Business

Tuesday June 2, 2009

Managing your taxes during these turbulent times

Key strategies will revolve around efforts to conserve cash


Comment by Tan Hooi Beng

NO one is spared during these challenging times. As the economy is expected to deteriorate before it improves, skill in managing business costs becomes crucial. As tax is one of the major cost elements, this article discusses several key aspects of tax management that are noteworthy.

Now, cash is king. Hence, the key strategies would revolve around the efforts to conserve cash, increase/accelerate tax deductions, gain tax refunds and reduce/defer tax payments. Clearly, all these should be carried out within the ambit of the law.

An important area is withholding tax (WHT). Although WHT is imposed on non-residents, in reality, some Malaysian payers are required to bear the tax directly and contractually, or indirectly. This is an additional cost of doing business.

Hence, Malaysian companies must be cognisant of the WHT regime. Penalty for late remittance of WHT must be avoided. With the introduction of WHT on “other income” effective Jan 1, there is a greater need for a good understanding of the intricacies of increasingly complex tax laws. One should also make the most of the advantages accorded by tax treaties.

Other notable areas include monetisation of tax assets such as dividend franking credits and losses. As Malaysia has shifted from the old dividend imputation system to the single-tier taxation system, there is a 5-year transitional period ending Dec 31, 2013 for the old regime to continue to operate.

As the clock is ticking fast, the tax and cash position of companies should be reviewed. A timely payment of cash dividends to shareholders who have the necessary tax shelter could result in a cash refund for the shareholders. Crystallise this opportunity or this tax asset will vanish into thin air soon.

Another important tax asset is tax losses. Only for years of assessment (YA) 2009 and 2010, the adjusted loss of a qualifying person may be carried back and deducted against the defined aggregate income (DAI) of the immediate preceding YA. The carry back amount is restricted to RM100,000 or its DAI for that YA, whichever is less.

Given the opportunity to monetise the losses, taxpayers should file their tax returns early with a view to determining the adjusted losses and expediting a tax refund. In addition, corporate groups must also make the most of the present group relief facility.

Business contracts and models should constantly be reviewed to ascertain whether there are avenues to plan the timing of gains or losses with a view to deferring payment of taxes. Where possible, expenses should be incurred in a timely manner to gain early deduction. The present tax facilities such as 200% deduction and accelerated capital allowance regime should be considered. Although cash conservation is crucial at this juncture, merger and acquisition exercises cannot be discounted. This could be an opportune time to strike a good deal.

From the tax aspect, it is advantageous for the bidder to understand the transactional taxes arising. An analysis of asset deal versus share deal is worthwhile. Any relief provided in legislation should be fully utilised.

The vendor and the bidder must properly strategise to ensure that most, if not all, the tax attributes such as losses and tax depreciation of the target company are preserved, taking into account the continuity of ownership test.

For those involved in cross-border transactions, it is important to determine the locality of profits. As foreign income is not subject to Malaysian tax, documentary evidence to support the foreign income position is vital. In addition, foreign tax exposure such as permanent establishment risk must be fully understood. The last thing that should happen is double taxation on the same income!

Tax-aligned supply chain strategy can be considered for overseas ventures and the timing may be right given the current lower valuations. This may minimise exit tax, if any.

Disciplined house-keeping will go a long way to ensuring that a taxpayer’s risk is kept at bay. Close monitoring of tax instalments would ensure that taxes are not over- or under-paid. A comprehensive tax calendar will mitigate the risk of the taxpayers being penalised. From the indirect tax aspect, valuation planning and the use of correct tariff classification could minimise the importation costs.

To conclude, the adoption of the right cash tax efficiency strategies is one of the factors that could lead one out of the storm. That does not mean a taxpayer should evade tax. We must continue to be responsible taxpayers by paying the right amount of taxes. But as the saying goes, “You must pay taxes. But there is no law that requires you to leave a tip.”

l Tan Hooi Beng is executive director in the International Tax group at Deloitte Malaysia.

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