Are you aware that “managing tax risks” is also an aspect of tax planning?
On this episode of #take5withthannees’ our MD, Mr Thanneermalai Somasundaram shares his views on how important “managing tax risks” is when undertaking a tax planning exercise.
When people think about tax planning, they think about tax savings. No, that’s not correct. There is another aspect to it which is actually tax risks. How do you manage tax risks? That is also part of the tax planning. Because if you don’t manage the risk, it can be blown out on you. So what are the risks you should be managing? And what are the tax risks? What are the types of tax risks? In my view, there are 4 types of tax risks. They are operation risk, transaction risk, compliance risk and reputation risk.
1. Operation risk
Operation risk is a day-to-day risk. For example, you got to pay the non-resident on a regular basis. You’ve got to deduct withholding taxes or if you’ve got to decide whether the transaction is subjected to SST or not on a daily basis. These are routine daily operations and if you don’t understand the tax implication for how to tax such a transaction then if you get it wrong, you will get it wrong on a continuous basis, on a day-to-day basis. That’s called operational risk. So you’ve got to make sure you manage that operational risk and make sure the people who are actually run it to understand what
is the rules of the game are so that they do not make the mistake on a daily basis.
Transaction risk is a one-off item. For example, you are undertaking a mergers & acquisitions, you do a business restructuring, you buy, you sell – these are one-off transaction and you must know how to interpret the law so that you get the right tax treatment and you pay a minimum amount of tax. If you get that wrong, then that is a transaction risk.
3. Compliance risk
Compliance risk which is you are a normal compliance and you file your tax returns annually, you have your SST returns on a by monthly basis, previously you have GST returns. All these returns that you do, these are regular compliance matters. You must also make sure that the compliance matters are correctly dealt with and the law is applied correctly. Otherwise, whenever you file your tax returns, you are going to do the wrong things and there is a compliance risk.
4. Reputational risk
If you get hit to the large tax, if you are happen to be a quoted company comes out in the newspaper, your share prices will be affected. So you have a reputation risk. Also the others will think that perhaps because you have been hit to such a large tax bill, perhaps your integrity can be also a questioned which means your reputation can be at risk.
These are all the risks that you should be managing when you are managing tax matters especially board of directors and directors should be aware of these risks so that they can ask the right questions and manage the risks.