24 July, 2019
Facts
This case concerned a registered specialist medical practitioner (“Doctor”) who had incorporated a company in July 2002 to carry on business as medical practitioners and to provide medical services to patients in and/or outside hospitals (“Company”).
Prior to the incorporation of the Company, the Doctor had signed a resident consultant agreement with the owner and operator of a specialist hospital (“Hospital”) to serve as a resident consultant physician (“Contract”).
This appears to be a common arrangement for specialist medical practitioners (“Specialists”) in Malaysia who are contracted to provide medical consultancy services in specialist hospitals, where all payments due to the Specialists for their services are paid to their companies (“Arrangement”).
This Arrangement fell under the scrutiny of the Inland Revenue Board of Malaysia (“Revenue”). The Doctor and several other Specialists were audited for the tax treatment of the monies received by the Specialists pursuant to arrangements similar to the Arrangement.
The Malaysia Medical Association (“MMA”) had met the Revenue on behalf of its members. The Revenue, in a letter addressed to the MMA in 2016, decided that the appropriate tax treatment of income received by Specialists pursuant to arrangements like the Arrangement was as the personal business income of the Specialists under section 4(a) of the Income Tax Act 1967 (“ITA”), and not as the business income of their companies (“Decision”). [Emphasis ours]
The application
The Doctor and the Company (“Applicants”) being aggrieved by the Decision applied for and were granted leave to commence judicial review proceedings against the Revenue in which the Applicants sought, amongst others:
- the quashing of the Decision;
- a declaration that the Decision is invalid and ultra vires Article 7 of the Federal Constitution and accordingly null and void, as it punishes the Applicants for the incorporation of a company to carry on business as medical practitioners and to provide medical services which was not illegal and invalid when the arrangement was made back in 2002; and
- a declaration that the Decision is unlawful and invalid, as the Revenue has acted unfairly towards the Applicants, as to amount to an abuse of power, by retrospectively departing from their previous course of conduct which had led the Applicants to reasonably believe at all material times that the Arrangement was lawful and valid.
Decision of the High Court
The Court proceeded firstly by construing the Contract under the principles stated in the Federal Court case of Berjaya Times Square Sdn Bhd v M-Concept Sdn Bhd1.
The Court held that the Contract was a contract for services and any monies to be received thereunder were for the services rendered by the Doctor to the Hospital. The mechanism for payment arranged between the parties, however, could not alter the character of the Contract and to read it otherwise would be to give the Contract a strained construction in order to avoid tax.
The Court found that the Revenue was correct in its construction of the Contract and thereafter in relying upon section 140 of the ITA in disregarding the payments received by the Company. The Court cited the Court of Appeal in Syarikat Ibraco-Paremba Sdn Bhd v Ketua Pengarah Hasil dalam Negeri2:
“it is for the taxpayer to demonstrate that the arrangement by which the income was produced was so preordained by compliance with the requirements of law or accepted business practices to limit risk exposure, and that tax savings were purely incidental.” [Emphasis ours]
The Court further dismissed the Applicant’s contention that the Applicant’s legitimate expectations had been breached — stating that the Revenue has broad powers under section 91(1) to raise assessments whether or not in doing so they will be departing from any existing practice or adopting a different form of assessment.
Based on the above grounds, amongst others, the Applicant’s judicial review application was dismissed.
Conclusion
This case again confirmed that the doctrine of estoppel does not apply to the Director General of Inland Revenue (“DGIR”) whereby the DGIR can exercise his discretion to change the form of assessment to be adopted.
In addition, on the basis of the facts, this case reaffirms the position that regardless of who payments are made to, tax is assessed on the person who had carried out the work that gave rise to the income.
For further information, please contact:
Haniza binti Abdul Ghani, Shearn Delamore & Co
haniza.ghani@shearndelamore.com
- [2010] 1 MLJ 597.
- [2017] 2 MLJ 120.
