Question 1

White Knight Sdn Bhd (White Knight) acquired the entire share capital of Distress Sdn Bhd
(Distress), a distribution company with unabsorbed losses and capital allowances brought
forward of RM15 million. Following the acquisition, White Knight injected a highly profitable
distribution business and effective business model, together with a strong management team into
Distress, and continued running the merged business, making full use of Distress’s excellent
distribution network and established brand name.
The tax authorities carried out an audit of Distress and denied the utilisation of the unabsorbed
losses and capital allowance brought forward by invoking the general anti-avoidance provisions
in s.140 of the Income Tax Act.

Required:

(a) State the main features and powers of the Director General of Inland Revenue under the
general anti-avoidance provisions contained in s.140. (5 marks)
(b) Set out the arguments that might assist Distress Sdn Bhd in its appeal against the tax
authorities’ invocation of the anti-avoidance provisions.

For this purpose, you may disregard the provisions in the Income Tax Act relating to substantial
changes of shareholders.

Answer:

Anti-avoidance provisions under s.140

Discuss with the students:

Section 140 provides that where the Director General believes that any transaction has the direct
or indirect effect of:

– altering the incidence of tax;

– relieving any person from tax or from having to file a tax return;
– evading or avoiding tax; or
– hindering or preventing the operation of the Act,

Arguments that might be used in an appeal

In appealing against the invocation of the anti-avoidance provision, the following

arguments may be put forward:

a) Commercial substance
Transaction has commercial substance and yields a tax advantage, it should not be branded
as tax avoidance and be disregarded. For instance, if a group of companies is re-structured
to maximise its business synergies, complementary activities, upstream, downstream, or
horizontal integration, distribution network, branding, etc, the tax benefits reaped along the
 way should not be denied because, undeniably, there is commercial substance in such
restructuring.

Legal form
In Malaysia, it has been established in successive judicial pronouncements that in
invoking section 140, the DGIR must observe the rules of natural justice – ie the DGIR
must state the grounds in sufficient detail at the time of raising the assessment so that the
taxpayer is fully apprised of the basis of allegations of tax avoidance and is given
sufficient time to prepare and present his defence. The DGIR must have valid grounds at
the time of invoking section 140, and not merely act on suspicion or conjecture.

Tax mitigation – ‘No man in this country is under the smallest obligation, moral or other,
so to arrange his legal relations to his business or to his property as to enable the Inland
Revenue to put the largest possible shovel into his stores.’ Lord Clyde. This means that a
taxpayer has a right to arrange his affairs so that he pays the lowest tax possible.

Commercial reality
Ordinary course of commercial activities – If a transaction is undertaken in the ordinary
course of commercial activities, not just for tax avoidance, it should prevail. For instance,
by raising working funds from a bond issue rather than a bank loan – thereby incurring
discounts rather than interest – withholding tax is avoided. Raising working funds is in
the ordinary course of commercial activities; adopting one mode vis-à-vis another is a
matter of choice and a function of many business considerations. Therefore, any tax
benefit accruing to such a mode of raising funds should not be viewed negatively and be
denied.

Not a sham(fake)
Despite having proper legal form, the transaction, when stripped of its tax advantage, has
no merits to it – ie it is a sham transaction. In substance, it is nothing but a transaction to
avoid tax. The tax authorities will be justified in disregarding such a transaction and
denying the intended tax deduction, relief or allowance.

Question 2

Your manager, Miss Etika, runs a tax advisory firm in Kuala Lumpur. Among the tax issues she
has encountered in the past week are:
(a) Mr X, a prospective client, stated that he intends to pay income tax of about RM10,000
for the year of assessment 2013 as compared to RM8,000 for the year of assessment
2012. He maintains his sales records on a cash basis and discards his business records
after five years because of a shortage of space.

Discussion Answer :

- Tax avoidance is legitimate, using tax deferral plan.

 - The activities have commercial substance.

- Tax evasion, fabrication, misrepresentation, non-disclosure or partial disclosure, contrivance

and fraud.

- With reference to the intention to pay a pre-determined sum of RM10,000, it suggests

contrivance and hence tax evasion (refuse to pay tax).

- Business income recognised on the accrual basis, when a debt first arises, e.g. on the issue of
the invoice.

- Hence, the cash basis is not acceptable and runs contrary to the provisions [s.24] of the Income
Tax Act. “services rendered or to be rendered at any time in the course of carrying on a
business, the amount of the debt shall be treated as gross income of the relevant person from
the business for the relevant period.”

- Business records must [pursuant to s.82] be retained for seven years from the end of the year to
which the business income relates to enable the income/loss to be ascertained.

(b) Vai Sdn Bhd received a notice of additional assessment for the year of assessment 2014,
dated 1 December 2020, requiring the company to pay additional tax of RM68,000. The
tax return for the said year had been submitted by the due date. In 2018, the Inland
Revenue Board conducted a tax audit on the company, raising some questions and calling
for further information, which was provided within the stipulated time. There were no
further developments until the receipt of the recent additional assessment.

Discuss the time bar and show them how to calculate the time bar.

- DGIR has five years to raise an assessment or additional assessment on a taxpayer.

- The five-year period is not applicable only if the DGIR is able to demonstrate that the
taxpayer has committed fraud, wilful default or negligence.
- The fact that a tax audit was conducted in 2018 does not shift the parameters of the time-
bar.
- The DGIR will not be able to successfully argue that since a tax audit was conducted in
2018, the five-year requirement has been satisfied; neither can the DGIR reasonably
argue that the five-year period runs from 2018 when the tax audit was conducted.
- Vai Sdn Bhd may argue that the tax is not legally raised, therefore the RM68,000 is not
due and payable.

(c) Gifted with a flair for style and fashion, Madam Kool loves to dress up and socialise. She
started to design clothes for her friends, and in time, friends of her friends, to help
prepare them for special functions. Madam Kool does not charge for her services, but the
 grateful friends would buy her expensive gifts and give her ‘ang-pows’ (red packets with
money) in return. The Inland Revenue Board has learned about Madam Kool from the
lifestyle magazines and on 2 December 2013, raised an assessment based on an estimated
income of RM100,000 for the year of assessment 2012. Madam Kool is aggrieved and
wants to know her rights in this matter.

Discuss the appeal process with the students:

- Madam Kool may appeal within 30 days after the service of the notice of assessment
- The appeal must be in writing through a prescribed form.
- The appeal is addressed to the Special Commissioners of Income Tax (SCIT)
- The DGIR shall, within 12 months from the date of receipt of the appeal, review the
appeal.
- As regards the tax raised, Madam Kool is obliged to settle the tax in full within 30 days
of the date of the notice of assessment

Qustion 3

(a) Ten officers from the Inland Revenue Board (IRB) visited the office of Magnolia Sdn
Bhd (Magnolia) this morning without any prior notice. On arrival, they informed
Magnolia’s finance director, Rahmat, that the company is under tax investigation. As you
are the tax adviser of Magnolia, Rahmat contacted you immediately. As he and his
finance team are busy preparing for a corporate transaction, Rahmat is wondering
whether it is possible to ask the IRB officers to come back at a later date.

Required:

Explain the difference between a tax audit and a tax investigation in terms of purpose and
prior notice and whether it is possible for Magnolia Sdn Bhd to request the Inland
Revenue Board (IRB) to defer the investigation procedure.

Answer:

Discuss the difference between tax audit and tax investigation

- A tax audit is carried out by the Inland Revenue Board (IRB) to ensure voluntary
compliance with the tax laws and regulations.
- taxpayer selected for an audit will be notified.
- A taxpayer may request for such an audit to be deferred

- A tax investigation, a surprise inspection visit

- conducted with the purpose of gathering evidence
- to ascertain the actual tax liability of the taxpayer.
- taxpayer would not receive any notice of the visit
(b) BungaRaya Sdn Bhd (BungaRaya) is a resident company which makes up its accounts
annually to 30 November. You have been appointed as the tax agent for the company
effective from the year of assessment 2018. As three key finance personnel resigned last
month, BungaRaya does not expect its audited accounts for the financial year ended 30
November 2017 to be finalised and signed by 30 June 2018. As the deadline for the tax
return submission is approaching, the company has informed you that it plans to submit
the annual tax return for the year of assessment 2018 even though the audited accounts
will not be signed by the tax submission deadline.

Required:
Explain the consequences for BungaRaya Sdn Bhd of filing its annual tax return for the
year of assessment 2018 without the signed audited accounts and the action the company
can take to avoid such consequences.

- return furnished by a company should be based on the accounts audited

- the tax return of a company which is filed without signed audited accounts will not be
valid as it is not a return [s.77A].
- IRB can impose penalties for failure by the company to furnish a return or give notice of
chargeability
- In addition, if the company proceeds to file its tax return without audited accounts, it
would not be possible to amend the return.
- To expedite the finalisation and signing of the audited accounts before the tax submission
deadline.
- To apply to the IRB for an extension of the time to file its tax return.