Tax law and working in tax

The issue of tax crops up in almost every legal transaction, as Chong Mun Yew, tax consultant for Wong & Partners, explains.

The Concise Oxford Dictionary defines a tax as 'contribution levied on persons, property or business for the support of government.'

The reasons for tax law

Pursuant to the Heasman Report of 1947, income tax was introduced by the British into the Federation of Malaya with effect from 1 January 1948 in the form of Income Tax Ordinance Tax, 1947 ('Ordinance'). The Ordinance was subsequently repealed and replaced by the Income Tax Act, 1967 ('ITA'), which became effective from 1 January 1968.

Generally, the Malaysian taxation system is based on territory ie the income of any person 'accruing in or derived from' Malaysia, or income received in Malaysia from a foreign country is taxed in Malaysia. The exception to this rule is when a resident person carries on banking, insurance or conducts air/sea transport operations taxed on an international basis.

Tax is important to a developing country like Malaysia, since it is a major source of revenue and the laws are used to assist in the carrying out of the fiscal and economic policies of the government. There are two types of taxes, namely:

• direct taxes
• indirect taxes.

In Malaysia, direct taxes and indirect taxes account for 50.2% and 19.6% of the total revenue of the Malaysian government respectively, based on the Federal Government Budget Report 2009.

When tax law comes into force and recent developments

The ITA sets out the main classes upon which income tax is chargeable. They are as follows:

• gains or profits from a business, for whatever period of time the business is in operation
• gains or profits from employment
• dividends, interest or discounts
• rents, royalties or premiums
• pensions, annuities or other periodical payments which do not come under the above tax groups
• gains or profits which do not come under the above tax groups.

The term 'business' includes profession, vocation and trade and every manufacture, adventure or concern in the nature of trade and it therefore wide in scope. Other direct taxes include petroleum income tax, real property gains tax (exempted from 1 April 2007) and stamp duty. Petroleum income tax is levied on the income from petroleum operations. Stamp duty is chargeable on certain instruments and documents, e.g., loan documents, properties, shares etc. Generally, indirect taxes include service tax, sales tax, import duties, export duties and excise duties, which are briefly explained below:

• Service tax is a consumption tax levied and charged on any taxable service provided by any taxable person, eg obtaining a legal advice from a legal firm in Malaysia.
• Sales tax is a single stage tax imposed on taxable goods manufactured locally and/or imported, eg alcoholic drinks.
• Import duties are levied on goods that are subject to import duties and imported into the country, eg raw materials, machinery, essential foodstuffs and pharmaceutical products.
• Export duties are imposed on the country's main commodities such as crude petroleum and palm oil.
• Excise duties are levied on goods manufactured in Malaysia, eg beer and other intoxicating liquors, cigarettes containing tobacco, motor vehicles and playing cards.

Pursuant to the 2009 Malaysian Budget, the Malaysian government introduced 'thin capitalisation' rules and the Advanced Pricing Arrangement which are relevant to transfer pricing issues.

Specialisations and the job at hand

There are many areas in which a person can specialise in tax, namely: corporate tax, personal tax, stamp duty, service tax, sales tax, transfer pricing, export duties, excise duties, import duties, goods and service tax etc.

In tax work, you will be involved in meeting with clients to discuss the tax implications in relation to a proposed transaction (eg merger and acquisitions, reorganisations or restructurings, cross-border transactions etc.), drafting documents, tax case research and statutory interpretation. Depending on the type of tax assignment, you may need to go to the clients' office to review tax documents (eg in a due diligence exercise). If you require the Malaysian tax authorities' confirmation or approval in relation to a proposed transaction, you will need to liaise closely with them. In the event you are involved in an employee share option scheme, you are required to deal with employment taxation matters. If you are involved in Customs disputes in terms of valuation of goods, you will need to meet up with the Customs officers.

About the author

Chong Mun Yew is a Tax Consultant with Wong & Partners,working in the area of tax advisory, consulting, due diligence and equity compensation plans. Chong's qualifications include ACCA (2000), LLB (2004) and CLP (2005), and has been with the firm for 14 months.

© GTI Specialist Publishers. Reproduced with permission.