Budget 2021 was unveiled with various commentaries (on a macro basis) from experts across various industries. This feel-good budget with various tax goodies proposed will continue for a little while. However, the nation’s tax revenue has to be safeguarded. The devil is in the details.
From a risk management standpoint, there are several proposed changes that one needs to be mindful of.
While our tax law only allows deduction for business expenses that are of revenue in nature, it permits a claim of capital allowance on qualifying capital expenditure (QCE), which comprises industrial buildings such as factories as well as plants and machineries. While machinery can be easily identified, it is “plant” that causes debates and disputes.
Prior to year of assessment (YA) 2021, “plant” has not been defined. Various case law precedents have been relied upon. In the famous case of Yarmouth v France (1887), “plant” includes whatever apparatus is used by a businessman for carrying on his business — not his stock-in-trade that he buys or makes for sale, but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in his business.
Interestingly, the Malaysian courts have held that for a bank, core deposit and credit card customer databases qualify as “plant”. Multi-storey car parks were also identified as a “plant” for car park operators. Meanwhile, a taxpayer in the business of providing telecommunication towers has also managed to argue that a telecommunication tower is a “plant”. Ultimately, due consideration must be given to the particular industry concerned, as well as the specific circumstances of the taxpayer’s business.
Effective YA 2021, “plant” is defined as an apparatus used by a person for carrying on his business, but does not include building, intangible asset or any other asset used and functions as a place within which a business is carried on. Hence, taxpayers have to exercise greater care in claiming capital allowance given the proposed exclusions. Tax litigations are expected to continue.
With December around the corner, it is also timely for taxpayers to plan their capital expenditure. Capital allowance on QCE can be claimed as long as the assets are incurred, used and owned by the taxpayers.
Reinvestment allowance (RA) is given to companies that incur capital expenditure on expansion, diversification, automation or modernisation. However, many companies involved in manufacturing and selected agricultural activities would have exhausted the first 15 years of the RA incentive period and potentially the additional three years of the RA incentive period granted for YAs 2016 to 2018. The proposed extension of this special RA for YAs 2020 to 2022 is welcomed. Since YA 2020 is the first year, this presents an opportunity for taxpayers to revisit their expansion plan. The key point here is to ensure that the claimant is able to demonstrate that all conditions are met, as RA claim is an area that the tax authorities would focus on in tax audits.
In tax law, the fundamental position is that the taxpayers must “pay first, appeal, or talk later”, though there are special circumstances where the Malaysian courts allowed a stay, albeit rare. From Jan 1, 2021, any proceedings against the government or the tax authorities by the taxpayers under any other written law shall not relieve any person from payment of any tax or any debt or other sum, for which he is or may be liable to pay.
Time will tell as to whether the Malaysian courts would maintain that they have the jurisdiction to grant a stay order. Given this, perhaps it is best for taxpayers to continue investing in time and resources at the dispute resolution level, with a view to achieving a win-win result before resorting to court appeal.
Effective Jan 1, 2021, the principal legislation reinforces the ability of the taxmen to disregard and re-characterise a structure in a related-party transaction. The proposed law could be invoked when it is believed that the economic substance of that transaction differs from its form. While the form and substance of that transaction are the same, tax authorities could still make adjustments if the transaction were to differ from those adopted by independent persons behaving in a commercially rational manner.
For example, where a parent company grants a loan to a subsidiary that involved only payment of interest without the principal, tax authorities may re-characterise the loan as equity. If so, the interest will not rank for a deduction.
Under the existing tax law, transfer pricing (TP) adjustment would only lead to a penalty if the taxpayer is in a tax payable position. Effective Jan 1, 2021, a surcharge of not more that 5% of the TP adjustment is proposed regardless of the tax position. This proposed special penalty that includes imprisonment for the failure to furnish contemporaneous TP documentation should also not be taken lightly.
All in all, we expect tax authorities to intensify their tax audit activities and rightfully so, especially in the case of tax evasion. The board of directors must take cognisance of the above proposals and implement the necessary measures to manage the tax risk. Where appropriate, voluntary disclosures on past errors can be considered.
Capital allowance maximisation exercise can continue with care. Greater emphasis must be given to related-party transactions and let a solid TP documentation be in place as it is akin to a lightning arrester, which would save lives. With all the changes in domestic and international tax, such as the anti-base erosion and profit shifting rule, Pillar 1 and Pillar 2, the days of aggressive tax planning are over. The focus should instead be on compliance and risk management.
Tan Hooi Beng and Tan Chia Woon are deputy tax leader and tax associate director of Deloitte Malaysia respectively. The above views are their own.