Tax Matters – Directors’ fiduciary duty and responsibility

IT IS commonly accepted by directors that upon settlement of tax matters with the Inland Revenue Board (IRB) or Royal Malaysian Customs (RMCD), that is where the matter ends and the directors are usually of the opinion that they have discharged their fiduciary responsibility to the company.

Is this correct? Not necessarily. The question that directors have to ask is whether as agents or trustees of the company, have they got the best settlement for the company?

In the event the settlement with the tax authorities is not favourable and may have been done for the sake of expediency, or without exploring all the avenues available to the company, the directors can be challenged on the grounds whether they have exercised reasonable care, skill, and diligence with the knowledge, skill, and experience which may be reasonably expected of a director having the same responsibilities; and any additional knowledge, skill, and experience which the director in fact has.

Duty and responsibility of directors under the company law

A director shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company. He must at all times consider the interests of the company and no one else’s, not even his own or the interests of the tax authorities.

Where there is a dispute with the tax authorities, and the company’s position is defendable based on either the professional judgment of the directors, or together with the advice from tax experts, professionals, it is the responsibility of the directors to make the best judgment for the proper purpose and in good faith in the best interest of the company. Ultimately, the directors are responsible for the decision. While directors may delegate their authorities to others, they cannot abdicate their responsibility and should at all times exercise collective oversight.

What should directors do?

The first and foremost responsibility of directors is to ensure that the company complies with the regulatory requirements under the tax laws. At the same time, they have to ensure that they do not overpay or underpay taxes. Any company that complies with good governance, all stakeholders’ interests, especially shareholders’, should be taken into account when decisions on taxes are made.

It is important to reiterate that when tax disputes with tax authorities are being negotiated and subsequently settled, the directors have to make sure that they have discharged their fiduciary responsibility of exercising reasonable care, skill and diligence.

If a settlement is arrived where there are alternative arguments which could have resulted in lower taxes, the directors have a responsibility to explore all options to the fullest extent before the settlement is reached. Otherwise, there is a danger that the shareholders could challenge the decision of the directors.

It is time for directors to take greater responsibility on tax matters as underpaying or overpaying taxes in a settlement with the tax authorities does not relieve them from their ultimate responsibility to act in good faith in the best interest of the company.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (