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).

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.

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.”

Case update: IRB’s right to apportion expenses

The general rule governing the deductibility of expenses is encapsulated under section 33(1) of the Income Tax Act 1967 (“the Act”) which reads (emphasis as highlighted):

Therefore, the below conditions must be fulfilled (unless otherwise provided in the Act) to allow a deduction for an expense:

  1. The expenses must be wholly and exclusively incurred in the basis year
  2. It must be wholly and exclusively incurred in the production of gross income

The contention arises where there is more than one motive for the purpose of the said expense i.e. an incidental benefit or ulterior purpose. The question is then for the trier of fact to decide that whethe the expense should be (1) wholly disallowed or (2) apportioned or (3) wholly allowed.

In DGIR v Kok Fai Yin Co Sdn Bhd, the amount was wholly allowed.

Background facts:

The DGIR was of the view that the directors’ fees paid to 3 directors of the company were unreasonably excessive and proceeded to only allow a portion of the directors’ fees expense and added back the remaining in the computation of gross income.

DGIR’s stance was that the directors’ fees were not “wholly and exclusively” incurred in the production of gross income hence the apportionment. (it’s a shame the facts did not provide how much was added back and the evidence and basis  by the IRB to prove what was they think ‘reasonable’ because there is a wide spectrum of the amount a directors’ can be paid.)

The question before the High court was whether this apportionment was justified.

Decision:

Upholding the decision of the SCIT and dismissing the DGIR appeal, the court held that DGIR had no power to Section 33 of the Act did not empower the DGIR to consider and determine what reasonable fees should have been paid to the directors by the Taxpayer and to disallow the excess from deduction under that section.

Comparing local laws to that of the UK, Section 33 does not encapsulate the word “wholly, exclusively and necessarily incurred”. The latter would empower the tax authorities to have authority and determine whether the said expense was necessarily incurred.

 

However, in the recent case of KPHDN v Kompleks Tanjung Malim Sdn Bhd, the High Court held that the tax authorities were justified in apportioning the quit rent expense.

Background facts:

The company was at all material times solely involve in the business of oil plantation only. Their only source of income was from the sale of fresh fruit bunches harvested from their land.

The Company applied to convert the said land from “agriculture land” to “commercial land” in 1993. As a result of the approval, the quit rent for the land where the oil palms were planted increased from RM200k in YA 2005 to RM1 mil in YA 2006, 2007 and 2011.

The IRB conducted a tax audit and disallowed a portion (around RM800k) on the basis that the whole amount of RM1mil was not incurred in the production of gross income of the company because, being an oil palm plantation company, there was no reason why the company should apply to convert the land from “agricultural” status to “commercial” status.

The SCIT followed Kok Fai Yin and agreed that the IRB had no power to apportion the single expense into allowable and non-allowable portions, hence this appeal to the High Court.

Decision:

Deciding Order by the SCIT was set aside and appeal allowed. The High Court held that the IRB was right in the apportionment. The reasonings are as follows:

1/ The SCIT made a finding of fact that the reason for conversion was solely to enhance the capital value of the land. Therefore, it had nothing to do with the company’s oil palm production business. The court said that this was akin to the payment of franchising fees where the expense was incurred for the right to commence business instead of production of gross income.

2/ This case can be distinguished from Kok Fai Yin on the basis that there is no disagreement directors fees are wholly and exclusively incurred in the production of gross income of the company. The only contention that they had was that it was unreasonably high. The question for the court here was whether the additional RM800k in quit rent expense should be allowed for a deduction where it had nothing to do with the company’s business. The question on point of law is different.

3/ The Company can still continue its oil palm business without the conversion hence it could not be said to be “wholly and exclusively” incurred in the production of gross income.

 

UPDATE: the Court of Appeal reverses the decision of the High Court in July 2019 and hence upholding the position of Kok Fai Yin where the IRB has no power to dictate how parties are to conduct their business. Therefore, although the conversion of the land from agriculture to commercial has no relevance to the taxpayer’s business of oil plantation, such expense is still deductible because the land on where the oil palm are planted is used in the production of gross income of the company.

Conclusion:

When determining whether an expense is wholly and exclusively incurred in the production of gross income, one must look at not only whether it is relevant to the company’s business but also the relationship with section 33.

Personally, I think that the decision in Kok Fai Yin is correct because directors’ fees is an arbitrary topic, mainly decided by contract between the director and the company and therefore not a matter that the IRB should interfere. I am curious as to how IRB could allow million ringgit directors’ fees in listed companies and why instead conducted this additional assessment on a private company.

Either way, IRB doesn’t lose out on tax received because the directors’ fees would be taxable at the director’s end under individual tax.

In Tanjung Malim case, I do think that there is some rationale behind the apportionment but I am interested to know how this plays on if there are other factors into play ie inflation and government intervention. Would the quit rent payment still be capped at Rm200k?

Another point I can think of which supports the High Court decision is that due to the fact that land is not part of the company’s trading stock, there really is no real purpose in increasing the value of the land. Compared to CP Sdn Bhd v KPHDN, valuation fees incurred for the purpose of (in addition to comply with MFRS) determining how much the land could be sold in the future form part of the company’s trading stock, as it was a property development company, is deductible. A highly valued land could fetch a higher price and when sold, higher gross income. In Tanjung Malim case, this does not seem to be the case as it’s trading stock is not the land, which would be subjected to Real Property Gains tax instead of income tax when sold hence not incurred in the production of gross income.

However, since it was held in Kok Fai Yin that section 33 does not give the IRB power to determine directors’ expenses but the same section allowed IRB to determine quit rent payment, which one prevails? As said in Kok Fai Yin, only where there is a word “necessarily” thereafter then the tax authorities could determine the apportionment of expenses. In absence of past records, can it be wholly deductible i.e. if someone purchased Tanjung Malim’s “commercial land” but continued the business of oil palm plantation, is that company also only allowed to claim RM200k tax deduction? Some clarification would be needed in order to have a clear conclusion of the limits of authority of IRB and powers given under section 33.

 

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.

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.

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!