media Player, added convenience isn’t always looked upon favourably.

Secondly, it’s quite unclear what kind of infringement this is. This is important because different tests are used for different infringements. At its closest, this appears to be a tying case such as Windows/ Windows Media Player but it wasn’t like consumers were prevented from using an alternate price comparison website and consumers didn’t need to buy Google Search to get Google shopping for free (welcome to the 21st century!). It is possible that this is a constructive refusal to supply case where if it can be proven ‘indispensability’ lead to a ‘margin squeeze’ and ‘a secondary market to be affected’. Bronner, Commercial Solvents, Magill and IMS Health all demonstrate this point (to a certain extent). The Commission notes in its Guidance that the existence of an obligation to supply – even for a fair remuneration – may undermine undertakings’ incentive to invest and innovate, which could be detrimental to consumers; and that, where a competitor can take a ‘free ride’ on the investment of the dominant firm, it is unlikely itself to invest and innovate, again to the detriment of consumers. So… What does it want Google to do exactly?

The part which baffled me the most is, as per the usual EU Competition Commission style, it did not tell Google how to remedy the problem but wants Google to figure out by itself on how it can be remedied and what commitments it plans to give. This is after 7 years of negotiation and various compromises being discussed hence it should be reasonable for the EUCC to at least give an idea of how to give a remedy the issue.

In other related thought, maybe EUCC has been overzealous with Google? It does have 2 cases pending with Google on it’s Adsense and Android workings…