Initial Financing Costs Sink Manufacturers’ Tax Appeal

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The petitioners are called PM, PR, and PI, which seem to be abbreviations for company names.

Obtaining financing can be costly for businesses, but can those costs be deducted against taxable income?

Three manufacturing companies found out that the answer is often no, as tax authorities likely consider financing-related expenses capital expenditures.


  • The taxpayers (PM, PR and PI) were companies manufacturing and marketing petroleum products in Malaysia.
  • They incurred various expenses for obtaining working capital financing facilities, including:
    • upfront fees,
    • stamp duties,
    • agency fees and
    • legal fees.
  • The taxpayers claimed these expenses were deductible under Section 33(1) of the Income Tax Act 1967 as incurred in the production of income.
  • The tax authorities disallowed the deductions because the expenses were capital in nature.


  • Whether the financing-related expenses were deductible under Section 33(1) as argued by the taxpayers.
  • Whether the expenses were capital expenditures as contended by the tax authorities.

The Special Commissioners of Income Tax’s Decision:

  • The Special Commissioners dismissed the taxpayers’ appeal and held the expenses were capital expenditures, not deductible under Section 33(1).


  • The court found the expenses were incurred to obtain a sustainable financing source, indicating a capital purpose.
  • Expenses to augment capital or create an enduring benefit are capital in nature based on principles laid out in Public Ruling No. 6/2006.
  • The taxpayers failed to prove the expenses were wholly and exclusively incurred in the production of income, a requirement under Section 33(1) for deductibility.
  • As capital expenses, the financing costs were not allowable deductions but added to the capital cost base.


  • The Inland Revenue Board successfully argued that the outlays were capital in nature rather than wholly incurred in producing income.
  • These cases highlight the need for companies to be cognizant that the purpose and nature of expenditures determine deductibility, not merely the amount.
  • Tax treatment may not align with accounting treatment. As this ruling shows, financing expenses fail the deductibility test as they secure an enduring benefit.
  • Companies should be aware that deductibility depends on the purpose and nature of expenses based on tax law principles.



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