Business

Tuesday April 14, 2009

Snaring the tax dodger

Tax Insights - By Kang Beng Hoe


Taxpayers need help in understanding their tax obligations to avoid non-compliance with tax law

WITH the start of the tax filing season on us, many will have to give thought to setting aside time to discharge this annual legal obligation.

For some it will be a question of whether they should respond to the official call to file electronically. For many, procrastination will rule the day, and there will be the inevitable rush to beat the deadline.

In recent weeks we have seen articles in the news media, which were intended to help taxpayers answer some of their many questions.

This is certainly helpful, but the recent statement in parliament by Deputy Finance Minister Datuk Kong Cho Ha has given taxpayers at large something to think about.

Kong was quoted as saying that it was estimated there were currently some two million people who should be paying taxes, but only around 1.1 million people were paying taxes now.

“Similarly, out of some 500,000 firms registered, only 104,000 companies paid taxes on their corporate profits.” This statement is somewhat alarming as it can only be taken to mean that the size of what has been termed “the informal economy” is large. But what is the average taxpaying person who dutifully files his tax returns and pays the tax due to make of this? Does it not leave a bad taste in his mouth and a sense of unfairness?

Apart from unfairness, tax evasion leads to loss of tax revenues and the inability of the Government to carry out programmes, which it would otherwise be able to undertake.

If left unchecked it can fuel perceptions of rampant cheating and undermine confidence in the tax system.

A large part of tax evasion stems from non-compliance. Tax compliance typically relies on our voluntary self-assessment, which requires taxpayers to calculate their own tax liability and to pay the amount due.

Three kinds of non-compliance arise: failure to file tax returns; under-reporting of taxable income (either through under-reporting of income or overstating deductions); and failure to pay taxes assessed.

It is not possible to talk about tax evasion without referring to tax avoidance and tax mitigation. The debate on the meaning of these three concepts is on-going among the professionals, academics and in the courts.

The underlying premise is that all taxpayers are entitled to know their legal position. They are entitled to know what will be regarded as evasion, what will be regarded as avoidance, and what is acceptable mitigation.

This is particularly crucial in our system of self-assessment where getting it wrong may bring about significant penalties or even criminal charges.

Tax evasion is illegal. Tax evasion typically involves failure to report income or improperly claiming deductions that are not permitted.

Thus evasion has occurred when your contractor “forgets” to report the RM5,000 cash he receives for building your garage, or when a business owner tries to deduct RM20,000 personal expenses from his business taxes, or a person falsely claims she has made charitable contributions.

The courts recognise that no taxpayer is obliged to arrange his/her affairs so as to maximise the tax to be collected by the Government. Individuals and businesses are entitled to take all lawful means to minimise their taxes.

Such an approach is generally termed as avoidance. For example, an employee may lawfully ask for his bonus to be paid in 2009 when the marginal rate is lower rather than in 2008.

It is also lawful to avoid taxes by making charitable contributions. A judge has gone on record to say: “Avoidance of tax is not tax evasion and carries no ignominy with it.”

However, most tax jurisdictions have sought to strike down what they term “abusive” avoidance. This has been generally understood to apply to methods, which, while legal, are seen to be contrived and devoid of business purpose.

The concept of tax mitigation is derived from judicial pronouncements involving tax avoidance cases. Put simply, everything, which is not evasion and is not avoidance is then tax mitigation.

These three concepts involve difficult areas of tax law where even the experts tend to have differing views.

A new concept of reasonable care was introduced when self-assessment was implemented. Reasonable care, derived from the law on negligence, requires a person to take all reasonable care in matters relating to his tax affairs.

For example if he is unsure if the profit from the sale of his investment would be taxable, he should take expert advice. Once he has done so, he would have acted with reasonable care even if the advice acted on was wrong.

The aim of our tax authority must be to get as many people as possible to comply with their tax obligations voluntarily.

To do that there is the need to make sure that people clearly understand these onerous obligations and every help, including greater information dissemination, should be given to them.

  • Kang Beng Hoe is executive director of Taxand Malaysia Sdn Bhd. Readers’ feedback to this article is welcome. Please e-mail to starbiz@thestar.com.my

    • E-mail this story
    • Print this story