ey tax alert · sdn bhd and cb ventures sdn bhd) acquired 56,025 units of shares in bioford. 9...

EY Tax Alert – Vol. 21 Issue no. 19 | 10 September 2018 1

Malaysian developments

Case law on whether a property development constitutes a “real property company” pursuant to Paragraph 34A of Schedule 2 of the RPGTA

In Ketua Pengarah Hasil Dalam Negeri v Continental Choice Sdn Bhd

& Anor (2018) MSTC 30-165, the High Court (HC) overturned the

decision of the Special Commissioners of Income Tax (SC) (see Tax

Alert No. 23/2017) and delivered a judgment in favour of the Inland

Revenue Board (IRB). The HC concurred with the SC that the HC

precedent in Binastra Holdings Sdn Bhd v Ketua Pengarah Hasil

Dalam Negeri (2002) MSTC 3897 (Binastra) was correctly relied on

by the SC as the decision was binding on them. The HC however

stated that the Binastra judgment was not binding on another HC

and so the HC could proceed to make its own decision. On that

note, the HC disagreed with the SC’s position in adopting a

purposive interpretation of Paragraph 34A of Schedule 2 of the

Real Property Gains Tax Act (RPGTA) and thus holding that a

property development company would not be a real property

company (RPC). The HC held that the law as laid out in Paragraph

34A must be given a strict interpretation as the words are clear and

unambiguous. The HC therefore held that the shares disposed by

the taxpayers’ were chargeable assets and the gains were subject

to real property gains tax (RPGT).

An overview of the case and discussion of the issues are set out

below.

EY Tax Alert Vol. 21 - Issue no. 19

10 September 2018

Malaysian developments

• Case law on whether a property

development constitutes a “real

property company” pursuant to

Paragraph 34A of Schedule 2 of the

RPGTA

Overseas developments

• UK Government’s guidance on

preparing for “No Deal” on Brexit

outlines indirect tax implications

• Poland publishes legislation on

Innovation Box

EY Tax Alert – Vol. 21 Issue no. 19 | 10 September 2018

2 2

Overview

The chronology of events are as follows:

7 January 2004

Bioford Development Sdn Bhd (Bioford) was incorporated

8 September 2004

Bioford purchased property from Mishika (M) Sdn Bhd and Maharta Sdn Bhd, for a consideration of RM14.5 million. After the purchase of the property, the defined value of Bioford’s real property exceeded 75% of its total tangible assets. Based on the above, the IRB found that Bioford was a “real property company” within the ambit of Paragraph 34A(6) of Schedule 2 of the RPGTA, commencing from the date of the said purchase of property by Bioford.

18 October 2004

The taxpayers (Continental Choice Sdn Bhd and CB Ventures Sdn Bhd) acquired 56,025 units of shares in Bioford.

9 August 2005

Continental Choice Sdn Bhd and CB Ventures Sdn Bhd disposed of their shares to Chean Ah Wah and Chean Chuan Fatt respectively. Thereafter, the taxpayers filed the relevant forms (including RPGT form, as well as supporting documents such as Sale & Purchase Agreement (property), Sale & Purchase Agreement (shares), computation and relevant bills) vide their solicitors, to err on the side of caution, despite being of the view that the gains from the sale of the shares were not subject to RPGT. Upon request by the IRB, the taxpayers also supplied additional documents, including Forms 24 and other supporting documents.

19 February 2008

The IRB issued a Notice of Assessment to CB Ventures Sdn Bhd, stating the RPGT payable.

23 June 2011

The IRB issued a Notice of Assessment to Continental Choice Sdn Bhd, stating the RPGT payable.

As the taxpayers did not agree with the

assessments, they filed notices of appeal to the SC.

The SC held in favour of the taxpayer. The IRB

appealed the SC’s decision, to the HC. The issues

for the HC’s determination were as follows.

Whether the SC was correct in deciding that:

1. the HC decision in Binastra was still good law

despite being reversed by the Court of

Appeal (CA); and

2. the CA decision could not be applied in this

case since there was no written judgment

The HC affirmed the SC’s judgment that the HC’s

decision in Binastra remained good law, and a

binding precedent to the SC, as the doctrine of

judicial precedent only applied in circumstances

where there was a written judgment produced by a

higher court. In this case, the CA’s judgment in

Binastra was not binding on the Court, as there was

no ratio decidendi or legal principles extracted from

the CA’s judgment.

Notwithstanding the above, the HC also found that

the HC’s decision in Binastra was not binding on

another HC of a similar jurisdiction. Therefore, the

HC in this instance could proceed to make its own

judgment.

Whether the SC was correct in deciding that:

3. Paragraph 34A of Schedule 2 of the RPGTA

must be given a purposive, rather than

literal, interpretation;

4. Bioford is not a “RPC” within the ambit of

Paragraph 34A; and


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5. the gains made by the Respondents from the

disposal of its shares in Bioford are not

subject to RPGT

The HC disagreed with the SC’s position in adopting

a purposive interpretation of Paragraph 34A, and

was of the view that the literal approach should

instead be adopted. The HC referred to the Federal

Court decision in Palm Oil Research and

Development Board Malaysia & Anor v. Premium

Vegetable Oils Sdn Bhd [2004] 2 CLJ 265, where it

was stated that “The correct approach to be

adopted by a court when interpreting a taxing

statute is ……

First, the words are to be given their ordinary

meaning. They are not to be given some other

meaning simply because their object is to frustrate

legitimate tax avoidance devices ……….

Secondly, ‘… one has to look merely at what is

clearly said. There is no room for any intendment.

There is no equity about a tax. There is no

presumption so to a tax. Nothing is to be read in,

nothing is to be implied. One can only look fairly at

the language used.’ ……….

Thirdly, the object of the construction of a statue

being to ascertain the will of the legislature, it may

be presumed that neither injustice nor absurdity was

intended, if therefore a literal interpretation would

produce such a result, and the language admits of

an interpretation which would avoid it, then such an

interpretation may be adopted.

Fourthly, the history of an enactment and the

reasons which led to its being passed may be used

as an aid to its construction.

In this case, the HC found that as the law set out in

Paragraph 34(6) was unambiguous, the words could

be given their ordinary meaning, and the test to

determine whether or not Bioford was a RPC was

clear. The intention of the taxpayers in acquiring

the shares of Bioford and the primary business of

Bioford, were not relevant considerations in

determining whether Bioford was a RPC.

Furthermore, no injustice or absurdities would arise

from construing Paragraph 34A in its ordinary and

natural meaning.

In addition, in line with the fourth approach, the HC

was of the view that the purposive approach (which

was taken by the SC), was only to be adopted in a

situation where the provision in the taxing statute

does not provide plain and unambiguous language.

The intention behind the introduction of a provision

may be used to aid its interpretation in cases of

ambiguity. However, in this case, it would not be

applicable, as the test of a RPC in Paragraph 34A

was so clearly worded that there was no ambiguity.

In conclusion, based on the facts of the case, the HC

held that Bioford was a RPC pursuant to Paragraph

34A of Schedule 2 of the RPGTA, and hence the

gains from the disposal of its shares were subject to

RPGT.

Overseas developments

UK Government’s guidance on preparing for “No Deal” on Brexit outlines indirect tax implications

On 23 August 2018, the United Kingdom (UK)

Government published its first batch of technical

notices setting out some of its unilateral actions and

recommended steps for businesses in a “No Deal”

scenario on Brexit. This scenario would be one

where the UK leaves the European Union (EU) on 29

March 2019 without an agreed EU Withdrawal

Agreement and without a framework in place for a

future relationship between the UK and the EU.

However, in such a scenario, the Government does

expect that some agreements can still be reached

with the EU given the number of interdependencies

between the UK and the EU’s respective

contingency plans.

This Alert focuses on the notices explaining how the

UK Government intends to operate its customs and


4 4

value added tax (VAT) border from 29 March 2019

absent a deal.

The steps announced in these notices will help

reduce some friction in the event of a No Deal

scenario mostly for companies that import to the

UK. In particular, allowing for VAT to be dealt with

in VAT returns rather than to be paid at the border

will reduce cash flow impacts, particularly for

smaller firms; and a selective approach to customs

checks will help reduce the risk of delays and costs

at the border.

While helpful, these notices can only cover some of

the impact businesses face in a No Deal scenario

and of course, only cover the UK perspective. UK

customs waving through a shipment will have

limited effect if that shipment is stopped on the

EU side and there are delays on that side. The

Government is right to challenge the EU to

reciprocate some of these arrangements to avoid

the most damaging friction, not least for EU-based

firms, should a deal not happen.

The notices published represent about a third of the

total notices the Government intends to publish by

the end of September. Some of the critical issues to

reaching a full agreement between the UK and the

EU, such as the ”border” between Northern Ireland

and the Republic of Ireland are the subject of

current negotiations and in the notices, the

UK Government simply reiterates that it will be

working on a solution to the Irish border issue with

the EU.

Customs and trade

Customs function development

All trade between the UK and the EU will require

customs declarations as well as safety and security

declarations. It is clear that businesses will need to

develop and expand their customs knowledge,

particularly businesses that have no experience in

imports and exports outside the EU.

All current trade of goods between the EU and UK

will need to be classified as per the existing HM

Revenue & Customs (HMRC) customs tariff. No

immediate changes will be made to the existing

commodity codes in use, but import licenses or

supporting documentation may be required. This

allows businesses confidence in the requirements

that need to be met and provides the ability to

evaluate their existing master data against the

requirements.

Businesses need to evaluate between both their

customers and suppliers which Incoterms best fit

for trade bearing in mind these contractual

decisions will now directly impact who will act as the

importer or exporter along with all the requisite

administration, duty costs and compliance.

The UK Government invites businesses to consider

using customs special procedures which could allow

reliefs of suspensions of duties for goods traded

with the EU. These come with controls requirements

and potential IT demands to be met that typically

have three-six month lead times to be met, meaning

businesses need to make those evaluations now if

they want to be effective in March.

Future tariff impacts

The UK intends to continue offering unilateral

preferences to developing countries and to

transition all existing EU free trade agreements (EU

FTAs). By omission this means exporters using FTAs

may lose the preferential treatment. The Most

Favored Nation rates will be applicable for trade

between the EU and the UK, however, the UK may

choose to apply new duty rates that differ to the

EU.

Export controls

Dual use items primarily require no license to move

between the UK and EU currently. If the UK leaves

the EU without a deal, licenses issued in the country

of export would be required for trade of these

goods. Existing export licenses for dual use goods

issued in the UK would no longer be valid if


5

exporting from an EU Member State, a new EU

license would be needed and vice versa if exporting

from the UK using an EU license.

Other points

UK excise goods moving under the Excise

Movement and Control System (EMCS) will now only

be allowed for domestic movements. Businesses

importing from the EU will need to make use of a

registered consignor to enter goods into suspension

and subsequently EMCS in a no-deal scenario.

For businesses producing and processing organic

foods, UK businesses would only be able to export

to the EU if they were certified by an organic

control body recognized and approved by the EU to

operate in the UK, however UK control bodies are

not permitted to make these applications until the

UK becomes a ”third country” and approval can

take up to nine months. The UK Government will

work with the EU for a solution.

The UK Government has applied to re-join the

Common Transit Convention which will facilitate

cross border movement and which will be a critical

tool especially with goods movements to Ireland.

In respect of trade remedies, the UK will review all

existing measures applied by the EU and is

developing a new system called the Trade Remedies

Authority for businesses to raise complaints for

investigation after Brexit.

VAT

The Government has confirmed the continuation of

a VAT system after the UK leaves the EU and that

the VAT rules relating to UK domestic transactions

will continue to apply to businesses as they do now.

The technical notice highlights the VAT changes

that businesses will need to prepare for when:

• Importing goods from the EU

• Exporting goods to the EU

• Supplying services to the EU

UK businesses importing goods from the EU

Accounting for import VAT on goods imported into

the UK

Postponed accounting will be introduced for import

VAT on goods brought into the UK. This means that

UK VAT registered businesses that import goods to

the UK will be able to account for import VAT on

their VAT return, rather than paying import VAT on

(or soon after) the time that the goods arrive at the

UK border. This will result in significant cash flow

savings for business as the import VAT will be offset

in the VAT return, rather than being paid and then

recovered.

Postponed accounting will apply both to imports

from the EU and non-EU countries. Customs

declarations and the payment of any other duties

will still be required.

VAT on goods entering the UK as parcels sent by

overseas businesses

If the UK leaves the EU without an agreement then

Low Value Consignment Relief will no longer apply

to any parcels arriving in the UK, and all goods

entering the UK as parcels sent by overseas

businesses will be liable for VAT (unless they are

already relieved from VAT under domestic rules).

For parcels valued up to and including £135, a

technology-based solution will allow VAT to be

collected from the overseas business selling the

goods into the UK. Overseas businesses will charge

VAT at the point of purchase and will be expected to

register with HMRC and account for VAT. On goods

worth more than £135 sent as parcels, VAT will

continue to be collected from UK recipients in line

with current procedures for parcels from non-EU

countries.

VAT on vehicles imported into the UK

Businesses should continue to notify HMRC about

vehicles brought into the UK from abroad as they do

now, using the Notification of Vehicle Arrival


6 6

Procedures (NOVA) system which will continue to

be used for this purpose.

Import VAT will be due on vehicles brought into the

UK from EU Member States. Certain reliefs will also

be available as with current imports of vehicles from

non-EU countries. Businesses will need to continue

to use NOVA to verify that VAT is correctly paid on

imported vehicles.

UK businesses exporting goods to the EU

UK businesses exporting goods to EU consumers

Distance selling arrangements will no longer apply

to UK businesses and UK businesses will be able to

zero rate sales of goods to EU consumers. EU

Member States will treat goods entering from the

UK as imports with associated import VAT and

customs duties due when the goods arrive into the

EU.

UK businesses exporting goods to EU businesses

VAT-registered UK businesses will continue to be

able to zero-rate sales of goods to EU businesses.

EC sales lists will not be required. There will be a

need for evidence to prove that goods have left the

UK, to support the zero-rating of the supply.

UK businesses supplying services into the EU

Place of supply rules for UK businesses supplying

services into the EU

The main VAT ”place of supply” rules will remain

the same for UK businesses. The rules around

”place of supply” will continue to apply in broadly

the same way that they do now, subject to the

points below.

For UK businesses supplying digital services to

non-business customers in the EU the ”place of

supply” will continue to be where the customer

resides. VAT on services will be due in the EU

Member State where the customer is resident.

For UK businesses supplying insurance and

financial services, input VAT deduction rules for

financial services supplied to the EU may be

changed. We will provide an update once more

information is available.

Other points

UK businesses selling their own goods in an EU

Member State to customers in that country will be

required to register for VAT in that EU Member

States where sales are made in order to account for

the VAT due in that country.

The technical notice recognizes that the impact on

the Travel Operators Margin Scheme is still not

clear. HMRC has been engaging with the travel

industry and will continue to work with businesses

to minimize any impact.

Businesses that sell digital services to consumers in

the EU will be able to register for the Mini One Stop

Shop (MOSS) non-union scheme. Businesses that

want to continue to use the MOSS system will need

to register for the VAT MOSS non-Union scheme in

an EU Member State. This can only be done after

the date the UK leaves the EU. The non-union MOSS

scheme requires businesses to register by the 10th

day of the month following a sale.

UK businesses will need to use the existing VAT

refund processes for non-EU businesses. This varies

across the EU and businesses will need to make

themselves aware of the processes in the individual

countries where they incur costs and want to claim

a refund.

UK businesses will be able to continue to use the EU

VAT number validation service to check the validity

of EU business VAT registration numbers but UK

registration numbers will not be a part of it. HMRC

is developing a service so that UK VAT numbers can

continue to be validated.


7

Next steps

The UK Government has repeated that it believes a

No Deal scenario remains unlikely given the mutual

interests of the UK and the EU in securing a

negotiated outcome. Negotiations covering both the

future UK/EU relationship and remaining points on

the Withdrawal Agreement will continue on a

regular basis in the coming weeks. The next

meeting of the EU Council is set for 17-18 October

2018 and the UK’s technical notices and any

responses to them will be part of the background to

the negotiations leading up to that meeting.

Businesses will hope for more certainty as to the

way forward to emerge from these negotiations,

preferably at the earliest opportunity.

Poland publishes legislation on Innovation Box

On 24 August 2018, the Polish Minister of Finance

published the much anticipated draft legislation

introducing the Innovation Box regime (IBR) into the

Polish tax system. The IBR is aimed at incentivizing

innovative research and development (R&D)

activities by taxing profits from qualifying

intellectual property rights (qualifying IP) at a

preferential 5% tax rate. The incentive is based on

the Organisation for Economic Co-operation and

Development (OECD) recommendations regarding

the modified nexus approach, which intends to link

the relief to the proportion of R&D in Poland.

The preferential 5% tax rate will apply to the

“qualified income” obtained from the qualifying IP

created, developed or improved by a taxpayer as

part of his R&D activity.

The new IBR is a further addition to Poland’s

existing tax landscape to encourage investment in

innovation activities in Poland. At present, Poland

already offers an R&D incentive, which allows for a

double deduction for tax purposes of certain

qualifying costs incurred in relation to a taxpayer’s

R&D activities. While the existing R&D incentive

refers to the cost side of the taxpayer’s activities,

the proposed Innovation Box relief will apply to

income earned from the qualifying IP developed as

a result of the taxpayer’s R&D activities.

Poland has already established itself as a popular

destination for Shared Services Centers and R&D

activities of many international groups. This is due

inter alia to the availability of skilled workforce and

cost competitiveness. Therefore, it is expected that

for many multinational groups benefitting from the

nexus-based incentive in Poland this will be a

welcomed development.

The proposed relief is to enter into force on 1

January 2019.

What IP qualifies?

Qualifying IP rights include:

• Patents

• Extensions of patent protection

• Protected utility models

• Registered industrial designs

• Registered topographies of integrated circuits

• Extensions of patent protection for medicinal

products and plant protection products

• Registered medicinal and veterinary products

admitted to trading

• Registered new varieties of plants and animal

breeds

• Rights to computer program

protected under national or international law.

What income qualifies?

The new provision contains a list of the types of

income from qualifying IP rights that are in scope of

the proposed relief:

• Fees and royalties under license agreement for

qualifying IP

• Income from sale of qualifying IP

• Income from the qualified IP embedded in the

sale price of products and services


8 8

• Compensation for infringement of rights arising

from qualifying IP obtained in litigation,

including court proceeding or arbitration

Calculation of the tax base

The amount that will be subject to the preferential

5% tax rate i.e., the qualified income amount,

corresponds to the amount calculated as the

income obtained from the qualifying IP right

multiplied by the ratio established in accordance

with the following formula based on the OECD

recommendations:

(a + b) x 1.3

a + b + x + d

Where the individual letters stand for costs actually

incurred by the taxpayer in respect of:

a. R&D activity carried out directly by the taxpayer

related to the qualifying IP right

b. acquisition of R&D results related to the

qualifying IP right from an entity unrelated to

the taxpayer, other than those mentioned in

point d

c. acquisition of R&D results related to the

qualifying IP right from an entity related to the

taxpayer, other than those mentioned in point d

d. the acquisition by a taxable person of the

qualifying IP right

In the case when the value of the ratio calculated in

accordance with the above formula is greater than

1, it is assumed to be 1.

Based on the above formula, the more R&D activity

that is performed by the taxpayer himself or

outsourced to unrelated parties, the higher the

amount of the relief the taxpayer will be entitled to

claim under the new IBR.

The above results from the nexus approach

formulated in accordance with the OECD

recommendations, according to which revenues

related to IP can be taxed on a favorable basis to

the extent that specific IP-generating income is the

result of R&D activity carried out by the respective

taxpayer.

Documentation requirements

Taxpayers intending to benefit from the preferential

taxation will have certain additional documentation

requirements. These taxpayers will be obliged to

keep accounting records, based on which it will be

possible to distinguish each qualifying IP right and

determine the revenues, tax deductible costs, and

income (loss) attributable to each of the qualifying

IP rights.

In certain cases, an alternative approach may be

available to taxpayers who earn income from more

than one qualified IP right and it is not possible to

determine the income streams and costs applicable

to each of the qualifying IP rights. Under this

alternative approach, it may be possible to

determine the income applicable to all qualifying IP.

Similarly, it may be possible to track income and

costs to the same type of products or services, or

the same group/family of products or services, in

which the qualifying IP asset was used.

Next steps

Companies operating in the field of innovation and

technology, and especially multinationals with an

R&D presence in Poland, should become familiar

with the current IBR proposals and consider their

application to the company’s operations.


9

Contact details

Principal Tax contacts Yeo Eng Ping [email protected] +603 7495 8288 Amarjeet Singh [email protected] +603 7495 8383

Global Compliance and Reporting Simon Yeoh [email protected] +603 7495 8247 Julian Wong [email protected] +603 7495 8347 Datuk Goh Chee San (based in Sabah) [email protected] +6088 235 733 Janice Wong [email protected] +603 7495 8223 Julie Thong [email protected] +603 7495 8415 Lee Li Ming (based in Johor) [email protected] +607 334 1746 Liew Ai Leng [email protected] +603 7495 8308 Koh Leh Kien [email protected] +603 7495 8221 Mark Liow (based in Penang) [email protected] +604 263 6260

People Advisory Services Tan Lay Keng [email protected]

+603 7495 8283 Irene Ang [email protected] +603 7495 8306

Christopher Lim [email protected] +603 7495 8378 Business Tax Services Amarjeet Singh [email protected] +603 7495 8383 Farah Rosley [email protected] +603 7495 8254 Robert Yoon [email protected] +603 7495 8332 Wong Chow Yang [email protected] +603 7495 8349

Transaction Tax Services Yeo Eng Ping [email protected] +603 7495 8288 Sharon Yong [email protected] +603 7495 8478

International Tax Services

Anil Kumar Puri [email protected] +603 7495 8413

Asaithamby Perumal [email protected] +603 7495 8248

Transfer Pricing Sockalingam Murugesan [email protected] +603 7495 8224 Vinay Nichani [email protected] +603 7495 8433 Hisham Halim [email protected] +603 7495 8536

Indirect Tax Yeoh Cheng Guan [email protected] +603 7495 8408

Aaron Bromley [email protected] +603 7495 8314

Financial Services Bernard Yap [email protected] +603 7495 8291

mailto:[email protected]



























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EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2018 Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no. 07001413 ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific

advice.

Important dates

15 September 2018 Due date for monthly instalments

30 September 2018 6th month revision of tax estimates for companies with March year-end

30 September 2018 9th month revision of tax estimates for companies with December year-end

30 September 2018 Statutory deadline for filing of 2018 tax returns for companies with February year-end

15 October 2018 Due date for monthly instalments

31 October 2018 6th month revision of tax estimates for companies with April year-end

31 October 2018 9th month revision of tax estimates for companies with January year-end

31 October 2018 Statutory deadline for filing of 2018 tax returns for companies with March year-end

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ey tax alert · sdn bhd and cb ventures sdn bhd) acquired 56,025 units of shares in bioford. 9...

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