Tax Planning


ALTHOUGH tax planning has similar ideas to other forms of planning – such as corporate, financial, family and even economic planning – it can easily be misused.

In this way, tax planning can lead to significant tax losses for the government, said the emeritus Prof. Dr. Barjoyai Bardai of Tun Abdul Razak University.

Tax evasion in law

The extreme form of tax planning is referred to in Section 114 of the Income Tax Act 1967 as “willful tax evasion”.

It is defined as the willful and willful evasion or assistance of a person to evade tax by failure to submit an income statement; make a false statement or an entry in a return; give a wrong answer; Creating or maintaining false books of accounts or records; Falsification of books of accounts or records; or to use or authorize the use of fraud, art, or invention.

Dr. Barjoyai stated that tax evasion occurs when taxpayers illegally evade taxes by disguising the real state of their financial affairs from tax authorities – be it by reporting their income; holding business by trading cash or other devices without receipts; Hiding money, stocks, or other assets in an offshore bank account; Misrepresenting personal expenses as tax-deductible business expenses or using company property for personal use without valid business reason.

Legal tax avoidance

However, the tax evasion regulation still leaves open the possibility of planning in the form of a tax avoidance regulation, as the 1999 case of the Director General of the Inland Revenue Board (IRB) against Rakyat Berjaya Sdn Bhd shows, where the judge of the Federal Court of Justice clearly stated: “Everyone tries within the framework the law does its best to pay as little tax as possible. All possible schemes are thought of.

“No merchant in the strict sense of the word will trade except on the basis of paying the slightest amount of tax. There is nothing wrong with a company organizing its business in such a way that taxes are minimized. “

Therefore, tax avoidance is seen as a legal way to minimize the amount of income tax owed by an individual or a company, said Dr. Barjoyai.

Dr. Barjoyai: The term tax avoidance is easily misused with extreme tax avoidance activities known as aggressive tax planning.

Nonetheless, he stressed that tax avoidance as a term can easily be misused, with extreme tax avoidance activities being referred to as aggressive tax planning.

By this is meant an activity that actively pushes the boundaries of what is legally permissible, stretches the definitions of terms in legislation to open loopholes, or dressing or arranging an arrangement in the appearance of something else in order to minimize taxes.

“It usually does this in three basic ways, namely reducing taxable income, increasing deductions and drawing on tax credits,” he said.

Combating Tax Avoidance

After numerous tax cases by the IRB defining various activities as tax evasion, the government amended the Income Tax Act of 1967 to add Section 140 – the “Anti-Tax Avoidance” – which provides for “authorization to disregard certain transactions” when the director – has general reason to believe that any transaction will have a direct or indirect effect on the taxes payable by an individual; Relief of any person from any liability; Circumventing or circumventing an imposed duty or liability; or hinders or prevents the implementation of the law in any way.

Dr. Barjoyai stated that the breakthrough case of Sabah Berjaya in 1999 was based on the section when the special commissioner applied the “Substance Over Form” (Ramsay Doctrine) test to assess the overall transaction, with the holding company and subsidiary as same entity.

The appellate judge nonetheless applied the Westminster “form over substance” doctrine – assessing each of the entities as a separate “person” regardless of the relationships between them – and concluded that the company was actually spending and Losses were incurred by bringing in donations to the holding rather than paying dividends.

“This is seen as a ‘containment program’ rather than a ‘tax avoidance program’,” he said.

The judge ruled that section 140 only covers tax avoidance and tax evasion programs, while tax reduction is not covered by the section’s provision.

He added: “The court specifically highlighted the term tax reduction, where the tax benefit is only achieved if the taxpayer can reduce the tax liability after the specific expense and loss incurred.

“During tax avoidance, the benefit is achieved when the taxpayer could reduce the tax liability without incurring expenses or losses. This can be used as a guideline for the limit of tax planning activities in the future. “

So the dilemma remains: How can we formulate exactly what aggressive tax planning is?

According to Dr. Barjoyai is aggressive tax planning a means to increase or expedite tax relief in a manner not intended by law.

This is practiced in the form of generating artificial losses; Shifting profits between subsidiaries in different jurisdictions to post profits in low-tax areas; Transfer of assets (such as intellectual property) from a subsidiary in a jurisdiction to a subsidiary in a low-tax area; Use of mailbox companies as a vehicle for transaction flows or accounting purposes; Loans from a low tax regime to subsidiaries in the high tax regime and debt repayments and interest expenses that are offset against corporate income tax under the high tax regime in order to reduce tax payments.

“Many aspects of aggressive tax planning originate from the deliberate intention to avoid paying taxes,” he said.

Changed perceptions

What is clear, however, is that the status quo cannot go on, especially given the OECD’s forecast that there will be more comprehensive aggressive tax planning in the near future that includes profit shifting through profit reduction (BEPS), profit deduction rules, taxation for e-commerce and cryptocurrencies as well as other technological and digital upheavals that are changing business models – and thus also the tax landscape.

The IRB examines the areas of aggressive tax planning both internally and externally by working with respected international bodies, said Dr.  Sabin.The IRB examines the areas of aggressive tax planning both internally and externally by working with respected international bodies, said Dr. Sabin.

Datuk Seri Dr. Sabin Samitah, chief executive officer of the IRB, told a national tax conference that the tax authorities are investigating the matter, adding, “We are addressing the issue of aggressive tax planning by initiating an aggressive audit program, investigation and forensic audit work.

“[We are also] Working with other prestigious international bodies such as the OECD to find the best or most appropriate methods to address problems related to the digital economy, sharing economy, cryptocurrency, technologies for delivering goods and services on different platforms and the Address the storage of business documents using cloud technology. “

Introducing specific tax procedures to deal with such problems arising from aggressive tax planning can also create some clear rules for the boundaries of tax planning activities, noted Dr. Barjoyai.

He concluded, “More sustained efforts to address the problems of aggressive tax planning should come through tax education to cultivate the culture of viewing taxes not as an expense but as a contribution to state building to ensure future development and survival.” Of taxpayers .

“Paying taxes should really be seen as a means of creating and maintaining a conducive business environment in which companies can operate and make profits in the future.”

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