Tax payer VS Inland Revenue Board (IRB) is a common cases in our country. The Court case usually used as a reference for future similar cases, The Income Tax Act (ITA)1967 may be interpret by both parties differently in point of view, hence it may create confusion among tax payers. Another hidden issue is IRB”S stand or current rules and regulations may be unfavorable to Tax payers. This article is intend to discuss some of the potential unfavorable ruling or practices to the tax payers. It hope that the tax payer will not fall into potential loophole for tax liability in the Act
1. Estimation of Tax payable
Current Rules : Section 107 (c ) ITA allow a company to revise the estimation of tax payable in the 6th ot 9th month, However if the final tax payable exceed total of installment payable with different of more than 30% of tax payable. The tax payer is liable to penalty of 10%of the difference under sec 107(c ) 10
Critical Issue : It seem that tax payer really need to be due diligence in estimate the tax payable. But, how a tax payer is really able to forecast accurately the profit for the final 3 month( assumed 9 month revise)? The 10% penalty can be huge for a listed company. Moreover the company is need to appeal for waive for such a penalty. It seem that the company need to revised estimation more to avoid potential penalty. However, sometimes the actual tax liability is really different with estimation since it involve actual tax computation and added back of unallowable expense.
2. Cash flow versus tax payable
Current Rules : Sec 107(c ) 4 the company can not revised or estimate less than 85% the estimation of previous CP204 (estimation form). Approval of IRB is required in such circumstances
Critical Issue : It seem company can not simply revise tax payable less than previous estimation. But it also indicated that the company need to spend early cash to pay tax. Some company may pay more tax as compared with actual tax liability. Hence it create tax credit This seem unfavaborable because of NPV of cash flow. In another words, now pay tax is more expensive as compared with paying tax in a later period. Another issues is usually the tax credit will be refund to tax payer in a later period. But sometime the refund status may take longer time due to desk audit process. Once again the NVP concept is affecting the cash flow of company
3. IRB’ stand on made payment first before you argue
Current Rules : Section 106 of ITA enable a court to take legal action without further action.
Example : IRB may use Sec106 to ensure us pay penalty before the due date. Sometime late payment also subject to 10% penalty.
Critical Issue : when we receive the additional assessment or penalty imposed by IRB, the current pratises is require us to pay the penalty before ague with IRB. Somemore there was some preceeding case in the court on this issues.. It may be unfair to tax payer to pay tax or penalty if it is was not they ‘ s fault or they may not liable to penalty due to tax
4 Section 140 issue
Current Rules : Sec140 enable a Director General (DG) to disregard transaction that is either evading or avoiding tax. Moreover the DG may charge greater tax and raise additional assessment to the tax payer.
Example : If I acquired certain company with the huge loss bought forward in view of potential profit generated by the company in the future. IRB may disregard the transaction with potential tax saving duel offsetting of carry forward loss. Another example on acquired a company and lease it at lower of market price.. IRB may regard this as an unusual transaction and disregard the transaction.( CIT v AB Estate Ltd)
Critical issue : The issue here is show that sometime if we are doing tax planning, the project may fall under sec140 , we may not able achieve tax saving moreover there is a possibility of penalty of 45% on the actual tax payable.. Hence Tax planning is really a difficulty task for tax payer or tax agent.
4. Deductible issues
Current Rules : Dedutible issues is a greater issues in tax computation. But Tax concept for deductibility of expense focus on issue like Incurred in production of income , no capital nature and etc.
Example: professional fees for secretarial , taxation fees, 1st time subscription, Improvement of asset, Interest of money borrow to pre production activities is not deductible and hence need to be added back to profit before tax.
Critical issue : the deductible issue often increase the tax liability.. There is many preceding case on deductible issue.. However., some of the items involved was cost of running business even is not income producing (sectarial fees) and compliance to rules. Why those items is not deductible but still subject to deductible test?
5. Pemanent loss
Current rules : investment expense is often a permanent loss if the expense exceed investment income. The loss can not offset with any other income.. Capital allowance is also permanent loss and can not carry forward to next year
Critical issue : The permanent loss is often an tax disadvantage to tax payer since it will not reduce the tax liability. Why there the loss can not forward and treat the same way for business income to help the tax payer pay less tax?
6. Tax computation for expense.
Current rules : Investment holding company (IHC) is fall under S60F and expense incurred by IHC is calculated based on the permitted expense, or 5% of income. While Leasing company is using gross profit as source to apportioned the expense>
Critical issue : Both of the rules restrict the deductible expense and thus increase the tax liability. Is it seem to be unfavorable to tax payer ? The expense incurred by both company shall be calculated based on actually amount incurred by the tax payer.
7. Court Case
Current Rules : the tax payer usually files an appeal to DG , next to special commissioner, then to high court , the next stages is court of Appeal and finally is Federal Court
Crtcical issue : it seem that the tax payer can have different channel to appeal until the result is favaorable to tax payer. However , the court’ cost is often out weight the tax saving. Furthermore, if we take a look in preceeding case, IRB will often appeal a case until the result is favorable to them. The issue here is would the tax payer spend time and cost for few year to win a court in achiving tax saving.? The opportunity cost of business is often high and a disadvantage to tax payer.
8. Tax envasion VS Tax Mitigation
Current rules : The rule provide a clear interpretation on tax evasion is illegal;, and tax mitigation is legally reducing tax.by allow expense and Tax avoidance is legitimate
Critical issues: Tax planning often is a tax mitigation , however , if we do some mistake planning, we may fall under sec140. Another issue is we may think we can easily do tax planning. But each course of income or action may still subject to tax.
Example : even if we not fall under section withholding tax section 107A , another sec109B(1) is still make us liable to tax.. Next, Some people may think it is easy for them to reduce tax by transfer income to another party. But the Section 65 , the settlement is deemed to be the settlor.. In other words, even if we may try transfer money but the income is still deemed to be our money and subject to tax.
9. Statue barred issue
Current rules : Sec91 (1) , no additional assessment may be made as it is under six year time bar.
section 91 (3) (B). Director General is still can raise assessment under 6 year for fraud and negligent.
Critical Issues : Current practice is most accounting firm will retain tax file for 7 years and destroy tax file for those file that above 7 year.. The issue is IRB may raise under section 91(3) in year 2011 for case happen in 2000.,so how tax payer is going to defend himself without the tax files ? section 91(1) can not fully protect the tax payer? The possible stand may be an aggressive stand of both party on assessment.
10. Tax saving VS Compliance cost
Current Rules : the company intend to achieve tax saving may claim the incentive or apply for special deduction.
Critical issue : the tax payer need to compliance with the requirement to claim for the incentive however there may be much more compliance cost as compared to tax saving. At the end , the tax payer end up by forgone the incentive.
In conlusion , The may be a case basis for each of the above issues. Those critical issue may seem to be unfavorable to tax payer.It still depend on the tax payer to plan proper in tax planning or some case law to help the tax payer. It hope that this article is provide awareness to the tax payer and personal view on interpretation on technical issue for the ACT
Diclaimer : The writter disclaim any liability in respect of reliance on partial or whole part of the contents. Professional ‘ advices shall be sought before making decision in tax planning.Writer of this article is General Manager for Light Tax Services(LTS).
