Income Tax (Trading And Other Income) Act (Ittoia)

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Income Tax (Trading and Other Income) Act (ITTOIA)

Income Tax (Trading and Other Income) Act (ITTOIA)


The operational links between taxation and financial reporting was reported in detail for various developed countries. These studies show that, over time, the operational links are not stagnant for any particular country. This paper is the first known study that observes this operational link in a developing country, Malaysia in particular. By doing this, the experiences of a developing country could be highlighted. This paper applies the methodology of earlier researchers in order to measure the tax/financial reporting linkages for Malaysia over a 20-year period up to the adoption of International Financial Reporting Standards (IFRS) in 2006. This paper shows that Malaysia, similar to the US and UK, experiences disconnection of tax from financial reporting in major areas. Malaysia's colonial past had significantly influenced this disconnection and the adoption of IFRS has also preserved this disconnection


The literature that analyses the relationship between taxation and financial reporting is mostly focused on developed countries (eg. Lamb, 1996; Lamb, Nobes and Roberts, 1998; Porcano and Tran, 1998; Oliveras and Puig, 2005 and Nobes and Schwencke, 2006). This article adds to the existing research on the relationship between taxation and financial reporting by focusing on the experience of a developing country, Malaysia. There is only a small amount of literature available on the relationship between taxation and financial reporting in Malaysia. Most of the literature (eg. Soin, 1978; Singh, 1980; Kanan, 1993; Subramaniam, 2001; Singh, 2003) come from tax technical books on the Malaysian income tax or articles in local professional journals. Their discussion centered only on the relationship between revenue law and financial reporting. The relationship is determined basically on decisions reached in old UK case law, which, at times can be vague. Main cases such as Odeon and Heather were highlighted to present the general rule concerning this relationship.


To observe the operational relationship between taxation and financial reporting in Malaysia, the methodology developed in Lamb, Nobes and Roberts (1998), as refined by Nobes and Schwencke (2006) is used. This methodology, identifies 5 categories of linkage between financial reporting and taxation, see Table 1. However, the category III relationship, as modified by Nobes and Schwencke (2006) is subdivided into 2 categories: Category III (accounting leads) and Category III^sup [dagger]^ (accounting leads but with reverse effects).

Assessing The Links

In this section, the relationship between tax and financial reporting for the 17 topics over the 20-year period are examined.

Tangible Asset Measurement And Depreciation

Prior to 2006, financial reporting follows MASB 15, which allows revaluation. Past financial reporting rules and practices also show that revaluation of assets are permitted and practiced. Generally, for taxation, the measurement for fixed assets has always been restricted to only historical cost. Revaluation is not permitted.

In taxation, the capital/revenue distinction is a fundamental concept. Instead of depreciation, capital allowances are given for fixed assets. However only assets which qualify as 'plant and machinery' and ...
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