OVER the past decade since the publication of the Base Erosion and Profit Shifting documents by the Organisation for Economic Cooperation and Development in 2013, the topic of aggressive tax planning has received greater focus by authorities around the world including Malaysia.
This intensity will increase with the clear statement by Malaysia’s Inland Revenue Board (IRB) in the recent weeks that iy will act against aggressive tax planning.
Many taxpayers do not understand when they are stepping into the aggressive tax planning minefield. The borderline between aggressive tax planning and acceptable tax planning is very thin.
Generally, aggressive tax planning arises when transactions or tax schemes stretch the intent of the law, lack commercial justification or are not supported by evidence demonstrating their genuineness. Such arrangements often produce tax benefits without any corresponding cost or economic loss.
These activities seek to exploit loopholes, mismatches or technical gaps, leverage asymmetries between different tax regimes, manipulate transfer pricing or create opacity and reduce visibility for tax authorities by creating multiple layers of special purpose vehicles. The underlying purpose is to shift profits from the higher tax regime to the lower tax regime.
What happens in aggressive tax planning?
The IRB has identified four key areas of aggressive tax planning for closer scrutiny.
Interest-free loans between related parties are likely to be subject to deemed interest, on the basis that independent third parties would not permit the use of funds without charging interest. The classification of receipts as capital or revenue will continue to be closely reviewed. In addition, the IRB remains vigilant against the manipulation of transfer pricing arrangements between related companies, as well as the misuse or abuse of tax incentive claims.
One of the most commonly misunderstood yet frequently employed practices is the blatant shifting of profits through transfer pricing. This often takes the form of artificially imposed management fees that lack commercial substance, genuine services rendered, or proper supporting documentation. Such approaches are naive, particularly given the assumption that detection by the IRB is unlikely.
In the area of tax incentives, it is common for groups to shift profits to entities enjoying tax holidays or lower tax rates by inflating revenues or suppressing costs within the incentivised companies. There are also frequent attempts to recharacterise taxable revenue as capital receipts, particularly where lump-sum amounts arise from court awards, compensation payments, or one-off payouts linked to business restructurings.
Ongoing disputes between the IRB and taxpayers are especially evident in transactions involving the distinction between Real Property Gains Tax and income tax.
Be prepared to defend your position
It is not an open and shut matter where all tax planning falls within the category of aggressive tax planning. Tax planning can be defended provided it is supported by economic substance and robust paperwork. Crucially, in defending such arrangements, the legal form must align with the commercial reality.
What is documented must be consistent with what actually occurs at the ground level.
Defending tax planning measures is significantly easier when transactions are clearly documented and even supported by approvals from relevant authorities such as the Ministry of Domestic Trade and Cost of Living, Department of Occupational Safety and Health, Department of Environment and the Ministry of Investment, Trade and Industry. Such regulatory endorsements strengthen the argument that the transactions are commercially driven and provide a meaningful layer of protection in the event of scrutiny.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
Source: tax-matters-aggressive-tax-planning-under-irbs-spotlight
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