A Labuan company has successfully obtained leave to apply for an order for the Minister of Finance to exercise his power under Section 135 and/or Section 127(3a) of the Income Tax Act 1967 to set aside or exempt the tax assessments raised by the Director General of Inland Revenue in the CMMT case. The authors successfully represented the company at the High Court and the Court of Appeal, which recently affirmed the High Court’s ruling.
The company had held units in a Malaysian real estate investment trust (REIT) since 2010, when it secured loans from a related non-resident company to acquire the REIT units investment. As a Labuan company, it enjoyed a tax incentive under the Income Tax (Exemption) (No. 22) Order 2007 (the ‘Exemption Order’) issued by the MOF. Consequently, the company did not subject the interest in relation to the loans paid to the non-resident company to withholding tax. The company also did not elect to be taxed under the ITA for the relevant years of assessment (YAs). Instead, the company was taxed under the Labuan Business Activity Tax Act 1990 (LBATA).
The DGIR took the position that the deduction for interest expense incurred on the loans obtained from the non-resident company should be disallowed as the relevant loan interest payments to the non-resident company were not subjected to withholding tax. Subsequently, the DGIR raised the assessments against the company.
Aggrieved by the assessments, the company submitted an application to the MOF to exercise his power to set aside or exempt the assessments. The MOF did not respond to the company and in doing so, decided not to issue the direction and/or exempt the assessments. As the MOF had failed to respond to the company’s request, the company applied for judicial review before the High Court to preserve its legal rights.
The High Court allowed the company’s application for leave to commence judicial review based on the following arguments:
The ordinary threshold for leave is extremely low, with the sole question being whether the application is frivolous.
The MOF, in exercising a quasi-judicial function or purely an administrative function as a public decision maker, has no jurisdiction to commit an error of law. If the MOF does make such an error, then he exceeds his jurisdiction and his decisions will not be immune from judicial review.
The MOF had committed an error of law by failing to apply the following legal principles:
Since the company is a company situated in Labuan, the applicable statute would be the LBATA, under which, among others:
Section 3 states that a Labuan entity carrying on a Labuan business activity shall be charged to tax in accordance with the LBATA for each YA in respect of that Labuan business activity;
Section 3a provides that a Labuan entity carrying on a Labuan business activity may make an irrevocable election in the prescribed form that any profit of the Labuan entity for any basis period for a YA and subsequent basis period be charged to tax in accordance with the ITA in respect of that Labuan business activity;
Section 2(3) provides that the provisions of the ITA apply only to a Labuan business activity carried on by a Labuan entity that makes an election under Section 3a of the LBATA; and
Section 3b stipulates that tax shall not be charged under the ITA on income in respect of a Labuan business activity carried on by a Labuan company, other than a Labuan company that has made an election under Section 3a of the LBATA.
In the Syarikat Pendidikan Staffield case, the High Court held that once the company has satisfied all the conditions under an exemption order, effect must be given to the exemption order and a taxing authority is not allowed to disregard such exemption arbitrarily. Since the company had satisfied all the conditions under the Exemption Order, the company payer should be exempted from paying any withholding tax on the interest payments received by the non-resident person.
The MOF’s silence can amount to a decision amenable to judicial review under Order 53 of the Rules of Court 2012, which provides for a wider ambit of reviewable decisions than the previous position under the Rules of the High Court 1980.
This ruling is the first tax case in Malaysia in which the High Court has exercised its jurisdiction to grant leave to a company to seek recourse by way of judicial review for the MOF to exercise his power under Section 135 and/or Section 127(3a).
