THE majority of charitable institutions work in helping the public in the areas of healthcare, education, alleviation of poverty, providing services for the public, building infrastructure in remote areas, providing relief when disaster strikes, etc. They complement and supplement the government. It is an extremely important role they play in helping the country.
Being non-profit organisations, they need to collect donations from the public to fund their activities. Across the world, tax reliefs are given to encourage donors to donate to such organisations.
Malaysia has always given tax exemptions to such institutions, organisations or funds, and provides tax deductions to the donors subject to certain limitations. Currently, many organisations and institutions are enjoying the tax exempted status for a period of five years which must be renewed thereafter.
This exemption is entirely in the hands of the Director General of Inland Revenue (DGIR). He has the power to grant or withdraw the tax-exempt status. He has the right to set the conditions to be complied, which are very extensive and has changed over the years. In the event he rejects an application, the organisation has the right to appeal to the Ministry of Finance. Although the guidelines issued by the DGIR is not the law, the conditions set in any of the approval follows the guidelines, and effectively become the conditions that needs to be met.
What is the current situation?
On the surface, obtaining or renewing such exemptions appears to be simple. However, the current climate has changed. The intensity of the scrutiny of such applications has increased significantly and the focus on compliance is being rigidly applied to the point where the benevolent aspect of this legislation is being downplayed, which is not alignment with the core principle of being compassionate within the Madani principle which promotes compassion for the society and people of this country.
The problem is both shared by the tax authorities and the exempt institutions or organisations. These organisations have not been diligent and paying sufficient attention in meeting the conditions imposed by the tax authorities. The common examples of non-compliance is: accounts and tax returns not submitted on time, breaching the 50% independent directors or trustee rules, not spending 50% of the organisations’ income received in the prior year, not acquiring permissions for change of directors or trustees, buying assets without the approval of the tax authorities and the other relevant authorities, not carrying out activities in line with the constitution or the trust deeds, conducting businesses such as fund-raising activities without obtaining the prior approval from the IRB, not investing in line with the stipulated investment policy, only acting as conduits to collect and Passover monies to other charitable bodies, etc. There are many more non-compliance issues.
Where should we be heading?
Applying the rules rigidly and denying the tax-exempt status is not the way forward. The IRB should look at the overall objective of these organisations and assist them obtain the exemption. It is important to note that these organisations do not have the manpower to continuously monitor or engage the IRB because they are usually running on shoestring budgets, but that does not exempt such organisations from paying attention to the IRB’s conditions of approval. They cannot assume that they will somehow be excused from meeting their obligations because accountability and transparency is somehow important to the IRB.
Unfortunately, some of these institutions have abused the tax-exempt status and this perhaps had led IRB to the current state of affairs. Dealing with these institutions require a different approach unlike the corporate sector where they have the resources and proper governance structure. There is no excuse for the exempt organisations to ignore meeting the requirements, but, at the same time the IRB should provide concessions where such requirements cannot be rigidly met. This is where dialogue, exercising compassion, and infusing a humanitarian element in the application and renewal process will improve the current relationship.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
