Malaysian IRB fails to recover RM1.8 billion in tax
S Saravana Kumar and Nur Amira Ahmad Azhar of Rosli Dahlan Saravana Partnership discuss a high court case clarifying reinvestment allowance for capital expenditure.
The Kuala Lumpur High Court recently allowed a judicial review application by Tenaga Nasional Berhad (TNB) challenging the decision of the Inland Revenue Board (IRB) to disallow its tax incentive claim.
TNB is Malaysia’s largest electricity company. It had claimed a tax incentive known as reinvestment allowance for the capital expenditure incurred in relation to its business of manufacturing electricity.
The taxpayer was successfully represented by RDS’s Tax, SST & Customs partner, S. Saravana Kumar and associate, Nur Amira Ahmad Azhar.
TNB’s business compromises an integral system of manufacturing electricity, which includes power generation. It had invested in manufacturing infrastructure such as power generation plants and substations which were designed for manufacturing electric energy to meet the nation’s ever-growing demand for electricity. TNB serves an estimated 9.3 million customers in peninsular Malaysia.
In 2018, TNB incurred capital expenditure for the installation and reinforcement of existing lines to expand and strengthen the transmission of electricity and the installation and reinforcement of new lines and substations to increase the capacity for distribution for electricity.
Accordingly, TNB claimed reinvestment allowance, which the IRB disallowed by issuing an assessment for RM1,812,506,384.64 ($433 million).
TNB’s key arguments were:
It is in the business of manufacturing electricity and the Malaysian Federal Court in an earlier civil case has settled this point of law. Additionally, several Commonwealth cases also support the contention that TNB is in the business of manufacturing electricity.
TNB did not fall within paragraph 7 of Schedule 7A of the Income Tax Act 1967, which lists specific circumstances in which a taxpayer cannot claim reinvestment allowance. Similarly, the finance minister in issuing the Income Tax [Prescription Of Activity Excluded From The Definition Of Manufacturing] Rules 2012 did not exclude the activity of manufacturing or generation of electricity.
TNB first claimed reinvestment allowance in 2003 and was originally entitled to claim the incentive for 15 years. However, consequent to a further amendment to the law, TNB was entitled to claim reinvestment allowance in 2018 as well. When TNB first made the claim, there was no definition of manufacturing in Schedule 7A. A restricted definition of manufacturing was only introduced in 2009. The IRB cannot import the restricted definition and curtail TNB’s claim as this affects or impairs its existing rights. The law must be read purposively to give effect of the actual intent of Parliament in enacting the law. The purpose of the reinvestment allowance is to encourage businesses to plan for modernisation of their businesses and to increase their production capacity.
The IRB internal interpretation of the law has no force in law.
The Revenue’s response
The Revenue’s main argument was that TNB is a utility company. Hence, it is a service provider and not a manufacturer.
Therefore TNB’s business (the generation of electricity) involves the activity of extraction of electricity and not that of manufacturing as envisaged under the law.
It also argued that TNB’s business activity relates to transmission, distribution and sale of electricity which fall outside the scope of manufacturing.
A landmark decision
In allowing TNB’s application, the High Court was guided by the Canadian Supreme Court case of Quebec (Hydro-Electric Commission), which held that “because it is the transformation in issue that turns the electrical energy into a form that can be used by the customer, this transformation must be considered to be part of the manufacture and production of electricity”.
The court also held that the question whether the taxpayer was in the manufacturing business or otherwise was previously addressed by the Malaysian Federal Court.
The court added that the definition of manufacturing that came into effect in 2009 could not be imposed on TNB as it would affect or impair the taxpayer’s vested right in 2003 where there was no restrictive definition of manufacturing. Finally, the court ruled that the IRB’s internal interpretation and policies do not bind TNB.
This decision is a landmark as it highlights that the IRB cannot read and apply a tax incentive provision narrowly so as to defeat its purpose. This win certainly puts TNB in a favourable position in relation to its other ongoing tax appeals for different years on the same issue, where the additional taxes amount to about RM5.8 billion.
Further, this case shows that despite taking account of the government’s need to realise taxes, the court is prepared to protect taxpayers from incorrect assessments.
S Saravana KumarPartner, Rosli Dahlan Saravana PartnershipE: email@example.com
Nur Amira Ahmad AzharAssociate, Rosli Dahlan Saravana PartnershipE: firstname.lastname@example.org