Rising importance of tax compliance

IN the current climate, it pays off to be on the right side of the law rather than outside the boundaries of it where the consequences can painful in the form of penalties, damage to one’s reputation and integrity, and in the extreme – imprisonment, as is happening in many countries. However much tax planning you do, you still need to get tax compliance correct and that is the first priority of the tax authorities worldwide.

Inland Revenue Board (IRB) CEO Datuk Sabin Samitah has made it clear over that IRB is vigorously addressing noncompliance. In the past month, the IRB has also made it clear that they will be going after companies employing aggressive tax planning and taxpayers who have paid up their outstanding tax liabilities.

The step up in activity by IRB is no different from what is happening worldwide.

What is tax compliance? Every taxpayer has to register his tax file and file his (tax) return in accordance with the tax laws and rules. The taxpayer needs to report his income correctly, make the proper expense deductions, claim all the permitted reliefs/ incentives and pay his tax liability on time.

Why is tax compliance becoming more important? The simple reason is cost of non-compliance can be very expensive because any tax adjustment will give rise to penalties. Currently, penalty regime is strictly being applied by the IRB (audit adjustments will trigger a 45 % penalty and can rise to 100 % in exceptional cases. In 2018 it is expected to rise to 100 %). This is only one element of the total cost. The other elements that will equally hurt the non-compliant taxpayer: management time to answer the IRB queries, consultants’ fees to seek guidance on handling the audit/scrutiny, consequential impact on the accounts to your shareholders, bankers, customers, suppliers and employees. Please remember if the company cannot pay up its tax liabilities, certain shareholder directors who are in management positions can be asked to pay up such liabilities.

How do you manage your tax compliance?

Know the law: If you do not know the law/rules, you can either consult the IRB for guidance or seek advice from tax consultants.

Obtain certainty in exchange for transparency: Problems regularly arise where there are differences of opinion on interpretation of the tax laws. In such situations, it is best to be transparent with the IRB and explain your rationale. In the event you take a different view, make it known to the IRB and your reasons supporting your position in which event, you will have good grounds to appeal against any imposition of penalties until the courts decide otherwise.

Be open and disclose upfront (proactively engage the IRB rather than wait for them to visit our office): Engage the IRB before a transaction takes place for their views to build trust with the IRB.

Dedicate greater resources and time to compliance matters.

How should the IRB respond IRB should walk the talk. Help the taxpayers, please. This is what the IRB has always said: it will do so within the confines of the law. Why not be bold and go beyond and welcome the taxpayers to engage the IRB upfront before taxpayers enter into a transaction. To ensure that such openness is not abused by tax advisers and taxpayers, the taxpayers who seek such responses upfront must be obligated to report back to IRB on whether the transaction has subsequently been implemented in accordance with the ruling of the IRB or has the taxpayer taken a different position. After all, transparency and trust must reciprocated by both sides.

is the managing director of Crowe Horwath Sdn Bhd and a trustee of the Malaysian Tax Research Foundation.