1
ZALEHA ADAM Director of Tax Litigation Division Legal Department Inland Revenue Board of Malaysia 2
400 350 REGISTRATION OF CASES BEFORE THE SPECIAL COMMISSIONERS OF INCOME TAX FOR YEARS 2015, 2016 & UNTIL 30 JUNE 2017 356 300 250 271 290 200 150 100 50 0 2015 2016 2017 @ 30 JUNE 3
CASE STATISTICS 4
L a b u a n O f f s h o r e A c t i v i t i e s Positive Vision Labuan Limited v Ketua Pengarah Hasil Dalam Negeri and other appeals [2017] 2 MLJ 421 W i t h h o l d i n g Ta x I s s u e s O n R o y a l t i e s Ketua Pengarah Hasil Dalam Negeri v Mudah.my Sdn Bhd [2017] 2 MLJ 197 Ketua Pengarah Hasil Dalam Negeri v Thomson Reuters Global Resources [2016] 10 MLJ 1 Ketua Pengarah Hasil Dalam Negeri v Alcatel Lucent Malaysia Sdn Bhd & Anor [2017] 1 MLJ 563 5
I n t e r e s t W a i v e d Ketua Pengarah Hasil Dalam Negeri v. Bandar Nusajaya Development Sdn Bhd (2016, unreported) C a p i t a l A l l o w a n c e Infra Quest Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) D G I R s A u d i t Finding L e t t e r Flextronics Shah Alam Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) 6
E x e m p t i o n of I n c o m e Society of La Salle Brothers v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) R e v e n u e R e c e i p t v C a p i t a l R e c e i p t Ketua Pengarah Hasil Dalam Negeri v Toxicol Sdn Bhd (unreported, 2017) 7
P a y m e n t Of S u b s i d y Chantika Kilang Beras Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) Utara Seeds Sdn Bhd v Ketua Hasil Dalam Negeri (unreported, 2017) I n c o m e Ta x A c t 1967 v R e a l P r o p e r t y G a i n s Ta x 1976 Insaf Tegas Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) 8
Labuan Offshore Activities Positive Vision Labuan Limited v Ketua Pengarah Hasil Dalam Negeri and other appeals [2017] 2 MLJ 421 9
P o s i t i v e V i s i o n L a b u a n L i m i t e d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i and o t h e r a p p e a l s [ 2017] 2 M L J 421 F A C T S The Taxpayers (i.e. Positive Vision Labuan Limited, GA Investment Limited and Avenues Zone Inc.) are offshore companies in the business of investment holding: Incorporated under the Offshore Companies Act 1990 Also known as Labuan company under Labuan Business Activities Tax Act 1990 (LBATA). Profits subject to tax under LBATA. The LBATA was amended via the Finance Act 2007 allowing Labuan companies to make irrevocable election to be charged under the Income Tax Act 1967 (ITA). Amendment effective YA 2009. On 18.12.2007, the Income Tax (Exemption)(No.22) Order 2007 [P.U.(A) 437/2007] ( Exemption Order ) was issued, exempting various types of income from tax. Dividends received by an offshore company exempted w.e.f. YA 2007. 10
P o s i t i v e V i s i o n L a b u a n L i m i t e d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i a n d o t h e r a p p e a l s [ 2 0 1 7 ] 2 M L J 4 2 1 F A C T S In YA 2011, these 3 taxpayers received dividends and made irrevocable elections under section 3A of LBATA. In 2012, tax consultant wrote to DGIR: Can a Labuan company which has made an election under section 3A be exempted from tax on dividends under the Exemption Order? DGIR informed the Taxpayer that MOF decided starting from 12.2.2010, the Exemption Order does not apply to a Labuan company which has made election under section 3A LBATA. Judicial Review applications were filed to quash DGIR s decision, declare that Taxpayers entitled for exemption, and DGIR s decision null and void & dividends should be exempted. Notices of Assessment were issued on 2.8.2012 respectively. 11
P o s i t i v e V i s i o n L a b u a n L i m i t e d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i and o t h e r a p p e a l s [ 2017] 2 M L J 421 Can MOF by policy or administrative decision declare that the Exemption Order has ceased to apply from a stipulated date without revoking it? Whether a Labuan Offshore Company which elects to be taxed under section 3B ITA is entitled to exemption under the Exemption Order? Whether a Labuan Offshore Company which elects under section 3A LBATA to be taxed under ITA is entitled to tax exemption under the Exemption Order? 12
P o s i t i v e V i s i o n L a b u a n L i m i t e d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i and o t h e r a p p e a l s [ 2017] 2 M L J 421 D E C I S I O N S The High Court and the Court of Appeal dismissed the Tax payers judicial review applications. At the Federal Court, the Taxpayers appeals were dismissed. It was decided that the Exemption Order must be read in harmony with sections 3A and 2(3) LBATA and 3B ITA: A Labuan company that has made an election cannot continue to enjoy the exemption. The Exemption Order intended to apply to offshore companies. The Taxpayers were chargeable offshore companies and were no longer within the terms of the order. There is no need to revoke the order. 13
Withholding Tax Issues On Royalties Ketua Pengarah Hasil Dalam Negeri v Mudah.my Sdn Bhd [2017] 2 MLJ 197 Ketua Pengarah Hasil Dalam Negeri v Thomson Reuters Global Resources [2016] 10 MLJ 1 Ketua Pengarah Hasil Dalam Negeri v Alcatel Lucent Malaysia Sdn Bhd & Anor [2017] 1 MLJ 563 14
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v M u d a h. my S d n B h d [ 2 0 1 7 ] 2 M L J 197 F A C T S The DGIR s letter of audit findings notified Taxpayer that some of the accounts and documents showed that it had not remitted withholding taxes for YA 2010, 2011 and 2012. In the letter of findings, the DGIR, inter alia: requested the Taxpayer to attend at the DGIR s office to discuss the audit findings. cautioned that legal action would be taken if the Taxpayer failed to attend the meeting. Three meetings were held with Taxpayer to discuss the audit findings and furnish documents and information required by the DGIR but after the fourth meeting was fixed, the Taxpayer cancelled it and filed a judicial review application in the High Court in order to quash the DGIR s decision in the letter of findings. 15
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v M u d a h. my S d n B h d [ 2 0 1 7 ] 2 M L J 197 Whether DGIR s letter to Taxpayer was decision amenable to judicial review? Whether DGIR s letter merely notified Taxpayer of initial finding of DGIR s field audit? Whether the Taxpayer s move to file for judicial review was premature and abused court s process? 16
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v M u d a h. my S d n B h d [ 2 0 1 7 ] 2 M L J 197 D E C I S I O N S The High Court agreed with the Taxpayer and granted the reliefs it sought and further decided that a payment for right to use or operate a copyright software or programme is a not royalty payment, thus not subject to withholding tax under Section 109B of the ITA. DGIR filed an appeal and Court of Appeal allowed the DGIR s appeal and held that- Letter of finding is not a decision. Domestic remedy is preferred as opposed to judicial review. Payment for the use or right to use software falls within the scope of royalty. 17
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T h o m s o n R e u t e r s G l o b a l R e s o u r c e s [ 2 0 1 6 ] 10 M L J 1 F A C T S Taxpayer is in the business of compiling, producing, developing and selling information services and dealing services. Taxpayer entered into a distribution agreement with its subsidiary, Thomson Reuters Malaysia Sdn Bhd (TRM) where the latter was appointed to market and sell the taxpayer s products i.e. information services and dealing services in Malaysia in return for a distribution fee. TRM was said to have erroneously paid withholding tax and requested to the DGIR for a tax refund. The DGIR rejected the application as the payment (distribution fee) was royalty and subject to withholding tax in Malaysia. The Taxpayer appealed to the SCIT. 18
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T h o m s o n R e u t e r s G l o b a l R e s o u r c e s [ 2 0 1 6 ] 10 M L J 1 Whether the distribution fee was royalty under Article 12(4) of the Malaysia-Swiss Federal Council Double Taxation Agreement 1974 ( DTA )? Whether the distribution fee was Taxpayer s business profit and thus, pursuant to Article 7(1) of the DTA, the distribution fee was only taxable in Switzerland? 19
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T h o m s o n R e u t e r s G l o b a l R e s o u r c e s [ 2 0 1 6 ] 10 M L J 1 D E C I S I O N S The SCIT allowed the Taxpayer s appeal and the decision was affirmed by High Court. DGIR s further appeal was dismissed by the Court of Appeal- Distribution payment was not subject to withholding tax. Payment for service rendered not a royalty. Payment not related to special commercial knowledge. No transfer or grant of know how or property rights. No permanent establishment in Malaysia, thus no tax. Definition of royalty in DTA prevails over ITA. 20
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v A l c a t e l L u c e n t M a l a y s i a S d n B h d & A n o r [ 2 0 1 7 ] 1 M L J F A C T S Alcatel Lucent Malaysia Sdn Bhd (ALMSB) entered into Service Agreement with Alcatel International Asia Pacific Pte. Ltd. (APPL)- APPL to provide services to ALMSB from overseas Provision of global network for voice, data and video communication Upon audit, it was discovered that no withholding tax (WHT) had been paid by ALMSB for payments made to APPL- DGIR of the view that payments were royalty payments WHT sum reduced after negotiations Letter dated 14.4.2008 issued confirming sum and referred to sections 109 and 109B of ITA 21
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v A l c a t e l L u c e n t M a l a y s i a S d n B h d & A n o r [ 2 0 1 7 ] 1 M L J F A C T S ALMSB paid WHT under protest but said that services were not royalty as they were performed outside Malaysia: No Form Q filed, ALMSB instead filed a judicial review application. ALMSB argued: By stating both sections in his letter, DGIR uncertain whether to apply section 109 or 109B. DGIR failed to provide reasons. DGIR argued: Not bound under the ITA to give reasons. Tax payer knew about the WHT issues as they were raised during negotiation meetings. Payments were royalties as consideration for use of software. 22
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v A l c a t e l L u c e n t M a l a y s i a S d n B h d & A n o r [ 2 0 1 7 ] 1 M L J Whether the DGIR s letter dated 14.4.2008 referring to both sections 109 and 109B of ITA is bad in law? Are payments made by ALMSB to ALLP royalties under section 109 of ITA? 23
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v A l c a t e l L u c e n t M a l a y s i a S d n B h d & A n o r [ 2 0 1 7 ] 1 M L J D E C I S I O N S The High Court and the Court of Appeal allowed the Taxpayers judicial review application: Demand letter illegal DGIR not sure which sections apply No reason given by DGIR in making the demand; Payment is not royalty under ITA. It is wrong to rely on draft agreement. 24
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v A l c a t e l L u c e n t M a l a y s i a S d n B h d & A n o r [ 2 0 1 7 ] 1 M L J D E C I S I O N S The Federal Court allowed the DGIR s appeal: DGIR s letter dated 14.4.2008 referring to both sections 109 and 109B of ITA is not bad in law. No statutory provisions demanding DGIR to provide reasons. Federal Court noticed that no appeal was filed under section 99 of ITA and said that an appeal would give the Taxpayer the opportunity to rebut that the payments were royalty and to rebut section 15A of ITA. Failure to appeal has established that the payments were royalty and income derived from Malaysia. 25
Interest Waived Ketua Pengarah Hasil Dalam Negeri v. Bandar Nusajaya Development Sdn Bhd (2016, unreported) 26
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v. B a n d a r N u s a j a y a D e v e l o p m e n t S d n B h d ( 2 0 1 6, u n r e p o r t e d ) F A C T S UEM Land Berhad (the Taxpayer s holding company) provided a loan of up to a maximum of RM875 million with interest rate at 12% p.a. In 1995, the interest rate was reduced to 5% per annum. In 2000, the rate was further reduced to 2% per annum. The Taxpayer had claimed tax deduction on the total amount of interest under Section 33(1) of the ITA. 27
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v. B a n d a r N u s a j a y a D e v e l o p m e n t S d n B h d ( 2 0 1 6, u n r e p o r t e d ) F A C T S The interest was claimed against two sources of income namely interest amounting to RM40,198,833.00 as deductible expense against Taxpayer s business income (the Taxpayer s development account); and interest amounting to RM181,863,826 as deductible expense against the Taxpayer s interest income. In 2006, UEM Land Sdn. Bhd. decided to waive the total amount of interest accrued under the loan facility. The interest in respect of the business income (development account) amounting RM40,198,833 which had been waived by UEM Land Sdn Bhd was brought to income tax for the YA 2006 by the Taxpayer. 28
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v. B a n d a r N u s a j a y a D e v e l o p m e n t S d n B h d ( 2 0 1 6, u n r e p o r t e d ) F A C T S However, the interest amounting to RM181,863,826 which had also been waived by UEM Sdn Bhd was not brought to tax. The DGIR took the stand that the interest waived (RM181,863,826) by UEM Land Sdn Bhd in respect of interest income source must also be brought to tax under Section 22(2)(a)(i) of the ITA. 29
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v. B a n d a r N u s a j a y a D e v e l o p m e n t S d n B h d ( 2 0 1 6, u n r e p o r t e d ) Whether misinterpretation of subparagraph 22(2)(a)(i) of the ITA 1967 by the DGIR (if there is) amounted to an error of law, and a clear lack of jurisdiction when the decision to raise the additional assessment was made. 30
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v. B a n d a r N u s a j a y a D e v e l o p m e n t S d n B h d ( 2 0 1 6, u n r e p o r t e d ) D E C I S I O N S The High Court s decision was affirmed by the Court of Appeal in allowing leave for Taxpayer s judicial review application. DGIR appealed to the Federal Court. Federal Court allowed DGIR s appeal with costs and set aside the decision of the courts below. Misinterpretation of paragraph 22(2)(a) of ITA is not an error of law that amounts to lack of jurisdiction, therefore, Judicial Review is not the correct procedure for the Taxpayer to challenge the assessment. The proper process is by filing an appeal to the SCIT. 31
Capital Allowance Ketua Pengarah Hasil Dalam Negeri v Infra Quest Sdn Bhd (unreported, 2017) 32
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v I n f r a Q u e s t S d n B h d ( u n r e p o r t e d, 2017) F A C T S Taxpayer, a wholly-owned subsidiary of Permodalan Kelantan Berhad (which was wholly owned by Perbadanan Kemajuan Iktisad Negeri Kelantan). Taxpayer is in the business of providing telecommunication towers licensed to companies that provide telecommunication services for the latter to affix antennas to the towers. Taxpayer owned 193 towers in Kelantan and its customers include telecommunication service providers such as Celcom, Maxis and Digi. 33
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v I n f r a Q u e s t S d n B h d ( u n r e p o r t e d, 2017) F A C T S Towers were all manufactured by 3rd party and installed for the purpose of Taxpayer s business. Taxpayer claimed capital allowance for telecommunication towers in its tax return but was disallowed by the DGIR upon audit. On 9.2.2011, DGIR issued notices of assessment for YA 2003-2008. The Taxpayer appealed to the SCIT. 34
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v I n f r a Q u e s t S d n B h d ( u n r e p o r t e d, 2017) Whether the notices of assessment for YA 2003 and 2004 were time-barred? Whether the Taxpayer was entitled to claim capital allowances on capital expenditure incurred to build telecommunication towers? 35
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v I n f r a Q u e s t S d n B h d ( u n r e p o r t e d, 2017) D E C I S I O N S The SCIT dismissed the Taxpayer s appeal on these grounds: DGIR had power to invoke section 91(3) of ITA: negligence of Taxpayer omitting to file correct returns by wrongfully claiming capital allowances for the tower. Towers were premises where the Taxpayer conducted its business activities. Towers were not apparatus by which the business activities of the Taxpayer were carried on. 36
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v I n f r a Q u e s t S d n B h d ( u n r e p o r t e d, 2017) D E C I S I O N S Taxpayer appealed to High Court and the appeal was allowed on these grounds: DGIR did not satisfy section 91(3) of ITA DGIR failed to prove the negligence of the Taxpayer. Taxpayer satisfied the requirement that the telecommunication towers were plants. used for the purpose of its business of providing telecommunication towers. DGIR then appealed against the High Court s decision to the Court of Appeal. The Court of Appeal upheld the High Court s decision. 37
DGIR s Audit Finding Letter Flextronics Shah Alam Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) 38
F l e x t r o n i c s S h a h A l a m S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) F A C T S Taxpayer is a contract manufacturer of electrical/electronic components including LCD panels for mobile phones, watches etc. Taxpayer affiliated with other Flextronics group of companies all over the world. In 2007, desk and field audit for YA 2000 2005 were conducted: 20.8.2014, DGIR issued field audit findings for YA 2000 2006. Taxpayer responded to the field audit findings via letters dated 19.9.2014 and 5.12.2014. 39
F l e x t r o n i c s S h a h A l a m S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) F A C T S DGIR issued a letter dated 10.12.2014 stating that notices of assessment for YA 2000 2006 will be issued under section 140(2) of ITA. Taxpayer filed an application for Judicial Review to quash the DGIR s letter dated 10.12.2014 on grounds of - Illegality Irrationality Procedural Impropriety 40
F l e x t r o n i c s S h a h A l a m S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) Whether or not the DGIR s letter dated 10.12.2014 amounts to a decision? 41
F l e x t r o n i c s S h a h A l a m S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S High Court dismissed the Taxpayer s application on the ground that the application was premature as the letter dated 14.12.2014 from DGIR was not a decision or an action which had adversely affected the Taxpayer s rights. Taxpayer s appeal to the Court of Appeal was dismissed. 42
Exemption of Income Society of La Salle Brothers v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) 43
S o c i e t y of La S a l l e B r o t h e r s v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) F A C T S Taxpayer is a charitable institution with the sole objective of ensuring that education is accessible to all races, religion and creed. Taxpayer established a number of La Salle Schools in Malaysia. 39 schools still in operation Letter dated 26.1.1970 - Taxpayer obtained tax exemption status from the Comptroller of Inland Revenue Malaysia Letter dated 25.7.1995 - DGIR notified Taxpayer for requirement to re-apply for tax exemption status: pursuant to amendments to para 13 Sch 6 of the ITA vide section 13 of the Finance Act 1988. to-date the tax payer had not done so. 44
S o c i e t y of La S a l l e B r o t h e r s v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) F A C T S On 16.3.2015, notices of assessment for YAs 2004, 2006, 2007, 2011, 2012 and 2013 were issued to Taxpayer. Taxpayer requested for payment by 28 monthly instalments. Taxpayer filed application for Judicial Review dated 9.4.2015 - quash the notices of assessment decision made by DGIR is null, void and unconstitutional. 45
S o c i e t y of La S a l l e B r o t h e r s v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) Whether Taxpayer is still entitled for tax exemption under Income Tax Ordinance 1947 which has gone through numerous amendments, i.e. Finance Act 1988 & Finance Act (No.2) 2000 in line with section 127 of ITA? 46
S o c i e t y of La S a l l e B r o t h e r s v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S High Court dismissed Taxpayer s application on these grounds: Any tax exemption obtained by tax payer prior to the amendments shall cease from YA 2004 onward unless an application is made and approved by DGIR pursuant to section 44(6) of ITA. To qualify for exemption, it is mandatory for Taxpayer to re-apply for approval from DGIR as per DGIR s letter dated 29.7.1995. Application for Judicial Review is inappropriate and an abuse of the court s process. Taxpayer bluntly refused to resort to appeal procedure under section 99 of ITA. The fact that Taxpayer requested to make payment by way of instalments implied that tax payer recognized that it was no longer entitled for exemption. 47
S o c i e t y of La S a l l e B r o t h e r s v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S Taxpayer s appeal to the Court of Appeal was allowed. Its tax exemption status as a charitable institution never withdrawn by DGIR. Amendments via the Finance Acts do not in law have any effect on the vested right of the Taxpayer. right acquired before the amendments which have no retrospective effect. DGIR has filed application for leave to appeal to the Federal Court. 48
Revenue Receipt v Capital Receipt Ketua Pengarah Hasil Dalam Negeri v Toxicol Sdn Bhd (unreported, 2017) 49
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T o x i c o l S d n B h d ( u n r e p o r t e d, 2 0 1 7 ) F A C T S The Taxpayer was in the business of management, handling, removal and disposal of toxic waste. In 1999, the Taxpayer had entered into contract with Kualiti Alam Sdn Bhd to be a Special Purpose Vehicle to collect and transport toxic waste to the Waste Management Centre of Kualiti Alam. During the initial period of the agreement, the relationship between Taxpayer and Kualiti Alam went on smoothly until the new management took over as a result of takeover by Khazanah. The new management was not interested in hearing Taxpayer s grievances and resolving outstanding issues. 50
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T o x i c o l S d n B h d ( u n r e p o r t e d, 2 0 1 7 ) F A C T S Due to change, the Taxpayer has no choice but to surrender the 1999 Agreement with Kualiti Alam. On 7.2.2005 Taxpayer and UEM Environment Sdn Bhd entered into an agreement for the novation of contract. Pursuant to the Novation Agreement, Taxpayer has to transfer all rights and liabilities to UEM. Taxpayer ceased its business in 2005 and had no other business. Taxpayer received RM23,000,000 under the Novation Agreement in respect of termination of its business by transferring to UEM all its rights and liabilities. 51
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T o x i c o l S d n B h d ( u n r e p o r t e d, 2 0 1 7 ) Whether the sum of RM23 million received by the Taxpayer in consideration of sale of contracts by way of Agreement of Novation of Contracts should be treated asincome/revenue receipt or capital receipt? Whether upon the facts and circumstances, there was a forced sale of Taxpayer s entire business and therefore the proceeds are not in the course of business? 52
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T o x i c o l S d n B h d ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S At the SCIT level, the Taxpayer s appeal was dismissed and the SCIT found that : The payment was compensation for loss of income under section 22(2) of ITA and chargeable to tax under section 4(a) of ITA. The effect of Novation Agreement did not amount to transfer of rights but merely transfer of obligations and benefits. There was never a forced sale of the agreement and the Taxpayer voluntarily sold the contract. 53
K e t u a P e n g a r a h H a s i l D a l a m N e g e r i v T o x i c o l S d n B h d ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S The Taxpayer had appealed to the High Court and the High Court allowed the appeal on the ground : Pursuant to Novation Agreement, the Taxpayer lost its business rights. The disposal of Taxpayer s rights and liabilities was a capital receipt and not taxable. There was a forced sale of the Taxpayer s entire business as the Taxpayer was frustrated with the new management. DGIR then appealed against the decision of the High Court to the Court of Appeal, where it was dismissed. 54
Payment Of Subsidy Chantika Kilang Beras Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) Utara Seeds Sdn Bhd v Ketua Hasil Dalam Negeri (unreported, 2017) 55
C h a n t i k a K i l a n g B e r a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) F A C T S Taxpayer s principal activity is as a rice miller. Taxpayer is not involved in the business of planting paddy. In YA 2008, 2009 and 2010, Taxpayer received subsidy payments from Ministry of Agriculture and Agro Based Industry Malaysia (MOA) for rice and paddy seedlings There were 2 types of subsidies - subsidize the price of paddy seedlings for paddy farmers to obtain good quality seedlings which can give better yield. reduce the burden of the public due to the sharp increase in the price of rice. 56
C h a n t i k a K i l a n g B e r a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) Payments of subsidy by MOA were calculated based on the difference between the selling price and market price of paddy seedlings and ST15 rice. Taxpayer declared the payment of subsidy received as its income under section 4(a) of ITA in YA 2008, 2009 and 2010. Taxpayer submitted CP15C in 2013 for relief under section 131(1) of ITA. Exemption Order No. 22/2006. F A C T S 57
C h a n t i k a K i l a n g B e r a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) Whether or not there is a mistake on part of Taxpayer when it declared the subsidy payments received as business income under section 4(a) of ITA? Whether the payments of subsidy received by tax payer from MOA were correctly brought to tax as business income by the Taxpayer? Whether Exemption Order No. 22/2006 applies to the Taxpayer? 58
C h a n t i k a K i l a n g B e r a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S The SCIT found that the scheme of subsidy introduced by the government through MOA was meant for paddy farmers to purchase good quality paddy seedlings at subsidised price, and to enable the public at large to purchase ST15 at a lower price. The SCIT also found that the word subsidy in MOA s letter to the Taxpayer is to denote the Taxpayer s participation in the subsidy programme only and not that the subsidy was meant for the Taxpayer in its capacity as a rice miller. SCIT also made a finding that regardless of the word subsidy used in MOA s letter to the Taxpayer, the real character of the payments received by the tax payer was not subsidy but compensation. 59
C h a n t i k a K i l a n g B e r a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S The High Court on appeal upheld the findings made by SCIT and dismissed the Taxpayer s appeal. Taxpayer appealed to the Court of Appeal against the decision of the High Court. The Court of Appeal decided in favour of the Taxpayer and overturned the decisions of the High Court and SCIT. 60
Income Tax Act 1967 v Real Property Gains Tax 1976 Insaf Tegas Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported, 2017) 61
I n s a f T e g a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) Taxpayer involved principally in property investment. In 1997, Taxpayer purchased 50 acres of land in Mukim Batang Kali, Selangor. The land was later disposed in 2004. F A C T S Certificate of exemption under RPGT was issued in 2009. In 2010, after field audit on the Taxpayer was conducted, the DGIR issued a Notice of Assessment with penalty as the disposal was treated as a disposal of stock in trade subject to income tax. 62
I n s a f T e g a s S d n B h d v K e t u a P e n g a r a h H a s i l Dalam N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) Whether the disposal is subject to tax under ITA or RPGT? Whether penalty is rightly imposed under section 113 of ITA? 63
I n s a f T e g a s S d n B h d v K e t u a P e n g a r a h H a s i l D a l a m N e g e r i ( u n r e p o r t e d, 2 0 1 7 ) D E C I S I O N S The SCIT and the High Court dismissed the Taxpayer s appeal: Intention for the purchase of the land was not for investment. SPA to develop the land within 2 years. Taxpayer was also required to submit building plan within 1 year. Memorandum allows Taxpayer to enter into contract to build buildings, other construction, and to carry on property development activities. Taxpayer appointed the buyer as a developer. Two company resolutions prior to and consequent to the SPA. Reasons for sale due to unfavorable market conditions and debt settlement exercise were disregarded. Taxpayer s appeal to the Court of Appeal was dismissed with costs. 64
Thank you zalehaadam@hasil.gov.my 65