EVERY taxpayer has an obligation to comply with the tax laws and any infringement will be an offence, which will lead to penalties, fines and, possibly, imprisonment. There are two types of penalties: mandatory penalties and discretionary penalties.
Mandatory penalties will be automatically imposed through the Inland Revenue Board’s (IRB) internal system. Common examples are late payment penalties for tax due, late payment of withholding taxes, underestimation of advance taxes, revision of tax computation within six months of submission, etc.
These penalties will be automatically triggered upon the expiry of the deadline and this is usually 30 days or one month from the due date. Clearly, when dealing with this category of penalties, there is no room for doubt that the taxpayer has defaulted in meeting the required deadline.
In practice, if the taxpayer can show extenuating circumstances which led to missing the deadline, the IRB has been magnanimous in either waiving or reducing the penalties in exercising its discretion.
An example would be where the taxpayer has submitted the payment before the due date, but the funds remitted are rejected by the bank due to certain banking anomalies. Subsequently, these amounts are made good by the taxpayer within a short period of the default, and the IRB is kind enough to waive the penalties. This is possible if the taxpayer takes immediate action to rectify the situation, which indicates his genuine intention to pay the tax on time.
This is the type of situation where the taxpayer in the eyes of the IRB has defaulted by providing incorrect information, incorrect returns or failed to submit tax returns on time. It is not clear cut in such circumstances the taxpayer has failed to meet the obligations and the penalties are not fixed and can include a range of rates.
For example, failure to furnish tax returns can trigger a penalty between RM2,000 and RM20,000, or imprisonment not exceeding six months, or both. Where there is no prosecution, the penalty could increase to 300% of the tax payable. Submitting an incorrect return or providing incorrect information or omitting or understating income can trigger a penalty between RM1,000 and RM10,000 and a special penalty of 200% of the tax undercharged.
When are discretionary penalties imposed?
The most common instances where discretionary penalties arise would be from tax audits and investigations. Although the penalties imposed here should be discretionary, in practice, penalties appear to be automatically imposed on any adjustments.
In such circumstances, the taxpayers should examine their position and be prepared to engage with the IRB on the imposition of the penalties.
When it comes to penalties imposed due to submission of incorrect returns, incorrect information or understating income, the law provides protection to the taxpayer in the event the matter is taken to court to prove that the position taken by the taxpayer was done on good faith. Effectively, it means that if the taxpayer has filed tax returns with complete disclosure of information and on time and cooperated with the tax audit or investigation officials, the defense of good faith is a good one.
Added to this, the taxpayer should be able to show that his interpretation of the law is justifiable based on facts and existing legislation and case laws. The test applied here should be one of a reasonable person. If the taxpayer has sought the views of a qualified professional, then he has added grounds to support his argument of good faith.
Now the IRB has accepted in its latest audit framework that where a difference of opinion is purely due to an interpretational matter, then penalties will not kick in.
Taxpayers should engage with the IRB in cases where in the course of settlement they are willing to accept the IRB’s position on a grey area relating to the interpretation of the law to request for the penalty to be waived. In such circumstances, the IRB should accommodate genuine taxpayers and refrain from imposing penalties.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).