Tax Case Study: Merimen Online Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri (KPHDN)  

The Taxpayer, Merimen Online Sdn Bhd, was granted Multimedia Super Corridor (“MSC“) Malaysia pioneer status tax incentive under Section 6 (1AB) of the Promotion of Investments Act 1986 (“PIA”). Subsequently, the Taxpayer was issued a pioneer certificate, and accorded pioneer status for an initial period of five years, which was subsequently extended a further five years. 

The Taxpayer took the position that 100% of its statutory income was exempted from income tax during the pioneer period pursuant to Section 21C of the PIA. The Taxpayer requested a ruling from the Inland Revenue Board (“IRB“) to confirm the same.  

However, two years later, the IRB responded that under the proviso to Section 21C, the difference between the Taxpayer’s statutory income and value-added income was taxable. No further reasons were provided for the ruling. The IRB subsequently issued assessments against the Taxpayer, along with penalties.  

The relevant portions of Section 21C (1), (2) and 2A of the PIA read as follows: – 

“Computation of income during tax relief period in respect of pioneer status granted under subsection 6(1 AB) 

 21C.  

(1) This section shall apply to a company which has been granted pioneer status under subsection 6(1AB).  

(2) Subject to any condition which may be specified in the pioneer certificate of a company issued under section 7, the income of a pioneer company for each accounting period of its pioneer business shall be computed in accordance with the principal Act by-  

(a) treating each such accounting period as the basis period for the year of assessment which includes the last day of the accounting period in question; and  

(b) ascertaining the income in question as if it were the statutory income from the pioneer business for that year of assessment: 

Provided that in the case of a company that is already operating in Malaysia, the income of the company for each accounting period of its pioneer business shall be value-added income of the company. 

(2A) For the purpose of this section – 

(a) ‘value-added income’ means the statutory income for the basis period for the year of assessment less the inflation adjusted base income…”  

The Court of Appeal addressed three key issues in this case:- 

1. Were the notices of additional assessment for YA 2009 and 2010 time-barred under Section 91 of the Income Tax Act (ITA)? 
   

    

   The IRB may only raise an assessment beyond the time-bar period there is evidence of fraud, wilful default or negligence on the part of the Taxpayer. The burden to bring itself within the exceptions to Section 91(3) lies with the IRB.  

   Applying the reasonable man test and considering the Taxpayer’s past record, the COA held that IRB had failed to discharge that burden. The Taxpayer had voluntarily written to IRB to request for clarification, amended its returns for YA 2009 to 2013 out of good faith to accord with the IRB’s view, and then filed its tax returns for YA 2014 to 2016 in accordance with IRB’s view. It was the IRB that had taken two years to respond with a tax ruling, and a further two years to issue the time-barred assessment. Merely claiming for deductions that are disallowed by the IRB does not automatically constitute negligence on the taxpayer’s part [Ketua Pengarah Hasil Dalam Negeri v. Procter & Gamble (Malaysia) Sdn Bhd  [2022] 1 LNS 754; See: Seiwa Podoyo Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri [2022] CLJU 1226].  

   Thus, any loss of tax was not caused by the Taxpayer’s negligence but by the IRB’s delay. The IRB is not entitled to raise the time-barred assessments. 

2. Is the Taxpayer’s income during the pioneer period for YA 2016 value-added income pursuant to the PIA?

   The Taxpayer argued that its income consists solely of its value-added income. Its inflation adjusted based income was not part of its income, and therefore not taxable.  

   The IRB took the position that the Taxpayer’s income consists of both its value-added income and the inflation-adjusted base income. Only the value-added income was exempted from tax. Thus, the inflation-adjusted base income was subject to tax. 

   The COA held that under Section 3 of the ITA, there can only be liability to tax where there is income. The question of exemption only arises where there is liability to tax.  

   As the Taxpayer had been operating in Malaysia prior to its pioneer status, it clearly fell under the proviso to Section 21C of the PIA. The proviso unequivocally provides that the income of the Taxpayer is its value-added income, which the PIA defines as its statutory income less its inflation adjusted base income.  

   Thus, there is nothing in the PIA that provides that the inflation-adjusted base income is the Taxpayer’s income, or that it is taxable. There is also nothing in the MSC Status Certificate granted to the Taxpayer to require the Taxpayer to pay tax on its inflation-adjusted base income. The wording “100% tax exemption” is clear and self-explanatory.   

3. Was the IRB correct in imposing penalties under Subsection 113(2) of the ITA for YA 2009 to 2013? 
   In light of its answer to the second issue, the COA found no necessity to answer this third issue.