Malaysia’s MoF has no power to restrict investment allowance claim
DP Naban, S Saravana Kumar and Elani Mazlan of Rosli Dahlan Saravana Partnership discuss a Malaysian High Court case that looks at an investment allowance claim.
The Malaysian High Court allowed a taxpayer’s judicial review application to challenge the decision of the Ministry of Finance (MoF) to restrict the right to claim investment allowance with the seven-year rule to carry forward the unutilised allowance.
The taxpayer was successfully represented by RDS’s Tax, SST & Customs partner, S Saravana Kumar and associate, Elani Mazlan.
In 2017, the MoF approved the construction of a power plant by the taxpayer as an approved service project (ASP) and granted a tax incentive in the form of investment allowance under Schedule 7B of the Income Tax Act 1967 (ITA) as follows:
Investment allowance of 80% of the qualifying capital expenditure incurred within five years from the year of assessment (YA) 2017 to YA 2021, which can be set-off against 85% of the taxpayer’s statutory income each year; and
The right to carry forward any unutilised investment allowance indefinitely until the entire amount of the allowance has been claimed.
In reliance of this incentive approval in 2017, the taxpayer proceeded with the construction of the power plant and incurred significant expenses which amounted to more than RM 3 billion ($716,997,320). However, in November 2018, the MoF amended the ITA by introducing a seven-year time limit that would be imposed on the carrying forward of allowances in respect of incentives granted under Schedule 7B.
In December 2018, the taxpayer attended a meeting with the MoF’s office to discuss the effect of the seven-year time limit on the tax incentive enjoyed by the taxpayer, where the taxpayer highlighted that:
The imposition of the seven-year time limit would result in the taxpayer being unable to enjoy in full the tax incentive approval granted in 2017;
The seven-year time limit did not form part of the terms of the tax incentive approval; and
The seven-year time limit should only be imposed on new projects undertaken from January 2019 onwards.
Subsequent to further discussions, in July 2019, the MoF rejected the taxpayer’s right to claim the unutilised investment allowance indefinitely without providing any reasons. Being aggrieved by this, the taxpayer filed an application for judicial review to challenge the MoF’s decision.
The taxpayer’s submission
The key arguments for the taxpayer were:
The MoF in making its decision has failed to consider the taxpayer’s vested right, which entitles the taxpayer to carry forward any unutilised investment indefinitely until the entire amount of the allowance has been claimed. This vested right has been preserved under the Interpretations Act 1948 and 1967 (IA), which states that the repeal of written law in whole or in part shall not affect any right accrued under the repealed law. Therefore, the vested right has not been taken away by the amendments made to Schedule 7B of the ITA.
The MoF failed to give due regard to the IA and the recent decisions of the superior courts including the Society of La Salle case, which held that where there is a doubt whether Parliament has intended to impair a taxpayer’s vested right, such ambiguity must be construed in favour of the taxpayer. In this case, the vested right to carry forward the unutilised investment allowance has not been removed by sufficiently clear words.
The MoF had also failed to consider the legitimate expectation of the taxpayer. The taxpayer has a right to claim and enjoy the tax incentive granted in 2017 given that the taxpayer had acted and relied upon the said incentive. The taxpayer had acquired a legitimate expectation that it would be entitled to carry forward any unutilised investment allowance indefinitely.
As the MoF failed to provide any reasons for its decision, it would also be open to conclude that the MoF had no good reasons to give.
The MoF’s response
The MoF’s main argument in opposing the taxpayer’s judicial review application was on the basis that there was no issue of vested right here. Additionally, the MoF submitted that it is not required by law to give any reasons for its decision.
The High Court allowed the taxpayer’s application for judicial review and held that the MoF had erroneously refused to uphold the tax incentive approval granted to the taxpayer in 2017. The High Court accepted that the taxpayer was entitled to enjoy investment allowance, including the right to carry forward any unutilised allowance indefinitely, which was vested on the taxpayer by virtue of the law which stood in 2017.
This decision bears significance as it reiterates the legal principle enunciated in the Society of La Salle case that a vested right of a taxpayer cannot be taken away arbitrarily. Accordingly, the various amendments via the Finance Act 2018 which restricts the carrying forward of unutilised allowances in relation to tax incentives approved prior to the amendments coming into effect are open to challenge.
Senior partner, Rosli Dahlan Saravana Partnership
S Saravana Kumar
Partner, Rosli Dahlan Saravana Partnership
Associate, Rosli Dahlan Saravana Partnership