TAX 715 Case Study Presentation… Max Glitter Sdn Bhd For: Ms Mildred Lopez Presenter: Ahmad Suazzri Sannusi

Situation…1 Tinsel Ace (Hong Kong) Hold stake in Sparkel Pte Ltd Hold “Super Glitter” patent right Sparkel (S’pore) Hold “Super Glitter” brand Max Glitter (M’sia) Trading Super Glitter merchandise a patentee of Sparkel Pay royalty to Sparkel Own by Mr. Sighed & JEM Own indirectly by Cooper & ING thru RCPS -Own a manuf’g plant in Indon (Cost function)

Situation…2 UP Company Pte Ltd Gold Dust Pte Ltd Oversees entire operation of Super Glitter product Gold Dust Pte Ltd Subsidiary of UP Co. Designs Super Glitter product

“Advise Mr Sighed on the issues he needs to consider “Advise Mr Sighed on the issues he needs to consider. In advising on tax implications you must advise him on the law as supported with tax cases” – because the IRB is coming…. Issue 1 “Whether the income (selling of products manufactured in Indonesia) from S’pore, HK and USA considered derived in Malaysia under Sec 12(1) (a) of ITA 1967?” The considering factor: Where the contracts were penned down Where is the operation where the profit arose

1. Where the contracts were penned down? Sold products to: MG in Malaysia Sparkel in S’pore Tinsel in HK Gold Dust in USA (2) Max Glitter Manufacturing Plant (Indonesia) Proposed: (1) If the contracts were done in M’sia, then the income was deemed to be derived from M’sia – Taxable (2) If the contracts were done outside M’sia, then it is not derived from M’sia – not taxable in M’sia Case:- AJE S/B v KPHDN - Comissioner of T (West Australia) v D&W Murray (1) Max Glitter S/B (Malaysia)

2. Where is the operation where the profit arose? Sold products to: MG in Malaysia Sparkel in S’pore Tinsel in HK Gold Dust in USA Max Glitter Manufacturing Plant (Indonesia) Proposed: -If the business operates in M’sia, then the income was deemed to be derived in M’sia – Taxable If the business operate outside M’sia, then is not deemed derived in M’sia – not taxable in M’sia Case:- CIR v HK-TVB International Ltd Max Glitter S/B (Operates In Malaysia)

2nd issue: Whether the royalty paid was an allowable expenses under Sec 33(1) ITA 1967? By statute: Sec 33(1): “..expenses wholly and exclusively incurred during that period by that person in the production of gross income from that source” By obiter dicta: HCJ dictum in Dutch Baby Milk Industries V KPHDN: “ The court is not concern with the label given by the parties to the payment made. What is important is the purpose, character and or true nature of the payment”

General rule: - if expenses in nature: allowable - if capital in nature: unallowable The test: If the payment is recurring (according to sales) it is expenses in nature (for past usage) – Allowable Case: Constantinesco v Rex (shooting gear) However, If the recurring payment were meant to secure right for future benefit, It capital in nature – Not allowable Case: Desouther Brothers v Hangar & co. (patent license installment) 2. Payment once and for all – Not allowable: Capital in nature Case: Evans Medical Supplies Ltd

However… If the receiver of the royalty payment declared it as an income under Sec 4(d), (not from trade, business and profession), cost by the paymaster to secure the patent is not allowed under Sec 39 (capital). Case: Jeffrey v Rolls Royce Ltd (know-how trade)

Remember…remember…. The payment is not allowed as an expenses if the royalty payment to the non-resident (Tinsel and Sparkel), when the with-holding tax under Sec 109 not being paid (Para 39(1)(f).

3rd issue: Whether the expenses charged by UP Co 3rd issue: Whether the expenses charged by UP Co. is allowable under Sec 33(1)? The expenses: Internal audit services Marketing expenses Centralized management account Commissions to sales agents Trip cost for achieving sales target The test: “whether these expenses wholly and exclusively incurred in the production of the gross income from that source during that period”

Proposed: Principe in Dutch Baby Milk Industries applies (nature of the payment) The expenses: 1. Internal audit services – No: Not for the purpose of earning profits 2. Marketing expenses – Yes: in the production of gross income 3. Centralized management account – No: not incurred during that period 4. Commissions to sales agents – Yes: for the purpose of earning profit 5. Trip cost for achieving sales target – Yes: Under Proviso para 39(1)(i)-(vii) Case: The Naval Colliery Co. Ltd v CIR (not actual expenses during the period) 2. Malayan Weaving Mills Sdn Bhd v DGIR (not in the production of gross income) 3. Strong v Woodifield (not in the production of gross income)

However, it can be contested.. Eventhough the expenses incurred did not generated income, it can be allowed: Case: Pernas Securities Sdn Bhd v KPHDN KPHDN v Multi-Purposes Holdings Bhd Principe: Interest expenses from investment source is allowed even though it did not generate income (CY adjusted loss) Dictum from New Zealand Flax Investments Ltd v FC of T case: “..’incurred’ does not mean only defrayed, discharged or borne, but rather it includes encountered, run into or fallen upon”

4th issue: Whether the redeemed preference shares is subjected to tax liability? Case: Hill v Permanent Trustees Co. of N.S Wales (Australia): “Any distribution of profits even though from capital, is considered as dividend and subject to tax” .but must not be a reduction of capital – consider as a realization of asset/capital, which is not taxable. . Therefore, if the IRB contested that the redeemed shares as ‘deemed dividend’, tax liability will arise in form of “credit dividend” “Thank You”