Tax Battles in the World of Takaful
In the realm of takaful, where financial operations adhere strictly to Islamic principles, a prominent operator faced a fierce tax challenge. The company had claimed deductions for:
- Profit payments on a subordinated bond
- Goodwill payments transferred from the shareholders’ fund to the annuity fund
To the operator, these financial maneuvers were essential for meeting Bank Negara Malaysia’s regulations. However, the tax authorities disagreed.
The Dispute Emerges
These deductions were claimed under the general provision of Section 33(1) of the Income Tax Act 1967. But the Director General of Inland Revenue (DGIR) rejected them, issuing Notices of Additional Assessment. The DGIR argued that the deductions were impermissible under the specific rules governing takaful operators.
The Conflict
The company’s legal team passionately defended the deductions:
“These payments are fundamental to maintaining operational stability and regulatory compliance.”
They asserted that the Income Tax Act contained no explicit prohibition against such claims.
But the DGIR was steadfast, invoking a core legal principle:
“Specific provisions override general ones.”
For takaful operators, the DGIR pointed to Section 60AA of the Income Tax Act, which governs their taxation and takes precedence over the general deductions allowed under Section 33(1).
The DGIR also cited a 2020 precedent, where similar profit payment claims on Tier 2 capital instruments had been denied. Their argument was clear: general provisions cannot override the specialized framework for takaful businesses.
The Courtroom Drama
In a tense courtroom, the operator’s counsel argued that these payments were crucial lifelines for the takaful business model. However, the DGIR countered:
“Regulatory compliance does not automatically equate to tax deductibility.”
The commissioners weighed both sides carefully, analyzing:
- The company’s reliance on legal advice
- The precedence of specific provisions over general ones
The Decision
The ruling was decisive: the commissioners sided with the DGIR.
“Specific provisions must take precedence. Section 60AA governs takaful operators, and these deductions fall outside its scope.”
The taxpayer’s appeal was dismissed, and the Notices of Additional Assessment for YA 2019 were upheld.
Lessons Learned
This case underscores critical lessons for businesses in specialized industries:
- Specific Over General: Specific tax provisions always take priority over general ones.
- Regulations vs. Tax Laws: Compliance with industry regulations does not guarantee tax deductibility.
- Precedents Matter: Prior rulings set powerful benchmarks for future cases.
In the complex world of taxation, understanding the nuances of specialized sectors like takaful can be the key to success.
Subseksyen 33(1) & 113(2), Perenggan 28 Jadual 6 serta Perenggan 5(3) & 5(6) Jadual 7A Akta Cukai Pendapatan 1967
