Directors - Beware of your tax responsibilities

07 Oct 2014 / 05:40 H.

    BEING director of a company is no longer a " walk in the park ". A director has significant responsibilities under the companies act and other acts of parliament which affect the operations of the company. Added to these responsibilities the director can also be held accountable for taxes due and payable by the company to both the Inland Revenue Board ( IRB ) and the Royal Malaysian Customs (RMC).
    With the imminent introduction of GST on Apr 1, 2015 together with the increased complexity of the tax regime and greater vigilance being exercised by both IRB and RMC through various tax audits and investigations coupled with significant penalties, it is high time that directors start paying more attention to tax matters in their companies.
    Directors cannot merely assume that their executives will have discharged the tax responsibilities of the company because in the event of any failure to do so, directors can be made to pay up, or hauled up to court to be prosecuted for possible offenses which can end in fines and in rare cases, imprisonment.
    The time has come for the directors to pay close attention to tax matters at the board level. They need to keep an eye on whether tax compliance matters covering both direct and indirect tax are being handled on a timely basis in accordance with legal requirements.
    The directors also need to keep a close eye on the tax affairs of the company to ensure optimal shareholders' returns by maximising all tax deductions and incentives available to the company.
    Although the tax responsibilities of a director will cover the normal compliance matters such as filing of various returns, reporting of information and payment of taxes in the areas of income tax, real property gains tax, sales and services taxes, customs duties and in the future, GST, the key area of concern the directors need to know is that they can be liable jointly and severally for the outstanding taxes due from the company.
    Generally the normal practice for IRB and RMC is to make reasonable attempts to collect the taxes from the company before proceeding to collect the taxes from the directors.
    The income tax and real property gains tax (RPGT) legislation; section 75A of the income tax act and schedule 1, paragraph 5 of the RPGT, clearly spell out that a director of a company during the period in which the tax or debt is liable to be paid, shall be jointly and severally liable for such tax or debt that is due and payable and be recoverable from the director.
    Please note that although a director may have ceased to be director at the time the IRB attempts to recover outstanding dues, the director can still be made to pay up on the grounds that he was a director at the time the tax liability originally arose.
    Similarly under the RMC jurisdiction there are similar provisions to collect the taxes from the directors such as sales and service taxes, excise duties and in the future, GST. The relevant provisions can be found in section 26 of the sales tax act 1972, section 17 of the service tax act and section 81A of the excise act 1976 and section 53 of the GST act 2014.
    It is important to note in the income tax legislation the responsibility to pay up the outstanding taxes of the company is limited to directors who are involved in management of the company's business and owns/controls directly or indirectly together with one or more associates or through a medium of companies of not less than 20% of ordinary share capital of the company. In the indirect tax area the coverage is wider and any person who is a director of the company can also be responsible for the payment of the outstanding taxes. Please be reminded that added to the above burden you need to bear in mind that as directors of a company, you could also be stopped from leaving the country in case there are any outstanding tax liabilities under your name.
    Directors, please familiarize yourselves with your tax responsibilities otherwise the consequences could be painful.

    S.M. Thanneermalai is a Council member and Chairman of the Indirect Tax Committee, transfer pricing sub committee and tax investigations and audit sub committee and a senior executive director in PwC

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