Understanding Tax Avoidance Schemes and GAARs in Taxation

GAARs AND TAXPAYERS RIGHT CHOW CHEE YEN Council Member Chartered Tax Institute of Malaysia Executive Director Advent MS Tax Consultants Sdn Bhd Ulaanbaatar, Mongolia, 2018

GAARs AND TAXPAYERS RIGHT PROFILE Chee Yen is currently the Executive Director of Advent MS Tax Consultants Sdn Bhd. He has more than 27 years of tax experience and was involved in tax engagements concerning cross border transactions, tax due diligence review, restructuring schemes, corporate tax planning, group tax review and inbound investments. Chee Yen s expertise is in high demand and he is a prolific trainer/facilitator for tax workshops and seminars organised by ACCA, CCH, CPA Australia, CTIM, MIA, MAICSA, MICPA and the STAR newspaper as well as in-house training for both professional firms and corporations. He is a Council Member of the Chartered Tax Institute of Malaysia (FCTIM), a Fellow Member of The Association of Chartered Certified Accountants (FCCA) and a Chartered Accountant of the Malaysian Institute of Accountants (CA). He is also a graduate of the Malaysian Institute of Certified Public Accountants (MICPA) Examinations.

GAARs AND TAXPAYERS RIGHT Tax avoidance is seen by tax regulators around the world as: Bending the rules of the tax system to gain a tax advantage that Parliament never intended Ignoring the spirit of the law Deliberately exploiting loopholes in the tax system Disguising business transactions to reduce payment of taxes tA 01

GAARs AND TAXPAYERS RIGHT Tax avoidance from Malaysian Inland Revenue Board perspective: Try to find loopholes with intention to pay less tax, even if technically legal, their actions may be against the spirit of the law and in this sense considered non-compliant. For instance: Non-arms length transactions Misuse of tax provisions Lacks commercial substance Non-bona fide purposes tA 01

GAARs AND TAXPAYERS RIGHT Common tax avoidance schemes: 1.Using, exploiting or abusing a relief 2.Finding a gap or loophole in the Act 3.Corporate loss utilization involving corporate reorganizations, financial instruments and non-arm s length transfer pricing 4.Mismatch arrangements involving differences in tax treatment between entities on transfers affecting two or more countries 5.Unnatural assets or transactions (developing assets or transactions such as dividend stripping, purely to manipulate the tax rules) 6.Dodgy offshore schemes tA

GAARs AND TAXPAYERS RIGHT Tax benefits arising from tax avoidance schemes: 1. Obtaining a relief or deduction against profits or gains 2. Obtaining a repayment or refund of tax 3. Avoiding or reducing tax chargeable or assessable 4. Deferring any payment of tax 5. Avoiding obligation to deduct or account for tax tA

GAARs AND TAXPAYERS RIGHT General Anti-Avoidance Rules (GAAR) in Malaysia Section 140(1) of Income Tax Act 1967 The Director General, where he has reason to believe that any transaction has the direct or indirect effect of (a) altering the incidence of tax .. (b) relieving any person from any liability which has arisen .. (c) evading or avoiding any duty or liability which is imposed .. (d) hindering or preventing the operation of this Act tA

GAARs AND TAXPAYERS RIGHT Specific Anti-Avoidance Rules (SAAR) in Malaysia Section 44A - Group relief for companies have to pass the 70% residual profits and residual assets test Section 140A (Transfer Pricing) - Power to substitute the price and disallowance of interest on certain transactions Section 140B - Loans or advances to directors Section 141 - Powers regarding certain transactions by non-residents tA

GAARs AND TAXPAYERS RIGHT TAX AVOIDANCE TAX MITIGATION Tax driven Tax savings is secondary or incidental Commercially justified Accepted business practices Permissible No commercial justification GAAR & SAAR

GAARs AND TAXPAYERS RIGHT CASE LAW DECISION Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his assessable income Arranging one s affairs to enjoy a tax benefit which is permissible under the Income Tax Act does not amount to tax avoidance Sabah Berjaya Sdn Bhd v KPHDN (1999) [Donations instead of dividend payment to Sabah Foundation] tA

GAARs AND TAXPAYERS RIGHT CASE LAW DECISION Just because the taxpayer had to borrow in order to pay for interests that accrued did not mean the payment of the interest was not genuine The DGIR must have reasons to believe that the taxpayer had committed an act resulting in tax avoidance (not based on suspicion alone) The burden of proof to establish that the transaction was a sham rests with the DGIR Port Dickson Power Bhd v KPHDN (2012) [Funding by way of loan stock instead of equity from shareholders] tA

GAARs AND TAXPAYERS RIGHT CASE LAW DECISION Taxpayers have the freedom to structure transactions to their best tax advantage The transactions were within the meaning and scope of the of the arrangements contemplated by the government in actively offering incentives, to promote Labuan as an international trade and financial centre Ensco Gerudi (M) Sdn Bhd v KPHDN (unreported) [lease rental payment made to a Labuan SPV to mitigate withholding tax] tA

GAARs AND TAXPAYERS RIGHT THANK YOU! tA