Tax evasion or tax avoidance; which one is your choice?
In Malaysia, it is mandatory for every business, irrespective of its identity, level of influence, or financial stability, to disclose its tax status and pay taxes if necessary. Nonetheless, the topic of taxes is highly unappealing to business owners as the process can be a significant financial burden and very time-consuming
I know, most business owners try to pay as little tax as possible. As a result, various ways of thinking have emerged to reduce taxes or avoid them, while some plan their taxes strategically.
We need to understand the difference between tax evasion and strategic tax avoidance as making the wrong choice can have serious consequences. It is important to ensure that the chosen approach does not violate any established laws and regulations.
In simple terms, tax evasion is a form of tax fraud that occurs when a person or business owner intentionally underreports or fails to disclose their income or information to the tax authorities to reduce the amount of tax they owe.
Tax evasion involves illegal activities such as failing to report income, inflating expenses, or using false documents to manipulate tax returns. It is important to understand that tax evasion is illegal under the law and is considered a serious offence that can result in fines, penalties, and legal consequences.
Tax avoidance is a proper practice of minimizing the amount of tax by using various strategies that are within the bounds of the tax code. Unlike tax evasion, tax avoidance is considered legal and is not punishable by law. Although this method does not allow you to pay taxes according to your preferences, it can help business owners pay the minimum amount of taxes as much as possible based on the law.
Strategic tax planning is a common example of tax avoidance. A business owner can ensure that their business account is always up-to-date and declared to the Inland Revenue Board (IRB) within the designated time frames while keeping all transaction documents related to the business and filing them appropriately. It is advisable to carefully manage expenses that are not allowed, such as charitable donations, which should only be made to eligible organizations that are permitted by the IRB.
Additionally, businesses can identify and take advantage of tax incentives, such as capital allowances, MSC status, agricultural allowances, industrial building allowances, reinvestment allowances, investment tax allowances, pioneer status, and transfer pricing. It is also important to ensure that tax estimates are accurate to avoid penalties for underpayment of taxes under the Income Tax Act. Companies can review their estimated taxes to be paid in the sixth and/or ninth basic periods by submitting CP204A.
The provided brief explanation can help businesses make informed decisions, but it is always essential to seek precise guidance from the IRB or certified tax professionals. As the line between legal tax avoidance and illegal tax evasion can be ambiguous at times, seeking professional advice can ensure that you do not cross that line.