Malaysia’s highest court wrestles with income tax legislation in landmark ruling
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Local Insights

Malaysia’s highest court wrestles with income tax legislation in landmark ruling

Sponsored by

sponsored-firm-rosli-dahlan-saravana-partnership.png
judge-1587300 resized.jpg

Datuk DP Naban, S Saravana Kumar and Dharshini Sharma of Rosli Dahlan Saravana Partnership detail this crucial decision which deals with thorny issues of domestic remedy and the interpretation of income tax law.

Judicial review is a litigation route available to taxpayers in Malaysia to challenge unlawful taxes raised by the Inland Revenue Board (IRB). Should the question of whether a taxpayer can bypass the tax tribunal be heard before the merits of the appeal are held? Malaysia’s highest court, The Federal Court of Malaysia (FCM), recently delivered an important ruling on this contentious issue, favouring the taxpayer. 

The taxpayer was successfully represented by DP Naban, S Saravana Kumar and Dharshini Sharma from the law firm Rosli Dahlan Saravana Partnership.

Background

The IRB disallowed the taxpayer’s deduction of project accrued expenses under Section 33(1) of the Income Tax Act 1967 (ITA) and imposed additional taxes and penalties for the years of assessment - 2015 and 2016. 

Aggrieved by this decision, the taxpayer filed for a judicial review application before the High Court. However, the taxpayer was not granted leave by the court on the basis that the taxpayer should have exhausted the appeal before the tax tribunal. The taxpayer appealed to the Court of Appeal (COA) which ruled in favour of the taxpayer. The COA also granted a stay order to the taxpayer against the payment of the disputed taxes. The stay order was sought by the taxpayer to maintain the status quo of the parties pending the completion of the judicial review hearing - the substantive stage.

Dissatisfied with the COA’s findings, the IRB appealed to the FCM and obtained leave for the following questions of law:

Whether the issue of domestic remedy may only be canvassed and decided at the substantive stage?

The threshold for leave in a judicial review application is extremely low. This legal position has been widely adopted by the superior courts and remains operative to date. 

The IRB contended that there is no hard and fast rule as to which stage the issue of domestic remedy can be canvassed at. The crux of the issue is the deductibility of the expenses incurred. Hence, the IRB claimed that this was a factual issue which ought to be heard by the tribunal. According to the IRB, the taxpayer failed to establish exceptional circumstances in this case to justify the passing off the domestic remedy. 

The taxpayer argued that the question of when courts should deal with the availability of domestic remedy depends on the circumstances of the case. The taxpayer also submitted that a question of law cannot be decided in a vacuum and all facts of the case will first have to be laid down before the court. Various factors must be considered before determining whether a domestic remedy should be considered, and this cannot be properly dealt with at first stage where the court is only in possession of the taxpayer’s affidavit.

Whether a stay order granted by the COA after allowing the leave application contravenes the tax recovery scheme pursuant to the ITA?

The IRB argued that the stay order in this present case prevents the government of Malaysia from exercising its statutory duty under Sections 103, 103b and 106 of the ITA to collect the disputed taxes. Upon being served with the notice of assessment, taxes become due and payable to the person assessed even if the matter was under appeal. According to the IRB, the courts have no jurisdiction to exercise discretion and grant a stay order in tax disputes. 

The taxpayer highlighted that courts have the inherent jurisdiction to grant a stay order to ensure the integrity of the appeal notwithstanding the relevant sections of the ITA. There are no provisions in the ITA which prevent the courts from granting a stay. In absence of any express legislation, the contention that the ITA restricts the courts’ inherent jurisdiction cannot hold water. 

If the tax recovery mechanism is interpreted too broadly, then the ITA will usurp the powers of the courts to exercise its judicial discretion to grant a stay order. Such a restriction would be unconstitutional as judicial powers are inherent rights guaranteed under the Federal Constitution and cannot be restricted by legislative process. 

Further, the possibility that the courts’ decisions may be reversed on appeal justifies the courts’ jurisdiction to grant a stay to preserve the status quo.

Outcome

The FCM unanimously accepted taxpayer’s submission and dismissed the IRB’s appeal with cost. This ruling affirmed the COA’s decision that issues of domestic remedy should be canvassed at the later stage of judicial review and that the ITA does not bar the courts from granting a stay order even in tax matters.

more across site & bottom lb ros

More from across our site

The ‘big four’ firm has also vowed to spend more on nurturing junior talent; in other news, Blick Rothenberg has hired a pair of tax partners
However, making APAs harder to reach could ‘pose problems’ for UK businesses
Microsoft's director of benefits taxation tells ITR about having no normal days, family inspiration and what makes tax cool
The 61-year-old has run the firm’s UK business since 2020
The report, which again demanded PwC release more information related to the scandal, 'did not go far enough', Australian Greens Senator Barbara Pocock told ITR
Resources needed to manage new compliance and financial reporting requirements will be significant, BDO also said
Interested parties may submit their comments on proposed bills and the subsidiary legislation by July 5
The Australian government has run roughshod over professional tax bodies with untested reporting obligations to please a mob baying for PwC’s blood, writes Tom Ravlic
Technical excellence is paramount for clients looking to hire new advisers, according to a survey of nearly 29,000 corporate counsel
The EU nation currently has a headline rate of 25%; in other news, DLA Piper and RSM UK have strengthened their tax teams
Gift this article