Stamp duty crackdown: legacy of lax enforcement or legal duty ignored?

 The sudden enforcement drive, under the newly released Stamp Duty Audit Framework effective Jan 1, 2025, raises a fundamental question of fairness and principle.

From Andrew Ewe

The Inland Revenue Board’s (IRB) recent focus on unstamped employment letters, service contracts, and other instruments has caused understandable alarm among employers across Malaysia.

What many are only now discovering is that the legal obligation to stamp these documents has existed since the Stamp Act 1949 – a statute that turns 75 this year.

The sudden enforcement drive, under the newly released Stamp Duty Audit Framework effective Jan 1, 2025, raises a fundamental question of fairness and principle: Can a law that was dormant for decades suddenly be brought to life, with penalties imposed on businesses that have long followed an unofficial industry norm?

A legacy of lax enforcement

For over half a century, the IRB rarely enforced the stamping of employment contracts or service agreements with periodic payments. Companies – large and small – operated under the reasonable assumption that such documents were not subject to stamping, or that even if they were, it wasn’t practically required.

This long period of non-enforcement effectively shaped market behaviour. Employers routinely issued letters of appointment, fixed-term contracts, and professional engagement agreements without stamping, and the IRB neither objected nor intervened.

The role of legitimate expectation

In public law, the concept of legitimate expectation arises when a public authority acts consistently over time, and individuals or entities rely on that conduct to guide their decisions.

Many taxpayers now argue that IRB’s decades-long silence constituted an implicit assurance – that unstamped employment documents were acceptable. And thus, they say, the IRB should not now impose penalties or retroactively enforce duties that were never seriously applied before.

But here lies the legal reality: while legitimate expectation is recognised in Malaysian administrative law, it cannot override express statutory obligations. The courts have consistently ruled that a taxpayer cannot rely on past lax enforcement to avoid current legal duties,especially where the law itself is clear.

So, while legitimate expectation may support an argument for fairness, grace periods, or waiver of penalties, it will not succeed as a full defence against the requirement to pay stamp duty.

A fairer way forward

The IRB is not wrong to enforce the law. But fairness demands that enforcement be proportionate and forward-looking, not punitive for past inaction that it tacitly allowed. Employers are now in a compliance bind: penalised for something they were never previously warned or reminded about.

To move forward constructively, the following approach is advisable:

1. Review all contracts – particularly employment letters, fixed-term service agreements, and any instrument involving reward payments.

2. Identify instruments that should have been stamped, especially those executed within the past three years as these are within audit range as indicated in the Audit Framework.

3. Voluntarily stamp those documents, where possible, to avoid penalties under audit.

4. Adopt a proactive stamping policy moving forward, making it part of your standard HR or legal process.

5. Engage with the IRB, where audited, to seek mitigation – citing widespread historical practice, absence of past guidance, and willingness to comply moving forward.

You may wish to wait for IRB’s decision on an amnesty period during which they may not impose any late stamping penalty.

Final thoughts

This is not merely a compliance issue. It’s a reflection of how tax enforcement must evolve -with transparency, predictability, and fairness. When a law has been neglected in enforcement for 75 years, it is not just a taxpayer oversight — it is a systemic policy failure.

The solution lies not in finger-pointing, but in balancing legal enforcement with administrative justice. Employers deserve clarity. And tax authorities owe it to the business community to enforce the law not just strictly, but sensibly. - FMT

Andrew Ewe is a Fellow of the Chartered Tax Institute of Malaysia and a former chairman of its Northern Branch.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.