Tax as a strategic business function during trying times — Jeff Lai

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JUNE 15 — Since Malaysia entered its first movement control order (MCO) just over a year ago followed by the more recent full lockdown under MCO 3.0 on June 1, 2021, the government has launched various multi-billion-ringgit economic stimulus packages to assist businesses in the country.

The finance ministry has also recently announced that right now is not the time to introduce any new form of taxation. As such, we will undoubtedly see the Inland Revenue Board (IRB) carry out their responsibilities more intensely than ever before given the pressure from the government to collect more revenue to cover the nation’s debt burden (e.g. debt-financed stimulus packages, legacy debts such as 1MDB loans, etc).

Against this background, it is useful for companies to review its tax functions to weather through these trying times. This article aims to cover some of the areas of tax functions (“tax”) in an organisation and how they are relevant to an organisation’s performance.

1. Compliance, compliance and compliance

Albert Einstein once said: “The hardest thing in the world to understand is the income tax”. Businessmen simply understand income tax as just another mandatory cost in their business. For everyone else, tax is a compulsory payment levied on them for support of the government and the nation’s continuous growth.

From a business organisation’s perspective, the focus on income tax is compliance with tax laws. This would mean declaring all income, filing the relevant tax returns, timely paying of taxes, adhering to the IRB’s various requirements, keeping records and documentation and last but not least, safeguarding the company’s tax position against potential challenge from the IRB. Nonetheless, the constantly evolving laws and requirements surrounding tax (e.g. transfer pricing rules, Country-by-Country Reporting, etc) continue to make the obligatory tax compliance process an arduous one.

Non-compliance with tax provisions or inability to support the company’s tax position in its tax return can lead to financial implications such as substantial additional tax assessments together with penalties raised by the IRB.

On the other hand, organisations having strong tax controls in place (to identify and address tax risks), people with the requisite technical knowledge (i.e. in-house tax department) and access to appropriate resources (including professional tax advice) will find that they are less likely to deal with unexpected surprises from the IRB.

Non-compliance with tax provisions or inability to support the company’s tax position in its tax return can lead to financial implications such as substantial additional tax assessments together with penalties raised by the IRB. — Bernama pic
Non-compliance with tax provisions or inability to support the company’s tax position in its tax return can lead to financial implications such as substantial additional tax assessments together with penalties raised by the IRB. — Bernama pic

2. Managing tax risks

In the context of tax risks in an organisation, it can involve various forms and will arise due to, but not limited to, the following reasons:

  • Compliance risks for not meeting tax deadlines such as filing of returns or payment due dates
  • Technical risks involving erroneous tax position in tax return. This could be due to lack of people with adequate tax knowledge, access to professional advice or lack of regular review of tax policies 
  • Operational risks arising from non-familiarity to corporate compliance requirements (due to high turnover rate), poor internal controls (lost records), inadequate documentation and/or weak corporate governance

The above are just some of the reasons which would trigger tax risks in an organisation.

Tax risks, if left unchecked, may cause severe financial and reputational repercussions to the organisation such as:

  • Substantial amount of assessments including penalties being raised by IRB
  • Adverse operating cash flow implications directly causing disruptions to day-to-day operations
  • Bad publicity and tarnishing the corporate brand name and reputation
  • For listed companies, shareholder wealth may be affected
  • Even worse, the IRB may take civil action against the company directors for unpaid taxes and preventing them from leaving the country

Given the high stakes surrounding tax risks and its ramifications which are potentially far-reaching, the C-suite executives have become increasingly involved on the tax agenda in ensuring the organisation’s long-term strategic goals are not impacted.

3. Achieving tax efficiency and savings

In a situation where tax is mandatory (i.e. compliance) and the consequences for non-compliance are severe, perhaps corporations may find some solace in the sense that there are ways to achieve tax efficiency and/or savings in an effort to pay the right amount of tax.

The most common way is to identify and utilise available tax benefits. Some examples of this include enjoying certain tax exemptions or incentives, maximising tax deductions (including double deductions), managing capital expenditure to maximise capital allowances (i.e. tax depreciation), etc.

Whilst most of these can be carried out at the tax compliance stage, certain tax incentives require approval from the relevant authorities and hence, there should be people with the requisite technical knowledge within the organisation to identify these opportunities and where necessary, engage professional tax advisors for further clarity and to assist in the application process.

On a broader angle, tax efficiency could be achieved through careful tax planning. Some of this include utilising unabsorbed business losses and capital allowances, understanding the implications of investment holding companies, minimising withholding tax exposures, etc. For multinational corporations, tax planning requires adequate knowledge of tax laws in multiple jurisdictions and the available double tax agreements, reviewing business structures to determine whether a permanent establishment is unintentionally created, transfer pricing arrangements, treaty planning, etc.

Whilst tax planning is a skilful exercise, it is crucial to differentiate between legitimate tax planning and tax evasion which is basically illegal. Minimising or reducing tax must never be the primary objective of a business arrangement / transaction and that the organisation must be fully prepared to justify and defend its position in the courts in the event of a challenge from the IRB. In this regard, documentation is key to demonstrate the transaction’s commerciality, substance, and/or arm’s length nature where applicable.

Concluding remarks

The above sets out a broad overview of the tax functions within an organisation. Given the current unpredictable course of the health crisis and rapidly changing business environment, it is imperative for companies to be aware of the significance of the tax functions as well as to exploit its benefits to drive strategic business decisions.

* Jeff Lai is a Managing Consultant of Tricor Taxand Sdn Bhd (f.k.a. Axcelasia Taxand Sdn Bhd), an entity within the Tricor Group and a member of the Taxand Global Organisation. The views expressed here are the writer’s personal views and he can be contacted at [email protected].

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.

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