Borderline between tax avoidance and planning
SM Thanneermalai 

We are being inundated with announcements by the Inland Revenue Board (IRB) of its forays into investigating or auditing cases involved in aggressive tax planning. The message is: aggressive tax planning could face severe sanctions in the form of penalties and may also lead to prosecution in the courts where a negative outcome could result in the taxpayers being subject to imprisonment. In this climate of fear and trepidation, is there room for tax planning or is it dead?


What is aggressive tax planning?

Datuk Sabin Samitah, the chief executive officer of the IRB, describes it as ignoring the spirit of the law and mainly performed to avoid high tax payments and his deputy, Datuk Mohd Nizom, defines it as the practice of exploiting legal loopholes or disguising business transactions to reduce taxes beyond the amount usually paid. Other common phrases used to describe such activities include unacceptable tax planning, abusive tax planning, and abusive tax avoidance.

Aggressive tax planning or tax avoidance is seen by tax regulators around the world as bending the rules of the tax system to gain a tax advantage that Parliament never intended. The UK tax authorities go further and add that it often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law, which is not the same as tax planning.

Australian tax authorities’ view is similar: the difference between tax planning and tax avoidance largely comes down to intent. Tax planning is organising your clients’ tax affairs in the most tax effective way within the intent of the law. In contrast, tax avoidance schemes involve the deliberate exploitation of the tax system.


Is tax planning dead or alive?

Taxation is created by Parliament and as long as you follow the law and you are within the spirit of the law, you should be allowed to benefit from the provisions of the law. Strictly speaking, legitimate tax planning is still alive and this has been supported by judicial pronouncements in Malaysia. Chief Justice of Borneo Lee Hun Hoe in the DGIR v Rakyat Berjaya Sdn Bhd case supported this notion: “No commercial person in his right sense is going to carry on commercial transactions except on the footing of paying the smallest amount of tax involved. There is nothing wrong at all for a company to organise its affairs in such a way as to minimise his tax.”

The courts have been fair to taxpayers and have in certain circumstances prevented the IRB from invoking the anti-avoidance provisions. The pendulum between the taxpayers and the IRB has swung both ways. The IRB has won some cases and lost others. Overall the judiciary has managed to balance the rights and interest of taxpayers and the government.


What is permissible tax planning in Malaysia?

Acceptable or permissible tax planning will cover transactions or arrangements involving tax mitigation. The basic guidance to avoid being caught within aggressive tax planning/anti-avoidance net is:

1. Any tax benefits obtained are permissible within the specific provisions of the law and within the intended scope and Parliament’s contemplation and purpose, both as a matter of legal form and economic reality within the context of the entire arrangement.

2. Whether the end economic results from the transaction match with the legal effects of the transaction.

3. Taxpayer must be able to demonstrate that the transaction or arrangement was carried out for bona fide commercial reasons or in the ordinary course of business and the taxpayer suffered a loss/incurred expenditures/reduced his income in the course of obtaining a tax benefit.

4. The dominant purpose of the transaction must be for commercial reasons and the tax benefits are merely incidental. The intention from the start should be commercially explainable.

5. Avoid inserting transactions in any arrangement that merely strengthen the tax position and obtain a tax benefit without any commercial rationale.

6. There must be transparency (full disclosure to the tax authorities via tax returns, transfer pricing documentation, worksheets supporting the tax computations, accounts and notes to accounts, comprehensive answers given on any enquiries from the IRB, etc).


Consequences of tax avoidance

It is absolutely certain that the IRB will apply penalties on any additional tax assessments that arise from tax avoidance. Currently the general rate is 45% and can rise, depending on the severity of the offence. The penalty rate will be raised to 100% next year.


Contemporaneous documentation

Since the defence in any anti-avoidance matter will largely rely on the evidence to support the intention of the parties at the time of the transaction, it is extremely important to retain documentation to show that the taxpayer undertook the transaction for business purposes and the tax benefit was incidental.


Tax planning will go on

As long as the dictum “every man has the right to organise his tax affairs so that he minimises his taxes”, which is a fundamental right available to all individuals and business enterprises, is available and respected by government, legitimate tax planning will be carried out within the confines of the law and the spirit of the law as intended by Parliament.

On the other hand, the tax authorities and the policymakers will continuously exercise vigilance over such transactions to ensure that the tax burden of the country is shared equitably among all taxpayers.

SM  Thanneermalai is managing director of Crowe Horwath KL Tax Sdn Bhd and chairman of the board of trustees, Malaysian Tax Research Foundation

This article first appeared in Focus Malaysia Issue 253.