EY Tax Alert. Malaysian developments. Vol Issue no April Case law on applications for leave to commence judicial review

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1 EY Tax Alert Vol Issue no April 2018 Malaysian developments Case law on applications for leave to commence judicial review Remission of tax and stamp duty GST matters Malaysian developments Case law on applications for leave to commence judicial review Overseas developments Japan enacts 2018 tax reform Philippines proposes corporate tax reform bill In Magnum Holdings Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2018) MSTC , the High Court (HC) delivered a judgment in favour of the taxpayer and allowed the taxpayer s three applications for leave to commence judicial review. The HC agreed that the failure by the Inland Revenue Board (IRB) to apply the legal position in Ketua Pengarah Hasil Dalam Negeri v Multi-Purpose Holdings Bhd (2001) MSTC 3880 (the Multi-Purpose case), which was binding on both the IRB and Special Commissioners of Income Tax (SC), amounted to an excess of the IRB s jurisdiction. The HC was also of the view that if the IRB was seeking to revisit the legal position in the Multi-Purpose case, the proper forum would be via the HC. An overview of the applications for leave is set out below. Overview The taxpayer is an investment holding company. It is a wholly owned subsidiary of Magnum Berhad (previously known as Multi- Purpose Holdings Berhad), which is in the business of investment holding, provision for share registration and provision of management services. Following an audit visit by the IRB to the taxpayer s premises and multiple correspondences between the IRB and the taxpayer between 2014 and 2017, the IRB issued Notices of Assessment and EY Tax Alert Vol. 21 Issue no April

2 Notices of Additional Assessment with penalties, despite the taxpayer s objections to the IRB s stand on the deductibility of interest expenses incurred by the taxpayer in respect of its investments. The grounds of appeal by the taxpayer for all the applications were essentially that the Notices were tainted with illegality, were void, unlawful and/or in excess of authority, irrational and unreasonable. The HC agreed with the taxpayer that as the facts and law in this case are in line with those in the Multi-Purpose case (which involves the same parties as in this case), the decision of the Multi-Purpose case was binding on the IRB and SC, and failure by the IRB to apply the principles amounted to an excess of jurisdiction. The HC also quoted the case of Ketua Pengarah Hasil Dalam Negeri v Mudah.My Sdn Bhd (2017) MSTC , where the Court of Appeal (CA) held that if the taxpayer can demonstrate illegality, then it would be wrong to insist on the exhaustion of an alternative remedy, that is an appeal to the SC. In addition, the HC also held that if the IRB was seeking to revisit the legal position established in the Multi-Purpose case, then the proper forum would be via the HC, as both the IRB and SC were bound to apply the HC decision in the Multi-Purpose case. In view of the above, the applications for leave were allowed. Editor s note: We note that favourable judicial review decisions by the HC were subsequently overturned in certain cases, such as Mudah.My (see Tax Alert No. 6/2017), Alcatel-Lucent (see Tax Alert No. 1/2017) and Bandar Nusajaya Development (see Tax Alert No. 24/2016). In these cases, the superior Courts held that a judicial review application was not the appropriate route of appeal, as there were no special circumstances to justify granting the application. Further, the IRB had commented in a panel session on 18 April 2018 at a tax conference that they will object to all applications for judicial review. Taxpayers will thus need to evaluate their position carefully in determining whether or not to follow this route of appeal. Remission of tax and stamp duty The Loans Guarantee (Bodies Corporate) (Remission of Tax and Stamp Duty) (No. 2) Order 2018 [P.U.(A) 104] was gazetted on 19 April The Order provides that any tax payable under the ITA and any stamp duty payable under the Stamp Act 1949 in relation to the following, shall be remitted in full: Islamic Medium Term Notes issued or to be issued by MKD Kencana Sdn Bhd pursuant to the Sukuk Murabahah in nominal values of up to RM1.5 billion; and Guarantee provided or to be provided by the Government of Malaysia in relation to the Sukuk Murabahah GST matters Application for remission of late payment penalty The Royal Malaysian Customs Department (RMCD) has made an announcement on its official website on 26 March 2018 that Goods and Services Tax (GST) taxpayers can now apply for remission of late payment penalty via the Taxpayer Access Point (TAP). The following supporting documents are required to be submitted together with the application: Official letter of penalty appeal [signed by the Company s director] Payment proof / receipt from bank Other supporting documents Getting ready for MyGCAP The RMCD has recently announced the Malaysia GST Compliance Assurance Program (MyGCAP), a new GST initiative to make it easy for companies with good GST compliance records to deal with GSTrelated matters. 2

3 The benefits to companies granted with MyGCAP certification include: Reducing the need for GST audits Expediting the GST refund process Having a dedicated desk officer to assist with any GST issues that might arise in the course of their business As part of the process, companies that are interested to participate in the programme will have to undergo an extensive review by an accredited MyGCAP reviewer prior to getting a MyGCAP certification. EY intends to apply to be such a reviewer. MyGCAP was initially scheduled to commence in the second quarter of However, the implementation date was deferred to July 2018 to give time for companies to prepare for the MyGCAP application. As such, it is crucial for companies to identify the risk areas, control deficiencies and areas of non-compliance, and address them accordingly prior to notifying the RMCD of its intention to apply for MyGCAP. Companies may consider undergoing a GST Health Check to provide an extensive review and validation process for them to be ready for MyGCAP application. To understand more about our GST health check, please do not hesitate to contact us. Overseas developments to taxable years beginning on or after 1 April 2018 unless otherwise specified. This Alert summarizes the key provisions relevant to multinational corporate taxpayers: Modification of the permanent establishment (PE) definition Tax credit for wage increases and productivity improvement Restrictions on research and development (R&D) tax credit and other tax credits Modification of the PE definition The PE definition under the Japanese domestic tax law is amended. The amendments basically follow the recommendations by the Organisation for Economic Co-operation and Development in the Base Erosion and Profit Shifting Action 7 final report. An agency PE includes a person who habitually concludes contracts on behalf of a non-resident individual or a non-japanese company, or habitually plays a principal role leading to the conclusion of contracts that are routinely concluded without material modification that transfer the ownership or use of a property, or the provision of services of a non-resident individual or non-japanese company to another person. A person who acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related is regarded as a dependent agent. Japan enacts 2018 tax reform On 28 March 2018, Japan s 2018 tax reform bill (the Bill) was enacted following passage of the Bill by the Japanese Diet. The tax law enforcement orders, which are regulations provided by the Government to supplement tax law, were also published in the Official Gazette on 31 March The Bill generally follows the tax reform outline announced by Japan s coalition leading parties in December The amendments generally apply Exceptions to a PE, such as a fixed place used for storage, display or delivery, apply only if the activities are of a preparatory or auxiliary character. Furthermore, the anti-fragmentation rules are added, which deny the PE exceptions where the activities of two persons constitute complementary functions and the combined activities exceed the PE threshold. The splitting-up of contracts rules is added by aggregating separate periods of construction contracts for purposes of determining a construction PE, if the main purpose of the 3

4 separation of the construction contracts is to avoid the one-year threshold period. A fills-order-agent and a secures-order-agent are excluded from the scope of the agency PE under the Japanese domestic tax law. This revision will apply to fiscal years beginning on or after 1 January Tax credit for wage increases and productivity improvement The current tax credit system for wage increases is amended. Under the new credit system, a company can enjoy a 15% tax credit on wage increases if both of the following conditions are met: The average salary paid by the company to the employees increases by at least 3% from the previous fiscal year. Domestic investment in depreciable assets is equal to or more than 90% of depreciation. A company meeting these conditions can also claim a deduction for the business scale enterprise tax. A company receives a 20%, in lieu of 15%, tax credit on the wage increases, if the costs incurred on training increase by at least 20% of the average training costs during the previous two years. The requirements for the tax credit are more relaxed for a small- or medium-sized company. The tax credit applies to fiscal years beginning on or after 1 April 2018 and ending on or before 31 March Limitations on R&D tax credit The R&D credit does not apply to large corporations if all the following conditions exist: Current taxable income exceeds the prior year s taxable income. The average salary paid by the company to the employees is equal to or less than the average salary paid during the previous fiscal year. Domestic investment in depreciable assets is equal to or less than 10% of depreciation. This revision applies to fiscal years starting on or after 1 April 2018 and ending on or before 31 March Other proposals The Bill includes but is not limited to the following: Bonus depreciation or tax credit on acquisition of software used to connect information and data Tax deferral on exchange of stock for shareholders who have accepted take-over bids Amendments to tax-qualified reorganization requirements Updates on the Japanese controlled foreign company (CFC) rules, including exclusion of capital gains arising from post-merger integration, the effective tax rate computation for a CFC in a tax haven jurisdiction and a qualified financial services company provision Philippines proposes corporate tax reform bill On 21 March 2018, the corporate tax reform bill (the Bill) was presented to the Philippine House of Representatives. The Bill seeks to reduce the Philippine corporate income tax rate while modernizing investment tax incentives and removing excessive tax exemptions and privileges. Proposed reduction of corporate income tax rate and optional standard deduction percentage The Bill reduces the current 30% corporate income tax rate by one percentage point every year beginning 1 January 2019, provided that the rate will not be lower than 20%. 4

5 The reduced corporate income tax rate will apply to domestic corporations and Philippine branches of foreign corporations. The optional standard deduction rate applicable to corporations is also proposed to be reduced from 40% to 20% of gross income. Proposed repeal of preferential corporate income tax rate The 10% preferential corporate income tax rate for regional operating headquarters and offshore banking units is proposed to be repealed. Withholding tax rates on specific income of foreign corporations A 15% withholding tax rate, an increase from the current 7.5%, is proposed on interest income of Philippine branches of foreign corporations. A capital gains tax rate on the sale of unlisted or untraded shares is planned to be increased to 15% from the current 5% rate for gains not exceeding Php100,000 (US$ 2,000), and 10% for gains exceeding Php100,000. This applies to foreign corporations with or without branches in the Philippines. The Bill proposes to reduce withholding tax on Philippine source income, such as dividends, royalties and service income by one percentage point every year beginning 1 January 2019, provided that the rate will not be lower than 20%. The withholding tax rates on the following Philippine source income of foreign corporations are to be repealed: 25% on gross income of cinematographic film owner, lessor or distributor 4.5% on gross rentals, lease or charter fees paid to non-resident owners or lessors of vessels 7.5% on rentals, charters and other fees derived by a non-resident lessor of aircraft, machinery and other equipment Modifications on provisions for non-recognition transactions No gain or loss will be recognized on an exchange of property solely for stock or securities in another corporation pursuant to a plan of reorganization. The proposed Bill removes the current requirement that a maximum of five persons be in control of the corporation as a result of the reorganization. The term reorganization is defined as: A statutory merger Acquisition by one corporation of stock of another corporation in exchange solely for all or a part of its voting stock, if immediately after the acquisition, the acquiring corporation is in control of the other corporation Acquisition by one corporation in exchange solely for all or a part of its voting stock or substantially all of the properties of another corporation Recapitalization Reincorporation Rationalization of fiscal incentives The following incentives may be granted to all export activities and strategic investments, including those intended for the domestic market, that are eligible for registration in an investment promotion agency and which will qualify for incentives upon evaluation: Income tax incentives: 1. Income tax holiday (ITH) for a period not exceeding three years 2. 15% corporate income tax rate 3. 50% deduction for actual qualified capital expenditure incurred within three years % deduction for research and development expenses for the year incurred % deduction for training expenses for the year incurred 6. 50% deduction for the wages corresponding to the increment in the number of direct labor 5

6 7. Full deduction on infrastructure development expense undertaken in an area designated as necessary for country-wide development or found to be deficient in infrastructure, public utilities or other facilities 8. Deduction for reinvestment made by a manufacturing registered enterprise, within five years from such reinvestment Customs duty incentive A five-year maximum exemption on customs duty on imported equipment, machinery and spare parts exclusively used for capital equipment and machinery In lieu of the ITH incentive under (1), the tax incentives under (2) (8) may be granted for a period not exceeding five years, including the ITH period. Thereafter, the regular corporate income tax will be imposed. Under no circumstances will value-added tax or local (provincial, city or municipal) taxes be used as investment tax incentives. Sunset provisions for existing incentives Registered activities with an existing ITH incentive will continue to be available for the ITH for the remaining period as originally granted or for a period of five years, whichever occurs first. Registered activities that received the 5% Gross Income Tax (GIT) incentive will be allowed to continue under the following schedule: Two years for activities that received the GIT incentive for more than 10 years Three years for activities that received the GIT incentive between 5 and 10 years Five years for activities that received the ITH or below five years for the GIT incentive, provided that the 5% GIT shall commence after the ITH period has lapsed and only for the remaining period within the five-year period 6

7 Contact details Principal Tax contacts Yeo Eng Ping Amarjeet Singh Global Compliance and Reporting Simon Yeoh Julian Wong Datuk Goh Chee San (based in Sabah) Janice Wong Julie Thong Lee Li Ming (based in Johor) Liew Ai Leng People Advisory Services Tan Lay Keng Irene Ang Christopher Lim Business Tax Services Amarjeet Singh Asaithamby Perumal Farah Rosley Robert Yoon Wong Chow Yang Transaction Tax Services Yeo Eng Ping Sharon Yong International Tax Services Anil Kumar Puri Transfer Pricing Sockalingam Murugesan Vinay Nichani Hisham Halim Indirect Tax Yeoh Cheng Guan Aaron Bromley Financial Services Bernard Yap

8 Important dates 30 April th month revision of tax estimates for companies with October year-end 30 April th month revision of tax estimates for companies with July year-end 30 April 2018 Statutory deadline for filing of 2017 tax returns for companies with September year-end 15 May 2018 Due date for monthly instalments 31 May th month revision of tax estimates for companies with November year-end 31 May th month revision of tax estimates for companies with August year-end 31 May 2018 Statutory deadline for filing of 2017 tax returns for companies with October year-end EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. Publisher: Ernst & Young Tax Consultants Sdn. Bhd. Level 23A Menara Milenium Jalan Damanlela, Pusat Bandar Damansara Kuala Lumpur Tel: Fax: