The latest thrust by the Inland Revenue Board (IRB) to develop sustainable tax collection is the introduction of the Tax Corporate Governance Framework (TCGF). It is intended to work within a good corporate governance framework that ensures business enterprises report and pay the correct taxes.
From the IRB’s perspective, this will provide accountability, transparency, accuracy, and completeness of information. This will also provide taxpayers certainty and avoid surprises.
To achieve the above aims, identifying, assessing, and managing tax risks is the most important pillar within the TCGF. The reason being that in the event the risk is mismanaged or not identified, the cost to the taxpayer can be expensive in the form of additional taxes and penalties, and to the IRB, the missed opportunity to collect the correct taxes at the right point in time.
When Do Risks Arise?
Risks arises when there is uncertainty, and this is due to the interpretation and application of the tax laws. Tax laws are often subjective with gaps in the law and case law developments usually adds to another layer of subjectiveness.
Another area where tax risks are self-created is when taxpayers do not keep up with changes in the tax legislation/practices adopted by the IRB.
Types of Risks
- Compliance risks – Risks encountered when preparing and submitting the tax returns. Examples would be the misalignment of the underlying records with the positions taken in the tax computation, or the disconnect between the underlying documentation and the actual transaction.
- Transactional risks – When transactions are non-routine in nature, such as business reorganisation, mergers and acquisitions, sale/purchase of businesses, tax uncertainty may arise in the interpretation and application of the law. This could cover the whole range of taxes.
The usual questions that will arise would be whether it is capital or revenue, whether such transactions attract sales or services tax, and the amount of stamp duty to pay. Anti-avoidance is another problematic area.
- Routine operational risks – This arises when there are recurring transactions such as sales and purchases of goods, services and intangibles (intellectual property related payments such as license fees). An example is when you fail to deduct withholding tax or account for sales and service tax on routine transactions.
- Reputational risks – This could occur if the tax authorities initiate a tax probe of a serious nature such as a tax investigation. If such information becomes a news item, there is always a danger that the perceptions of the customers, suppliers, and employees can be negatively affected.
Why Manage Risks?
The cost of neglecting risk management will result in additional taxes and penalties. Do not take the attitude of “wait until the IRB catches you”.
The current approach by the IRB is to encourage taxpayers to be transparent with them on the risk areas which is now clearly embedded in the TCGF.
If taxpayers remain delinquent and refuse to cooperate, the IRB has no choice but to use its enforcement powers to seek out such taxpayers and impose the maximum punishment through additional taxes, penalties and bringing such taxpayers to court.
Who is Responsible?
The TCGF makes it clear that the ultimate responsibility for managing the tax affairs and tax risks lies with the board of the company, and the execution lies with the management of the company.
How to Manage the Risk?
First, identify risks and assess the financial implications of the risks. Second, document the basis supporting your positions and ensure reporting of such risks immediately to the senior management and the board of directors.
Constantly review the internal controls to identify, assess and mitigate the risks. This will include aligning the accounting system and the IT systems to support the management of the tax risks.
With the government seeking additional revenues to narrow the budget deficit, it is best for taxpayers to manage their tax risks through increasing their transparency and engagement with the IRB.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.