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High Court issues three rulings in relation to Subsidiary Legislation on Labuan Business Activity

27 July 2023

In Bright World Trading Co Ltd & Ors v Director General of Inland Revenue & Anor and Other Cases [2023] 6 CLJ 538, the High Court handed down three rulings in relation to the following subsidiary legislation made under the Labuan Business Activity Tax Act 1990 (“LBATA”):  
1. Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2018 [P.U.(A) 392/2018] (“the 2018 Regulations”);
2. Labuan Business Activity Tax (Requirements for Labuan Business Activity) 2018 (Amendment) Regulations 2020 [P.U.(A) 375/2020] (“the 2020 Regulations”); and
3. Labuan Business Activity Tax (Requirements for Labuan Business Activity) Regulations 2021 [P.U.(A) 423/2021] (“the 2021 Regulations”).
The 2018 Regulations (which were amended by the 2020 Regulations) and the 2021 Regulations set out the requirements (“substance requirements”) that have to be satisfied by a Labuan entity in order for its business to be taxed at the rate of 3% of its chargeable profits under section 4 of the LBATA instead of the rate of 24% under section 2B(1A) of the LBATA.1 The 2021 Regulations which revoke the 2018 Regulations were gazetted on 19 November 2021, purportedly to take effect retrospectively from 1 January 2019.
 
The High Court held that:
1. the 2018 Regulations are ultra vires and invalid;
2. the 2020 Regulations are invalid; and
3. the 2021 Regulations are to take effect prospectively from the date they were made, namely 19 November 20212 and not retrospectively from 1 January 2019 as provided in the 2021 Regulations.
The 2018 Regulations and the 2020 Regulations
 
The High Court’s reason for striking down the 2018 Regulations was that the 2018 Regulations were made by the Deputy Prime Minister3 and not by the Minister of Finance. According to the High Court, “[i]t seems that there is no order of notification in the Gazette by the Yang di-Pertuan Agong conferring or designating the Deputy Prime Minister with the functions and responsibility for the country’s finance during the time when the 2018 Regulations were enacted by the Deputy Prime Minister.”4
 
Second, as there are no provisions in the LBATA that allow the Minister of Finance to sub-delegate the powers conferred on him to make subsidiary legislation, the purported exercise by the Deputy Prime Minister of the powers to make the 2018 Regulations contravenes the maxim delegatus non potest delegare and the 2018 Regulations are therefore ultra vires and invalid.
 
Although the 2020 Regulations were made by the Minister of Finance, the said regulations are likewise invalid and ineffective as they purport to amend the 2018 Regulations which are invalid.
 
The 2021 Regulations
 
According to the learned Judge:
1. the applicants in this case have the vested rights as Labuan entities with business activities not required to satisfy the substance requirements and are entitled to the benefit of being subjected to tax at a lower rate under the LBATA before the making of the 2021 Regulations; 
2. it is impossible for the applicants now to go back in time to 2019 to fulfil the substance requirements as prescribed by the 2021 Regulations in order to avoid being subject to a higher tax rate;
3. to require the applicants to go back in time to comply with the substance requirements retrospectively would be a grave injustice to them. The legislature could not have intended to confer such authority or power upon the Minister of Finance or delegate the authority or power to prescribe the substance requirements to apply retrospectively through the provisions of sections 2B(2) and 21 of the LBATA for the purpose of making regulations;
4. there is no express provision in the LBATA which empowers the Minister of Finance to make regulations to apply retrospectively5;
5. for the purposes of delegated legislative provisions, the authority delegated to legislate by regulations has no power to legislate by regulations that apply retrospectively so as to take away the vested rights of citizens unless authorised expressly or by necessary implication by the parent Act, that is the LBATA in this case; and
6. section 20 of the Interpretation Acts 1948 and 1967 has to be narrowly and strictly construed so as to not take away the vested rights of the applicants and subject to section 30 of the same Acts.
For the reasons stated above, the High Court held that the 2021 Regulations are to be construed to apply to the applicants prospectively from the date they were made, i.e. 19 November 2021.
 
Comments
 
While the High Court’s decision that the 2018 Regulations and the 2020 Regulations are invalid is significant from a legal perspective, its practical impact is limited to the years of assessment 2019 to 2021 as the 2018 Regulations (as amended by the 2020 Regulations) have been revoked by the 2021 Regulations as from 19 November 2021.
 
The decision that the 2021 Regulations cannot operate retrospectively to deprive Labuan entities of vested rights will be welcomed by such entities that are unable to retrospectively satisfy the substance requirements introduced under the 2021 Regulations. It would appear that Labuan entities that were subjected to a higher tax rate based on the 2018 Regulations or for the period during which the 2021 Regulations purported to have retrospective effect may seek to recover the excess tax paid to the tax authority.
 
Case note by Kok Chee Kheong (Partner), Sheba Gumis (Partner), and Tan Wei Liang (Senior Associate) of the Corporate Practice of Skrine.

 

1 Prior to 1 January 2019, a Labuan entity was entitled to elect to be charged a fixed tax of RM20,000 for a year of assessment under section 7 of the LBATA instead of being subject to tax at the rate of 3% of its chargeable profits under section 4 of the LBATA. Section 7 was deleted from the LBATA pursuant to the Finance Act 2018.
2 It is respectfully submitted that the 2021 Regulations should come into effect from 22 November 2021, i.e. the day after the 2021 Regulations were published in the Gazette, and not from 19 November 2021, i.e. the day on which the 2021 Regulations were made (see section 19(1) of Part I of the Interpretation Acts 1948 and 1967).
3 The 2018 Regulations state that the regulations were made by the Deputy Prime Minister “exercising the functions of the Minister of Finance”.
4 The responsibilities of the Ministers of the Federal Government are usually set out in an Order, e.g. Ministers of the Federal Government Order, issued by the Yang di-Pertuan Agong under section 2 of the Ministerial Functions Act 1969. Where a Minister is temporarily unable to exercise his functions, whether due to sickness, absence or any other cause, the Yang di-Pertuan Agong may exercise his powers under section 51 of Part I of the Interpretation Acts 1948 and 1967 to direct that the powers of that Minister to be exercised by another Minister under a Temporary Exercise of Ministerial Functions order.
5 In coming to this finding, the learned Judge did not appear to have considered section 20 of Part I of the Interpretation Acts 1948 and 1967 which, as a general rule, allows subsidiary legislation to be made to operate retrospectively “notwithstanding the absence of any express provision in any Act or other written law”.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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