TAXPAYERS want certainty and finality to their tax affairs. They do not want to be revisited by any tax authorities many years after they have fulfilled their compliance obligations by filing the relevant tax returns. If the law is clear, why should the tax authorities revisit them?
Currently, there is an increasing number of disputes between the Inland Revenue Board (IRB) and taxpayers. Why is it so? One of the reasons is the uncertainty due to the divergence of views between taxpayer and IRB. If the gap is narrowed, the resources of IRB and taxpayers can be redeployed productively elsewhere rather than wasting them on arguing with one another.
What is ironic here is that there are many tools and measures available for taxpayers to obtain certainty, but the question is: Are these measures working? If they were working, the disputes should be reducing instead of increasing.
Tax certainty is a cornerstone of an effective tax system that provides a level playing field for taxpayer and IRB. This means that the tax liability should be certain and not arbitrary in nature.
The tax laws must be clear, specific and non-discretionary.
Benefits of tax certainty
The benefits of certainty are that it increases predictability of the tax liability, reduces costs for taxpayers in interpreting tax rules, promotes good faith in the tax system, making tax collection more acceptable, and guarantees the correct application of tax laws. Tax laws should be understandable to an average taxpayer.
Where does uncertainty arise?
Uncertainty largely arises from the interpretation of the tax laws and the timing of the implementation of the new laws. When policymakers enact new laws, they are unable to anticipate all business practices they intend to tax, and taxpayers in turn need time to adjust to accommodate the new laws. It is not uncommon for laws to be introduced and tweaked within a short timeframe.
A recent example is foreign-sourced income, where the intention of the authorities was to tax such income remitted into Malaysia, but shortly thereafter the authorities reversed the decision and exempted such income from taxation subject to certain binding guidelines to be issued by IRB.
These guidelines came out almost six months after the law. Some of the conditions surprised taxpayers, and this is the kind of uncertainty that could have been avoided if the guidelines were issued closer to the change in the policy decision.
Similarly, the Transfer Pricing Rules which came out in May 2023 but were effective retrospectively for the year of assessment 2023. There is a gap period where taxpayers could be caught without knowing the rules that came out only in May 2023.
There are good tools available from the IRB to obtain certainty in advance such as the Advance Pricing Agreements, Advance Rulings, Tax Corporate Governance Framework Programme. The problem with these tools is the protocols attached to them are rigid and the authorities dealing with these mechanisms need to exercise greater flexibility and use their discretionary powers to make exceptions to ensure that commercial transactions are encouraged.
An example is where one seeks an advanced ruling, the biggest impediment is the requirement that the transaction must effectively go through. The tax authorities should not look at it from a tax collection perspective, but instead look at the economic reality and the benefit to the country.
The mindset must change.
The introduction of the Tax Corporate Governance Framework (TCGF) and the Special Voluntary Disclosure Programme is a breath of fresh air. The certainty provided here is that there will be no audits and in the case of TCGF, continuous certainty will be provided with constant engagement between IRB and taxpayer during the three- to five-year agreement. The existing avenues such as Advance Pricing Arrangements, Advance Rulings, etc. need a revamp and realign them with the needs of the industry.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
This article was originally published on the Sun daily.