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Special commissioners of income tax (scit) considers the interpretation of s.2 of the income tax (exemption) (no.8) order 2011 – tax exemption for non-malaysian citizens employed in managerial capacity in Labuan

12 Apr 2023 Asia

TAX/ REVENUE LAW

P v Ketua Pengarah Hasil Dalam Negeri

In this appeal, SCIT considered, amongst other issues, whether the Appellant’s employment fell within the term “managerial capacity” and whether the Appellant was entitled to claim tax exemption under S.2 of the Income Tax (Exemption) (No.8) Order 2011 – Tax Exemption For Non-Malaysian Citizens Employed In Managerial Capacity In Labuan, which provides that: -

A minister exempts an individual non-Malaysian citizen from the payment of income tax on 50% gross income received by that individual from exercising an employment in a “managerial capacity” with a Labuan entity.

Background Facts

The appellant is a British citizen who holds a Malaysian Permanent Residence (PR) and was employed by a Labuan-based entity. The appellant had made claims under the Exemption Order with no issues in previous years of assessment. However, for the years of assessment of 2016, 2017 and 2018, the Inland Revenue Board (IRB) denied the appellant’s claims for the exemption and issued notices of assessment including penalty.

The argument put forward by the IRB, amongst others, was that the appellant’s employment did not fall within the definition of a “managerial role” and it was the IRB’s further contention that only the managing director who held the top position of the company is entitled to this exemption under the Exemption Order.

On behalf of the appellant, it was submitted, amongst others, that although there had been a change in the company ownership, the Appellant still held the same position of director and performed the same role and function. Therefore, it was submitted that it is reasonable that the Appellant should still qualify for the exemption. It was further submitted that the IRB’s interpretation of the term “managerial role” was too restrictive.

After consideration of parties’ submissions, the SCIT allowed the Appellant’s appeal and held that the Appellant was exercising an employment in a “managerial capacity”.

Concluding Thoughts

A key point that was determined in this appeal is that the IRB was too restrictive in its interpretation of the term “managerial role” within the Exemption Order. As a result, the Appellant successfully appealed against the IRB’s disallowing of claims under the Exemption Order and succeeded in quashing the additional assessment and penalty imposed on the Appellant.

The SCIT’s decision is a welcome one for taxpayers and will provide more certainty as to the interpretation of S.2 of the Income Tax (Exemption) (No.8) Order 2011.

The successful Appellant was represented by our counsel, Datuk Francis Tan and Brandon Shen from Azman Davidson & Co. If you have any queries pertaining to any tax treatment and tax relief applications, please contact the author or his team partners.