THERE is a fundamental misunderstanding by taxpayers that the CP204 is a means to collect taxes in advance.
The truth of the matter is the tax is being collected concurrently as the year progresses and as the profits arise. The mechanism works on the estimated profits during the year, and the final profits will be finalised immediately after the year end and the balance of the tax will be paid when the tax return is filed. If there is a refund the tax authorities have indicated as they will try to refund the money as soon as possible.
CP204 requires businesses to estimate their corporate tax payable for the upcoming financial year one month before beginning of the new tax year and remit monthly instalments over the subsequent 11 months starting from the second month of the new year. The basic rule is the CP 204 tax estimate for the year cannot be less than 85% of the final tax liability of the previous tax year. Taxpayers are allowed to revise their estimates in the sixth , ninth and in the eleventh month of the tax year.
Practical Problems
Despite the flexibility to amend CP204 estimates provided by Malaysia's Inland Revenue Board (IRB) in subsequent months, many industries' profitability is affected by external factors beyond their control. Examples include unexpected events such as the 1997 Asian financial crisis, the 2007 Lehman bank crisis, the RussianUkraine war or the current Middle East crisis. Events arising from internal mismanagement of fraud may also occur. Climate change and related natural calamities could likewise overturn forecasts.
The common industries that face problems include construction, property, commodities (such as palm oil, petroleum products, rubber) and hospitality.
CP204 could mitigate risks and help tax planning
The IRB is an important stakeholder in your business as it collects on average about 24% of your profits. The basic principle of taxation is that taxpayers must follow the written law and pay the correct amount of tax. Every taxpayer aims to comply with the requirement while paying only the minimum tax required.
The CP204 requires taxpayers to review their tax position before the year begins and to continue reviewing it as the year progresses. In the process of reviewing profit forecasts, taxpayers, together with their tax advisers, should be able to identify potential tax risks as well as opportunities for tax planning.
When tax risks arise, proactive steps can be taken to mitigate them by reorganising transactions.
There are often opportunities to turn risks into tax benefits. For example, if a transaction is likely to be disallowed for tax purposes, restructuring it so that it becomes tax deductible would achieve both risk mitigation and effective tax planning.
Conclusion
Although CP204 is only one aspect of tax compliance, taxpayers should begin paying much greater attention to overall tax compliance. Rather than treating it as a routine "run-of-the-mill" process, giving proper attention to tax compliance can help to reduce tax risks while also creating opportunities for effective tax planning.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).