Case Spotlight: Transfer Pricing - DGIR’s Power To Vary Transactions

This article is written by Lee Hishamuddin and Gledhill (LHAG) and was first published in their Transfer Pricing e-Alert in June 2019. Reproduced with permission from LHAG.

 In the recent Indian case of Pr Commissioner of Income Tax vs M/S Aegis Ltd (Case No 1248 of 2016), one of the issues was whether the Indian Revenue Service (IRS) can re-characterise a share subscription transaction as an advance of unsecured loans. The High Court held that the IRS is not entitled to do so and dismissed its appeal against the decision of the Income Tax Appellate Tribunal (Tribunal).

Brief Facts

The taxpayer, a company based in India, was subjected to a transfer pricing audit for the years of assessment 2009 and 2010. It was dissatisfied with the decision of the IRS to deem interest income and raise tax assessments.

During the said years of assessment, the taxpayer had subscribed to redeemable preferential shares of its associated enterprise and redeemed some of the shares at par on a later date. The IRS took the position that the preference shares were equivalent to an interest-free loan advanced by the taxpayer and accordingly, imputed deemed interest.

Two key issues that arose were whether:

Case Spotlight: Conflict of Interest in Employment

by Donovan Cheah (Partner, Donovan & Ho)
www.dnh.com.my

This article was first published on Donovan & Ho's website on 8 April 2019.

Do you find anything wrong with this scenario?

“Employee X is working for a multinational corporation (“MNC”) as its purchasing officer. Her husband owns a company called Renovator ABC that specialises in office renovations. When the MNC announces its plans to open another branch office in Kuala Lumpur, Employee X recommends that Renovator ABC carry out the office renovations since they are experienced in the industry and can offer a good discount. As per company policy, 3 quotations are obtained from different renovation companies and Renovator ABC ends up being the cheapest priced. Employee X did not specifically tell anybody in MNC that her husband owns Renovator ABC. MNC appoints Renovator ABC to carry out the renovation work at a fee of RM1.2 million."

Situations like the above are referred to as potential “conflicts of interest”. This is because the employee’s personal interests are in conflict with the interests of her employer. In the scenario above, Employee X stands to benefit financially from Renovator ABC’s appointment, since it is her husband’s company. However, as a purchasing officer of MNC, she also has obligations to ensure that the best supplier is selected, and price may not be the sole criteria.

If challenged, it’s likely that Employee X would argue that MNC did not suffer any losses anyway, and in fact benefited from the arrangement since Renovator ABC was the cheapest priced. Does this make the entire situation acceptable from an employment law standpoint?

India needs to rethink attitude towards corporate tax avoidance

by Shilpa Goel (Editor) (Tax Lawyer)

This article was first published on the Kluwer International Tax Blog on 8 April 2019.

According to an oft-cited research by the UN University World Institute for Development Economics Research, India loses over 40 billion US dollars in revenue, annually, to corporate tax avoidance. Obviously, for a country like India, the money could have been used to reduce poverty-related deaths and to provide basic social care to the poor and underprivileged. Despite its impact, corporate tax avoidance is one of the lesser debated issues in India.

Multinational tax avoidance has almost never made it to the front pages of popular Indian newspapers and has never been discussed on primetime TV news debates. That corporate tax avoidance is not ‘popular’ with the Indian voters today is also indicated by the fact that not a single question relating to “tax avoidance” or “corporate tax avoidance” was raised in the Sixteenth Lower House of Parliament (2014-2019).

This is not to suggest that nothing has been done so far. I have blogged about some of the changes recently carried out to the Income Tax Act to mirror the OECD’s BEPS recommendations. Also, in 2017, the government introduced a legislative general anti-avoidance rule (GAAR) to disregard aggressive tax planning arrangements and deny tax treaty benefits. Of course, the GAAR came too late in the day and came only after the Supreme Court, in the case of Vodafone, rather bluntly noted that tax benefits cannot be denied in the absence of any explicit anti-abuse rule in the tax law.

These changes, though necessary, are not sufficient to win India’s fight against corporate tax avoidance. A lot needs to change, both at domestic and international levels.

Reforms relating to tax compliance and tax incentives

There are two aspects to consider in improving the Malaysian tax system – tax compliance and tax incentives.

Tax compliance

Tax compliance needs to be made a way of life. However, media advertisements can only do so much to educate. There should be a focus on the educational role so as to be able to disseminate tax information. The website could be used more effectively, for example, listing all tax case law decisions, etc. as the public needs to know it all in the self-assessment world. The need for information also extends to officers of tax authorities, where they should be trained via contributions from the private sector to develop staff with a broader mind-set and enhanced business knowledge.

Tax compliance is a multi-faceted issue, hence there are many facets to consider. Examples include improvement of the tax consultation process, utilisation of technology in holistic manner, improvement of the tax authorities’ technical capabilities.

Tax incentives

The roll-back of certain tax incentives that commenced in 2012 has stalled. It is important to carry out a review and decide which tax incentives are important and cease pandering to vested interests. The tax incentives legislation needs to be revamped to remove certain incentives while simplifying others.

The development of tax incentives in Malaysia has not really gone through a focused review. Instead, an approach of “add-ons and tinkering” was adopted rather than taking a step back and reviewing the rationale for the need for tax incentives and having a clear measurement tool to evaluate the effectiveness of tax incentives.

The Tax Reform Committee set up in September 2018 aims to address some of the issues mentioned above. It is not undertaking a public review of the tax system which will require a significant amount of time and resources. Rather, it acts as an advisory committee to the MoF by engaging with various stakeholders for suggestions on improvements, and provide recommendations to the MoF.

Dr Veerinderjeet Singh, Chairman of Axcelasia Taxand Sdn Bhd discusses examples of tax reforms to better the Malaysian tax system.

Click here to read more.

Sugar tax in Malaysia: Sweet idea or bitter pill?

by Dave Ananth

Dave Ananth, Senior Tax Counsel with Stace Hammond Lawyers, is based in Auckland, New Zealand. He is a senior lawyer, a former Magistrate and advocate in Malaysia before taking up a position with the Inland Revenue Department in New Zealand as a Prosecutor. He is an expert in taxation and tax policy. He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand. He is a consultant for Wolters Kluwer Malaysia. He can be reached at davea@shg.co.nz.

The usage of tax to change “unhealthy behaviour” is not uncommon. Examples include “sin taxes” on cigarettes and alcohol, tax on high fat food (Denmark) and a “metabo” law (Japan) which was introduced to overcome obesity through annual measurement of waist circumference, provision of weight loss classes and the imposition of fines[1].

Malaysia’s sweet tooth

In August 2018, Damanasara MP Tony Pua floated the idea of a “soda tax” to kill two birds with one stone – to increase government revenue and encourage healthy living. A few weeks later, Prime Minister Dr Mahathir Mohamad says the government is considering implementing a soda tax to encourage healthy living and reduce sugar consumption as the diabetes rate in Malaysia is very high.

It cannot be denied that Malaysians are eating and drinking too much sugar. Not just from soft drinks, but from other sweetened drinks (teh tarik), local kuih (cakes) and biscuits. Per the chart below, the estimated daily consumption of sugar is the highest among Malaysians[2] in Southeast Asia (SEA).

It was reported that in 2017, about 16.74% of adults in Malaysia have diabetes. While it is not the highest in the world (Malaysia ranks 12), Malaysia still has the highest number of diabetes sufferers in SEA[3]. It is also worth noting that Malaysia has the highest levels of obesity sufferers in SEA, at 15.6%. Again, while Malaysia is not the highest in the world[4], it is still a cause for concern. Total (direct and indirect) costs of obesity are highest in Malaysia, amid SEA, where it is estimated to be between 10% and 19% of national healthcare spending[5].

Do’s and Don’ts When Terminating Employees

Author: Riesty Wulandari has been working as a content writer in a wide variety of topics.

www.hrinasia.com

Terminating employees is one of the toughest decision employers are forced to take during times of crisis, economic downturns and internal business restructuring. Letting go of key talent within organisation is not easy, and more so difficult is communicating the news of termination. Tact has to be ensured during communication and beyond to not sabotage an employee’s career.

Issuing letters of termination especially to key talent needs prior planning and calculated severance pay such as to not leave them depressed, frustrated and stressed because of termination.  If the process of termination is not well-handled, employees retort in ways such as filing case against the employer in court or propagating bad reviews about the employer brand on social media platforms.

Incompetence, disobedience, theft and constructive dismissal could be some of the common grounds on which termination call is initiated, besides of course, business restructuring, when an employee is terminated from job with severance pay, prior to completion of their contract with the employer.

Strategising efforts and synergies in thoughts from all senior leaders should be put to practice, when terminating employees. Culling through sources, here are some list of do’s and don’ts HR managers could observe before handing over the pink slip:

Do’s

Provide full explanation to employees. HR managers and employers should provide detailed clear explanation to an employee/s on reasons for termination. Transparency and honesty are two crucial elements, HR managers must observe during the termination process. Downsizing owing to financial loss or change in business plans should be clearly communicated to all staffers. While communicating the nitty-gritties and other intimidating factors to employees could be tough, hence HR managers can observe discretion in certain matters. However, never opt for a lie as means to safeguard company’s interest when announcing layoffs.

Let employees know in person. With digital mediums of communication now being sought by employers such as chats, emails, or video conferences, these are not suitable to communicate critical messages that involve sentiments of employees and those decisions that involve an element of fear to sabotage their careers. A face-to-face meeting between the employer and employee is the right approach to communicate downsizing and layoffs. This will make employees feel more respected and valued.

Show respect. Showing respect is a must-thing to do during termination, regardless of the severity of employee mistakes and flaws in working. If you do think an employee needs to be terminated, do it respectfully and politely. This would minimise the impact of the final decision announcement, influence perceptions and the emotional responses derived consequently.

Make a great consideration beforehand. Being assertive and straightforward in announcing termination of employees, would make it easier for them to accept the decision and further avoid the negative influence on other colleagues as they leave. It is important that employers make great consideration beforehand, and be certain of their decisions to terminate before talking it out.

DONT’s

Terminating employees without warnings. Before issuing termination, it is important that employees are made aware of the reasons for the same – it could be poor performance on part of the individual or a state of company crisis. Employees cannot be terminated suddenly. In case of poor performance, they should be provided adequate training and time to improve, however only in case of several attempts failed employers are then forced to initiate termination.

Sudden termination without any preliminary warnings would make employees angry and disappointed. Except in case of crisis times when massive layoffs are announced as an outcome of business failure, employers otherwise  should set a PIP (Performance Improvement Plan) for employees to measure their improvements at work and provide timely feedback for growth.

Terminating employees without witness. Terminating employees without involving other parties such as HR managers or other representatives would result in an unfair decision-making. Without a witness, employees can take up the issue at courts for legal advice, or defame the employer brand. A witness is important to ensure that the discussion is in consent with other members of the management and employees are treated fairly with respect.

Terminating employees without specific regulations about the company’s property. Before escorting employees to the gate for the last time, employers should provide clear specific handover guidelines, regards possession of company assets to include door pass, badge, Smartphone, laptop, tablet, files, keys of the cabinet and so on. If some of the company inventory is at employee’s home, make sure they are returned within a specific timeframe and in a good condition.

Allowing employees to access company information. Once the termination call has been initiated, it is the duty of HR managers to ensure that employees have no further access to company emails, reference websites and other confidential information – as this could lead to violation of business norms.

Termination well done, needs patience, care, understanding, and immaculate planning to details by the HR manager to ensure that the process goes unhindered with complete sensitivity, knowledge and awareness of employer’s actions and its consequent repercussions on employee behaviour. Tactful strategy has a pivotal role to play here.

Tis’ the season of giving

IRB's Special Voluntary Disclosure Programme

In a bid to improve its revenue collection and also bring non-compliant taxpayers into the system, it was announced that a Special Voluntary Disclosure Programme (SVDP) will run from 3 November 2018 to 30 June 2019.

Voluntary disclosure under this programme can be made at any Inland Revenue Board (IRB) office, from 3 November 2018 to 30 June 2019 in respect of the following categories of taxpayers:

• Unregistered taxpayers who have not submitted the Income Tax Return Forms (ITRF)/ Petroleum Tax Returns (PTR)/ Real Property Gains Tax Returns (RPGTR) for any YA
• Registered taxpayers who have not submitted ITRF/PTR/RPGTR for any YA
• Taxpayers who have submitted ITRF/PTR/RPGTR but with incorrect declarations
• Stamp duty payers who failed to present stamp-able instruments within a stipulated period of time.

Under this programme, taxpayers will be subjected to penalty rates of 10% to 15% of tax payable. Once the voluntary disclosure period expires, taxpayers could be subjected to penalty rates of 80% to 300%.

This is not IRB’s first rodeo. In 2016, the Budget 2016 Recalibration proposed for a special consideration on relaxation for penalty on taxpayers who come forward and declare their past years’ income and settled their arrears before 31 December 2016. Following this, the IRB announced the following offers to taxpayers in support of the proposal:

• Reduction of penalty to specified rates for taxpayers who opt for voluntary disclosure of non-compliance, subject to certain requirements.
• Waiver of tax increase for taxpayers who wish to settle in full their income tax, petroleum income tax, real property gains tax or withholding tax areas on or before 15 December 2016.

While the gist and the end goals of the two audit programmes remain somewhat similar, there are some differences.

Budget 2019 and Young Working Adults in Malaysia

by Shawn Ho and Ee Lyne Chong (Corporate, Property and Tax Practice Group, Donovan & Ho)

www.dnh.com.my

This article was first published on Donovan & Ho's website on 7 November 2018.

With the Budget 2019 tabled in Parliament by the Finance Minister on 2 November 2018, this article highlights the features of how this Budget will affect young working adults in Malaysia.

Transport – Petrol, Toll, Public Transport

If you own only one car or motorbike with an engine capacity of 1500cc and below, you will be able to enjoy a subsidy for RON95 petrol amounting to RM0.30 per litre. This subsidy will be capped at 100 litres per month for cars and 40 litres per month for motorbikes. It will be interesting to see how, among other considerations, one’s actual petrol consumption is monitored, and how local and foreign vehicles are distinguished.  

For those that have been feeling a pinch when your SMART TAG device beeps several times a day, there will be no toll hike in 2019! Tolls for motorbikes for the Penang Bridge, Second Penang Bridge and the Malaysia-Singapore Second Link will also be abolished.

To encourage the regular use of public transport, our government will be introducing a RM100 unlimited public transport monthly pass, for the rail and RapidKL bus networks from 1 January 2019; as well as a RM50 monthly pass for RapidKL bus services.

Malaysian Tax Budget Conference 2019

The new government’s maiden budget announced last Friday indicates that they are trying to balance between being a socialist government and being pro-business to boost economic growth. They announced a creative host of subsidies, grants  and allocation of funds, and utilised tax measures to promote economic growth and well-being. 

The government proposed measures to increase tax revenue such as introducing new taxes (levy on international departures, soda tax) or increasing existing ones (taxes on gaming industry, RPGT for sixth year and beyond disposals, stamp duty on property transactions over RM1 million). They modified existing tax rules to curb income set-off – imposition of a 7-year time limit for businesses to utilise losses and allowances from tax reliefs. They also proposed to impose service tax on foreign services providers that provide online services (downloaded software or music) as well as on imported services acquired by Malaysian businesses, which should level the playing fields between local and foreign players. Apart from that, the government proposed a special voluntary disclosure programme where taxpayers who voluntarily disclosed unreported income are entitled to reduced penalty rates.

The government also proposed tax measures to improve social welfare. They widened the scope of donations – Donations to social enterprises are now qualified for deduction. They focused on employee welfare – a 100% deduction for PTPTN payments made by an employer on behalf of its employees and a 200% deduction on remuneration of full-time employees who are either senior citizens or ex-convicts. These deductions, however, are subject to conditions. They government also proposed a stamp duty exemption for first time home-buyers in respect of property valued between RM300,000 and RM1 million, subject to conditions, consistent with their promise of affordable housing.

The government also proposed tax measures to encourage green businesses. Companies producing environmentally-friendly plastics will be granted Pioneer Status (70% exemption of statutory income) or Investment Allowance (60% of qualifying capital expenditure) for five years. It also proposed to expand the list of green assets that qualify for green technology investment allowance from 9 to 40.

While many agree that the measures implemented are targeted at selective business industries, it is still important for the government to continue with the tax reform reviews with the aim of making the tax system more efficient, neutral and progressive while promoting the long-term productivity of the economy.

Find out more about these taxes, key trends, challenges and opportunities that may impact your business and influence your strategy in 2019, at our Malaysian Tax Budget Conference 2019.

Transition to SST – lessons learnt for future tax reforms

By Sim Kwang Gek

This article was first published in the Star Online on 23 August 2018.

MALAYSIA’s decision to abolish the goods and services tax (GST) and return to a sales and service tax (SST) regime after only a period of three years is not only significant in terms of changing the tax landscape, but also in terms of providing useful and critical lessons when significant tax reforms are contemplated in the future.

The return to the SST has happened at breakneck speed, understandably so as the government needed to meet the demands of the 100-day time-frame set in its manifesto. Just over a week after the election, there was an announcement on the reduction of the 6% GST rate to 0%, and then a few weeks later, that the SST would be reintroduced on Sept 1.

The decisive moves have been welcomed by the public, but it has not been without cost, in particular to businesses that have had to make significant adjustments to systems and processes in a limited time. Depending on the circumstances, it can take several months to make changes to critical systems, including those front-end systems that calculate the tax and generate invoices.

However, due to the limited time and information available, many will not be ready by Sept 1.

Adequate information on the framework is needed

Although it is only a matter of weeks before the new tax is to go live, there are still considerable details that are not yet made available. A broad framework has been introduced but that is still a work in progress, with new information being added on a daily basis.

We have started to see the beginnings of a consultation process and some hand-holding programmes, but this has come far too late to make a significant impact.

Some businesses, for example, have received notices saying they are registered to collect the SST, even though based on the information, it is not clear whether they should be registered. These businesses have been left to ponder whether they should charge tax or not.

One has to sympathise with tax regulators and administrators, as they have had to work tirelessly to draft legislation and then produce a multitude of information to help people understand how the new tax would operate.

There would have also been considerable discussions and debate before the final details can be released, and it is clear that there continues to be such debate as we are seeing a continued evolution of the new SST rules.

For example, as late as the middle of last week, there were a number of concerns that the SST would apply in most transactions between related companies in the same corporate group.

This would create significant costs for such groups, as there are considerable shared costs. Fortunately, confirmation was received by businesses in the latter half of last week that such transactions would now be given some form of relief or exemption.

Whilst we must acknowledge that we are dealing with unique circumstances, certainly not one seen before in Malaysia, we must still take note of this for future tax reforms. It is critical that the implementation of new taxes happens after an appropriate level of consultation with the public and business community, so that issues can be ironed out in advance.

Uncertainty or complexity in the system should be avoided

One of the biggest complaints with the Malaysian version of the GST was how complex it was and how difficult it was to comply with for many businesses. The GST system adopted in Malaysia was far more complex and administratively cumbersome than our neighbours in Singapore and many of the other countries in our region that have a GST/VAT system. However, these complexities are not limited to just the GST and we see this even within the rules relating to anti-profiteering.

The anti-profiteering measures are intended to protect consumers from businesses seeking to profiteer through unreasonable price increases. It was a measure brought in to curb prices prior to the GST and is being used in equal measure to control prices prior to the SST.

Unfortunately, the rules are written in such a way that do not make for easy reading, and certainly not for someone who does not have a good accounting background and preferably deep knowledge of cost accounting.

There are multiple formulas involved where businesses need to calculate costs based on particular dates and particular circumstances; even auditing such calculations is not easy. Add to this the current climate in which businesses are uncertain as to which of their costs would increase or stay the same, as the level of detail on the scope of the tax is still not yet known.

Even if this were clear, pricing decisions are not simple and tax is only one piece of the equation. Ultimately, whilst the intention and the desire are noble in seeking a reduction in prices and improving the cost of living for the rakyat, the complexity of the framework may work against achieving this outcome.

Final thoughts

Generally, businesses prefer to operate in a stable environment with immense certainty that is absent of frequent policy changes.

The transition from the SST to the GST in 2015 was a mammoth exercise; unwinding the GST and returning to the SST is no less laborious.

Nonetheless, the voice of the people on May 9, 2018 who asked for change precipitated the de-implementation of the GST; the decision has been made by the new government and hence we have to move forward.

In this respect, all the major stakeholders, including the authorities, businesses and professionals, should work together closely in the formulation and execution of the SST re-implementation programme so as to mitigate strain in the running of businesses.

Sim Kwang Gek is Deloitte Malaysia Country Tax Leader.

The obfuscation of GST refunds in Malaysia

Dave Ananth looks at the controversy of “missing” GST refunds in Malaysia.

by Dave Ananth

Dave Ananth is a senior lawyer, a former Magistrate and advocate in Malaysia before taking up a position with the Inland Revenue Department in New Zealand as a Prosecutor. He now practises as a Tax Barrister, based in Auckland. He is an expert in taxation and tax policy.  He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand.  He is a consultant for Wolters Kluwer Malaysia. He can be reached at davetaxnz@gmail.com.

Introduction

GST refunds are part and parcel of any GST regime, like any other tax regime. A GST refund is usually triggered when the output tax remitted to the Royal Malaysian Customs Department (RMCD) exceeds the amount of input tax paid.

The GST Regulations 2014 provides, under normal circumstances, GST refunds are to be made within 14 working days from submission of online GST returns or 28 working days from submission of manual GST returns, or within a time that is practicable. However, it is common for GST refunds to be withheld for reasons such as incorrect calculations, suspected fraud, etc. while RMCD verifies the GST returns filed, by way of audits and investigations. In cases where further information is required, the GST Regulations 2014 provides that the refund be made within 90 days of receipt of all information. The audit or investigation usually involves a request for further information and supporting documents, typically communicated via the Taxpayer Access Point (“TAP”) or via a letter, an email or a phone call.

Overdue GST refunds

In April 2018, it was reported that while businesses were getting used to GST, a common grouse was the issue of late refund of GST credit. The RMCD director-general Datuk Seri T. Subromaniam admitted that it was a persistent issue but pointed out that 70% – 75% of the refunds were paid out promptly[1]. A survey conducted in July 2018 by the Federation of Malaysian Manufacturers (FMM) showed that more than RM220 million in input tax refunds are still owed to 100 of its members. In another case, a tax consultant says that one of his clients, who is building a factory and paid some RM50 million in input tax credits has yet to receive his refund[2].

Missing GST refunds

Then, in August 2018, Finance Minister Lim Guan Eng declared that about RM19 billion of GST refunds were not returned to taxpayers. This declaration was confirmed by RMCD director-general Datuk Seri T. Subromaniam, who informed that RMCD had requested from the monthly Trust Fund committee meetings, for RM82.9 billion be transferred to the GST Refunds Trust Account but only received RM63.5 billion, giving rise to the shortfall of RM19.25 billion. This amount was based on the GST-03 form, the refund form.

The finger pointing and blame shifting began while reassurances were made that the funds were not missing but were still in the Consolidated Fund.

THE FUTURE OF AUDIT IS ASSURANCE

But the basics still apply

The phrase that gets bandied around all the time these days where auditing is concerned is “value-add”. In this case, your audit services must add more value to the customer. It’s why you now have items such as Key Audit Matters, why you now place emphasis on Other Information, why you now have Sustainability Reporting. It’s not just management letters these days.

Traditional audit is dead, long live audit.

That’s not to say that everything changes. The objective of an audit remains the same as defined under International Standards on Auditing ISA 200, as do the ethical principles governing an auditor’s professional responsibilities, and the core skillset an auditor should have still needs to be utilised.

Using a good example, in the Malaysia context, one could argue that the audit lapses with regards to 1Malaysia Development Bhd (1MDB) center around the use of that same core skillset, those same ethical principles. This is the case regardless of the fact that the nature of audit isn’t really designed to identify fraud.

However, it is widely acknowledged that today’s audit process continues to evolve. Technology advancements and changes in the information needs of financial statement users has meant that audit methodology and output must also adapt and an auditor’s skills must expand beyond what they ‘traditionally’ spend time doing.

Tax in the digital age

by Laurence Todd & Connor Vance

This paper was first published (September 2018) on the IDEAS website.

Introduction

Advances in technology have led to radical changes in existing business models and the creation of radically new ones. With the advent of the internet, many corporations no longer need physical establishments or proximity to customers to do business. This new digital age has encouraged the emergence of an enormous variety of new products and services, easily accessed online.

However, there has been a growing sentiment within some governments that the reach and accessibility of new digital channels poses a challenge to the long-standing principles of taxation. In response to these concerns, the OECD has established a Task Force on the Digital Economy to seek to develop a global consensus and is due to report in 2020. But some countries want to move faster, and several jurisdictions are now considering new unilateral taxes targeting digital activity.

The emergence of digitalisation is of course not unique to any one country, and there are many different perspectives on how digitalisation changes the way we think about taxes – or even whether it should at all. In Malaysia, the previous government was actively looking into ways to raise revenue from digital activity; Second Finance Minister Datuk Seri Johari Abdul Ghani stated in January 2018 that the government had sought out “feedback from the OECD” on potential methods for imposing a new digital tax in Malaysia (The Malaysian Reserve, 2018). As the new Pakatan Harapan government develops its first budget, they too may consider targeting the revenue of digital companies. With this in mind, this Brief Ideas considers the main issues, domestically and globally, in the debate over digital tax.

The case for digital tax

Those countries arguing for new tax measures targeting digital activity often advocate two arguments in favour of this course of action:

• First, that digital companies pay less tax than non-digital companies;
• Second, that digitalisation has fundamentally altered the way value is generated.

Before we consider these two arguments, we should note the challenge in specifying a company as “digital” for the purpose of taxing it. Many, if not most businesses, will seek to use digital channels to some extent, including for sales and advertising. This includes many traditional “brick and mortar” companies that have adapted to the innovations provided by the internet and digital technology, but these cannot be classified as “digital companies”. Of course, many new predominantly digital business models have also emerged over the past few years, such as social media platforms, but even among these, there remains an enormous variety in size and function. In recognition of this, the OECD concluded that “because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes.” This difficulty in defining exactly what it is that is going to be taxed makes policy development significantly more challenging and risks new taxes being unfairly targeted, which can in turn create market distortions. Any new digital tax would almost certainly have an inadvertent impact on traditional companies.

Judicial review as an appeal process under SST

By S. Saravana Kumar

This article was first published in the The Edge Malaysia, 6 August 2018. 

The Customs Appeal Tribunal was introduced in 2007 through an amendment to the Customs Act 1967 (CA 1967). Section 141B of CA 1967 established the Customs Appeal Tribunal to hear appeals from taxpayers who were aggrieved by the decision of the Director-General of Customs (DG). Prior to the establishment of the tribunal, such appeals were heard by the minister of finance. If taxpayers were dissatisfied with the minister’s decision, they could appeal to the High Court by way of judicial review.

Under the soon-to-be-implemented Sales and Services Tax (SST), taxpayers who are aggrieved by a decision of the DG on SST matters may also appeal to the tribunal.

Judicial review

Notwithstanding the existence of the tribunal, established multinational corporations have opted to bypass this appeal process and commence their appeal by of judicial review. Some of these cases, such as Levi Strauss (M) Sdn Bhd v Ketua Pengarah Kastam, Malaysia (Levi Strauss), were reported in the law journals. In Levi Strauss, the taxpayer challenged the imposition of additional customs duty and selas tax on it by way of adjustment of royalty pursuant to regulation 5(1)(a)(iv) of the Customs (Rules of Valuation) Regulations 1999. It was a technical issue that involved the interpretation of various provisions of the law and working papers of the World Trade Organization. However, under the old consumption tax regime, the tribunal did not allow the taxpayer to be represented by an advocate and solicitor, which then resulted in the taxpayer seeking legal remedy by way of judicial review.

At present, there is a proposed amendment to the CA 1967 before the parliament to remove this restriction by allowing taxpayers to be represented by any person of their choice.

This article highlights that on certain matters, taxpayers may proceed directly to the High Court by way of judicial review if they are dissatisfied with the DG’s decision under the soon-to-be-implemented SST regime. In other words, can taxpayers proceed directly to the High Court despite the existence of the tribunal or a similar tribunal under SST? It is anticipated that any appeal against the decision of the DG under the new regime will be forwarded to the tribunal.

The Levi Strauss case

In Levi Strauss, the taxpayer applied for leave from the High Court for an order of certiorari to quash the DG’s decision to raise a bill of demand for additional taxes and pending the leave application, the taxpayers sought to stay the enforcement of the decision.

The attorney-general (AG), however, raise a preliminary objection to the taxpayer’s application on the premise that the taxpayer’s application was premature and misconceived. The AG took the position that the taxpayer should have filed its appeal before the tribunal and not the High Court. The taxpayer disagreed with that position and both parties were instructed by the High Court to file their written submissions. However, at the eleventh hour before the hearing, the AG withdrew his objection. Consequently, the High Court granted the taxpayer leave to apply for judicial review and stayed the enforcement of the decision pending the determination of the application.

The crux of the taxpayer’s submission was that the availability of an alternative remedy (that is, the Customs Appeal Tribunal) does not exclude judicial review. The following grounds, which are discussed below, were raised by the taxpayer in support of its application for judicial review:

(a) The Sungai Gelugor case;
(b) The tribunal is not specialised;
(c) The tribunal is domestic;
(d) Section 141N of CA 1967; and
(e) The court's powers are not restricted by CA 1967.

Potato, potahto, tomato, tomahto

Definition of Malaysia’s Government Debt 2018

by Dave Ananth

Dave Ananth is a senior lawyer, a former Magistrate and advocate in Malaysia before taking up a position with the Inland Revenue Department in New Zealand as a Prosecutor. He now practises as a Tax Barrister, based in Auckland. He is an expert in taxation and tax policy.  He also writes extensively on direct and indirect tax issues in Malaysia and New Zealand.  He is a consultant for Wolters Kluwer Malaysia. He can be reached at davetaxnz@gmail.com.

Richard Greene, once joked, in an article about US public accounting, that the “basic drives of man are few: to get enough food, to find shelter, and to keep debt off the balance sheet”[1].

What constitutes government (public sector) debt has always been a contentious issue. Government debt affects many factors – the amount of public and private investment, GDP, credit rating and fiscal flexibility, just to name a few. Given its political salience, it is in the best interests of a government to ensure that its debt levels are capped at internationally acceptable levels.

Malaysia has succeeded in piquing its people’s interest in the government debt debate. The definition of “government debt” has been subject to much discussion recently when the current and previous Ministers of Finance publicly disagreed on the actual levels of government debt in Malaysia.

According to Bank Negara Malaysia’s data, the federal government debt at the end of 2017 was RM686.8 billion. This was 50.8% of GDP which is well within the rule that federal debt should not exceed 55% of GDP. However, the new Minister of Finance has announced that the debt exceeds RM1.087 trillion (80.3% of GDP) once government guarantees and public-private partnership (PPP) lease payments were included[2].

Which Minister of Finance speaks the truth? What does government debt consist of?