Tax Matters – Time for fraudsters to stop cheating the taxman

GOOD taxpayers are being cheated by bad taxpayers who intentionally set out to avoid paying taxes or underpay their taxes. Be forewarned that Customs and Inland Revenue Board (IRB) are actively increasing their vigilance to uncover the fraudsters. These taxpayers are enjoying benefits provided by the government without contributing their share.

The top of the game for fraudsters is to avoid bringing cash receipts into income, or in layman’s terms, it is equivalent to keeping two sets of books – one that is declared, and one that is not declared. This is common where cash transactions are pre-dominant – construction, food and beverage, agriculture, traders, manufacturers, etc. Cash received from illegal transactions, bribery, or transactions involving money laundering are usually hidden away from tax. The realisation of profits on crypto assets by cryptocurrency traders frequently falls under this category on the belief that the tax authorities cannot catch them.

Taxpayers tend to believe that activities carried out overseas by Malaysian business should not be brought to tax in Malaysia as long as such income is kept overseas. This is incorrect as such income can be regarded as domestic source and will be taxed whether or not it is remitted to Malaysia.

Transfer pricing without proper justification to meet the arm’s length rules is another common means of understating income.

Other types of tax frauds committed by taxpayers are: creating or buying fictitious invoices for expenses and purchase of goods which were never received; bribery payments tucked away and falsely described as legitimate business expenses; inflating employee costs by including fictitious employees in the payroll; or buying assets which are non-existent.

Business enterprises may try to shift profits from one company to another by introducing charges for services such as management services or technical support etc (supported by legal agreements), but were never provided in reality. Another approach used to defraud is to move profits around in circles within multiple companies with different financial year ends to defer the payment of taxes indefinitely.

Although tax planning is legal, pushing this beyond the boundaries can lead up to tax fraud. A typical example would be in the case of service tax, there are thresholds which triggers a business to register. In order to avoid the registration for service tax purposes, businesses tend to create multiple business outfits to stay within the threshold and avoid accounting for service tax. In the indirect tax area, licensed manufacturers who sell their goods without accounting for sales tax are also falsifying their tax returns.

How will the tax authorities find you?

The tax authorities are not stupid. They have a group of dedicated people and the necessary soft-ware to weed out taxpayers either by identifying those who are out of sync with the rest of the industry or connecting your asset base or asset growth to the income levels.

Please do not forget that the tax authorities are constantly connecting the various declara-tions that are being made to them. Examples are annual tax returns, withholding tax returns, employer returns, public state-ments in the press, stamped documents, real property gains tax returns, etc. Do not forget that the tax authorities of different countries are exchanging information and cooperating with one another.

There are the hardcore tax evaders who will believe they are beyond the law because they are well-connected, or that they are privileged.

This assumption has been recently debunked by our prime minister who said: “I am saying this so that everyone, whether they are my acquaintances or not, my supporters or not – taxes must be paid and LHDN (IRB) must search and look for the tricks used (to avoid paying taxes)”.

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