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High Court Rules Revenue Interpretation Of Tax Exemption Under Paragraph 33A Is Flawed






Recently, the High Court in Notable Vision Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2024] MLJ 173 held that the taxpayer was entitled to the tax exemption available under paragraph 33A(1) of Schedule 6 of the Income Tax Act 1967 (ITA).

 

This alert discusses the key aspects of this case.

 

Brief Facts

 

The taxpayer, a special purpose vehicle, held by TMF Trustee Malaysia Berhad, was primarily involved in implementing and carrying out asset-backed medium-term notes (MTN) arising from the securitisation of a commercial property, with a nominal value of up to RM750 million. Pursuant to the securitisation transaction, the taxpayer had issued Class A Senior MTNs, Class B and Class C Junior MTNs to a non-resident company (FHTM) in Singapore to finance the acquisition of a piece of land together with a commercial property known as The Westin Kuala Lumpur (the Property) from JBBH (i.e. the Originator).

 

The transaction in relation to the asset-backed securitisation transaction can be summarised as follows:

 


Pursuant to paragraph 33A(1) of Schedule 6, the taxpayer did not subject the interest paid to FHTM to income withholding tax. Paragraph 33A(1) provides that:

 

“(1) Interest paid or credited to any company not resident in Malaysia, other than such interest accruing to a place of business in Malaysia of such company –

     

(a)  in respect of securities issued by the Government; or

 

(b)  in respect of sukuk or debenture issued in Ringgit Malaysia, other than convertible loan stock, approved or authorised by, or lodged with, the Securities Commission.

 

(2)  The exemption under subparagraph (1) shall not apply to –

 

(a) interest paid or credited to a company in the same group; or

 

              …”

 

It must be noted that the tax exemption under paragraph 33A(1) does not apply to interest paid or credit to a company in the same group as stated in paragraph 33A(2) of Schedule 6. After initially agreeing to the tax exemption via a letter dated 5.7.2018, the Revenue later reversed its decision in a letter dated 24.6.2020. The Revenue claimed that the taxpayer, JBBH and FHTM were companies within the same group according to Section 2(4)(b) read together with Section 139 of the ITA and thus, were not eligible for the said exemption.

 

The taxpayer initiated judicial review proceedings before the High Court to challenge the Revenue’s decision contained in its letter dated 24.6.2020.

 

The Revenue’s Position

 

The Revenue contended that the taxpayer, JBBH and FHTM were part of the same group of companies by reading together Section 2(4)(b) of the ITA (which establishes the criteria for determining companies within the same group) with Section 139 of the ITA, which defines "controlled companies”. Section 2(4) of the ITA reads:

 

          “Where –

 

(a)  two or more companies are related within the meaning of section 6 of the Companies Act 1965;

(b)  a company is so related to another company which is itself so related to a third company;

(c)   the same persons hold more than fifty per cent of the shares in each of two or more companies; or

(d)  each of two companies is so related to at least one of two or more companies to which paragraph (c) applies,

 

all the companies in question are in the same group for the purposes of this Act.”


In a letter dated 24.6.2020, the Revenue concluded that paragraph 33A did not apply because it considered the taxpayer to be a group company of FHTM and JBBH for several reasons:

 

(a)        The relationship between the taxpayer and FHTM was identified as that of the "immediate holding company" of the taxpayer in the audited accounts for the YAs 2016 to 2018. Notably, interest paid by the taxpayer was disclosed as "interest of MTNs charged by immediate holding company" in the audited accounts.

 

(b)    FHT's annual report indicated that both FHTM and the taxpayer were wholly owned by FH-REIT, which in turn was wholly owned by FHT.

 

(c)    JBBH was a wholly owned company of FHMPL. The taxpayer received rental income from JBBH and this transaction was regarded as “significant related party transactions” in the audited accounts for the YAs 2016 to 2018.

 

(d)    All financial and management controls were with the FHT group. This was evident based on director resolutions which stipulated that FCLP (a subsidiary of FHT Group) was responsible for handling bank account transactions for the taxpayer. Under the MTN programme, FCLP acted as “Services” which will guarantee payment commitment by the originator, JBBH, whilst TMFGS only acted as an administrator.

 

Based on the factors mentioned above, the Revenue interpreted FHTM's control over the financial and managerial aspects of the taxpayer, along with JBBH's connection to FHMPL, as indications of “companies within the same group”. Consequently, the Revenue concluded that FHTM, JBBH and the taxpayer met the criteria to be classified as “companies within the same group”.

 

The Taxpayer’s Position

 

The taxpayer contended that the Revenue's reliance on the concept of control as defined in Section 139 of the ITA was misplaced. Reference should be made to Section 2(4), which specifically addresses the determination of companies considered to be in the same group for the purposes of paragraph 33A(1). The Revenue cannot in determining who are to be considered companies in the same group, rely on Section 139 of the ITA, which is a provision for determining whether a person shall be taken to have control.

 

According to Section 2(4), group companies are determined based on the 50% shareholding threshold or reference to Section 6 of the repealed Companies Act 1967, which is pari materia to Section 7 of the Companies Act 2016. Under this provision, companies are related if one is the holding company of another, a subsidiary of another, or a subsidiary of the holding company of another.

 

Additionally, Section 5(1) of the repealed Companies Act 1965 (pari materia to Section 4(1) of the Companies Act 2016) defines a subsidiary based on control of the composition of the board of directors, voting power, or issued share capital. Control of the board of directors is further defined in Section 5(2) (which is pari materia to Section 4(2) of the Companies Act 2016), where a corporation's board is considered controlled if another corporation can appoint or remove all or a majority of the directors.

 

Relationship between the taxpayer and JBBH

 

Despite being a wholly owned subsidiary of FHMPL, JBBH does not possess any direct or indirect equity stake in the taxpayer and lacked the ability to effectively influence the decisions made by the taxpayer regarding the securitisation transaction. This aligns with paragraph 6.03 of the Offering of Asset-backed Securities by the Securities Commission (ABS Guidelines), which prohibits an originator such as JBBH from holding any equity stake, directly or indirectly, in an SPV (the taxpayer). As a result, the taxpayer and JBBH cannot be considered part of the same group of companies.

 

Relationship between the taxpayer and FHTM

 

The fact remains that the sole shareholder of the taxpayer was TMF Trustees. The reason why FHTM was regarded as the taxpayer’s immediate holding company was due to the requirement of accounting, namely, the Malaysian Financial Reporting Standards (“MFRS”) 10. According to MFRS 10, entities are mandated to consolidate financial statements of those under their control. Control, in this context, is determined by the potential to influence variable returns based on the investee's performance. Consequently, the taxpayer’s auditor inferred that FHTM exercises control over the taxpayer due to the variable interest returns it received from the asset-backed MTNs issued by the taxpayer.

 

There is a plethora of case law that show that accounting treatment is merely a guide and where there is conflict, the express provision of the ITA must prevail (see Ketua Pengarah Hasil Dalam Negeri v Dato’ Hanifah Noordin (2003) MSTC 4007).

 

It is evident that the requirements outlined in Section 2(4) of the ITA for companies to be considered within the same group are fundamentally different from those stipulated in MFRS 10. The ITA specifically refers to the Companies Act 1965, without any mention of financial reporting standards. The Companies Act 1965 emphasises control over the composition of the board of directors and more than half of the voting power. Conversely, MFRS 10 focuses on the power to direct activities of the investee significantly affecting the investor's variable returns and the investor's ability to use such power. These criteria represent separate and distinct tests—one concerning control over governance structures, and the other over operational activities.

 

In light of these differences, the taxpayer denied that there is any form of "control" by the taxpayer over JBBH and FHTM, and vice versa.

 

The High Court’s Decision   

 

The High Court ruled in favour of the taxpayer. A significant aspect of the ruling was the classification of the impugned letter as a decision subject to review. Despite the Revenue's assertion that the letter lacked finality, the Court disagreed. Contrary to the Revenue's position, the Court found the letter to exhibit finality, especially considering its effect on the taxpayer’s rights.

 

The Court then scrutinised the Revenue's reliance on Section 139, where the Court commented that the approach adopted by the Revenue lacked legal support, particularly in the context of interpreting paragraph 33A(1) and paragraph 33A(2) of  Schedule 6. These provisions provide income tax exemption for interest paid to non-resident companies, excluding those within the same group. Importantly, they do not address the concept of one company exerting control over another.

 

The Court asserted that the Revenue's attempt to apply Section 139 to interpret paragraph 33A constituted a legal error. It amounted to rewriting the statutory provision, a function beyond the authority of the Revenue. Drawing on the well-established principle articulated in Martego Sdn Bhd v. Arkitek Meor & Chew Sdn Bhd & Anor Appeal [2019] 5 AMR 516, the Court emphasised that the one cannot alter legislative intent or introduce extraneous elements into statutory provisions. The relevant excerpt from the Court’s ruling is instructive:

 

“[56]  In the circumstances, the Revenue’s attempt to rely on s 139 of ITA to give meaning to para 33A of Schedule 6 is wrong in law. It amounts to rewriting para 33A. It cannot do that.

 

[57]  The Federal Court in Martego Sdn Bhd v. Arkitek Meor & Chew Sdn Bhd & Anor Appeal [2019] 5 AMR 5

16 FC held that it is a well-established principle of interpretation that the court cannot rewrite, recast or reframe the legislation because it has no power to do so. The court cannot add words to a statute or read words that are not there. By importing s 139 of the ITA to para 33A of Schedule 6 of the ITA, the Revenue did just that.

 

[58]  I therefore respectfully agree with the applicant’s contention that the decision is tainted with illegality and consequently amenable to judicial review.”

 

Conclusion

The High Court’s decision once again highlights that the Revenue cannot arbitrarily raise assessments based on their own interpretation of the law, particularly when such interpretation deviates from statutory provisions. The Court's scrutiny of the Revenue's reliance on Section 139 of the ITA when interpreting paragraph 33A of Schedule 6 serves as a reminder that statutory provisions must be interpreted within their intended scope and cannot be expanded or modified to suit administrative convenience.

 

 15 April 2024

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