Professional Documents
Culture Documents
November 2013
PP 9741/10/2012 (031262)
PwC Alert
Local versus
foreign sourced
income
A continuous
debate
www.pwc.com/my
Scope of taxation
The concept of source is a difficult area of tax law which has been
much debated in the regional courts over the years - from the courts
in New Zealand (the Philips case, 1954) to Hong Kong (Privy Council
cases of Hang Seng Bank and Hong Kong-TVB in the 90s followed by
numerous other cases), to Singapore (Chandos Pte Ltd v Comptroller of
Tax (1987) 2 MLJ 670) and Malaysia.
It has been well recognised in the tax circles that the broad guiding
principle for determining where income is sourced from is as
enunciated by Lord Bridge in the landmark Privy Council case*,
Commissioner of Inland Revenue v Hang Seng Bank Ltd (1990) STC 733:
The broad guiding principle, attested by many authorities, is that
one looks to see what the taxpayer has done to earn the profit in
question. If he has rendered a service or engaged in an activity such as
the manufacture of goods, the profit will have arisen or derived, from
the place where the service was rendered or the profit-making activity
carried on. But if the profit was earned by the exploitation of property
assets as by letting property, lending money or dealing in commodities
or securities by buying and reselling at a profit, the profit will have
arisen in or derived from the place where the property was let, the
money was lent or the contracts of purchase and sale were effected
This article will focus on the developments of Malaysian tax cases and
seek to examine if the Hang Seng Bank principle has been adopted by
the Malaysian courts.
* Refer to page 13 for a summary of the Commissioner of Inland Revenue v Hang Seng
Bank Ltd (1990) STC 733 case
Application of broad
guiding principle
Did the Malaysian courts adopt the broad guiding principle
in Hang Seng Bank?
The RO Drilling appeal was heard by the courts prior to the birth
of the broad guiding principle. The courts focused on the place
where business acumen, judgement, intuition, knowledge and
experience were exercised and employed, i.e. where the central and
management control of the business was. Although the facts of the
OA Pte Ltd case are somewhat similar to the ROD Co Ltd case, the
courts decision in the OA case that the income was sourced from
outside Malaysia was made based on the Hang Seng Bank case.
The courts in the Aneka Jasaramai case did not discuss the Hang
Seng Bank case. They appear to have placed more reliance on
the finding of fact that the activities of the taxpayer were outside
Malaysia, i.e the sale and payment for the bus tickets were in
Singapore, in applying Section 12(1)(a).
Subsequent cases had generally applied the broad guiding
principle. In the CHM case, the court found that the originating
cause that produced the interest income was the provision of loans
in the Netherlands. In the Kyros case, the Hang Seng Bank principles
were also considered and applied by the Courts. The SCIT found in
favour of the taxpayer based on the finding of fact that the operations
of the foreign franchisees took place overseas. In making the decision,
the operations of the franchisor were not examined.
Conclusion
Appendix
But the question whether the gross profit resulting from a particular
transaction arose in or derived from one place or another is always in the
last analysis a question of fact depending on the nature of the transaction.
It is impossible to lay down precise rules of law by which the answer to that
question is to be determined. The broad guiding principle, attested by many
authorities, is that one looks to see what the taxpayer has done to earn the
profit in question.
The activity of the bank from which the income arose was the trading of the CDs
in the Singapore and London markets and hence the income was not derived
from Hong Kong.
Lets talk
If you would like further information in relation to the issues outlined
earlier, please call the Corporate Tax senior executive directors and
executive directors of PricewaterhouseCoopers Taxation Services Sdn Bhd:
Kuala Lumpur
Jagdev Singh
+60(3) 2173 1469
jagdev.singh@my.pwc.com
Jennifer Chang
+60(3) 2173 1828
jennifer.chang@my.pwc.com
Pauline Lum
+60(3) 2173 1059
pauline.ml.lum@my.pwc.com
Clifford Yap
+60(3) 2173 1446
clifford.eng.hong.yap@my.pwc.com
Steve Chia
+60(3) 2173 1572
steve.chia.siang.hai@my.pwc.com
Dorothy Ooi
+60(3) 2173 1444
dorothy.ooi@my.pwc.com
Lorraine Yeoh
+60(3) 2173 1499
lorraine.yeoh@my.pwc.com
Penang / Ipoh
Frances Po
+60(3) 2173 1618
frances.po@my.pwc.com
Heather Khoo
+60(3) 2173 1636
heather.khoo@my.pwc.com
Lavindran Sandragasu
+60(3) 2173 1494
lavindran.sandragasu@my.pwc.com
Margaret Lee
+60(3) 2173 1501
margaret.lee.seet.cheng@my.pwc.com
SM Thanneermalai
+60(3) 2173 1582
thanneermalai somasundaram@
my.pwc.com
Theresa Lim
+60(3) 2173 1583
theresa.lim@my.pwc.com
Tony Chua
+60(4) 238 9118
tony.chua@my.pwc.com
Johor Bahru
Benedict Francis
+60(7) 222 4448
benedict.francis@my.pwc.com
Melaka
Teh Wee Hong
+60(3) 2173 1595
wee.hong.teh@my.pwc.com
Labuan
Jennifer Chang
+60(3) 2173 1828
jennifer.chang@my.pwc.com
pwc.com/my
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