Tax Law and Interpretation

1. In this article, we will briefly discuss about the Income Tax Act, 1967 and the misconceptions about the role of the Inland Revenue Board and how the law works in Malaysia. 
   
   
2. The common misconception people have about the Income Tax Act, 1967 is that the law is actually set by the Inland Revenue Board (IRB) and therefore the IRB would have the final say in any tax disputes.
   
   
3. In reality, the laws pertaining to Income Tax are determined by Parliament and the IRB are entrusted to enforce the law. This means that the IRB officers are also bound by the provisions of the Income Tax laws and if the tax payer is unhappy with the assessment raised, there are appeal procedures available under the law.
   
   
4. Another important matter pertaining to the tax law in Malaysia is the rule of interpretation. In law, there are generally 3 rules of interpretation, namely, golden rule, mischief rule and literal rule. In short, the golden rule and mischief rule allow a certain degree of discretion in the interpretation of the wording of the law to determine the 'purpose' or 'fairness' of the application of law. However, the literal rule demands strict application of the law to the letter of the law. This means, there is no room to consider the 'purpose' or 'fairness' of the application of the law.
   
   
5. In Malaysia, tax laws are are interpreted using the literal rule. This has been determined in the case of Mamor Sdn Bhd vs Director General of Inland Revenue. So, what does this mean to the tax payer? It means that if a certain provision is not literally stated in the Act, then we cannot make presumptions about it.
   
   
6. Let's take a look at the provisions of Section 3 of the Act which reads as follows:
   
   "Subject to and in accordance with this Act, a tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received from outside Malaysia."
   
   
7. Applying the literal rule on the above, in order for income tax to be charged, there must be an element of 'income', it must be earned by a 'person' in Malaysia or received in Malaysia from outside Malaysia.
   
   
8. If for example, in a highly unlikely scenario, a show animal is able to legally receive an income of say RM1 million a year in its own name in Malaysia, it would not be subject to tax because it is not a 'person' as defined under Section 2 of the Act. The definition of a 'person' under the Act is limited to natural individuals, companies and body corporates.
   
   
9. Even though, it would seem unfair that a natural person who earns RM80,000 would be subject to tax and the show animal in the above example which earns RM1 million is not taxed. One cannot argue that the animal must be taxed due to fairness under the literal rule of interpretation of the Income Tax Act, 1967. If the Golden rule or mischief rule of interpretation is used, then probably one can argue that the show animal needs to pay tax. However, since it has been decided in the Mamor case that the literal rule is to be applied, it is a binding precedent which will not be changed with regards to the interpretation of the Income Tax Act, 1967.
   
   
10. The above scenario is of course absurd, however it is to illustrate the point that since the literal rule is applicable, one has to read the Act to the letter when dealing with tax matters, instead of making assumptions or drawing logical conclusions.
    
    
11. Frequently we encounter clients who argue that they refuse to pay taxes because they feel it is unfair due to various reasons. Sometimes, their reasons and circumstances may even be justified given the circumstances. However, even with the best justification, one cannot be exempted from paying tax unless it is specifically allowed under the law, i.e. one cannot refuse to pay tax on the grounds of just and equity because of the literal rule of interpretation used on the Income Tax Act, 1967, which clearly states that income tax liabilities must be paid, even if the person is no longer alive!
    
    
12. This concludes our article on Tax Law and Interpretation. We hope that this article would set the foundation on the significance of the wordings of the law and its application. The next article would deal with the concept of "Scope of Charge" and how to determine whether an income is taxable in Malaysia or not.