New IRB penalties disturbing

THE tax filing deadlines for 2012 are fast approaching, as such it is a good time to re-examine the amendments to the penalties for late filing introduced last year.

It was announced on Oct 1, last year, that the Inland Revenue Board (IRB) will impose a 20% to 35% penalty on taxpayers who are late in submitting their annual income tax returns.

Despite only being announced on Oct 1, this directive was made effective from June 1, 2011.

Prior to this, the IRB had imposed penalties based on graduated scale rates with a minimum of RM200 up to a maximum of RM2,000 for late submission of tax returns, depending on the number of offences committed by the taxpayers.

It is very distressing that the new penalty rates are calculated based on the total tax payable and do not take into account any payments already made to the IRB via monthly deductions or tax instalment payments.

Therefore, even if the payments made by the taxpayer exceeded the final tax payable, a penalty will still be imposed and unless the total tax payable is less than RM10,000 the new penalty rates can result in a very substantial increase in the penalties imposed.

In the case of large profitable companies, the penalties can even range in the millions.

The new penalty rates to be imposed is dependent on the duration of late filing and therefore unlike the previous system, the IRB does not take into account the number of offences committed.

A taxpayer who is late once, is imposed the same penalty as a taxpayer who is a habitual repeat offender.

This is not in line with the socially accepted norm that harsher penalties are only imposed on repeat offenders.

It is also disturbing to note that the penalties are imposed automatically and therefore if a taxpayer submits the e-filing even a single minute past midnight the minimum penalty of 20% shall apply in full.

In all fairness, the IRB has stated that a taxpayer can appeal against the imposition of the penalties. However this is an added hassle to the taxpayers and there are no guidelines on the acceptable reasons that the IRB is willing to accept.

The IRB has also stated in dialogues with professional accountancy bodies that failure or lateness on the part of the accountant or tax agent is not an acceptable reason for appeal against penalties.

The question then arises: Would delays arising from the submissions past midnight on the last day because of slow response from the e-filing server be considered a failure or lateness on the part of the accountant or tax agent?

In the current environment of global financial turmoil and the strong measures taken by the Government to encourage Foreign Direct Investment and entrepreneurship by local Malaysians, it is disappointing to see the IRB impose such business unfriendly policies.

Malaysia already has a substantially higher income tax rate compared to certain countries in the region. In this context, the imposition of such harsh penalties can be a severe disincentive for investors and aspiring entrepreneurs, especially when we consider the already onerous obligations and penalties under the self assessment system.

However, the most disturbing aspect is the manner in which it was implemented. The IRB elected not to conduct any prior consultations with key stakeholders who would be affected by such a decision, such as taxpayers and professional accountancy bodies, but instead chose to implement the changes unilaterally.

The IRB had already begun to impose the new penalty rates prior to the announcement on Oct 1, 2011 and therefore the substantial increase in penalties caught the accountancy industry and taxpayers by surprise.

It was only after much lobbying by professional accountancy bodies that the IRB agreed to give an exemption and only impose the new penalty rates on late submissions of return forms submitted after Sept 30, 2011 as well as announce the penalty rates on Oct 1, 2011.

The IRB should have engaged with the professional accountancy bodies prior to the implementation of any major changes as it must be recognised that tax agents play a crucial role in assisting the IRB to ensure that the correct amount of taxes are collected.

Tax agents are already embarrassed when telling their clients that fees paid to the tax agent is not allowed as a deduction and yet must now add to that their ignorance of impending major changes which have a material effect on both themselves and their clients.

It must also be noted that the imposition of harsh penalties for late filing can also be a serious threat to the future of the accountancy profession. Taxpayers might blame the tax agents or auditors for the late filing and initiate legal action to claim the penalties and damages.

Accountants working for the taxpayer would also be at risk as the accountant is the employee tasked with ensuring that the taxpayer submits all the required returns in time.

This risk is further intensified because on March 29, the IRB announced that an incomplete Income Tax Return Form will be returned and the penalty will be imposed if the re-submission is late.