The High Court in Multi Square Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (WA-14-11-04/2021) held that the management fees are not tax deductible as both one-page Management Services Agreements (“MSAs”) are sham agreements.

The salient facts of Multi Square (supra) are as follows:

a. The Taxpayer is a subsidiary of Sersol Berhad (“Sersol”) and carrying on the business of manufacturing and sale of paints and chemical solvents.

b. Pursuant to a tax audit, the Inland Revenue Board of Malaysia (“IRB”) disallowed the management fees paid to Sersol (RM316,500 in year of assessment (“YA”) 2010 and RM728,500 in YA 2011) on the grounds that the management services were part of the regular responsibility of Sersol as the Taxpayer’s holding company and issued Notices of Additional Assessment.

c. The Taxpayer appealed to the Special Commissioners of Income Tax (“SCIT”) but the appeal was dismissed.

 The High Court held that, amongst others:

a. Both the MSAs are only a one-page agreement.

b. The terms and conditions stated in the MSAs are very terse and lack of details.

c. The MSAs are silent on:

i. How the Taxpayer could ensure Sersol indeed rendered the management services.

ii. How many Sersol’s executives or manpower were involved.

iii. The time costs spent by Sersol.

iv. The extent of Sersol’s liability as a service provider to the Taxpayer.

d. No proper record keeping, and documents are available to substantiate that Sersol duly rendered the management services to the Taxpayer.

e. The MSAs are sham agreements designed to give third parties or to the court the appearance of creating legal rights and obligations between Sersol and the Taxpayer when it was indeed Sersol’s obligation as the holding company to ensure that its subsidiaries to comply with the requirements of Bursa Malaysia.

f. Thus, the management fees incurred are not tax deductible expenses under Section 33(1) of the Income Tax Act 1967 (“ITA”).

Comments

At the outset, this case shall not be read as management fees expenses are not tax deductible. In Multi Square (supra), the management fees expenses are not tax deductible because the Taxpayer failed to provide any evidence to substantiate that Sersol duly rendered the management services and, most importantly, the MSAs are regarded as sham agreements by the High Court.

It is not uncommon that the holding company or an identified SPV to provide management services to a group of companies and thereafter bill for the services among themselves. However, a proper management services agreement and proper record keeping, appear to be often overlooked by the taxpayers. This case demonstrates the importance of having a proper management services agreement which clearly set out all the salient terms (e.g. obligations, liabilities, record keeping of services rendered), and proper record keeping. Otherwise, the taxpayers may run the risks of not being able claim a tax deduction on the management fees expenses incurred.

About the author

Desmond Liew Zhi Hong
Partner
Tax
Halim Hong & Quek
[email protected]