The Inland Revenue Board (IRB) will be happy to know that listed companies are paying more taxes for their latest financial year compared to previously.
This month’s Focus List shows that the 50 largest tax-paying entities on Bursa Malaysia paid almost RM22 bil to the taxman, up from the RM19.7 bil paid by last year’s 50 largest (see table).
The three top listed taxpayers were all from the financial sector and represent Malaysia’s three largest financial services providers. In fact, five such companies made the top 10 list and in total there were 11 financial services players on the list.
The country’s largest bank, Malayan Banking Bhd (Maybank), paid an effective tax rate of 22.5% of its pre-tax profit or RM2.28 bil in taxes. The second-largest banking group, Public Bank Bhd, paid RM1.57 bil or 22% of its pre-tax profit of RM7.12 bil.
In third spot is CIMB Group Holdings Bhd which paid an effective tax rate of 24.5% or RM1.5 bil on its pre-tax profit of RM6.11 bil.
Utility player Tenaga Nasional Bhd paid just 16.1% of its RM8.3 bil in profit before tax, but that was enough for it to be ranked fourth on our list. Gaming player Genting Bhd contributed RM1.1 bil or 24.8% of its pre-tax profit of RM5.2 bil to the taxman.
Tabulating corporate taxes is complex as it involves calculating tax payable minus various tax allowances and incentives as provided by tax rules. Our list is by no means definitive as the actual taxes paid are difficult to determine. However, it gives a perspective of how much taxes companies paid as reported in their annual reports or latest unaudited full-year results.
For comparison purposes, we took the income tax expense figure from each company’s latest full-year income statement. This includes taxes paid locally and overseas, as well as deferred taxes where declared. Most companies paid a significant portion of their taxes to the Malaysian taxman.
In Malaysia, companies are required to pay a standard tax rate of 24% on their locally-derived income. According to auditing firm Deloitte Malaysia, taxable income comprises “all earnings derived from Malaysia, including gains or profits from a trade or business, dividends, interest, rents, royalties, premiums or other earnings”. (see box story).
It is not uncommon for companies to pay a tax rate of below 24%, in fact half of the companies on our list did not. Among our top 10, only CIMB Group and Maxis Bhd did, with the latter paying 24.2% or RM702.38 mil.
Tax experts say this could be the result of several factors. Importantly, it does not necessarily mean non-compliance with tax laws.
A tax expert with a multinational auditing firm points out that Malaysia’s tax code offers companies a slew of tax incentives which can be used to lower their tax rates.
Secondly, a company that generates foreign-source income will not be taxed locally but rather at the jurisdiction where it generates it.
Malaysia also does not have a tax on capital gains aside from those on real property gains. So, gains made on shares or from the sale of a business are not taxed, he adds.
Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai notes that it is normal for companies to undertake some level of tax planning. “If you understand tax laws, you will probably do some tax planning. This could mean making use of deferrals, for example, or planning how your capital expenditure is spent because you might be able to take advantage of significant tax deductions,” he adds.
Over the past couple of years, the issue of tax avoidance has been heavily debated. While not illegal like tax evasion, the former still raises moral and ethical questions about where the line is drawn between acceptable and unacceptable tax avoidance.
Thanneermalai suggests that there is a three-step test that can be applied to determine where a certain action taken to lower taxes falls under the category of planning or has crossed the line into avoidance.
Firstly, he says a company must have incurred a cost or suffered reduced income on something to receive a tax benefit that would qualify as tax planning. It crosses the line to avoidance if you receive a benefit without first incurring some cost, he explains.
Secondly, a company is within its rights to take advantage of any options offered to it under the tax code. So, if the tax code allows for a transaction to be tax exempted, then there is nothing wrong with a company choosing the route that leads to it paying lower taxes, he says.
“Finally, the transaction must be commercially explainable. Which in simpler terms means that if a company carries out a transaction which others also carry out, then this is acceptable and will not be classified as avoidance,” Thanneermalai adds.
Axelasia executive director Thang Mee Lee reiterates that any transaction undertaken for the purposes of tax planning needs to be demonstrably backed by an “economic or commercial justification”.
One common way companies, particularly large multinationals, lower their tax rates is by headquartering in a country with a more preferential tax regime. This move has often been criticised because the companies are able to pay much lower taxes by doing this.
“In using a preferential tax regime, it is important to have substantial activities in that jurisdiction and these are typically reflected in terms of adequate annual business spending as well as employment of an adequate number of employees,” says Thang about this method of tax planning.
She also advises that tax planning be an on-going activity for companies and it must be reviewed periodically to ensure that it is in line with the tax code.
“Once a planning structure has been implemented, it is advisable to have a periodic review of any changes in the tax law or government policies that may have an impact on the structure and to take remedial actions, where necessary,” says Thang.
She also highlights that there are provisions within the Malaysian tax code which empower the IRB to rein in overzealous tax avoidance activities.
“In the context of Malaysian taxation, there are anti-avoidance provisions in the Income Tax Act 1967 to prevent the avoidance of tax or to counter schemes which are regarded as ‘unacceptable’ to the IRB,” she adds.
This allows the Director-General of Income Tax to disregard certain transactions which he believes have the direct or indirect effect of altering the incidence of tax or avoiding it.
“In viewing whether a scheme or transaction falls within the anti-avoidance provision, the courts would look at ‘substance over form’ and whether the transaction or scheme is driven by economic or commercial consideration [or merely to avoid taxes],” Thang explains.
Meanwhile, there has been a notable reduction in field audit and investigation cases since the new Pakatan Harapan government was formed, notes Thang.
“Currently, most audits are confined to desk audits and the new government has pledged that any assessments raised on taxpayers will be strictly based on the tax law,” she adds.
Thanneermalai concurs that the tax authorities have tempered down their investigations this year.
“They are following the rule of law more strictly now which is line with the guidance issued by the new government, which is to not push the envelope too far.
“We have seen that more room for discussion is given by the authorities, and more opportunities given to put forward your case and position,” he notes.
Nonetheless, he believes that while the IRB will not be as aggressive as it was previously, it will start to get more rigorous in the months to come.
Therefore, despite the softening over the past six months, Thanneermalai advises corporates to not try and take advantage of the more measured stance by ignoring or taking chances and flouting the tax laws. FocusM