Recently, the High Court allowed the taxpayer’s judicial review application to challenge the decision of the Minister of Finance to restrict the taxpayer’s right to claim investment allowance with the 7 year rule to carry forward the unutilised allowance. This decision bears significance as it reiterates the legal principle enunciated in the recent case of Society of La Salle that a vested right of a taxpayer cannot be taken away arbitrarily. Accordingly, the various amendments via the Finance Act 2018 which restricts the carrying forward of unutilised allowances in relation to tax incentives approved prior to the amendments coming into effect are open to challenge.
The taxpayer was successfully represented by the firm’s Tax, SST & Customs partner, S. Saravana Kumar and associate, Elani Mazlan. This alert summarises the arguments advanced by the parties in this matter.
Recently, the High Court allowed the taxpayer’s judicial review application to challenge the decision of the Minister of Finance (MOF) to restrict the taxpayer’s right to claim investment allowance with the 7 year rule to carry forward the unutilised allowance.
The taxpayer was successfully represented by the firm’s Tax, SST & Customs partner, S. Saravana Kumar and associate, Elani Mazlan.
Background Facts
In 2017, upon the application from the taxpayer, the MOF had approved the construction of a power plant by the taxpayer as an Approved Service Project (ASP) and granted tax incentive in the form of investment allowance under Schedule 7B of the Income Tax Act 1967 (ITA) as follows:
Investment allowance to be claimed at 80% of the qualifying capital expenditure incurred within 5 years from the year of assessment (YA) 2017 to YA 2021, which can be set-off against 85% of the taxpayer’s statutory income of each YA.
The right to carry forward any unutilised investment allowance for a particular YA to the subsequent YAs indefinitely until the entire amount of the allowance has been claimed.
In reliance of this incentive approval in 2017, the taxpayer proceeded with the construction of the power plant and incurred significant expenses which amounted to more than RM 3 billion. However, in late November 2018, the MOF announced that, amongst others, a 7 year time limit would be imposed on the carrying forward of allowances in respect of incentives granted under Schedule 7B of the ITA. This was implemented through the amendments introduced by Section 29 of the Finance Act 2018.
In December 2018, the taxpayer had attended a meeting with the MOF’s office to discuss the effect of the 7-year time limit on the tax incentive enjoyed by the taxpayer, where the taxpayer highlighted that:
The imposition of the 7 year time limit would result in the taxpayer being unable to enjoy in full the tax incentive approval granted in 2017.
The 7 year time limit did not form part of the terms of the tax incentive approval.
The 7 year time limit should only be imposed on new projects undertaken from January 2019 onwards.
Subsequent to further discussions, in July 2019, the MOF rejected the taxpayer’s right to claim the unutilised investment allowance indefinitely without providing any reasons. Being aggrieved by the MOF’s decision, the taxpayer filed an application for judicial review to challenge the MOF’s decision.
The Taxpayer’s Submission
The key arguments for the taxpayer were:
The MOF in making its decision has failed to consider the taxpayer’s vested right, which entitles the taxpayer to carry forward any unutilised investment indefinitely until the entire amount of the allowance has been claimed. This vested right has been preserved by Section 30 of the Interpretations Act 1948 & 1967 (IA),which states that the repeal of written law in whole or in part shall not affect any right accrued under the repealed law. Therefore, the vested right has not been taken away by the amendments made to Schedule 7B of the ITA via Section 29 of the Finance Act 2018.
The MOF has failed to give due regard to Section 30 of the IA and the recent decisions of our superior courts including the Society of La Salle case, which held that where there is a doubt whether Parliament has intended to impair a taxpayer’s vested right, such ambiguity must be construed in favour of the taxpayer. In this case, the vested right to carry forward the unutilised investment allowance has not been removed by sufficiently clear words.
The MOF had also failed to consider the legitimate expectation of the taxpayer. The taxpayer has a right to claim and enjoy the tax incentive granted in 2017 given that the taxpayer had acted and relied upon the said incentive. The taxpayer had acquired a legitimate expectation that it would be entitled to carry forward any unutilised investment allowance indefinitely.
As the MOF had failed to provide any reasons for its decision, it would also be open for the High Court to conclude that the MOF had no good reasons to give.
The MOF’s Response
The MOF’s main argument in opposing the taxpayer’s judicial review application was on the basis that there was no issue of vested right here. The MOF submitted that its decision was justified as Sections 29 and 30 of Finance Act 2018, which were the saving provisions, circumvented the effect of Section 30 of the IA. Additionally, the MOF submitted that it is not required by law to give any reasons for its decision.
The High Court’s Decision
Upon reading and hearing submissions by both parties, the High Court allowed the taxpayer’s application for judicial review. It was held that the MOF had erroneously refused to uphold the tax incentive approval granted to the taxpayer in 2017. The High Court accepted the argument that the taxpayer was entitled to enjoy investment allowance, including the right to carry forward any unutilised allowance indefinitely, which was vested on the taxpayer by virtue of the law which stood in 2017.
This decision bears significance as it reiterates the legal principle enunciated in the recent case of Society of La Salle that a vested right of a taxpayer cannot be taken away arbitrarily. Accordingly, the various amendments via the Finance Act 2018 which restricts the carrying forward of unutilised allowances in relation to tax incentives approved prior to the amendments coming into effect are open to challenge.
Authored by Elani Mazlan, an Associate with the firm’s Tax, SST & Customs practice.
3 January 2022