TAXPAYER value legal certainty in the application of laws so that they can plan so as not to be left in the dark about their taxation rights and obligations. The majority of taxpayers want to pay the right taxes and nothing more.
Taxation makes the state a partner of your company by collecting part of your income as taxes. Venture to Start a Business Businesses based on an expected return on investment and taxes are included in this calculation. When tax laws are applied arbitrarily or retrospectively, it becomes difficult for many companies to venture into new, low-margin businesses.
What is happening now?
Uncertainties arise from two sources – the introduction of retroactive laws or the enforcement of laws that were previously inactive.
Avoid retroactive legislation
It has been observed that primary law or secondary law was introduced in the form of gazette decisions without passing the existing situations (i.e. without applying the old rules to the situations prior to the introduction of the new law).
An example of such legislation would be the introduction of the Transfer Pricing Ordinance on May 11, 2012, which was retroactive to January 1, 2009. The retrospective introduction of such laws creates uncertainty and violates taxpayers’ rights as they could be asked to pay additional taxes that they were not previously aware of.
Another recent example of retrospective application of new legislation is the introduction of Section 113B into the Income Tax Act 1967, where failure to submit transfer pricing documentation within 14 days of being requested by the Inland Revenue Board (IRB) incurs a penalty of between RM20. results in, 000 and RM100,000 for each year of failure.
The law came into force on January 1, 2021. However, since the IRB is entitled to require transfer pricing documents from seven years ago in an audit from 2021 onwards, it can use this provision to penalize taxpayers for the earlier years.
The penal provisions should only apply forwards, not backwards.
Activate subsequent legislation prospectively
It is not uncommon for the IRB to remain silent about the application of certain provisions of tax law for many years. A prime example of dormant legislation currently being activated is the imposition of market rates on interest-free loans between related parties.
The right to charge market interest rates on such interest-free loans has been enshrined in our legislation since 1967 through anti-circumvention provisions in Section 140 (6) and was further expanded with the introduction of Section 140A for non-circumvention situations.
Interest-free loans are very common within corporations in Malaysia. Historically, until recently, we have not seen tax authorities use these provisions to tax such transactions.
This is a topic that has been raised many times in public forums at the IRB for guidance on the position of tax authorities. Apart from general pronouncements in the Transfer Pricing Guidelines, there were no forthcoming clear responses or guidance from the IRB.
Suddenly attacking taxpayers retrospectively is not fair. If the authorities wish to activate a tax rule that has been dormant since 1967 or 2009, it is only appropriate for the IRB to warn or guide taxpayers of their intention to activate those rules.
In addition, tax professionals may not believe that the IRB has sufficient legal powers to pay interest free loans under applicable tax laws.
The way forward
It is in the interests of all parties that such application of the law is prospective and not retroactive and that guidance on the position of the IRB is issued.
This article was published by Thannees Tax Consulting Services Sdn Bhd. contributed
Managing Director SM Thanneermalai.