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, among 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 Special 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. 

With the recent release of Budget 2023, the government Malaysia has proposed another round of SVDP. This new round of tax amnesty will be taken one step further with full penalty waiver, covering both direct and indirect taxes. IRB and RMCD were tasked to revive this programme and it is targeted to run from June 2023 till the end of 2024.

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 (USD1.7 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 High Court in this case ruled in favour of the taxpayer by allowing the taxpayer’s application for reinvestment allowance. This is a landmark decision as it highlights that the IRB should not interpret and apply a tax incentive provision narrowly so as to defeat its purpose. This win certainly puts the taxpayer 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 MYR5.8 billion. The major win in this case will certainly pave the way for the other similar cases and contribute significantly as a precedent. 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.

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 Court of Appeal in this matter has affirmed the High Court decision and for the former Prime Minister to pay the income tax arrears. Leave has been granted by the Federal Court and the appeal will be heard on 14 June 2023.

The possibility of tax controversy can be mitigated through various ways. One of the most effective ways is by ensuring compliance with tax laws and regulations. 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. 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. 

During audits and/or investigations, it is essential for taxpayers to engage with revenue officers in a constructive manner. Taxpayers should respond to queries and requests for information promptly. Taxpayers should provide economic reasons and a commercial rationale for why a treatment or arrangement was made in a certain manner to avoid any misunderstandings or disputes. Tax controversies are always 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.

Lastly, tax planning can aid businesses to structure their transactions in a tax-efficient manner thereby reducing the likelihood of tax controversy. However, tax planning must be done within the limits of the law and is not seen as aggressive tax avoidance.

Malaysia has committed to implement and adhere to the Base Erosion and Profit Shifting (BEPS) Action Plan introduced by the OECD. The OECD formally announced on 6 March 2017 that Malaysia was the 94th country to become part of the Inclusive Framework on BEPS. On 28 January 2018, Malaysia signed the Multilateral Instrument (MLI) to implement tax treaty-related measures. Furthermore, in October 2022, the former Finance Minister expressed the government’s intention to implement the Two-Pillar approach to create a competitive environment for both foreign and domestic direct investments while preventing cross-border tax evasion. This was further confirmed in the Budget 2023 speech, where it was announced that Malaysia will be joining the growing number of countries that will be implementing the 15% global minimum tax under Pillar Two, targeted to begin in 2024.

As Malaysia implemented the Base Erosion and Profit Shifting (BEPS) recommendations relatively recently, their contributory effects on tax controversies have yet to be seen. Given that Malaysia fundamentally has a territorial income tax system, Malaysia does not need to adopt many of the measures that other countries have introduced to counter tax evasion and avoidance. Malaysia will continue to follow closely international trends and adopt a more reactive approach. This change in tax laws will not negatively impact foreign direct investments and it is believed that it will encourage MNCs to be more transparent with their disclosure to maintain their reputation.

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 from a court of law, the taxes 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. 

Where the taxpayer fails to file an income tax return, the Director General of Income Tax (DGIR) may issue best judgement 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 Goods and Services Tax Act 2014 (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 judgement 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 Act 2018 and the Service Tax Act 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 judgement 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. Case selection for tax audits is mainly determined through risk-based assessments and information from third parties, such as taxpayers' returns. 

Tax audits are conducted across broad-based categories, but certain industries, with higher tax exposures and selected industries which may have inherent tax issues, are scrutinised more intensely by the IRB. There will also be a higher chance that the IRB will perform a tax audit if there is significant decrease in profits upon expiry of their tax incentive period. 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 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. 

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 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 as desk audits and field audits. However, during the COVID-10 pandemic, the IRB officers have been mainly conducting desk audits to comply with the standard procedures enforced by the Malaysian government. 

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 comparable, the methodology of the selection of comparable and benchmarking analyses to ensure that they are consistent with the "arm’s length" principle.

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. 

It is important for taxpayers to be aware of these areas of special attention to ensure that their tax affairs are in order. 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. Malaysia would also receive financial account information on Malaysian residents from other countries' tax authorities. This will 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.

Tax audit is merely an examination of records and does not imply that taxpayers have intentionally made errors in their income tax returns. Having said that, taxpayers should always be prepared for potential tax audits. Taxpayers are advised to keep sufficient records and supporting documents for more than seven years. This is because when it comes to the issue of deduction of expenses, it will be helpful if the expense is an accrual amount and taxpayers are able to provide relevant evidence supporting it. 

Where payments were made to non-residents, taxpayers are advised to determine if there were any implications of withholding tax. 

During tax audits, taxpayers should demonstrate utmost co-operation with the revenue officers and provide the relevant evidence. 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. 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 to preserve the taxpayer’s right of appeal. It is pertinent that any settlement agreement must be crafted in a manner that does not suggest any admission of liability. 

Judicial Review

A taxpayer who is aggrieved and dissatisfied with a decision of any revenue officers, including a tax assessment, may appeal through judicial review where exceptional circumstances exist. 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 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 litigated in court. 

If parties are unable to reach 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. 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. 

Appealing against a 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. Under Section 101 ITA, the DG shall, within 12 months from the date of receipt of the notice of appeal, review the assessment against which the appeal is made. Where the DG requires an extension of time to carry out the review, the DG may apply to the minister at least 30 days prior to the expiration date. The minister may grant such extension as he thinks proper and reasonable in the circumstances that the extension does not exceed a period of six months from the expiration date. The decision of the minister will be final.

The DGOC will then review his decision and aim to decide on the application within 60 days of receiving the application. However, it is common for the DGOC to take up to six months to decide.

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.

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. 

Judicial Review

Although taxpayers may appeal the decision of the revenue officers via judicial review, there can only be judicial review where there are exceptional circumstances, such as:

• a clear lack of jurisdiction; 
• a blatant failure to perform some statutory duty; or
• a serious breach of the principles of natural justice. 

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 must be made within 90 days of the date of the impugned assessment or a decision to the High Court. 

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, statement of facts and 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, 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, 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. 

Judicial Review

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 consisting of one to three commissioners. 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 an oral submission may be scheduled for the parties to be heard. 

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. 

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. 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 no witness evidence will be given as there should be no dispute of fact. However, parties may request to cross-examine witnesses via an application supported with an affidavit under Order 38 Rule 2 of the Rules of Court 2012. 

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 [2018] 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 [1995] 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 DGIR 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. This was stated in UEM Edgenta Bhd v Ketua Pengarah Hasil Dalam Negeri [2021] MLJU 2850 that Section 103B of the ITA cannot prevail against Section 25(2) of the Courts of Judicature Act 1964 and Paragraph 1 of the Schedule thereto which gives the High Court the power to issue directions, orders or writs. Furthermore, Section 4 of the CJA provides that in the event of inconsistency between the CJA and other written law other than the Constitution in force at the commencement of the CJA, the provisions of the CJA shall prevail. However, 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. This was later cited in Glocomp Systems (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2019) MSTC 30-300, where the court reiterated that the Commentary of the OECD will be used to determine the constructions of the relevant articles in the Malaysia-Singapore DTA.

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, 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 [2011] 1 MLJ 25, states that the requirements to appeal to the Federal Court are as follows:

• the High Court heard the matter in its original jurisdiction; 
• the appeal must be against the decision of the Court of Appeal; 
• the appeal must involve a question of law of general principle that has not been previously decided by the Federal Court; 
• where leave is sought on the ground of "public advantage", the applicant must satisfy the leave panel that it is a point of general public importance for which further argument is required; and
• there is a good prospect of success in the appeal.

This was later cited in the case of Ng Hoe Keong & Others v OAG Engineering Sdn Bhd & Others [2022] MLJU 686, where the Federal Court held that a leave application cannot be made arbitrarily and the burden is on the applicants to show cogent reasons or that the single judge had committed a fundamental error in her decision. 

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, among others: 

• the notice of appeal; 
• the statement of facts and issues; 
• the memorandum of appeal; 
• the deciding order; 
• the notes of proceedings;
• the grounds of decision; and 
• relevant documentary exhibits. 

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 the 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. 

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 the 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, 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. 

As mentioned in 6.1 Mechanisms for Tax-Related ADR in This Jurisdiction, Dispute Resolution Proceedings (DRP) is a mandatory ADR mechanism in resolving tax disputes. As for customs and indirect tax matters, an appeal to the DGOC can be made. 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. 

IRB has recently published the Guidelines on Dispute Resolution Proceeding on 15 June 2021. This was to provide information regarding DRP as a disputes resolution mechanism and to promote awareness of a taxpayer’s rights and responsibilities. However, the ADR process has not been very successful, as seen in the large number of cases under appeal.

As to whether agreement can be reached to reduce a tax assessment, the interest due or the penalties that may be applied, there is no mediation or arbitration for tax disputes in the jurisdiction. 

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 SKF Bearing Industries (Malaysia) Sdn Bhd 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 [2006] 4 MLJ 685, 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.

The question of whether an entity uses an ADR mechanism instead of litigation in the courts is not relevant in Malaysia.

No ADR mechanisms other than DRP are available for transfer pricing cases in Malaysia. 

Failure to pay the taxes under an 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, wilful evasion of tax, attempted to leave Malaysia without paying the outstanding taxes or obstructed officers in carrying out their duties under the relevant acts. 

During tax investigation, IRB has the power to freeze, seize or forfeit property suspected of the offence. In the event of IRB finding evidence of criminal elements, they may recommend criminal charges to the Attorney General’s Chamber (AGC). AGC will then decide whether to proceed with the charges and file an indictment in court. 

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 matter 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 & Another (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.

While 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. An administrative infringement process will only evolve into a criminal tax case if the IRB determines that there has been a deliberate attempt to evade tax.

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 is 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 impose 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. 

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. 

As mentioned in 1.1 Tax Controversies in This Jurisdiction, under the Special Voluntary Disclosure Programme (SVDP) businesses and individuals are given the chance of full waiver of their penalty when they opt for voluntary disclosure.

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.

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 [2018] MLJU 2158. The IRB’s appeal to the Court of Appeal was unanimously dismissed. 

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 [2012] MSTC 30-045, the failure of the IRB to specify the subparagraph of subsection 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.

In the recent case of Petronas Trading Corporation Sdn Bhd v KPHDN (2022) MSTC 30-497, it was held that where the DGIR was of the view that the transaction had been entered into for the purpose of avoiding taxes, while invoking Section 140 of the ITA, the DGIR must provide particulars of the adjustments made together with the notice of assessment. The DGIR cannot dictate how the taxpayer should conduct its business and a taxpayer is at its own liberty to conduct its business with all available means to make good profit and to mitigate his incidence of tax. Furthermore, Section 140 must be subjected to the principle of strict interpretation as propounded by the Supreme Court in National Land Finance Co-operative Society Ltd v Director General Inland Revenue [1993] 4 CLJ 339. The internal guidelines and policy of the DGIR have no force of law and every exercise of statutory power cannot be done arbitrarily.

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 73 countries and are under negotiation with 24 countries, such as China. 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. The MAP mechanism is independent from the legal remedies available under domestic law.

A MAP may be requested when the action of either Malaysian or its Treaty Partner’s tax administrations results in or will result in taxation not in accordance with the Double Taxation Avoidance Agreement. Generally, the due date for a MAP request is three years. However, it will depend on the specific period mentioned in the MAP article under a particular Tax Treaty. In the request, taxpayers will need to show that element of double taxation is probable and not just possible to arise related to the MAP issues. 

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. 

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing (MLI) came into force on 1 June 2021. As of March 2023, Malaysia’s Tax Treaties with 54 countries will be modified by MLI. For instance, MLI will cover the Agreement between the Government of Japan and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. 

The Council of the European Union approved Directive 2017/1852 on 10 October 2017, aiming to provide a mechanism for resolving tax disputes between EU member states and reducing the risk of double taxation within the EU. Since Malaysia is not a member of the EU, it is not directly impacted by the Directive. However, Malaysian has signed double taxation treaties with several EU member states, such as Germany. These treaties provide for mechanisms to resolve disputes arising from their interpretation and application which complied to the minimum standard of the BEPS.

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 has been held in cases such as Lembaga Hasil Dalam Negeri Malaysia v Alam Maritim (M) Sdn Bhd (2012) MSTC 30-049, 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). Malaysian tax authorities will be able to increase their ability to combat BEPS. 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.

With this change in law, it will likely lead to increased scrutiny by tax authorities of cross-border arrangements and transactions that seek to obtain treaty benefits. Courts may play a role in interpreting and applying, and taxpayers have to be more careful making sure that their arrangements comply with the object and purpose of the relevant treaty. They may need to provide additional documentation to support when claiming treaty benefits.

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. 

For instance, in HSIS Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2020) MSTC 10-113, the taxpayer filed an appeal to the SCIT against the notices of additional assessment of the DGIR, which imposed withholding tax on payments made to SISPL, a company incorporated in Singapore. The primary issues to be determined including whether the Distribution Fee is “royalty” under Art 12 of the Malaysia-Singapore DTA or “royalty” under Section 2 under ITA. It is settled law that, in the event of conflict, DTA will prevail over ITA. This can be seen under Section 132(1) ITA and in several cases such as Damco Logistics Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2011] MSTC 30-033. Besides, throughout the hearing and submission, the DGIR failed to prove and convince the court otherwise. The appeal was allowed and the assessment was set aside.

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. The request should be submitted together with a draft outline of the case, indicating the following: 

• the taxpayer’s business model and industry information;
• the scope of the transaction and periods to be covered;
• the proposed transfer pricing methodology (TPM) and an explanation of whether the method accords with the arm’s length principle;
• and any other information that the DG may require. 

The DG shall, within 14 days, notify the taxpayer of his decision on whether the taxpayer may proceed with the application for an APA. The taxpayer may then, within two months after receiving the notification, submit to the DG an application for a Unilateral APA, Bilateral APA or Multilateral APA. 

As 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 among 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. 

In Akamai Technologies International AG v Ketua Pengarah Hasil Dalam Negeri (2022) MSTC 30-495, the appellant is a company incorporated in Switzerland and it did not carry permanent establishment, employees nor offices in Malaysia. Its subsidiary, Akamai Malaysia, entered into a service reseller agreement with the appellant and under the agreement Akamai Malaysia would pay the appellant an annual fee for the right for market, resell and support the services in Malaysia. The appellant made an application to the DGIR for a ruling to confirm its position that the payments were not royalties in accordance with Article 12 of the DTA and were therefore not subjected to withholding tax under Section 109 of the ITA. It was rejected by the DGIR, hence this application for leave to judicial review. The High Court concluded that the appellant had successfully established an arguable case and warrants leave for judicial review. This decision sets precedent for non-Malaysian registered taxpayer to be heard in Malaysian Courts.

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, among 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.

This section is not relevant in Malaysia.

The OECD has introduced its Two-Pillar Solution under BEPS 2.0 to address the tax challenges arising from the digitalisation of the economy in the form of Pillar One and Pillar Two. 

In October 2022, our former Finance Minister expressed government’s intention to implement the Two-Pillar approach to create a competitive environment for both foreign and domestic direct investments while preventing cross-border tax evasion. Furthermore, in the Budget 2023 speech it was announced that Malaysia will be joining the growing number of countries that will be implementing the 15% global minimum tax under Pillar Two, targeted to begin in 2024. Although the Two-Pillar Solution has yet to be implemented in Malaysia, it is expected that the nation will move in that direction sooner rather than later. 

Following the implementation of Pillar One, it is expected that Malaysia may have the potential to increase its tax revenue. Pillar One aims to eliminate the possibility of double taxation, although this requires a largely co-ordinated global agreement involving multiple nations. If such an agreement is able to be made available, it would certainly be able to mitigate the controversies surrounding the implementation and will provide further certainty to individuals as well as entities. In the absence of such a co-ordinated global agreement, the issues of double taxation that Pillar One aims to address will still arise, even if Malaysia were to introduce digital service taxes and applied Pillar One elements through its own local domestic legislation. However, Pillar One may not be the focus of the nation as the MNEs in Malaysia are less likely to be impacted by it. 

Pillar Two, on the other hand, would be the focus of Malaysian taxpayers as it introduces a global minimum tax of 15% for MNEs with a global annual revenue above EUR750 million. It was also announced by our Finance Minister that government intends to implement the Qualified Domestic Minimum Top-up Tax as well. It is a high possibility that the top-up tax will be imposed on a parent entity in respect of the low-taxed income of its subsidiaries when its subsidiaries do not meet the minimum tax of at least 15%.

Malaysian subsidiaries of large MNEs that are currently enjoying the tax benefits of paying concessionary tax rates that are far below 15% are expected to be impacted by Pillar Two. Similarly, Malaysian-based MNEs with overseas subsidiaries that are enjoying low tax rates overseas could be subjected to a top-up tax in Malaysia following the implementation of Pillar Two.

There are risks that come with this approach. Malaysia offered tax incentives such as concessionary tax rates to encourage foreign investment and economic growth. However, with the subsidiary’s tax falling below 15%, this will lead to the parent entity being subjected to a top-up tax in another jurisdiction under the income inclusion rule or the under-taxed payments rule. This means that the MNE will have to pay additional tax in another jurisdiction to ensure that its overall effective tax rate meets the minimum threshold of 15%. Malaysia would, as a result, then lose out on tax revenue as the initial tax incentive has been rendered ineffective. Besides, this will also underscore the importance of co-ordination and co-operation between jurisdictions to ensure that the tax rules are a fair and effective prevention of tax avoidance.

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:

• SCIT/CAT – costs will be awarded if the decision of the revenue officers under appeal is vexatious and frivolous;
• High Court – MYR5,000;
• Court of Appeal – MYR10,000; and 
• Federal Court – MYR30,000.

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, among other factors. The higher the court, the higher the filing fees will be. 

Unfortunately, as explained in 11.1 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 in 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 Lords' sentiments in Woolwich Building Society v Inland Revenue Commissioners (No 2) [1992] 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 against the decision of the revenue officers. The taxpayer should first determine the course of action – ie, to appeal against the assessment raised via 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 warranting 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. 

The economic downturn due to COVID-19 has not deterred the government of Malaysia from initiating civil proceedings against taxpayers to recover taxes. On the contrary, civil recovery proceedings by the government of Malaysia have been higher and stricter 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.