There are two revenue bodies that govern tax matters in Malaysia: the Inland Revenue Board (IRB) and the Royal Department of Customs Department (RMCD). The IRB governs matters pertaining to income tax, stamp duty and real property gains tax, while the RMCD oversees issues concerning customs, duties and indirect taxes.
Malaysia implemented a self-assessment system for companies in 2001, and for businesses, partnerships, co-operatives and individuals in 2004. Under this system, taxpayers are responsible for determining and computing their respective tax liabilities based on existing tax legislation, policies and guidelines. The self-assessment system applies only for income tax returns.
Tax controversies may arise due to disagreements regarding the treatment of a particular transaction and/or arrangement between the revenue officers and the taxpayer. These would normally arise during tax audits conducted by the officers or through information obtained from third parties.
In cases involving stamp duty, tax controversies may arise upon the stamping of the relevant instrument at the Stamp Office. There may be disagreements regarding the market value of the Memorandum of Transfer, the nature of the document and the availability of stamp duty relief to a taxpayer, amongst other matters.
A point of particular interest is whether voluntary disclosure of under-reported incidence of tax by a taxpayer can give rise to a tax controversy. In 2018, the government of Malaysia introduced the Self Voluntary Disclosure Programme (SVDP) to encourage taxpayers who had under-reported their incidence of tax in previous years of assessment to voluntarily declare such unreported income, giving assurances that a declaration under the SVDP would not expose the taxpayer to subsequent tax audits or investigations. There have been some recent controversies and allegations that the government is reneging on this assurance.
Income taxes form a large proportion of the government's tax revenue, so most tax controversies arise due to disagreements regarding the interpretation and application of the Income Tax Act 1967 (ITA), which governs both corporate income tax and individual income tax.
The case of TNB v KPHDN (unreported) involved the largest sum of corporate tax in dispute in history, amounting to a whopping MYR7 billion (USD 1.7 billion). The issue in dispute related to the taxpayer’s claim for reinvestment allowance under Schedule 7 of the ITA. The IRB was of the view that the taxpayer did not “manufacture” electricity but was merely a service provider and therefore did not qualify for reinvestment allowance. The case is now pending a judicial review hearing before the High Court.
For individual income tax, the IRB has initiated civil proceedings against the former Prime Minister of Malaysia to recover outstanding tax amounting to MYR1.7 billion. The case is currently pending before the Court of Appeal.
During audits and/or investigations by the revenue officers, the taxpayer can mitigate tax controversies by providing economic reasons and a commercial rationale for why a treatment or arrangement was made in a certain manner. Commonly, a taxpayer has a statutory obligation to keep and retain in safe custody sufficient records for a period of seven years. This includes invoices, vouchers, receipts and such other documents as are necessary to verify the particulars in a return. However, taxpayers are encouraged to maintain these records beyond seven years, as it is not uncommon for the revenue officers to conduct tax audits beyond the statutory prescribed period.
Tax controversies are easier to mitigate where the taxpayer displays the qualities of a good taxpayer, which include providing full and frank disclosure of the taxpayer’s affairs, honesty in tax determination, filing tax returns and forms properly and in good time, and co-operating with the revenue officers to the extent required by law.
Moreover, tax controversies are easier to mitigate where there is previous case law that supports a certain position. Failure to abide by the ruling of a court of law may give grounds for a taxpayer to commence judicial review (see 3.1 Administrative Claim Phase).
As Malaysia implemented the BEPS recommendations relatively recently, their contributory effects on tax controversies have yet to be seen.
Tax Assessments by the IRB
The IRB has repeatedly declared its intention to conduct tax audits every five years on both individuals and companies. In most tax audit cases, the IRB will issue preliminary findings letters and give taxpayers the opportunity to respond to the issues raised.
Audits are concluded with the issuance of a final audit findings letter stating the alleged underpaid taxes. Taxpayers may sign a letter of acknowledgment of the IRB’s position and pay the taxes. If the taxpayers refuse to do so, tax assessments may be issued in respect of such alleged underpaid taxes.
Notice of Additional Tax Assessment (Form JA) or Notice of Tax Assessment (Form J) commonly requires the taxes to be paid within 30 days. In the absence of a stay order before a court of law, the taxes as stated under the additional tax assessments are payable notwithstanding an appeal.
Section 91(1) of the ITA allows assessments to be raised within five years of the relevant year of assessment (seven years for transfer pricing matters under Section 91(5) of the ITA). However, the statutory time limit does not apply where there is evidence of fraud, wilful default or negligence. It is common for the IRB to issue additional tax assessments beyond the statutory time limit, as the IRB adopts the position that a different interpretation of the tax legislation between the IRB and the taxpayer amounts to negligence, which is a basis for going beyond the statutory time limit.
Where the taxpayer fails to file an income tax return, the Director General of Income Tax (DGIR) may issue best judgment assessments against the taxable person. Failure to furnish an income tax return is a criminal offence punishable under Section 112(1) of the ITA. Upon conviction, the taxpayer may be liable to a fine of between MYR200 and MYR20,000, or to imprisonment for a term not exceeding six months, or both.
Tax Assessments by the RMCD
The RMCD oversees both indirect tax and customs matters. Goods and Services Tax (GST) was introduced in 2014 but subsequently repealed in 2018. For completion, this chapter will also address issues relating to GST as there are cases pending resolution.
Tax assessments issued by the RMCD on customs and indirect tax matters are commonly required to be paid within 14 days. Under the Sales Tax Act 2018, the Service Tax Act 2018 and the GST Act 2014, the Director General of Customs (DGOC) may raise notices of assessment up to six years after the date that the alleged tax was due and payable. Similarly, the time limit does not apply where the DGOC is of the opinion that there is fraud or wilful default.
Under Section 41 of the GST Act 2014, persons who are considered taxable persons are required to furnish a return to the DGOC on a monthly or quarterly basis. Failing to furnish a GST return will empower the DGOC to raise best judgment assessment on the amount of tax due and payable under Section 43 of the GST Act 2014. Failure to furnish a GST return is also a criminal offence and, upon conviction, may be liable to a fine not exceeding MYR50,000 and/or imprisonment for a term not exceeding three years.
Under Section 26 of the Sales Tax 2018 and the Service Tax 2018, taxable persons are required to furnish a return to the DGOC on the last day of the month following the end of the taxable period to which the return relates. Where a taxable person fails to furnish a return, the DGOC may raise best judgment assessments on the amount of taxes due and payable. Failure to furnish a return is a criminal offence punishable with a fine not exceeding MYR50,000 and/or imprisonment for a term not exceeding three years.
Tax Audits by the IRB
Although the IRB has publicly declared a routine tax audit on taxpayers every five years, the audit cycle is not fixed as the selection is determined through risk-based assessments and information from third parties, such as taxpayers' returns.
Tax audits are conducted across broad-based but certain industries, with higher tax exposures scrutinised more intensely by the IRB. In recent years, the IRB has tended to focus on Labuan companies, companies with a high volume of related party transactions and companies claiming a high level of tax allowance and/or reliefs.
Tax Audits by the RMCD
Conversely, the indirect tax regime in Malaysia took a big shift in 2014 with the introduction of the GST Act 2014, which replaced the previous Sales Tax Act 1972 and the Service Tax Act 1972. However, the GST Act 2014 was short-lived as it was repealed four years later by the Goods and Services Tax (Repeal) Act 2018 (GST Repeal Act). Due to the GST Repeal Act, the RMCD has been active in carrying out tax audits and investigations on GST as to expedite the disposal of all matters relating to GST.
The initiation and duration of tax audits depends on a range of factors, such as the complexity of the matter, the amount in dispute and whether there is any binding case law suggesting an established legal position. Although the IRB has stated its intention to complete tax audits within 90 days, this differs from case to case.
There are no time limits for the revenue officers to commence tax audits, but the issuance of notices of assessment and/or findings must comply with the relevant statutory time limit and legal principles. The commencement of a tax audit does not stall the limitation period.
The DGIR and DGOC are armed with wide powers under the relevant acts to conduct tax audits. These include powers to call for the production of relevant documents such as books, bank account statements and certificates, for access to buildings and documents, and for all such information that may be relevant. Tax audits may be conducted by desk audits and field audits.
Desk audits are commonly conducted through correspondence such as letters and emails. Parties will explain their position and attempt to come to a resolution. Occasionally, the taxpayers may be required to be present at the tax authority’s office to provide further clarification and to facilitate discussion.
Field audits may involve a request from the revenue officers to access the documents at the taxpayer’s premises. Where required, the revenue officers may even raid the taxpayer’s premises.
Depending on the area of tax under audit, the revenue officers may require the provision of certain documents as evidence and substantiation. For example, for transfer pricing matters, the revenue officers will commonly request transfer pricing documents, financial statements of comparables, the methodology of the selection of comparables and benchmarking analyses.
Where a company is claiming relief and the issue is whether the company is eligible to claim said relief, the revenue officers may require evidence that the taxpayer has duly met the conditions whereby the relief is granted.
In highly technical tax areas, lawyers or expert representatives are encouraged to be present to communicate with the revenue officers more effectively.
Malaysia is a participating country of the automatic exchange of information (AEOI) system initiated by the Organisation for Economic Co-operation and Development (OECD), and has also publicly declared its commitment to the Common Reporting Standard (CRS).
Under the CRS, Malaysian financial institutions are required to collect and report financial account information on non-residents to the IRB, which will exchange this information with the participating foreign tax authorities of those non-residents. Correspondingly, Malaysia would also receive financial account information on Malaysian residents from other countries' tax authorities. This will help ensure that residents with financial accounts in other countries are complying with their domestic tax laws, and act as a deterrent to tax evasion.
Tax information exchange agreements with treaty countries and non-treaty countries are provided for under Sections 132 and 132A of the ITA, respectively. Section 132B of the ITA serves to facilitate mutual administrative assistance in tax matters with government authorities outside Malaysia involving simultaneous tax examinations, automatic exchange of information or tax administrations abroad.
During tax audits, taxpayers should demonstrate utmost co-operation with the revenue officers and provide the relevant evidence, as this would demonstrate qualities of good faith. The evidence and supporting documents should contain cogent technical reasons for the adoption of a certain tax treatment.
It would be prudent for taxpayers to engage tax consultants and lawyers for their representations during tax audits with the revenue officers. Such representation would provide credence and support to the underlying reasons for a certain tax treatment and ensure that they are clearly articulated to the revenue officers.
Taxpayers should always remain vigilant and err on the side of caution when submitting any document to the tax authorities. There is a possibility that these documents may be used for litigation and future records purposes. Evidence that is cloaked with the veil of privilege can be withheld from disclosure to the tax officers.
Furthermore, any proposed settlement discussions between the taxpayer and the IRB should be conducted strictly on a without-prejudice basis, in order to preserve the taxpayer’s right of appeal. It is pertinent that any settlement agreement must be crafted in a manner so that it does not suggest any admission of liability.
A taxpayer who is aggrieved and dissatisfied with a decision of any revenue officers, including a tax assessment, may appeal through a judicial review where there are exceptional circumstances. If this is the case, the matter is automatically directed to the judicial phase without reference to the administrative claim phase.
Taxpayers will have to appeal decisions by the DGOC on GST matters after the implementation of the GST (Repeal) Act 2018 through judicial review, due to the abolishment of the GST Tribunal.
Appealing to the Special Commissioners of Income Tax (SCIT)
A taxpayer who is aggrieved by an assessment raised by the DGIR may file a notice of appeal (Form Q) with the SCIT, together with the grounds of the appeal, within 30 days of the date of service of the notice of assessment.
The DGIR has a 12-month review period upon receipt of the Form Q, during which dispute resolution proceedings may be initiated and held. The purpose of the dispute resolution proceedings is to reach an amicable settlement without the matter being referred to a court of law.
If the parties are unable to conclude an agreement during the review period, the Form Q will be forwarded to the SCIT for registration of the appeal.
Appealing to the Customs Appeal Tribunal (CAT)
A person aggrieved by the DGOC’s decision may make an application for the DGOC to review the decision within 30 days of being notified of the decision. The DGOC will then review his decision and aim to decide on the application within 60 days of receiving the application, where practicable. However, it is common for the DGOC to take up to six months to decide.
Where a person remains dissatisfied with the DGOC’s review decision, they may appeal to the CAT within 30 days of the review decision being communicated to them.
Under the GST regime, a person aggrieved with a decision of the DGOC may file a notice of appeal to the GST Tribunal within 30 days of the date the DGOC’s decision was communicated. However, owing to the repeal of GST and the abolishment of the GST Tribunal, cases registered and pending before the GST Tribunal will now be heard before the CAT.
Appealing Against Decision of the Collector of Stamp Duties
Stamp duty matters are directed to the Collector of Stamp Duties, who is a part of the IRB. If a person is dissatisfied with the assessment by the Stamp Office, he or she may object to the assessment by giving written notice to the Collector of Stamp Duties within 30 days of the date of assessment, giving all the relevant particulars and information to support the objection.
Upon review, the Collector of Stamp Duties may cancel or maintain the same assessment. If the person is not satisfied with the review by the Collector of Stamp Duties, he or she may appeal to the High Court within 21 days of being notified of the result of the review in writing.
For administrative claims (ie, an appeal to the DGIR, DGOC or Collector of Stamp Duties), there are statutory deadlines for tax authorities to decide an appeal, but these are extendable upon request.
Taxpayers should stay vigilant and aware that any communication by the revenue officers during the administrative claim, such as failure to respond and/or take appropriate action before the expiry of the statutory timeframe, may prejudice the right to appeal.
Judicial tax litigation may be initiated via two routes: judicial review or an appeal to the SCIT and CAT. However, stamp duty matters are heard directly by the High Court by way of an appeal.
Although taxpayers may appeal the decision of the revenue officers via judicial review, there can only be a judicial review where there are exceptional circumstances, such as:
Taxpayers should note that the dispute under judicial review should be restricted to questions of law as opposed to questions of fact. An application for leave to commence judicial review under Order 53 Rule 2 of the Rules of Court 2012 (Form 109) must be made within 90 days of the date of the impugned assessment or a decision to the High Court.
The application for leave must be accompanied by an affidavit, documentary evidence and a statement under Order 53 Rule 2 of the Rules of Court 2012.
Appeal before the SCIT
When parties cannot reach a resolution following the process outlined in 3.1 Administrative Claim Phase, the matter is forwarded to the SCIT and registered accordingly. The SCIT shall fix a place and date of hearing, and give the taxpayer and the DGIR at least 28 days’ notice of such.
In practice, the SCIT will give directions for parties to file cause papers (ie, issues to be tried, a statement of facts and an index of the agreed bundle of documents) before fixing the hearing dates.
Appeal before the CAT
A taxpayer aggrieved by the decision of the DGOC may appeal before the CAT straight away, or can apply to the DGOC to review the decision. The process for an application to the DGOC to review his decision is as provided in 3.1 Administrative Claim Phase.
The taxpayer can also appeal to the CAT straight away, without referring to the DGOC for a review decision. A taxpayer aggrieved by the DGOC review decision or a decision would need to file a notice of appeal (Form A) under Section 143 of the Customs Act 1967, Section 96 of the Sales Tax Act 2018 and Section 47 of the Excise Tax Act 1976, within 30 days of the date the decision was communicated to the taxpayer.
Appeal on Stamp Duty Matters
A person aggrieved by the decision of the Collector of Stamp Duties may appeal to the High Court via an originating summons pursuant to Section 39 of the Stamp Act 1949 read together with Order 55A of the Rules of Court 2012.
Once an application for leave for judicial review is filed, the High Court will set a date for the hearing of the application for leave to commence judicial review. This may involve both parties filing affidavits, documentary evidence and both written and oral submissions. Upon hearing the respective parties’ submissions, the High Court may allow or deny leave for judicial review.
If leave is denied, the taxpayer may appeal the matter before the Court of Appeal.
If leave is granted, the matter will be set down for hearing on the substantive merits of the judicial review application. This may involve further exchanges of affidavits and written submissions to be filed by both parties. Upon hearing the parties' submissions, the High Court may allow the judicial review or decide against the taxpayer.
Appeal before the SCIT
The procedure for hearings at the SCIT and the powers of the SCIT are stipulated under Schedule 5 of the ITA. Briefly, appeals before the SCIT are heard before a panel of three Commissioners, at least one of whom judicial or other legal experience. Where relevant, the SCIT may direct that two or more appeals may be heard concurrently, and taxpayers may be represented by either an advocate or a tax agent or both during the hearing.
During the hearing, the SCIT will hear witness evidence from both the taxpayer and the IRB. Upon conclusion of the hearing, parties may file post-hearing written submissions and then an oral submission may be scheduled for the parties to be heard. In the absence of any complications, the SCIT will give its decision within two months of the conclusion of the oral submission.
Appeal before the CAT
Tribunal hearings are heard before a panel of three members. However, the matter may be heard before a single Tribunal member in the interests of expediency and the efficient conduct of the appeal. Where an appeal to the CAT is made, the same issues cannot be in another court unless the other proceedings have been commenced earlier or unless the appeal before the CAT is withdrawn, abandoned or struck out. Through the Customs (Amendment) Act 2018, advocates and solicitors who were previously barred from appearing at the CAT are now able to do so.
Similar to the process in the SCIT, the CAT will hear witness evidence from both the taxpayer and the RMCD. Upon conclusion of the hearing, parties will file post-hearing written submissions and then an oral submission will be scheduled for the parties to be heard. The CAT will pronounce its decision a few months after the conclusion of the oral submission. Decisions of the CAT are deemed to be an order of a Sessions Court and are enforceable as such.
Appeal on Stamp Duty
For an appeal of stamp duty matters, a hearing will be conducted at the High Court, commonly before one judge. Parties will tender evidence via affidavits and may apply for permission to call for witnesses (commonly valuation experts) to provide oral evidence to assist the judge in coming to a determination. Upon hearing the parties’ submissions, the judge may affirm, vary or cancel the notice of stamp duty assessment raised by the Collector of Stamp Duties.
Matters litigated through judicial review and stamp duty appeals are often restricted to evidence tendered through affidavits, and there will no witness evidence given as there should be no dispute of fact. However, parties may also request to cross-examine witnesses via an application supported with an affidavit under Order 38 Rule 2 of the Rules of Court 2012.
Matters referred to the SCIT and CAT will involve witness evidence and documentary evidence, which can be admitted with the consent of both parties or at the discretion of the court.
In a judicial review application, the burden of proof is canvassed in Section 101 of the Evidence Act 1950. If the taxpayer is seeking a court judgment on any legal right or liability, the taxpayer must prove the facts asserted. Similar provisions are found under paragraph 12 Schedule 5 of the ITA, Section 83 of the Sales Tax Act 2018 and Section 68 of the Service Tax Act 2018.
However, there are circumstances whereby the burden of proof is shifted to the revenue officers. In Ketua Pengarah Hasil Dalam Negeri v Rainforest Heights Sdn Bhd  MLJU 2158, the High Court held that the burden of proving any avoidance of tax by the taxpayer rests with the revenue officers.
When choosing which litigation route to take, the taxpayer should assess the merits and strength of its case. The difference in choosing the judicial review route as opposed to an appeal to the SCIT or the CAT is that only the High Court is empowered to grant a “stay” under the Rules of Court 2012. However, a stay order is at the discretion of the court of law and will only be given where the court is satisfied that there are special circumstances that warrant a stay.
In Government of Malaysia v Jasanusa Sdn Bhd  2 CLJ 701, the apex court held that the possibility of arbitrary or incorrect assessments brought about by fallible officers who have to fulfil the collection of a certain publicly declared targeted amount of taxes may be influenced by the target to be achieved rather than the correctness of the assessment. In such circumstances, a stay should be granted.
However, the recent amendment of the Finance Act 2020 may impede the ability of the taxpayer to plead for a stay from the High Court. The addition of Section 103B of the ITA mandates that the initiation of any proceedings under any written law against the government or the Director General shall not relieve any person from liability for the payment of any tax. It is arguable that the amendment does not restrict the power of a court of law to grant a stay, but the full force of the amendment has yet to be determined.
Although Malaysia is not a member of the OECD, the domestic law and policy relating to transfer pricing mirrors the OECD's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010 (OECD Guidelines), including the arm’s-length principle and the preparation of contemporaneous transfer pricing documentations and methodology in Malaysia.
In Damco Logistic Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2011) MSTC 30-033, the Malaysian courts held that the OECD's Commentaries on the Model Tax Convention on Income and on Capital 2014 were a persuasive authority when interpreting double taxation agreements.
Judicial Review and Appeals against the Collector of Stamp Duties
Where a person is dissatisfied with the decision of the High Court in the judicial proceeding or with the stamp duty appeal against the Collector of Stamp Duties, the matter may be appealable twice, to the Court of Appeal and thereafter to the Federal Court, which is the highest court in the country.
An appeal to the Court of Appeal does not require prior leave where the amount in dispute is more than MYR250,000, as provided under Section 68(1)(a) of the Courts of Judicature Act 1967 (CJA). Correspondingly, leave by the Court of Appeal is required where the amount in dispute is MYR250,000 or less.
The threshold to appeal to the Federal Court is high, and prior leave from the Federal Court is required. Section 96(a) of the CJA, read together with Terengganu Forest Products Sdn Bhd v Cosco Container Lines Co Ltd  1 MLJ 25, states that the requirements to appeal to the Federal Court are as follows:
Appeal against the SCIT or CAT
Similarly, a person aggrieved by the decision of the SCIT or the CAT may appeal against the decision twice – to the High Court and the Court of Appeal, the latter of which is the highest appealable court. In an appeal against the decision of the SCIT or CAT, the High Court hears the matter in its appellate jurisdiction, so one of the conditions required to appeal to the Federal Court is not fulfilled.
Where either party is dissatisfied with the decision of the SCIT, the appellant would appeal against the SCIT decision through a notice in writing within 21 days of the date of the decision of the SCIT, as stated under Paragraph 34 Schedule 5 of the ITA. Thereafter, the appellant is required to file a record of appeal containing the following documents, amongst others:
When hearing dates at the High Court are determined, the parties file their respective submissions and a hearing before the judge is conducted.
An appeal from the High Court to the Court of Appeal is similar but is governed under the Rules of Court of Appeal 1994. The aggrieved party would be required to file a notice of appeal within 30 days of the date of the High Court’s decision or of the date where leave is granted, if relevant. The appellant would thereafter be required to file a record of appeal containing documents similar to those listed above, mutatis mutandis, within three months of the date of the decision. When the hearing dates are set, the parties file their respective submissions and a hearing before the Court of Appeal is conducted.
Any appeal to the Federal Court would require leave by the Federal Court. The procedure to appeal to the Federal Court is similar except for a requirement under Section 96 of the CJA wherein leave of the Federal Court is required under Section 97 of the CJA. Once leave is granted, the same process would apply, mutatis mutandis.
SCIT and CAT
Between one and three judges sit in the SCIT and CAT, depending on the complexity of the matter. Judges sitting in the SCIT and CAT are experienced and knowledgeable in tax.
The SCIT is established under Section 98 of the ITA, which states that there shall be, at the time of writing, a minimum of three Commissioners, who are appointed by the Yang di-Pertuan Agong (the Ruler of Malaysia) and whose tenure, remuneration and allowance are determined by the Minister of Finance.
The CAT is constituted under Section 141B of the Customs Act 1967. The CAT shall consist of a Chairman and a maximum of two Deputy Chairmen from the judicial and legal service, alongside a minimum of seven members who have wide knowledge or extensive experience in tax or customs matters. All members are appointed by the Minister of Finance, who also determines the renumeration, qualifications, terms and conditions of the members of the CAT.
High Court, Court of Appeal and Federal Court
Where the matter is heard before the High Court, there will commonly be only one judge. A hearing in the Court of Appeal will commonly involve three judges. Finally, between three and seven judges will make a determination on cases at the Federal Court.
The judge presiding over the matter in the appellate courts (High Court and above) may not be experienced in the area of tax but will be conversant with all areas of civil law.
Under Article 122B of the Malaysian Federal Constitution, the appointment of a judge in the High Court, the Court of Appeal and the Federal Court is by Yang di-Pertuan Agong, acting on the advice of the Prime Minister.
The first alternate dispute resolution mechanism is mandatory, and involves resolving tax disputes through the Dispute Resolution Proceedings (DRP) under Section 101 of the ITA. The DRP allows for a 12-month review period after the Notice of Appeal (Form Q) is filed. This may involve IRB officers from the DRP and the taxpayer attempting to come to a common resolution, along with the tax consultant or legal representative. If the matter is not resolved during the DRP, it would be forwarded to the SCIT for registration.
The second alternate dispute resolution mechanism is an appeal to the DGOC to review a decision. As mentioned in 3.1 Administrative Claim Phase, a person aggrieved by the decision of the DGOC may apply for him to review his decision within 30 days of notification of the decision. The DGOC will review and give his review decision within 60 days. Unlike the DRP, an appeal to the DGOC for a review decision is not mandatory, as taxpayers may file an appeal to the CAT without further reference to the DGOC.
During the DRP and review decision by the DGOC, parties would communicate with each other through letters, emails and meetings to attempt to come to a common ground, which may come into fruition in a settlement agreement.
However, the ADR process has not been very successful, as seen in the large number of cases under appeal.
There is no mediation or arbitration for tax disputes.
It was previously considered that an Advance Ruling under Section 138B of the ITA could reduce the possibility of tax disputes, as it ensured certainty of tax treatment and transparency in tax administration. However, case law has cast doubts on whether Advance Rulings can truly reduce tax controversies.
In SKFBISB v KPHDN (unreported), the High Court found that the taxpayer’s non-compliance with the requirements under the Income tax (Advance Ruling) Rules 2008 was fatal to the taxpayer’s Advance Ruling application. Paragraph 3(a) of the Income tax (Advance Ruling) Rules 2008 states that the DGIR shall not make an advance ruling where the arrangement for which the advance ruling is sought has already been entered or effected. In this instant case, the application for an advance ruling was made four months after the agreement was entered into, so it was inapplicable to the taxpayer.
Furthermore, in IBM Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (unreported), the Federal Court upheld the Court of Appeal’s decision against the taxpayer. The Court of Appeal was of the view that the Advance Ruling, although unfavourable towards the taxpayer, had not adversely affected the taxpayer until tax returns were filed and tax was assessed. Furthermore, the Court of Appeal held that IBM should have applied to the SCIT to appeal against the Advance Ruling and not bring a judicial review application.
In Teruntum Theatre Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, the Court of Appeal held in favour of the IRB in deciding that no person can raise an estoppel against himself to defeat a positive duty imposed upon him by a statute. The DGIR cannot raise an estoppel against himself from discharging his statutory duty to raise a correct assessment under the appropriate law if the basis of treating the gain as a capital gain was not within the meaning ascribed to it by the Real Property Gains Tax Act 1976 and no real property gains tax is payable.
This is not relevant in Malaysia.
No ADR mechanisms other than DRP are available for transfer pricing cases.
Failure to pay the taxes under assessment or a bill of demand is generally a civil offence as opposed to a criminal offence. The taxpayer's failure to pay the amount of taxes as stated in the assessment or bill of demand before the prescribed date, in the absence of a stay order by a court of law, may result in civil proceedings by the IRB or RMCD through the government of Malaysia as a debt due to the government.
The plaintiff to the civil proceedings will be the government of Malaysia, which will serve a writ of summons and statement of claim unto the taxpayer, as the named defendant. The taxpayer will have 14 days to enter appearance by filing a notice of appearance, and another 14 days to file the statement of defence.
A taxpayer may be liable to a criminal offence if it is found that they defaulted in furnishing the relevant documents, filed incorrect information returns or reports, attempted to leave Malaysia without paying the outstanding taxes or obstructed officers in carrying out their duties under the relevant acts.
A civil proceeding does not prevent the initiation of criminal litigation or an appeal against the notice of assessment, but either may be struck out by the court for duplicity of proceedings or as an abuse of court process if they are based on the same facts and cause of action.
In the interest of justice, the taxpayer may ask the court for either file to be stayed pending the outcome of the other case, to prevent inconsistent decisions or rendering either decision academic.
In a recent landmark ruling in SMSB v Ketua Pengarah Kastam & Anor (unreported), the Federal Court dismissed the DGOC’s application for leave to appeal the decision of the Court of Appeal, which held that the Bills of Demand for purported non-compliance with conditions of a duty-free licence were ultra vires.
However, shortly after the Federal Court’s decision, the directors of the taxpayer were charged with more than 600 counts of alleged non-compliance with the conditions of the duty-free licence, the same conditions which were held to be ultra vires by the Federal Court. The matter is now at its early stage and is pending before the Magistrate Court.
Whilst it is common for civil recovery proceedings to be taken against the taxpayer to recover outstanding taxes due and payable, it is uncommon for underpaid taxes to lead to criminal prosecution, especially where a court of law has declared the cause of action to be void.
As mentioned in 7.1 Interaction of Tax Assessments with Tax Infringements, the legality of an assessment or decision by the revenue officers is often a civil matter rather than a criminal matter. As such, the correctness of a tax assessment is determined by the civil courts and not the criminal courts.
Criminal litigation commonly starts at the Magistrate or Sessions Court, depending on the gravity of the offence. Firstly, the alleged offender (the Accused) will be charged and the charge is read and explained to him before the judge. The Accused will be asked to plead guilty or otherwise.
If the Accused pleads guilty, the plea shall be recorded and he may be convicted.
If the Accused does not plead guilty and proceeds to trial, the court shall take all such evidence in support of the prosecution. The prosecutor bears the burden of proving a prima facie case against the Accused. If the court if not convinced that a prima facie case was made against the Accused, the Accused may be acquitted.
If a prima facie case is made, the Accused will be asked to enter a defence. The Accused may adduce evidence required and call witnesses to prove his case. The Accused himself has three options: he can give sworn evidence from the witness box, give unsworn evidence from the dock or remain silent.
At the end of the trial, the court shall consider all evidence and decide whether the prosecution was successful in proving its case beyond a reasonable doubt. If the prosecution was successful, the Accused shall be found guilty and may be convicted. Otherwise, the Accused should be acquitted.
It is settled law that although the IRB and the RMCD are empowered under the relevant acts to imposed penalties where they are of the view that taxes have been underpaid by the taxpayer, the discretion to impose such penalties cannot be fettered and must be based on legitimate considerations. This applies even where the court agrees with the tax treatment by the IRB or the RMCD.
In Office Park Development Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2011) MSTC 30-023, it was held that a penalty should not be imposed where the taxpayer had acted in good faith, taken professional advice and made full disclosure, and the matter in dispute arises from a technical adjustment.
However, the IRB may also compound the penalty to resolve and settle the issue in dispute expeditiously.
Parties may enter into a settlement agreement with the tax officers and/or the government of Malaysia to stop a criminal trial at any time before the pronouncement of a decision by the judge. Since discussions are commonly conducted in private and are not disclosed to the public, the exact terms of the settlement agreement are not known.
Any person aggrieved by the decision of the judge in the subordinate court (Magistrate and Sessions Court) can appeal to the High Court under Section 303A of the Criminal Procedure Code (CPC). The notice of appeal must be filed with the relevant subordinate court within 14 days of the date of the decision of the court.
Upon receiving the grounds of decision, the appellant shall file a petition of appeal (Form 51) to the High Court, stating the substance of the judgment appealed against and the particulars of the points of law or of fact from which the subordinate court is alleged to have erred. Upon hearing the parties, the High Court judge may dismiss or allow the appeal and order acquittal, conviction or retrial.
An appeal against the decision of the High Court to the Court of Appeal is largely the same; the only difference is that, if the matter originated from the Magistrate Court, leave of the Court of Appeal is required, except where the appellant is the prosecutor, and it is limited to questions of fact. An appeal to the Court of Appeal originating from the Sessions Court or High Court does not require leave.
Appeals to the Federal Court are available only where the High Court heard the matter in its original jurisdiction. However, prior leave from the Federal Court is still required.
In recent years, the IRB has been actively invoking Section 140 of the ITA (the general anti-avoidance provision) in alleging tax avoidance cases by taxpayers. However, the IRB has repeatedly failed to appreciate that, if there is commercial justification or if the transaction is a bona fide transaction, the DGIR is not entitled to disregard or vary that transaction. This is known as tax mitigation, and it is an established principle of tax law that a person may do all things within the law to minimise his incidence of tax.
Recently, the Court of Appeal dismissed the IRB’s appeal and upheld the High Court’s decision in Ketua Pengarah Hasil Dalam Negeri v Rainforest Heights Sdn Bhd  MLJU 2158. In this case, a company was incorporated for a property development project. One of the terms of the shareholders' agreement was that the partners will purchase a unit from the project at the price of MYR380 per square feet as at the material time the developer licence had not been obtained by the taxpayer. When the company was granted a housing developer’s licence, several units from the project were sold to each of the parties at the price of MYR380 per square feet.
The IRB invoked Section 140 of the ITA and alleged tax avoidance. Aggrieved, the taxpayer appealed to the SCIT, which found in favour of the taxpayer. The IRB appealed to the High Court.
The High Court held in favour of the taxpayer. In upholding the decision in Port Dickson Power Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri  MSTC 30-045, the failure of the IRB to specify the sub-paragraph of sub-Section 140(1) of the ITA rendered the notice of additional assessment null and void. Additionally, the IRB's failure to furnish the particulars of the adjustment together with the notice of assessment rendered the notice of assessment null and void is in accordance with the law.
The IRB’s appeal to the Court of Appeal was unanimously dismissed.
In the event of alleged double taxation under a tax assessment, taxpayers must use the domestic litigation process to appeal against the assessment – either an appeal to the SCIT or judicial review. In the event of a conflict between the provisions of the tax legislation in Malaysia and the Double Taxation Agreement with a country, the latter takes precedence.
In Orange Rederiet Aps v Ketua Pengarah Hasil Dalam Negeri (2018) MSTC 30-160, the High Court held that the Malaysia–Denmark DTA had been ratified in Malaysia subsequent to the enactment of Section 4A and must have clearly been intended by Parliament to take precedence over the ITA.
To date, Malaysia has entered double taxation agreements with 76 countries. The Article on Mutual Agreement Procedure (MAP) in Malaysia’s Tax Treaties allows the Malaysian Competent Authority (CA) to interact with the CAs of Treaty Partners with the intent of resolving international tax disputes involving double taxation and inconsistencies in the interpretation and application of a Tax Treaty.
In the Mutual Agreement Procedure Guidelines, the IRB has stated that all information obtained or generated during the MAP process is protected by the confidentiality provisions in the ITA and the provisions of the applicable Tax Treaty. As far as is known, there has not yet been any appeal against the outcome of a decision from the MAP, as they are concluded in private.
Although there may be overlaps between the application of the general anti-avoidance rules (Section 140 of the ITA) or the specific anti-avoidance rules and matters under the tax treaties, it is held that where there are inconsistencies between the ITA and tax treaties, the latter prevails.
Malaysia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI Convention) in January 2018 and has adopted the first approach, the Principal Purpose Test (PPT). Under the PPT approach, treaty benefits are to be denied “if it is reasonable to conclude … that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit.”
The exception is where it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention. This led to the ratification of the MLI Convention in local legislation and with amendments to Sections 132(1A), 132B(1A) and 132 of the ITA and Section 21(1)(b) of the Labuan Business Activity Tax Act 1990.
A taxpayer aggrieved by any transfer pricing adjustments under a notice of assessment by the IRB can initiate a challenge through an appeal to the SCIT or judicial review.
The advance pricing arrangement (APA) regime is regulated under Section 138C of the ITA. An application for an APA is a determination by the DGIR or the CA with the taxpayer of the transfer pricing methodology to ensure the arm’s-length transfer prices in relation to a transaction.
Under Rule 4 of the Income Tax (Advance Pricing Arrangement) Rules 2012, a taxpayer must first write to the DGIR for a pre-filing meeting for an APA at least 12 months prior to the first day of the proposed covered period. Both unilateral and bilateral APAs are entered into by consent of the taxpayers and the DGIR and/or the CA, so it is likely that an APA can reduce litigation in transfer pricing matters.
In view of the current COVID-19 pandemic, there is likely to be an increase in issues relating to permanent establishments and transfer pricing as these were amongst the biggest concerns for multinational enterprises (MNEs). Concerns over permanent establishment issues may arise in relation to the question of whether a person’s continued existence in a foreign country or in Malaysia may result in the accidental creation of a permanent establishment.
A company may obtain financial assistance from a related company overseas to sustain business and cushion the impact of the COVID-19 pandemic. Possible controversies may arise regarding whether the provision of financial assistance by a related company complies with the “arm’s-length” price principle. Another area of concern is whether the IRB can expect contract manufacturers of MNEs to earn their routine profit notwithstanding the unprecedented economic conditions and rising operational cost due to the requirement to comply with Standard Operating Procedures prescribed by the government.
Taxpayers can mitigate their risks by maintaining proper evidence and documentation proving a certain course of action adopted with cogent commercial reasoning. For example, the provision of financial assistance and the determination of the corresponding interest should take the prevailing interest rate at the time, creditworthiness, credit risks and credit ratings into consideration, amongst other matters.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
This section is not relevant in Malaysia.
The sum of fees payable to the tax authorities is directly proportional to the level of appeal: the higher the appellate court, the higher the fees payable to the authorities.
As a ballpark figure, the scale of sums payable is as follows:
Fees are payable by both parties at each stage of the litigation, with the amount depending on the nature of the document filed and the level of the court of law, amongst other factors. The higher the court, the higher the filing fees will be.
Unfortunately, as explained in 10.1 Costs/Fees Relating to Administrative Litigation, the taxpayer may recover some costs but such payments are very meagre, because any tax proceeding is an action against the government of Malaysia. Since any sum payable is any tax proceeding is meant for the purposes of social welfare, the actual costs granted by a court of law are much lower than the costs awarded in civil proceedings between private parties.
However, a taxpayer can claim for interest if it is found that the revenue officers were unlawful in withholding the taxpayer’s money. In Pelangi Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2011) MSTC 30-036, the High Court echoed the House of Lord’s sentiments in Woolwich Building Society v Inland Revenue Commissioners (No 2)  3 All ER 737, where Lord Stynn held that it is unacceptable to deny a taxpayer interest when the taxpayer paid large sums of money to the Revenue based on invalid regulations, which were retained free of interest, pending a court decision.
Accordingly, the High Court awarded interest of 4% to the taxpayer from the date the IRB had use of the money.
An appeal to the DRP or the DGOC to review his decision does not involve any costs becoming payable to the other party.
There is no publicly available information or statistics on the number of tax court cases pending in each instance, or the value thereof. As such, it is difficult to ascertain the number of cases before each court.
There is no publicly available information on the number of cases initiated and terminated each year relating to different areas of tax and the values thereof. As such, it is difficult to estimate the accurate number and value.
The statistics on a party succeeding in litigation are not publicly available, and depend on the facts of each case.
The taxpayer should consult a tax lawyer at an early stage to preserve their rights to appeal the decision of the revenue officers. The taxpayer should first determine the course of action – ie, to appeal the assessment raised via a judicial review or to the SCIT or CAT by reviewing the facts of the case and obtaining a legal opinion on the most suitable course of action.
Judicial review is available where the issue relates to a clear and flagrant breach of the law and there are exceptional circumstances in the form of a clear lack of jurisdiction, failure to perform a statutory duty or a serious breach of the principles of natural justice. However, where the issue involves a substantial question of fact or contains an allegation of time-barred assessment and fraud, the matter should be referred to the SCIT instead.
Another relevant consideration is whether there are also special circumstances entitling a stay order. As mentioned earlier, only the High Court and higher courts are empowered to grant a stay, but not the SCIT. As a general rule, the court will only grant a stay order where the applicant satisfies the court that there are “special circumstances” warranting a stay, such as a breach of natural justice.
The economic downturn due to COVID-19 has not deterred the government of Malaysia in initiating civil proceedings against taxpayers to recover taxes. On the contrary, civil recovery proceedings by the government of Malaysia have been higher and more strict than ever. It is not surprising for a writ action to be served on the taxpayer a day after he defaults to pay the taxes by the due date.
In the absence of a stay order, the taxpayer would have to pay the taxes under assessment forthwith. However, the DGIR and the DGOC have discretion to allow the payment of taxes under assessment in instalments instead of the full sum immediately. Applications for an instalment payment scheme addressed to the DGIR or the DGOC would commonly require evidence of the financial circumstances of the person for a specified period. It is recommended for taxpayers to make an application for instalment payments as soon as possible, to prevent the imposition of a penalty.