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Wednesday, June 27, 2012

New tax rules create a quandary for lending to family members

CHARGING below market interest gets you in trouble with the taxman or the law against money-lending.

“Neither a borrower nor a lender be”.

This advice by Polonius, the King's adviser to his son in Shakespeare's Hamlet remains good advice today.

But good advice, it is said, is least heeded when most needed.

Lending money gives rise to risk of default, a stark reminder of today's global phenomenon.

At a personal level, it can lead to the loss of a friend, a relative remaining one only by virtue of blood ties.

The term “relative” is defined in our tax law to include a wide network of family members including a nephew, a niece, a cousin and somewhat incredibly “an ancestor or lineal descendant.”

How the latter is to be determined, the law has not made clear, leaving the conundrum perhaps to the wisdom of the courts.


In many cases, loans between family members are below-market loans.

By this is meant that the lender charges either no interest or a rate that is less than the “market rate” also known as the “arm's length” rate.

This is in breach of the tax law, which requires a loan to a related party including a relative to be at the market rate of interest.

This requirement has been made clear by a recent Government Gazette setting out rules on transfer pricing as the rules do not state that such loans must be in the context of carrying on a business or must be used in a business.

Thus when you make a below market loan to a relative, driven entirely by altruistic reasons and devoid of any business considerations, the tax law treats you as having derived imputed' income from your borrower and would proceed to levy tax on that imputed income.

This phantom income on which tax is levied equals the market rate you should have charged less the interest you actually charged.

This means that you must report the imputed interest as taxable income in your tax return failing which you will be in default of the tax law.

If you were to consider avoiding this unfavourable tax outcome by being somewhat hard-hearted and charged interest to your relative, then you are in breach of the Moneylenders Act.

The law here precludes the charging of any interest since you are not a licensed moneylender.

A moneylender under this law is any person who “lends a sum of money to a borrower in consideration of a larger sum being repaid to him”.

So this puts you, the lender, setting out to help a financially distressed relative, on the proverbial “horns of a dilemma”.

You are in the untenable position of breaking one or the other law.

This state of affairs seems to run counter to any coherent tax policy objective.

In the United States, the lending of money below market rate historically occurred without tax consequences.

Through a series of court cases over several years culminating in a case in 1984, the court held that the lender's right to receive interest is a “valuable property right” and where such a right is transferred by way of an interest-free loan, it is in the nature of a gift subject to “gift tax”.

But the point here is that the taxing of the interest-free loan is because of the existence of a gift tax.

We do not have such a tax in Malaysia and taxing imputed interest, as this measure is generally known, between related individuals not conducting business transactions, is a retrograde step.

We had long repealed a similar imputed income provision, which treated a person owning an unoccupied house as having an income source, even where no income exist.

Business related loans follow similar concepts, but here the law is entirely understandable and justified where the intent is to avoid tax.

If company A makes an interest-free loan to its subsidiary which is a tax exempt pioneer company, then this leads to tax results which are not reflective of transactions between commercial parties.

Not charging interest inflates the subsidiary's tax exempt profits enhancing its capacity to pay tax exempt dividends, without a corresponding tax liability on the lending parent had interest been charged.

Here the existence of a “tax shelter” where one entity has either tax exempt status or a tax loss position, can lead to tax leakage, the reason for the arm's length rule.

Interest-free business lending between related companies can also lead to anomalous results.

This is a consequence of the divergence between the tax treatment and the new accounting standards for public listed companies.

The taxman will require tax to be imposed on the lender on the imputed market rate interest.

Whereas if such a company lends RM100,000 to its subsidiary interest - free to be repaid in equal instalment over five years and the market interest rate is 10%, the accounts will reflect the lender as having a debt of RM75,816, which is the discounted amount at the inception of the loan.

Over the period of the loan, the borrower will be shown as having paid interest of RM 24,184 which will equal the discount.

Thus the books of both companies will be recorded as if interest had been paid as shown in the table.

Since these are book entries and there are no costs incurred or income earned, they have no tax consequence.

This reflects the economic substance of the loan transaction as distinct from the strict legal substance, the mainstay for tax.

This fundamental difference in concept tends to make attempts at convergence between the accounting and tax treatments particularly problematic.

The more pressing issue is doing away with the taxing of imputed interest on non-business lending between relatives, a measure which seems unjustified.

Kang Beng Hoe is an executive director of TAXAND MALAYSIA Sdn Bhd, a member firm of TAXAND, the first global organisation of independent tax firms. The views expressed do not necessarily represent those of the firm. Readers should seek specific professional advice before acting on the views. Beng Hoe can be contacted at kbh@taxand.com.my

Learn more about Malaysian new Assembly Act

Previously, everything was prohibited unless permitted. Now everything is permitted unless prohibited. This is a significant shift in civil rights thinking.

IN early legal systems, the primary end of the law was to keep the peace. In modern legal orders, a just balance between the might of the state and the rights of the citizens is attempted. No field better exemplifies the difficulty of achieving this fair balance than Malaysia’s law relating to assembly and procession.

The recently enacted Peaceful Assembly Act 2012 has received much criticism in the media and deserves scrutiny of its high and low points.

Police permit: Previously under Sections 27 of the Police Act, citizens had to apply for a police permit for gatherings or processions of more than three people.

Under the new Act, there is no requirement for a police permit, but organisers of assemblies must notify the authorities 10 days in advance under Section 9(1). No notice is required for meetings in designated places or if the assembly is an exempted assembly.

If in response to a notification the police do nothing, then under Section 14(2) silence is deemed as consent.

Previously, everything was prohibited unless permitted. Now everything is permitted unless prohibited. This is a significant shift in civil rights thinking.

No power to ban: Under the Police Act, assemblies and processions could be prohibited outright or conditions imposed.

The new Act in Section 15 permits the OCPD to impose significant restrictions and conditions including the date, time and place of the assembly. However, there is no power to issue an outright “No” before the assembly takes place.

Time limits: Just as citizens are required to give advance notification of 10 days, the police response must also be communicated within a stated time limit of five days: Section 14(1). An appeal to the Home Minis­ter must be decided within 48 hours: Section 16(2).

Designated places: The Act permits the minister to designate places where assemblies may be held without notification to the police. Critics have charged that this is an attempt to isolate Opposition gatherings in distant and low-impact places.

This is an overly cynical view. Actually it is a good idea to designate some fields, stadiums and Speakers’ Corners for public assemblies.

What would be improper is if the owners of designated places indulged in the selective granting or refusal of permission. If this happens, judicial review is likely on the (Article 8) principle of equality or the administrative law principles of reasonableness, irrationality or abuse of power.

Exempted assemblies: This Act does not apply to election campaigns, strikes, lock-outs and pickets under the Industrial Relations Act and the Trade Union Act: Section 1(3).

It is also inapplicable to religious assemblies, funeral processions, weddings, open houses, family get-togethers, family days and meetings of societies or associations: Third Schedule Paragraph 9(2)(b).

The words “meetings of societies and associations” are very broad and permit vast possibilities.
Right to object: All persons likely to be affected by a proposed assembly have a right to be informed and to raise objections. In principle this is acceptable.

However, there is a perception that the police may pander to extremist groups; subordinate minority rights to majority concerns, and discourage lawful but unpopular assemblies. This perception needs to be proved wrong.

Judicial review: Mercifully, the Act has no ouster clauses for excluding judicial review.

Counter-assemblies: The Act takes admirable note of counter- and simultaneous assemblies, and seeks to regulate them by giving preference to the assembly first in place. It also provides for alternative sites, times and dates for the counter- or simultaneous assembly or assemblies.

Spontaneous gatherings: These are not contemplated by the law and are presumably not illegal.

Involuntary presence: The definition of “participant” leaves out anyone who is unintentionally or involuntarily present at an assembly. This will be a useful defence to a citizen who is the subject of a prosecution.

Despite the above wholesome features, the reformed law still bristles with some controversial provisions.
Street protests: These are a form of assembly in motion, a procession or a demonstration. They were permitted (within limits) subject to regulation under Section 27 of the Police Act, but are now absolutely banned.

Other ambiguous aspects of the law are that a street protest by definition involves “walking in a mass march or rally.” So if there is no walking but a motorcade of cars or bikes, that will not be caught by this law and the authorities may have to use Section 268 of the Penal Code or some provision in the Road Traffic Act 1987.

Further, although “street protests” are banned, the Act refers here and there to “processions” and “assemblies in motion.” One has to struggle to understand the distinction bet­ween a lawful procession and an unlawful street protest.

Police discretion: Under the Police Act, police discretion to grant or withhold a permit was more or less unfettered and the power to impose conditions was very wide, although subject to occasional judicial review as in Chai Choon Hon v Ketua Polis Kampar (1986) and Patto v CPO Perak (1986).

Similar to the Police Act, the new law in Section 15 still confers on the men in blue very wide discretion to impose “restrictions and conditions,” arrest without a warrant any person failing to comply with a restriction or condition, or order the assembly to disperse.

It must be acknowledged, however, that such wide discretion is known in other jurisdictions like Britain, Finland and the state of Queensland in Australia, but subject to external review.

External control: Unlike the recent Security Offences (Special Measures) Act which subjected the powers of the police and the Minister to judicial control, this Act makes no effort to subject police discretion to external, non-executive control.

An appeal lies with the minister, which basically means there is an appeal from the executive to the executive.

Fortunately, however, there is no ouster clause, and judicial review on the first principles of administrative law is a possibility.

Public places: These are defined too broadly, so they include private places open to or used by the public by the express or implied consent of the owner or on payment of money. This means that private premises, hotels and halls to which members of the public are invited or permitted are deemed public places!

Constitutionality: It remains to be seen whether the courts will review the constitutionality of some parts of this law. Issues germane for discussion are:

> The total ban of street protests without linking it to public order and national security may well fall foul of Article 10(2).

> The ban on people under 21 organising an assembly may be challenged as a violation of Article 10 (free speech) and Article 8 (equality). It is noteworthy that case law has established that parliamentary res­tric­tions on human rights must be reasonable by objective standards (Hilman Idham).

> One of the grounds on which the police may exercise the power to regulate assemblies is “the protection of the rights and freedom of other persons” (sections 2, 3 and 15). These words of limitation do not occur in Article 10(2), and may therefore be seen as an extra constitutional limitation.

In most countries including the US and Malaysia, courts have accepted implied limits on human freedoms and have often carved out common law restrictions on fundamental freedoms.

In sum, the Act has many wholesome features. But it is defective in that it imposes no objective restraints on the police and ministerial discretion.

Nevertheless, as judicial review is not excluded, courts may provide a proper balance between police powers and fundamental freedoms. Whether the courts will play such a balancing role remains to be seen.

REFLECTING ON THE LAW By SHAD SALEEM FARUQI

> Shad Saleem Faruqi is Emeritus Professor of Law at UiTM.

Ethics vital for lawyers! Force to sign documents & hit client?

I REFER to the YouTube clip (http://www.youtube.com/watch?v=pXGuSf_YARM&sns=fb) showing a lawyer forcing a client to sign documents without reading the contents, shouting at the client, shoving him and kicking him. (See below: Lawyer who hit client claims self-defence)



Any person who encounters poor legal services or suffers detriment has the right to seek remedy.

In Malaysia, action against lawyers lies in the hands of the Disciplinary Board set up under the Legal Profession Act 1976. The Disciplinary Board is independent of the Bar Council, consists of senior lawyers, and is chaired by a judge of the Court of Appeal. It deals with all complaints against lawyers.

The Bar Council is only empowered to deal with cases of misconduct involving dishonesty, which includes cases of cheating and the misappropriation of funds. If the Bar Council receives a complaint involving dishonesty, it can apply for a court injunction to stop the lawyer concerned from practising pending investigations into his case, or apply to the Disciplinary Board for an order of suspension pending such investigations. The Bar Council will also lodge a police report in respect of the complaint if the complainant has not already done so.

The Bar Council regulates the legal profession in this country and it can deny any application to join the profession – based on the “good character” requirement. The meaning of “good character” can be a little bit hazy, but it’s been described as having a strong moral fibre, a belief the law must be upheld, and an appreciation of the difference between right and wrong.

As a regulating body, the Bar Council polices the conduct of lawyers, and disciplines members not only for unethical actions, but also rude or overly aggressive behaviour. Anyone found guilty of professional misconduct shall face suspension.

At university, legal ethics should be viewed as a major subject, to provide students with a thorough grounding of the proper spirit in which lawyers should practise. Honesty should be a crucial part of a lawyer’s education. By the time students begin pupillage, they should already have a good grasp of what makes a good lawyer. This should include knowledge on how to handle clients’ money ethically and the manner in which they are to deal with other lawyers and the courts. Such education should imbue a correct and broad mindset in students and guide them during their pupillage, as they begin to apply the legal knowledge they have acquired in theory to real-life cases.

A word to all legal professionals in Malaysia: respect your clients, the profession, the country and the public interest. Law is an imperfect profession in which success can rarely be achieved without some sacrifice of principle. But we can strive to make it a notable profession that people can respect in this country.

JACK WONG KIN TUNG
Law lecturer, Ipoh

Lawyer who hit client claims self-defence
By SIRA HABIBU  sira@thestar.com.my
http://www.malaysianbar.org.my/

PETALING JAYA: A video clip of a house buyer being pushed and kicked by a lawyer has gone viral but the purported attacker says he did it in self-defence after being provoked.

Lawyer Tan Hui Chuan, who was a Selayang municipal councillor until recently, said the house buyer had uttered “hurtful and disrespectful words”.

“I just wanted him to get away from me because he was provoking me, so I pushed him. But I did not punch, scratch or slap him. Yes, I kicked him. But I did not kick to injure him. It was a soft kick,'' he said when contacted yesterday.

The nine-minute video clip shows two men arguing in the presence of three others in an empty house. At one point, one of the men, who is apparently infuriated, pushes the other man and kicks him once. He shoves him several times later.

Gone viral: A still from the video grab purportedly showing the attack.
 
The footage, recorded by a woman who came with the house buyer, was posted on YouTube on June 21, two days after the alleged incident.

The house buyer claimed he was upset that the lawyer “forced” him to sign some documents without giving him time to verify them first.

However, the lawyer said he merely asked his client to sign the acknowledgment of receipt of several documents that had been tendered to the bank.

“It was neither an agreement nor a contract as all transactions had been completed a week earlier. The client has already taken possession of the property,'' he said.

Tan said his client went to his firm several days later and signed the acknowledgement of receipt.
“And the video was released after that,'' he said.

The lawyer felt that the house buyer had tarnished his reputation by releasing the video.

Bar Council president Lim Chee Wee said victims of physical assault could sue for damages, adding that the house buyer could lodge a police report as well.

“No amount of provocation should attract (any form of) physical assault,'' he said.

He also said that in cases of misconduct involving lawyers, the people could lodge a complaint with the council's disciplinary board.

Theng Book offers to mediate

The Star June 10 2012

PETALING JAYA: Selangor MCA Public Services and Complaints Department chief Datuk Theng Book has offered to mediate in the controversy involving a lawyer who is alleged to have assaulted a housebuyer.

He, however, urged lawyer Tan Hui Chuan to apologise to Neo Kian Hua within a week.

“Failing which, Neo can take the necessary action if he wants to,’’ Theng Book told a press conference at the Selangor MCA office here yesterday in the presence of Neo.

The alleged assault happened on June 19 after Tan summoned Neo to the house he had purchased to sign some documents.

A video clip showing an enraged Tan pushing and kicking Neo posted on YouTube went viral.

Tan, who was a Selayang municipal councillor until recently, had clarified that Neo had uttered “hurtful and disrespectful words” and that he had acted after being provoked.

The lawyer also claimed that he had merely asked Neo to sign to acknowledge the receipt of several documents that had been tendered to the bank.

Neo, a 32-year-old IT consultant, said yesterday that he had never met Tan prior to the incident as he had only dealt with his assistant.

“I also felt strange as to why he was calling for a meeting at the house and not his office,’’ said Neo, who added that he decided to get his girlfriend who accompanied him to the meeting to record it.

Neo claimed that Tan lost his cool after he (Neo) began reading through the documents before signing them.

“As I continued to read the documents, Tan grabbed them from me and told me to go to his office to do the signing,’’ he further claimed.

Theng Book advised all housebuyers and vendors to appoint their own lawyers to protect their interests.

“Banks should not recommend lawyers to vendors and buyers,’’ he said.

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Lawyer to stand trial to settle RM3.9mil claim against land owners

‘Violent lawyer’ may face action 

Tuesday, June 26, 2012

Lawyer to stand trial to settle RM3.9mil claim against land owners

Court strikes out Manoharan’s application for time extension



PUTRAJAYA: Lawyer M. Manoharan has been ordered by the Court of Appeal here to stand trial over his RM3.9mil claim in legal and consultation fees for allegedly acting for two landowners.

The panel of judges unanimously striked out Manoharan’s application for an extension of time to appeal against an earlier Kuala Lumpur High Court decision to set aside a judgment-in-default (JID) awarding him the RM3.9mil.

Ordering Manoharan to pay RM15,000 in costs, the three-man panel, led by Justice Hishammudin Mohd Yunus, also fixed Sept 20 to 21 for a full trial at the Kuala Lumpur High Court.

Also on the panel were Justices Anantham Kasinather and Lim Yee Lan.

Manoharan had filed the appeal against the High Court’s decision on May 17. However, the deadline for appeal was April 9.

In applying for an extension of time, he had claimed that he had been delayed in filing due to his case load, adding that he had put his clients’ interests above his own.

However, lawyer Mansheel Kaur, who represented the landowners, argued that “lawyers should not say that they were simply too busy to file their own appeal”.

In his lawsuit filed on Dec 22 last year, Manoharan had said that he was appointed by the landowners to advise them on land deals. He subsequently obtained the default judgment from the High Court against the two landowners.

However, the landowners – medical centre Imran ENT Specialist Sdn Bhd and its director Aminah Sirajudin – succeeded in their application to set aside the judgment on March 9.

By QISHIN TARIQ qishin.tariq@thestar.com.my
http://www.malaysianbar.org.my/legal/general_news/court_strikes_out_manoharans_application_for_time_extension.html

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China advises ASEAN to be independent

Don't be bystanders or tools of major powers, says Beijing

China has urged members of the Association of Southeast Asian Nations not to be a bystander or "a tool of major powers" to cope with the new challenges in the current global political and economic atmosphere.

"ASEAN should exercise its independent judgment to move this region forward. If ASEAN takes sides, it would lose its relevance," Vice-Minister of Foreign Affairs Fu Ying told The Nation in an exclusive interview over the weekend.

"ASEAN has an important role to play with its tried-and-true ASEAN Way, as major powers are shaping their new relations in the region."

She said relations with ASEAN countries are of "unquestionable priority" for China. China will continue to support ASEAN's "centrality" in East Asian cooperation, she said.

Fu was in Bangkok over the weekend to meet Thailand's Foreign Affairs Permanent Secretary Sihasak Phuangketkeow. In July, Thailand is to take over the role of ASEAN's coordinator with China for the next three years.

Since the dialogue partnership was established in the early 1990s, ASEAN-China relations have enjoyed robust development, she said.

"We have also encountered a lot of challenges. Yet, rather than hurting our relations, these challenges were turned into opportunities to reinforce our relations," she said.

Asked about the United States' decision to "rebalance" its forces in Asia and the Pacific, Fu said: "China has no problem accepting the US presence and its positive influence in the Asia Pacific. We welcome a constructive US role in regional affairs."

She noted, however, that there is growing concern from media and academics in China over the heavy US emphasis on security in the region.

"I've noticed that the same concern has also been heard in other Asian countries. Some say China is the 'elephant in the room'. Some others worry about a possible return to the Cold War," she said.

"As I see it, maybe it's still too early to draw conclusions."

Asked whether Beijing is concerned about Washington's possible "containment policy" against China, she said: "The US has loudly denied any intention to contain China. We will just take them at their word."


She said she did not believe any country could "contain" another country in the current global environment.

"How can anyone contain 1.3 billion people of China from building better lives for themselves?" she asked.

Fu said China's industrialization is "only halfway" complete. Its huge population means that China's per capita GDP would remain low for a long time to come.

"We are still a developing country working hard to address the imbalances and the uncoordinated and unsustainable aspects of the economy," she said.

Regarding the South China Sea disputes, the vice-minister reiterated that China wants to handle the disputes peacefully through direct negotiations between countries concerned.

"At the same time, we must protect China's sovereignty and maritime rights and interests. We remain committed to working with countries concerned to reach a farsighted and wise solution," she added.

China and ASEAN countries signed the Declaration of Conduct of Parties in the South China Sea in 2002. Central to the DOC is a commitment by all parties to "exercise self-restraint in the conduct of activities that would complicate or escalate disputes and affect peace and stability".

The vice-minister said China and ASEAN are also involved in ongoing discussions on the formulation of a Code of Conduct. "This shows that safeguarding stability in the region and managing disputes appropriately remains the mainstream thinking in our region."

She added: "We sincerely hope that China and ASEAN countries will keep a cool head on this issue and exercise restraint through action, and that all parties will refrain from undermining the atmosphere for peace and stability in the region."

She pointed out that more than 80 percent of China's trade goes through the sea lanes in South China Sea.

"Safety of the navigation routes is of utmost importance for China. We will do all we can to ensure peace in this part of the world," Fu said.


By Suthichai Yoon  (China Daily)  
Suthichai Yoon is editor-in-chief of The Nation Group in Bangkok
The Star/Asia News Network

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