Tax Espresso May 2019 - Deloitte United States · Tax Espresso – May 2019 5 (a) Before the...
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Tax Espresso Guideline on dispute resolution proceeding, tax cases, income tax rules and more May 2019
Transcript of Tax Espresso May 2019 - Deloitte United States · Tax Espresso – May 2019 5 (a) Before the...
Tax Espresso – May 2019
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Tax Espresso Guideline on dispute resolution proceeding, tax cases, income tax rules and more
May 2019
Tax Espresso – May 2019
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Greetings from Deloitte Malaysia Tax Services
Quick links: Deloitte Malaysia
Inland Revenue Board of Malaysia
Takeaways:
1. Updated Procedure on Submission of Amended Return Form
2. Guideline on Dispute Resolution Proceeding
3. Tax case: KPHDN v Kompleks Tanjong Malim Sdn Bhd (High Court)
4. Tax case: Glocomp Systems (M) Sdn Bhd v KPHDN (High Court)
5. Income Tax Rules 2019 in relation to deduction on issuance of Retail Debenture, Retail Sukuk
and Sukuk
Upcoming events:
1. Opportunities and Risks of Digitalisation in the Fourth Industrial Revolution
Important deadlines:
Task Due Date
31 May 2019
1. 2020 tax estimates for companies with June year-end √
2. 6th month revision of tax estimates for companies with November year-end √
3. 9th month revision of tax estimates for companies with August year-end √
4. Statutory filing of 2018 tax returns for companies with October year-end √
5. Due date for 2019 CbCR notification for companies with May year-end √
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Updated Procedure on Submission of Amended Return Form
The Inland Revenue Board of Malaysia (IRBM) has updated the Procedure on Submission of Amended Return Form (GPHDN 3/2019) on 22 April 2019 (available in Bahasa Malaysia only)
and it supersedes the GPHDN 1/2010 issued on 30 November 2010.
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Guideline on Dispute Resolution Proceeding The IRBM has recently issued the Guideline on Dispute Resolution Proceeding (dated 1 March
2019). The purpose of the guideline is to:
provide information regarding the implementation of Dispute Resolution Proceeding (DRP),
which is a mechanism to resolve disputes arising from an appeal or application for relief filed
by taxpayer to the IRBM; and
spread awareness of the taxpayer’s rights and responsibilities in relation to DRP.
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Tax case: Ketua Pengarah Hasil Dalam Negeri (KPHDN) v Kompleks Tanjong
Malim Sdn Bhd (High Court)
Issues:
1. Whether the Director General of Inland Revenue (DGIR) was empowered to apportion the
taxpayer’s claim to deduct its quit rent payments into allowable and disallowable portions under Section 33(1) of the Income Tax Act 1967 (the ITA), instead of allowing the taxpayer
to deduct the quit rent payments in full under Section 33(1) of the ITA for the years of
assessment (YAs) 2006 to 2009 and 2011; and
2. whether the DGIR’s imposition of penalties on the taxpayer for the YAs 2006 to 2009 and
2011 under Section 113(2) of the ITA was correct in law, and if so, whether the penalties
were reasonable and warranted taking into account all relevant facts and circumstances of the taxpayer’s case.
[The Special Commissioners of Income Tax (SCIT) had decided in favour of the taxpayer and the
DGIR appealed to the High Court (HC)]
Decision:
The HC allowed the appeal by the DGIR on all issues with the following grounds of judgement:
Issue 1
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(a) The issue was whether the payment of quit rent based on industrial land rate was
wholly/entirely and exclusively/solely incurred in the production of gross income from the
palm oil plantation business of the taxpayer.
According to the SCIT’s finding of facts, the taxpayer’s sole purpose of conversion from
agricultural lands to commercial lands was merely to enhance the capital value of the lands. The judge was of the view that the purpose of the conversion to commercial land had nothing
to do with the taxpayer’s palm oil production. Hence, it cannot be said that the payments of
the quit rent based on commercial land was wholly and exclusively incurred for the palm
oil production of the taxpayer. Therefore, the taxpayer simply cannot deduct a full quit rent based on commercial land category as this was against Section 33(1) of the ITA.
(b) The next issue then was whether the DGIR had the power to apportion, i.e. to allow deduction of quit rent based on agriculture land, and to disallow deduction of quit rent based
on commercial lands. If the DGIR cannot apportion, then either the DGIR allows all or
disallows all.
The SCIT had allowed the taxpayer’s appeal by applying the decision in DGIR v Kok Fai Yin
(MTKL Rayuan Cukai No. 14-1-90). Although in Kok Fai Yin’s case, it was decided that
Section 33(1) of the ITA did not empower the DGIR to consider and determine what reasonable fees should have been paid to the directors and to disallow the excess from
deduction under Section 33(1), the HC found that the facts in Kok Fai Yin’s case were
distinguishable from the present case. That case did not deal with the issue of whether the directors’ fees were wholly and exclusively incurred in the production of gross income. The
only concern was that the directors’ fees were unreasonably excessive and the DGIR had
sought to deduct the amount according to the DGIR’s opinion.
(c) As such, it was only proper for the DGIR to disallow the deduction of quit rent payment based
on commercial land category. The DGIR could not allow a full deduction of quit rent as that
would be contrary to Section 33(1) of the ITA. However, the DGIR could not disallow all of the quit rent as that would be prejudicial to the taxpayer because the taxpayer did pay the
quit rent for the said land and was entitled to such deduction under Section 33(1) as part of
its expenses. Any claim in excess of deductions wholly and exclusively incurred in the production of the income under Section 33(1) would trigger the statutory duty of the DGIR to
disallow such expenses not wholly and exclusively incurred for the production of the income
concerned. The duty of the DGIR was to ascertain that only statutory deductions allowed by
the ITA may be claimed by the taxpayer, nothing more and nothing less (refer to Kok Fai Yin case law).
Therefore, the HC was of the considered opinion that where the taxpayer had made a claim for deductions that were not sanctioned by the ITA, i.e. deductions that fell outside the ambit
of Section 33(1) of the ITA, the DGIR could apportion the taxpayer’s claim to deduct its quit
rent (by allowing deduction of quit rent based on agricultural land and disallow the portion that relate to the value of commercial lands). In the present appeal, the DGIR was legally
correct when the DGIR restricted the taxpayer’s deduction to quit rent based on agricultural
land (refer to case law of Syarikat Pukin Ladang Kelapa Sawit Sdn Bhd v DGIR [2012] 6 MLJ
411).
Issue 2
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(a) Before the penalties under Section 113(2) could be invoked, the DGIR must be satisfied that
the taxpayer had made an incorrect return by omitting or understating any income or had
given any incorrect information.
In the present case, the taxpayer did not file the correct return to the DGIR for the relevant
YAs. If the DGIR had not conducted the audit, the DGIR would not have been aware that the taxpayer had been claiming the full quit rent based on the commercial land category. It was
on this basis that the DGIR had issued the Notices of Additional Assessments. Therefore, the
HC was of the opinion that there was a legal basis for the DGIR to invoke his discretion in
imposing the penalties.
(b) With regards to the issue raised by the taxpayer that the filing of the tax returns were based
on the taxpayer’s interpretation of the law, the HC echoed the findings in Syarikat Pukin Ladang Kelapa Sawit Sdn Bhd (supra), that ignorance of law could not be a defence.
(c) The taxpayer also submitted that where the incorrect return or information were made in good faith, it was wrong to impose penalties under Section 113(2) of the ITA. However, in
respect of the use of the words ‘good faith’ in section 113, the Court of Appeal in Syarikat
Ibraco Paremba Sdn Bhd v DGIR [2015] 10 CLJ 114, had held that ‘good faith’ was not
relevant where the DGIR had exercised his discretion under Subsection 113(2).
In the present case, since there was no prosecution against the taxpayer under Subsection
113(1) of the ITA, and that the penalties were imposed under Subsection 113(2), then the issue of whether the mistake in the tax returns were made in ‘good faith’ was not relevant.
(d) Therefore, the HC decided that the DGIR’s imposition of penalties on the taxpayer under Section 113(2) of the ITA was correct in law, as the DGIR had the discretion to impose them
in accordance with the law.
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Tax case: Glocomp Systems (M) Sdn Bhd v KPHDN (High Court)
Issues:
1. Whether the definition of ‘royalties’ in Article 12 of the Malaysia-Singapore Double Taxation Agreement (DTA) takes precedence over Section 2 of the ITA;
2. whether the payments made by the taxpayer to Symantec Asia Pacific Pte Ltd (Symantec) in 2010 were royalties under Article 12 of the Malaysia-Singapore DTA;
3. whether the payments were business profit of Symantec and therefore only taxable in Singapore, pursuant to Article 7 of the Malaysia-Singapore DTA; and
4. whether the matter should have been referred to the SCIT under Section 109H(1) of the ITA.
Decision:
The HC allowed the taxpayer’s application for judicial review on the following grounds of judgement:
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Issue 1
Under Section 132(1) of the ITA, in the event of conflict between the ITA and the DTA, the
provisions of the DTA shall prevail. This has been settled by the Federal Court in DGIR v
Euromedical Industries Ltd [1983] CLJ (Rep) 128, which the decision was applied in Damco Logistic Malaysia Sdn Bhd v DGIR [2011] MSTC 30-033.
Issue 2
(a) The Article 12 on ‘Royalties’ in the Malaysia-Singapore DTA was referred to and the
Commentary of the OECD shall be used to determine the construction of the relevant articles
in the Malaysia-Singapore DTA (this followed the decision in Damco Logistic Malaysia Sdn Bhd v DGIR). Paragraph 11 of the OECD Commentary explains that ‘royalties’ refer to the concept
of know-how, and in a know-how contract, one party agrees to impart his special knowledge
and experience (which involves confidentiality) to the other party. The know-how contract differs from contracts for the provision of services, in which one of the parties undertakes to
use his customary skills of his calling to execute the work himself for the other party. The
contract for the provision of services does not involve the transfer of special knowledge or
skill or expertise to the other party. Additionally, payments made under a contract for the provision of services generally fall under Article 7 ‘Business Profits’.
The Distributor Agreement entered by the taxpayer with Symantec was for the taxpayer to ‘act as an independent distributor of Symantec Products’ Therefore, the nature of the
Distributor Agreement was merely in the nature of contract for service, and not a know-how
contract.
(b) Having considered the Distributor Agreement which formed the basis of whether the
payments made by the taxpayer to Symantec were payments of royalty or not, the said
payments were not royalty payments within the ambit of Article 12 of the Malaysia-Singapore DTA. This finding was based on the following reasons:
the payments were not payments for the ‘right to use’ of the software systems as the payments were not made for the rights to exploit a ‘know-how’ or information;
the payments were not for the granting of licenses or copyright or partial copyright by
Symantec;
the taxpayer did not acquire a general license for the use of the software or the grant of a
license or copyrights from Symantec;
the taxpayer did not obtain any proprietary right, copyright or know-how in Symantec’s
products as all the intellectual property rights vested or remained with Symantec; and
the taxpayer was not given the right to reproduce the computer program by Symantec,
but merely acted as an intermediary distributor of the Symantec products to the
Malaysian subscribers.
Therefore, the taxpayer was only paying for the distribution of the Symantec products and
did not exploit any rights in the software copyrights of the products. Consequently, the payments were not royalty within Article 12 of the Malaysia-Singapore DTA.
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(c) The Distributor Agreement was merely to state that the Symantec products were distributed
under trademarks and trade names of Symantec, which simply meant that for all intent and purpose, the Symantec products belonged to Symantec. Also, it did not state that the price
was for the purpose of transfer of rights, such as copyright or know-how information, of the
Symantec products to the taxpayer.
d) Therefore, the HC found that the payments made by the taxpayer to Symantec were not
royalty within Article 12 of the Malaysia-Singapore DTA.
Issue 3
The said payments were business profits of Symantec in Singapore and Symantec was subjected to tax by the Inland Revenue Authority in Singapore on that basis. Therefore, pursuant to Article
7 of the Malaysia-Singapore DTA, the business profit of Symantec shall not be taxable in
Malaysia, unless Symantec carries on business in Malaysia through a permanent establishment. It was not in dispute that Symantec did not have a permanent establishment in Malaysia.
Issue 4
The HC was of the opinion that there was no dispute of facts. The taxpayer had admitted that
they had made payments to Symantec in Singapore. It was also not in dispute that Symantec
had no permanent establishment in Malaysia.
As this case did not involve any disputed facts and the only issue was on the interpretation of
the Distributor Agreement as well as the application of the Malaysia-Singapore DTA, then the
discretion lay with the HC as to whether to proceed with the judicial review application. Since the DGIR did not apply to set aside the leave granted on the basis of the doctrine of alternative
remedy, the HC would have to consider this issue in light of the judicial review application as
well. In light of the HC findings on the judicial review application, the failure to refer the subject matter to SCIT was not fatal to the taxpayer’s application.
In its conclusion, the HC held that the payments made to Symantec were not royalty payments
under Article 12 of the Malaysia-Singapore DTA, and were, therefore, not subject to withholding
tax. The taxpayer’s application for judicial review was allowed.
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Income Tax Rules 2019 in relation to deduction for expenditure on issuance of
Retail Debenture, Retail Sukuk and Sukuk
The following Rules have been gazetted on 25 April 2019 and these Rules have effect for the YAs
2019 and 2020.
(i) P.U.(A) 117/2019 – Income Tax (Deduction for Expenditure on Issuance of Retail Debenture
and Retail Sukuk) Rules 2019
P.U.(A) 117/2019 allows a deduction in respect of additional expenses (equivalent or twice
the amount) incurred by a resident company on the issuance of a retail debenture; a retail
sukuk structured pursuant to the principle of Murabahah or Bai’ Bithaman Ajil (based on
Tax Espresso – May 2019
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Tawarruq concept), Mudharabah, Musyarakah, Istisna’ or any Shariah principle (other than
the principle of Ijarah or Wakalah); and a retail sukuk structured pursuant to the principle of
Ijarah or Wakalah comprising a mixed component of asset and debt.
(ii) P.U.(A) 118/2019 – Income Tax (Deduction for Expenditure on Issuance of Sukuk) Rules
2019
P.U.(A) 118/2019 allows a Malaysian resident company incorporated under the Companies
Act 2016 or the Labuan Companies Act 1990 a deduction in respect of expenditure incurred
on the issuance of sukuk structured pursuant to the principle of Ijarah or the principle of Wakalah comprising a mixed component of asset and debt.
Please refer to the abovementioned Rules for the full conditions imposed.
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We invite you to explore other tax-related information at:
http://www2.deloitte.com/my/en/services/tax.html
Tax Espresso – May 2019
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Tax Team - Contact us
Service lines / Names Designation Email Telephone
Business Tax Compliance & Advisory Sim Kwang Gek Tan Hooi Beng
Stefanie Low Thin Siew Chi
Choy Mei Won Suzanna Kavita
Managing Director
Deputy Managing
Director
Executive Director
Executive Director
Director
Director
+603 7610 8849
+603 7610 8843
+603 7610 8891
+603 7610 8878
+603 7610 8842
+603 7610 8437
Business Process
Solutions Julie Tan Loke Chee Kien
Shareena Martin
Executive Director
Director
Director
+603 7610 8847
+603 7610 8247
+603 7610 8925
Capital Allowances Study Chia Swee How
Sumaisarah Abdul Sukor
Executive Director
Associate Director
+603 7610 7371
+603 7610 8331
Global Employer Services Ang Weina
Chee Ying Cheng Michelle Lai
Executive Director
Director
Director
+603 7610 8841
+603 7610 8827
+603 7610 8846
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Government Grants & Incentives
Tham Lih Jiun Thin Siew Chi Peggy Wong
Executive Director Executive Director
Director
+603 7610 8875
+603 7610 8878
+603 7610 8529
Indirect Tax Tan Eng Yew Senthuran Elalingam Chandran TS Ramasamy Larry James Sta Maria Wong Poh Geng
Executive Director
Executive Director
Director
Director
Director
+603 7610 8870
+603 7610 8879
+603 7610 8873
+603 7610 8636
+603 7610 8834
International Tax & Value Chain Alignment Tan Hooi Beng
Deputy Managing Director
+603 7610 8843
Mergers & Acquisitions Sim Kwang Gek
Managing Director
+603 7610 8849
Private Wealth Services Chee Pei Pei Gooi Yong Wei
Executive Director
Executive Director
+603 7610 8862
+603 7610 8981
Tax Audit & Investigation Chow Kuo Seng Stefanie Low
Executive Director
Executive Director
+603 7610 8836
+603 7610 8891
Transfer Pricing Theresa Goh Subhabrata Dasgupta
Executive Director
Executive Director
+603 7610 8837
+603 7610 8376
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Philip Yeoh Gagan Deep Nagpal
Justine Fan Vrushang Sheth Anil Kumar Gupta
Executive Director
Director
Director
Director
Director
+603 7610 7375
+603 7610 8876
+603 7610 8182
+603 7610 8534
+603 7610 8224
Sectors / Names Designation Email Telephone
Automotive Stefanie Low
Executive Director
+603 7610 8891
Consumer Products Sim Kwang Gek
Managing Director
+603 7610 8849
Financial Services
Chee Pei Pei Gooi Yong Wei Mark Chan Mohd Fariz Mohd Faruk
Executive Director
Executive Director
Director
Director
+603 7610 8862
+603 7610 8981
+603 7610 8966
+603 7610 8153
Oil & Gas Toh Hong Peir Kelvin Kok
Executive Director
Director
+603 7610 8808
+603 7610 8157
Real Estate
Chia Swee How Tham Lih Jiun
Executive Director Executive Director
+603 7610 7371
+603 7610 8875
Telecommunications Thin Siew Chi
Executive Director
+603 7610 8878
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Other Specialist Groups / Names
Designation Email Telephone
Chinese Services Group Tham Lih Jiun
Executive Director
+603 7610 8875
Japanese Services Group Julie Tan
Executive Director
+603 7610 8847
Korean Services Group Chee Pei Pei Lily Park Sung Eun
Executive Director
Associate Director
+603 7610 8862
+603 7610 8595
Branches / Names Designation Email Telephone
Penang Ng Lan Kheng Au Yeong Pui Nee Everlyn Lee
Monica Liew Tan Wei Chuan
Executive Director
Director
Director
Director
Director
+604 218 9268
+604 218 9888
+604 218 9913
+604 218 9888
+604 218 9888
Ipoh Ng Lan Kheng Lam Weng Keat
Executive Director
Director
+604 218 9268
+605 253 4828
Melaka Julie Tan Gabriel Kua
Executive Director
Director
+603 7610 8847
+606 281 1077
Johor Bahru Chee Pei Pei Thean Szu Ping
Executive Director
Director
+603 7610 8862
+607 222 5988
Tax Espresso – May 2019
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Kuching Tham Lih Jiun
Philip Lim Su Sing Chai Suk Phin
Executive Director
Director
Associate Director
+603 7610 8875
+608 246 3311
+608 246 3311
Kota Kinabalu Chia Swee How Cheong Yit Hui
Executive Director
Manager
+603 7610 7371
+608 823 9601
Sim Kwang Gek Tan Hooi Beng Stefanie Low Thin Siew Chi Julie Tan
Chia Swee How Ang Weina Tham Lih Jiun Tan Eng Yew Senthuran Elalingam
Chee Pei Pei Gooi Yong Wei Chow Kuo Seng
Theresa Goh
Subhabrata Dasgupta
Philip Yeoh Toh Hong Peir Ng Lan Kheng Choy Mei Won Suzanna Kavita
Tax Espresso – May 2019
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Loke Chee Kien Shareena Martin Chee Ying Cheng Michelle Lai Peggy Wong
Chandran TS
Ramasamy
Larry James
Sta Maria Wong Poh Geng
Gagan Deep
Nagpal Justine Fan
Vrushang Sheth Anil Kumar
Gupta Mark Chan
Mohd Fariz Mohd Faruk
Kelvin Kok
Au Yeong
Pui Nee Everlyn Lee Monica Liew Tan Wei Chuan Lam Weng Keat
Gabriel Kua Thean Szu Ping Philip Lim Su Sing
Sumaisarah Abdul Sukor
Lily Park Sung Eun
Chai Suk Phin Cheong Yit Hui
Tax Espresso – May 2019
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Tax Espresso – May 2019
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