TAX planning is the legitimate right of any taxpayer to manage and minimise his taxes within the legal framework. The tax legislation is very specific, and it clearly lays out what income or capital or transactions should be brought to tax.
Anything outside the ambit of the tax legislation is not taxable. If there are choices available in the legislation, the taxpayer is not barred from taking advantage of the best available choice.
Tax evasion – where taxpayers set out to intentionally avoid paying taxes – is illegal. However, tax avoidance – taking advantage of the loopholes in the law – is probably unethical but legitimate and cannot be denied through legislation.
In Malaysia, tax mitigation is permissible where taxpayers obtain a benefit by incurring a cost or suffering a loss, and the transaction is commercially explainable or there is a valid family reason for undertaking the transaction.
Principles of tax planning
Tax planning is a continuous process throughout the tax year. A taxpayer should look at maximizing tax deductions on operating expenditure, claiming maximum capital allowance or tax depreciation on capital expenditure, maximise the utilisation of available tax incentives, organising revenue flows to benefit from lower rates of tax where choices are available, converting income into capital gains, deferring the timing and payment of taxes, benefitting from tax exemptions and reliefs available, etc.
These principles cut across income tax, real property gains tax, stamp duties, and indirect taxes such as sales and services tax, customs duties, etc.
Where do you start?
First, taxpayers should determine whether there is tax liability in the upcoming tax year. Next is to understand the nature of the inflows/outflows and their timing. This will help determine whether the inflows are of an income or capital nature.
In Malaysia, we do not tax capital gains except capital gains from real property transactions. The starting point here is whether the inflows can be legitimately structured to be of a capital nature. An example would be where the sale of a property through an investment holding company would be of a capital nature which may be subject to lower rates of real property gains tax (perhaps at 10%) versus a property developer where such inflows would be treated as income and will be subject to income tax at 24%.
Thereafter, taxpayers should consider taking advantage of tax incentives under the Promotion of Investments Act such as pioneer status incentive or investment tax allowance, or Income Tax Act such as reinvestment allowance.
The next step is to look at your expenditure patterns to maximise your deductions. The taxpayer should look at increasing the deductions through permissible double deductions such as research and development, etc.
As for capital outflows such as expenditure incurred on buildings, plant and machinery, you need to structure your investments such that they qualify for capital allowances within the ambit of the law.
You also need to think about ways of structuring your documents/instruments to minimise the stamp duty. You should also not forget the impact of service tax, sales tax, and customs duties. You can take advantage of the exemptions available and selecting the correct HS Codes could reduce your taxes on importation and the manner in which you import could have an impact on your indirect taxes.
There is significant room for tax planning and reducing your taxes legitimately. However, be mindful that the tax authorities are continuously challenging taxpayers who attempt to step into the arena of unacceptable avoidance.
But if the taxpayer has legitimate commercial reasons for carrying out the transactions and has the necessary documentary evidence to support the transactions, then such challenges from the tax authorities can be defended against.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).