Judgment

Abdul Kadir Sulaiman J

1. The appellant, United Overseas Bank Ltd, is carrying on banking business in Singapore. Its business address during the basis years 1981 to 1985 was No 1, Bonham Street, Raffles Place, Singapore. The appellant carries on the banking business in Malaysia through a branch in Kota Kinabalu, Sabah. In exercise of the powers conferred by s 132 of the Income Tax Act 1967 (‘the Act’), the Minister, by PU518 of 1968 made the Double Taxation Relief (Singapore) Order 1968 (‘the 1968 Order’). The schedule to the 1968 Order contains the agreement between the two governments for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income with a view to affording relief from double taxation in respect of taxpayers from both countries. By art XXl cl 1 of the agreement, it became effective as respect taxes from both countries from the year of assessment 1969 onwards. Section 132 of the Act states as follows:

   132.

   (1) If the Minister by statutory order declares that – (a) arrangements specified in the order have been made by the Government with the government of any territory outside Malaysia with a view of affording relief from double taxation in relation to tax under this Act and any foreign tax of that territory; and (b) it is expedient that those arrangements should have effect, then, so long as the order remains in force, those arrangements shall have effect in relation to tax under this Act notwithstanding anything in any written law.

2. Under the Banking Act 1973 (‘the 1973 Act’), the appellant having a branch in Malaysia was required to maintain, inter alia, networking funds as part of the financial requirements and duties of a licensed bank here. Accordingly, for the relevant years of assessment 1982–1986, the head office in Singapore made available to its branch abovementioned sums required under the 1973 Act. The head office in Singapore charged interest on the sums made available to the branch in Malaysia for the purpose. The following were the amount of interest charged in respect of each basis year in respect of the sums made to the branch:

   Basis Year 1981 1982 1983 1984 1985

   Amount of Interest $ 35,233 $275,136 $338,991 $482,629 $394,015

3. Singapore income tax were paid by the head office on this interest income it received from the branch. However, the respondent also issued notices of additional assessment all dated 20 April 1987 requesting payment from the appellant in respect of the same interest income for the following years of assessment:

   Year of Assessment 1982 1983 1984 1985 1986

   Additional Tax Payable $ 15,855.10 $123,899.35 $152,547.75 $217,187.45 $169,094.36

4. The basis for the respondent in levying income tax in respect of the said interest was the proviso to para 33 of Schedule 6 which paragraph had been amended from time to time but for the purpose of this appeal the provisions applicable and effective from year of assessment 1982 states as follows:

   (33)

   Income of any person not resident in Malaysia for the basis year for a year assessment, in respect of interest derived from Malaysia (other than such interest accruing to a place of business in Malaysia of such person) and paid or credited by any person (whether the same person or not) carrying on the business of banking in Malaysia and licensed under the Banking Act 1973:  Provided that the exemption under this paragraph shall not apply to interest paid or credited on funds required for the purposes of maintaining networking funds as prescribed by the Central Bank of Malaysia in pursuance of s 14 of the Banking Act 1973.

5. If the proviso is applied, it is clear that the said amount of interest paid by the branch to the respondent will be subject to tax because they are interest paid or credited on funds supplied by the appellant to the branch for the purpose of maintaining networking funds required under the 1973 Act. However, the appellant objected to the additional tax imposed by the respondent in relation to the amount of interest received by it and filed its appeal with the Special Commissioners. Before the Special Commissioners, the appellant put forward the following reasons for the objection. Firstly, that the interest charges imposed upon its branch in Malaysia constitutes a business expense to the branch and a business income to its head office. Secondly, by reason of arts IV and XV of the agreement contained in the 1968 Order, the said interest received would not be subject to any tax as interest income and further that there can be no economic or commercial link between the head office and the branch in the provisions of funds for which the branch is required to pay the interest on the fund provided. The Special Commissioners heard the appeal and made their deciding order on 29 October 1994 dismissing the appeal of the appellant and confirmed the additional assessment imposed by the respondent on the appellant in respect of the years of assessment 1982–1986. Briefly, the reason for the dismissal of the appeal was that having construed the provisions of arts XV and IV of the agreement in the 1968 Order, they came to the conclusion that the interest received by the appellant from its branch is part of the appellant’s income in Malaysia on which Malaysian tax may be imposed in accordance with para 1(a) of art IV of the agreement.

6. Article IV cl 1(a) of the agreement states as follows:

   1.

   (a) The income or profits of a Singapore enterprise shall not be taxable in Malaysia unless the enterprise carries on business in Malaysia through a permanent establishment situated in Malaysia. If the enterprise carries on business as aforesaid, tax may be imposed in Malaysia on the income or profits of the enterprise but only on so much thereof as is derived by that permanent establishment in Malaysia. [emphasis added]

7. The appellant, being dissatisfied with the said decision of the Special Commissioners, by a notice dated 10 November required the Commissioners to state a case for the opinion of the High Court. Thus, by way of case stated this appeal is before this court now. The question posed by the Commissioners for this court’s opinion is whether, on the facts found by them, their decision is correct in law.

8. As far as the facts are concerned, there is no dispute. It is a simple case of a foreign bank establishing a branch in Malaysia. By the law of Malaysia, a banking institution is required to provide a networking fund. The branch of the appellant in Malaysia, being a banking institution, is therefore required to provide this fund. This fund came from the appellant’s head office in Singapore. For the provision of the fund to its branch here, the appellant in Singapore charged interest to be paid by the branch. For the purpose of income tax in Singapore, the appellant paid the tax upon the said interest income received from its branch in Malaysia. On the other hand, the respondent here wants a slice of the cake out of the said amount of interest paid by the branch in Malaysia to the appellant in Singapore. Its ground as stated earlier is based on the proviso to para 33 of Schedule 6 to the Act. The Special Commissioners in their case stated disagreed for the reason that the provisions in the Act are being superseded by the 1968 Order as so provided by s 132 of the Act, when at p 6 of case stated the Special Commissioners said that they are in complete agreement with the appellant’s ‘primary contention that by reason of s 132(1) of the Act, a place of priority and pre-eminence must be given to the agreement over the domestic or municipal law, i.e. the Act’. In my view, they are right in so holding because the phrase ‘any written law’ found at the end of the said section includes the Act itself which is a written law. The effect of the conflict between – as in our case – the provisions of the Act and the provisions as provided by the 1968 Order was considered by the House of Lords in Ostime (HM Inspector of Taxes) v Australian Mutual Provident Society 38 TC 492 as between the Income Tax Act of England and the Double Taxation Relief Agreement, where it was decided that the unilateral legislation must give way to the agreement which becomes the municipal law which, in our case, Malaysian law pursuant to s 132(1) of the Act. The principle so stated in the case cited has been received and applied in Malaysia in Director General of Inland Revenue v EIL (1950–1985) MSTC 256. EIL from United Kingdom entered into agreement with a Malaysian company to set up the EISB and EISB had paid money to EIL as managerial fees. By s 2 of the Act, these payments are royalties which are subject to tax but do not fall within the definition of royalty in the Double Taxation Relief (United Kingdom) Order. It was held that because of s 132(1), in the event of conflict, the provisions of the relief order should prevail.

9. No doubt under the proviso to para 33 of Schedule 6 to the Act, such interest paid or credited by the branch to the appellant on account of funds provided by the appellant for the purpose of maintaining networking funds required under the 1973 Act is not exempt from tax but in the light of the conflict of the provisions of the proviso with art IV cl 1(a) of the agreement, providing otherwise, the provisions in the said clause of the article prevails. Though art XVIII cl 1 states that the laws of Malaysia and Singapore shall continue to govern the taxation of income derived from either country but the clause itself excepted it where express provisions to the contrary is made in the agreement. But art IV cl 1(a) made an exception by limiting the income and profits of a Singapore enterprise to ‘so much thereof as is derived by that permanent establishment in Malaysia’. Therefore, the basis for the respondent imposing the additional tax on the appellant relying on the proviso to para 33 thereof lacks merit.

10. However, in dismissing the appeal of the appellant, the Special Commissioners had misconstrued the provisions of art IV cl 1(a) of the agreement. It must not be lost sight of that the concerned interest amount was not received by, paid to or derived by the branch in Malaysia from its clients on account of its business on behalf of the appellant. Under the said art IV cl 1(a), tax may be imposed only on the income or profits derived by the branch in the course of its business. It is logical because it is only that income or profits made by the branch in the course of its business here which constitute the income or profits of the appellant in Singapore. For whatever construction to be given to cl 1(b) of art IV, it is irrelevant for the Special Commissioners to consider because that cl 1(b) relates to a Malaysian enterprise having a branch in Singapore, which is the converse. The fund provided by the appellant in Singapore is considered as a loan granted by it to its branch in Malaysia and interest is payable by the branch to the appellant on account of the loan so granted. It is therefore correct as so contended by the learned counsel for the appellant before me that the payments by way of interest by the branch to the appellant for the utilization of funds provided by the appellant in Singapore to the branch in Malaysia constitutes a business expense of the branch and a business income to the appellant which even under the main provisions of para 33 of Schedule 6 to the Act is exempted from tax because the appellant was not resident in Malaysia and the said income is not such interest accruing to a business in Malaysia.

11. In the circumstances, the appeal by the appellant is allowed as the concerned interest is not the income or profits of the branch in the course of its business on behalf of the appellant. Pursuant to para 39(a) of Schedule 5 to the Act, I order that the additional assessments to which the case relates be discharged and if paid be refunded to the appellant. Costs to the appellant.

Cases

Director General of Inland Revenue v EIL (1950-1985) MSTC 256

Ostime (HM Inspector of Taxes) v Australian Mutual Provident Society 38 TC 492

Legislations

Banking Act 1973 

Double Taxation Relief (Singapore) Order 1968 

Income Tax Act 1967: s.132

Representations

Sandrasegaran Woodhull (Shearn Delamore & Co) for the appellant.

Salmah Kassim (Legal Officer, Department of Inland Revenue, Malaysia) for the respondent.

Notes:-

This decision is also reported at [1997] 3 MLJ 359.