Question

1. Wing Sdn.Bhd is responsibility to pay royalties of RM70,000 to Way Pte Ltd for the financial year ended 31 December 2018. Wing Sdn.Bhd paid RM63,000, net of tax to Way Pte Ltd on 30 December 2018.

The company claimed the entire RM70,000 as a tax deduction to arrive at the chargeable income of RM800,000 for Y/A 2018.

Wing Sdn.Bhd submits its tax return Form C for Y/A 2018 on 31 July 2019, showing a tax charge of RM192,000 (24% of RM800,000). As at 31 August 2019, Wing Sdn Bhd did not yet submit the Withholding tax to IRB.

Required:

1. Compute the amount of penalty that the Director General can impose on Wing Sdn.Bhd for Y/A 2018.

2. Compute the amount due to IRB as at 31 August 2019.

2. Would your answer be the same in (b) if Wing Sdn Bhd is a pioneer company enjoying full income tax exemption under the Promotion of Investment Act 1986?

Answer 1

a) DGIR is empowered to impose a penalty under subsection 113(2) of the ITA for incorrect returns. This will be applicable in the said case where the Wing Sdn Bhd has taken deduction on a Income which was subject to withholding tax and such tax had not been deposited till the date of filing of return by the company.

Addition in tax liability by Disallowing RM 70,000 @ 24%[as per paragraph 39(1)(j) of the ITA] = RM 16800

Penalty under 113(2) is 100% of tax underreported = RM 16800

b) Amount due to IRB as at August 2019 is RM 7000 + 10% under subsection 109B(2) of the ITA = RM 7700

along with the tax and penalty under 113(2) as calculated above in a).

c) As per subsection 39(3) of the ITA, if Wing Sdn Bhd is a pioneer company enjoying full income tax exemption under the Promotion of Investment Act 1986 and fails to remit withholding tax on the expenditure incurred and payable to a non-resident in respect of royalties under section 109 of the ITA, the deductions disallowed under paragraphs 39(1)(f), 39(1)(i) or 39(1)(j) of the ITA are not applicable to that payer.

However, deductions disallowed under paragraphs 39(1)(f), 39(1)(i) or 39(1)(j) of the ITA are still applicable to the payers who enjoy tax exemption on income equal to capital expenditure incurred, (i.e. Investment Tax Allowance).

Hence, if the company is enjoying an Investment Tax Allowance under PIA, the income will still be added back under 39(1)(j) while calculating the computation of income.And almost similar treatment depending on the unabsorbes investment tax allowance will take place.