Introduction
Businesses/taxpayer company may be paying out "incentives" on top of their employed employee's salary or agent. It may not be stated within he agency agreement or the employment contract. Below are some of the reported case laws that have discussed the tax deductibility of incentives payment in various subject matters.
Mug, T-Shirt & Umbrella
In Aspac Lubricants (Malaysia) Sdn Bhd v KPHDN (2007), the taxpayer company (appellant) had appealed on the question of law on whether items such as mugs, t-shirts and umbrella (“items”) which carries the appellant’s logo given away to customers is deductible under s33(1) of ITA 1967. The COA has held that those items are deductible. The Court held the shirt may be worn and the mug may be used for several purposes which confer practical purposes. The giving out of items to the customers is for the sole purpose of business promotion and it is not an entertainment expense under s39(1)(l) of ITA 1967.
Incentives payment paid to marketing agent
In KPHDN v NV Alliance Sdn Bhd (2010) (High Court), the issue arose from appeal was that whether the payment of incentive to the sales agent was deductible under s.33 of the ITA 1967. The SCIT Tribunal has decided that the payment of incentive was incurred in promoting the taxpayer’s (respondent) business thus was revenue in nature. The LHDN had appealed to the High Court (HC). The HC had held in favour of the LHDN. The HC had disallowed the taxpayer claim for the incentive paid out because:
(i) the Public Ruling No. 3/2004 has no force in law;
(ii) the incentives were paid through a competition or contest organized by the respondent to sales agent who achieved their sales target. Although the incentive payment had a purpose to promote the respondent business, it has also been paid to reward sales agent who achieved their sales target;
(iii) Respondent did not include the incentive payment in the income tax statement of each sales agent;
(iv) the incentive payment had not been part of the contractual commissions paid under the agency agreement;
(v) the incentive payments were by nature gratuitous without consideration.
In NV Alliance Sdn Bhd v KPHDN (2012) (Court of Appeal) has reversed the decision in the High Court, and held that the incentives paid out was deductible under s.33 of the ITA 1967.The reasons for allowing the appeal were as follow:
(i) The expenses incurred are solely with the object of promoting the business:
AW1 - all the expenses were made to the agent who achieved the sales target as set out in the respective notices sent out to them. The incentives are in the form of additional remuneration to the agents who met the sales target. The incentive is to motivate the sales agent to work harder to increase the sales of the agent
AW2 - The agent's income is in the form of commission based on the agent's performance. Besides commission, the agent was also paid with other incentives such as, sales target incentive, agency sales competition incentives, quarterly incentive and cash incentive.
(ii) The expenses are related to the performance of profit earning operations; therefore it is revenue in nature.
Incentive trip
In KPHDN v Khind- Mistral (Borneo) Sdn Bhd, the issue arose was whether the incentive trips incurred by the taxpayer company is deductible under s33 of the ITA 1967. The taxpayer company wanted to remaward its electrical products dealers by giving them trips to tourist destinations both local and overseas if they have hit their sales target. LHDN had argued that these incentives trip were entertainment under s18 and will not be allowed for deduction under s39. The High Court had decided in favor of the taxpayer company as follows:
(i) these incentive trips were not given to any dealer. It was only given to those who achieve their sales target;
(ii) achieving the sales target can only mean one thing- boosting the sales target of the company and the company’s income. These trips are not hospitality under s18;
(iii) Hospitality means the actions of entertaining someone without that person having to subscribe towards the costs incurred by the hosts for the purpose of entertaining that someone (United Detergent Industry v DGIR);
(iv) the dealers or recipients of the incentive trip must earn those trips;
(v) only those who achieved sales target are entitled to the trips because they have contributed to the generating of income for the company.
Tour promotions, sponsorships, sales promotions and business trips
In Pensonic sales Sdn Bhd v KPHDN, the issue was related to the expenses incurred for tour promotions, sponsorships, sales promotions and business trips (“trips”). LHDN has disallowed the deductions under s39 of the ITA 1967. The High court had disallowed the appeal by the taxpayer in claiming the deduction for the trips. The reason for rejection were as follows:
Tour promotions, sponsorships, sales promotions
The trips are given via a credit notes or rebate which links back to the sales transactions and the dealers finally bear the ultimate cost. The trade discount under the tour promotion is imputed in the Appellant’s product price. Therefore ultimately the dealer bears the costs of the trips. The trip discount works in terms of getting a dealer to promote sales as the dealer will push harder at the year end to achieve the published targets as they do not want to lose out on the trade discount/ rebate package. The dealers do not regard trade discounts in the form of rebates, credit notes or trips as free gift as they have to earn them. Sales and promotion are part of the standard practice in electric and home appliances sales industry. The cost of sponsorships and sales promotions are imputed into the Appellant’s product price and given via a credit note or rebates. Therefore it is all deductible.
Sponsorship
Sponsorship is allowed as there was evidence provided by the taxpayer.
(c) Business trips
Business trip claim for deduction is disallowed.
(ii) The taxpayer travel overseas to meet foreign business partners. To learn from foreign manufacturer on the changes. It is advisable to get an official letter from the foreigner manufacturer to invite the tax payer to go overseas for the business trip.
(iii) the taxpayer is also advisable to prove its itinerary, minutes of meeting and other supporting documents to support its claim.
(iv) taxman argued that the taxpayer is merely a trading company. There is no such role to go and attend to oversea meeting that often.
Commission expenses (Insurance Agent)
In Etiqa Family Takaful Berhad v KPHDN, the issue was related to the payment of commissions expenses on the Wakalah fee on whether it is deductible under s33 of the ITA 1967. The court had disallowed the deduction with reasons as follows:
(i) There is a specific section, s60AA(9)(b)(iv) ITA 1967 which was inserted via Finance Act 2014 to allow deduction of commission expenses under the shareholder fund;
(ii) The court accepted the revenue’s counsel argument that the takaful business is a separate and distinct business. It is for this reason that the parliament enacted s60AA(9)(b)(iv) ITA 1967 to deal with a specific business of a Takaful operated;
(iii) s60AA(9)(b)(iv) ITA 1967 prevails over s33(1) of the ITA based on the maxim of generalia specialibus non derogant;
(iv) the taxpayer was merely having a different interpretation of the provision within ITA. The taxpayer had taken professional advice from an independent tax firm. It was under the impression that the commission expenses were covered under s23 of the ITA. Therefore this is not negligence within s91(3) of the ITA by the taxpayer.
Franchise fee
In Ketua Pengarah Hasil Dalam Negeri v. Shaklee Products (M) Sdn Bhd MTKL Rayuan Sivil No: RI-14-07-2008, it was held that the payment to acquire a rights to operate a business (business name, system and products) of the franchisor in Malaysia is capital in nature.
In conclusion
There needs to be proper planning to the area of incentive payment by company so that they can fully maximum the deductibility of the payment of incentives.
This article is co-written by Mr. Dylan Chong & Ms. Lim Jia Kei, who is currently undergoing the CLP Examination.
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