Legality of Sarawak’s petroleum sales tax hinges on MA63

Petronas is said to be the only company that has yet to pay the tax, which came into effect at the beginning of the year

by MARK RAO / pic by BERNAMA

THE court will decide the legitimacy of the imposition of the sales tax by Sarawak on petroleum products based on the Constitution and what is provided under the agreement when the East Malaysia state joined Malaysia 56 years ago.

The state, which is rich with petroleum resources, imposed a 5% sales tax on petroleum products – crude oil, natural gas, liquefied natural gas, chemical-based fertilisers and gas-to-liquid products — sourced from the state early this year.

Petroliam Nasional Bhd (Petronas) has not paid the additional sales taxes for its oil and gas (O&G) exploration activities in the state.

Other states are not allowed to impose sales taxes as such tax collections fall under the federal jurisdiction or to prevent double taxation for the same products or services.

The Sarawak Comptroller of the State Sales Tax and Sarawak state government filed an action suit against Petronas before the High Court in Kuching last week to demand the payment of the 5% sales tax.

Petronas confirmed the legal filing but did not mention its responses.

Petronas is said to be the only company that has yet to pay the tax, which came into effect at the beginning of the year, despite repeated warnings to do so and legal actions threatened by various state representatives.

The Sarawak government claimed Petronas has breached the Sarawak State Sales Tax Ordinance 1998.

A local tax expert said Sarawak’s petroleum sales tax is “nothing unique” as certain powers are reserved for the Sabah and Sarawak state governments.

“It is a historical legacy vis-àvis the Malaysia Agreement 1963 (MA63), but the states had likely agreed to hold back this authority,” a legal expert, who preferred to remain anonymous, told The Malaysian Reserve (TMR).

“However, if they wanted to reassert their authority, they can do so if backed by state law or legislation,” said the expert.

The expert said some “powers” are exclusive to Sabah and Sarawak which are nonexistence to other state governments inPeninsular Malaysia.

Sarawak is already demanding 20% royalties for the petroleum resources mined in the state. The federal government had argued the high royalty would have a huge negative financial impact on Petronas.

International Islamic University Malaysia assistant professor and deputy legal advisor Dr Wan Mohd Zulhafiz Wan Zahari said Sarawak is arguing that its State Sales Tax Ordinance 1998 is a valid law.

This is as it was passed pursuant to Article 95B(3) of Malaysia’s Federal Constitution, he said.

“Since Petronas refused to pay the tax, Sarawak is taking action against Petronas to recover the payment,” he said, adding that it is up to the court to decide if the state has the authority to impose taxes on Petronas.

Under Article 95B(3) of the Federal Constitution, the Legislature of Sabah or Sarawak can make laws for imposing a sales tax. Any sales tax to be imposed by these states will be deemed to be among the matters enumerated in the state and not federal list.

Meanwhile, jurisdiction over the legal proceedings taken against Petronas could still fall under the Federal Court despite the legal action being filed before the Kuching High Court. This will depend on the court proceedings itself.

The MA63 is understood to have granted Sabah and Sarawak control over its natural resources in exchange of joining Malaysia.

But following the Petroleum Development Act 1974, regulatory authority over Malaysia’s petroleum resources was given to Petronas in exchange for royalties paid to Sabah and Sarawak.

Other oil-producing states like Kelantan and Terengganu were given compassionate funds.

A steering committee has been established by the government to review the MA63 and Sabah and Sarawak’s rights in relation to the agreement.

Petronas’ third-quarter performance for the year, where it noted that a 48% year-on-year drop in profit on weaker commodity prices and impairments, showed that the national O&G company is not immune to market challenges. Any additional costs to be incurred, be it in the form of new taxes or higher royalties paid, could compromise the company’s profitability.