FAILURE to pay attention to proper compliance can be very expensive in the form of additional taxes, penalties and surcharges. And in the event that any failure is prosecuted, the taxpayer or the representatives of the organisation can be imprisoned.
In the case of corporates, the government is a de facto stakeholder who generally collects 24% of profits as taxes. Surprisingly, many owners or boards of companies abdicate their responsibility rather than delegate under supervision to their management to internally prepare tax computations or outsource the work to their tax agents. Many directors may not know the details of the tax computations.
How is tax computed?
There is a general misconception that taxable profits are derived from accounting profits. The basis of taxation is set out step-by-step in the Income Tax Act, and calculating taxes follow specific rules. However, in practice, the accounting profits are used as a starting point, and adjustments are made to the accounting profits to arrive at the taxable profits which will be different from the accounting profits.
Where is the gap?
Since this is an annual requirement, there is a tendency for tax preparers especially in organisations where there is no change in the business to do a “copy and paste” from the previous year’s tax computation, updating the numbers based on the current year financials. The person preparing the tax computation relies on the description in the ledgers or the management accounts, and very often fails to check the underlying details of the income or expenditure to ensure the accuracy or correctness of the transactions. Without this understanding, the tax computation can go badly wrong because of misapplication of the income tax rules.
The increased volume of tax regulations, tax rules, guidelines, rulings and notices of change of practices circulated by the Inland Revenue Board makes the preparation of tax computations time consuming. Unless close attention is paid to all these changes and the provisions in the Income Tax Act together with the supporting secondary legislation, mistakes can be easily made
If there is any special expenditure incurred or actions taken by the company, for example, assets held for sale where during that year, you are not entitled to any capital allowances although the assets are still being used by the company. There are many other provisions such as controlled transfer provisions, definition of received versus receivable, meaning of incurred, transfer pricing, and many more issues which can come up in one year and may not arise in the next year that can “trip up” the tax preparer.
Since most taxpayers do not provide underlying documents to the tax agents, a serious gap will arise between the taxpayer and the tax agent in the tax treatment in the event there is a disconnect between the underlying documents and the ledgers provided to the tax agents. Tax agents usually handle large volumes of tax returns and time is of essence to them. Unless the tax agent spends time to probe the taxpayer, he may not be able to uncover any mistakes because the taxpayer may have misunderstood or accidentally misrepresented information to the tax agent.
Divergence of accounting and tax principles has widened
The divergence here also requires much attention because in preparing the tax computation, the accounting treatment of the transaction must be unwound and given the proper tax treatment. An example is treatment of long-term lease payments, long-term concession transactions, etc. If the preparer does not understand the accounting treatment, it will lead to an incorrect tax treatment.
What should you do?
Boards of directors and senior management should spend time monitoring the output of the tax computation to check at least the reasonableness of the tax positions. It is also extremely important that all tax preparers must keep abreast with the changes in the tax laws
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
