• Tenaga Nasional (TNB) announced that it has received notices of additional tax assessments of RM1.4bil for year of assessment (YA) 2015, RM1.3bil for YA2016 and RM1.3bil for YA2017.

• Based on the legal advice obtained by its tax solicitors, TNB said that it has good basis to contend that there is no legal and factual basis for the Inland Revenue Board (IRB) to issue the notices.

• TNB will be appealing against the notices. There were no details on the notices of additional tax assessments.

• We view this development negatively. In total, the additional tax assessments of RM4bil are 72.1% (70.3 sen/share) of TNB’s core net profit of RM5.5bil for FY19E. We do not think that TNB would be making any provision for the additional tax assessments. TNB’s gross cash and cash equivalents stood at RM16.7bil as at end-Sept 2019.

• Also, we believe that the appeal would be a long and drawn out process. TNB’s appeal in respect of its additional tax assessments for YA2013 and 2014 has not been resolved yet.

• This is not the first time that TNB has been issued with additional tax assessments by the IRB.

• In 2015, the IRB issued additional tax assessments of RM985.6mil for YA2013 and RM1.1bil for YA2014 to TNB. The IRB had disallowed TNB’s reinvestment allowance claims for YA2013 and YA2014.

• The reinvestment allowance claims were in respect of TNB’s annual capex for the expansion, modernization and upgrading of its electricity infrastructure. TNB had recognised the reinvestment allowances as there was a letter of approval dated 21 January 2013 from the IRB.

• TNB has filed an appeal to the Special Commissioners of the Income Tax on the additional tax assessments for YA2013 and YA2014. In addition as at 31 Dec 2018, TNB recognised a tax recoverable of RM1.8bil (to be recovered from the IRB) in its balance sheet. This wasdue to the resubmission of tax computations for YA2014 following the letter of approval dated 21 January 2013 from the IRB.

• According to TNB’s 2018 Annual Report, the group did not record any tax liability in respect of the additional tax assessments for YA2013 and YA2014.

• The realisation of the tax liability depends on the outcome of the judgment by the Special Commissioners of the income Tax and the Kuala Lumpur High Court. TNB had exercised judgment that there is sufficient evidence and case law to support the group’s appeal against the notices issued by IRB.

Source: AmInvest Research - 29 Nov 2019