Business

Tuesday July 7, 2009

Taxman raises the stakes on corporate tax risk

Tax Insights - By Kang Beng Hoe


THE British budget in April saw the Chancellor of the Exchequer introducing an unprecedented measure by making senior accounting officers of large British companies personally accountable for taxes of the company they work for.

Thus the chief financial officer or finance director is required to certify personally that adequate accounting systems are in place to ensure the accuracy of the company’s tax reporting.

Specifically, this executive will be required to:

·Take reasonable steps to establish and monitor accounting systems within their companies that are adequate for accurate tax reporting.

·Certify annually that the accounting systems in operation are adequate for the purposes of accurate tax reporting or alternatively of any inadequacies and confirm that those inadequacies have been notified to the company’s auditors.

The penalty for careless or deliberate failure to meet these obligations is up to £5,000 on the official plus separate penalties chargeable on the company.

Thus a large British subsidiary of a Malaysian company could be subject to these provisions.

These measures reflect a pendulum swing from the position contemplated at the 2006 meeting when tax authorities from some 35 countries signed the Seoul Declaration.

At that meeting, held under the auspices of the Organisation for Economic Co-operation & Development, it was agreed that national tax bodies should “encourage top management and audit committees of large enterprises (e.g. CEOs and boards of directors) to take an interest in, and responsibility for, their tax strategies.”

Thus the “carrot” approach has given way to the “stick” as far as Britain is concerned, drawing on the example of Section 404 of the Sarbanes-Oxley Act 2002, under which office holders of US corporations have obligations placed on them in respect of internal controls over financial reporting processes.

Australia, on the other hand, has maintained the conciliatory approach.

Its Commissioner of Taxation has said that he believes “a strong and healthy relationship between the Tax Office and large businesses is essential to the efficient and effective operation of its tax system”.

In doing so, it sets out clearly the factors, which would be taken into account in identifying cases for possible audit. These are:

·Financial or tax performance that varies substantially from industry patterns;

·Significant variations in the amounts or patterns of tax payments compared with past performance and relevant economic indicators and industry trends;

·Unexplained variation between economic performance, productivity and tax performance;

·Unexplained losses, low effective tax rates and cases where a business or entity consistently pays relatively little or no tax;

·A history of aggressive tax planning by the corporation, group, board members, key executives or advisors;

·Weaknesses in the compliance structures, processes and approaches; and

·Tax outcomes which are inconsistent with the policy intent of the tax law.

Whilst these are not particularly revealing, both the British and Australian initiatives reflect the increasing attention being paid by tax authorities around the world on large corporations in the belief that these multinational corporations structure their affairs in such a way as to avoid taxes in virtually every jurisdiction they operate.

The officials at the Seoul meeting took the view that “international non-compliance is a significant and growing problem. Cross-border non-compliance can take many forms up to and including outright tax fraud.”

At the domestic front, Malaysian tax law now provides for a more robust challenge on tax avoidance via related party transactions.

This involves transfer pricing, a closer look at group financing arrangements (both domestic as well as cross-border) as well as complex “thin capitalisation” rules pending.

Our system of self-assessment places on the corporate executive (who is charged with tax filing responsibility) the onerous statutory obligation of taking “reasonable care”, with the prospect of court sanction in the event of default.

What this amounts to is that corporate governance has to be given increased focus particularly in the area of tax risk.

As part of the financial reporting requirement, a company may be required to disclose the possible risks associated with both its domestic as well as its international tax situation.

The board of directors, through its audit committee, may need to interact with the management and external auditors to help identify the critical areas where tax risks lie.

Tax risk can be a significant business risk. Many companies’ boards fail to grasp the implications and potential severity of tax risks exposure and the last thing they want to do is learn from hindsight. Rather they should act on foresight.

  • 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

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