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1. ramlitax-home.
2. ramlitax-more about me.
3. ramlitax-address.
4. Guidelines On Advance Rulings.
5. Tax Risks Key To Success.
6. Winning Audit Case.
7. Tips For Preventing Tax Audits.
8. How To Prepare For Tax Audit
9. Proper Classification Of Workers.
10. Commencement And Cessation Of Business.
11. Public Ruling On Trade Association.
12. Public Ruling On Income From Rent.

Part of our social responsibility is to publish many more articles in this website when necessary to bring greater knowledge and awareness to public.

ramlitax-home

We focus on our client's success in their career. Our aim is to support the customers need. We provide solution to reduce their tax risks.Anyone who understand tax will have better opportunity to plan their own or client's current and future tax. Tax agenda becomes their first priority.

However, others will depend on CEO or tax advisors to pay attention.Bad reporting on financial statements, causes inaccurate tax figures in accounts. It effect corporate image or reputation, paying more tax than required by law and decreasing investors support.In most cases, it will increase IRB focus on audit while taxpayers will incurred more incidental cost and pay heavy tax with penalties.

There are also number of cases involved in shifting of corporate risks to personal where individuals ended up settling corporate tax and pay fines or face imprisonment or both.

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ramlitax-more about me

Ramli, the proprietor, starts his career as tax officer when he joins Inland Revenue Department (IRD). He earned very good experience in various tax divisions in Alor Star, Penang, Kuala Lumpur and Johor Bharu.
During his term in IRD, he heads Corporate Real Property Tax Division and Revenue Civil Claims Department, both in Jalan Duta Goverment Office Complex in Kuala Lumpur and head of first Jotor Bharu Mobile Unit.
He had gone through IRB Tax Advance Course in Law I & II as well as Accounting I & II and has attended most of tax seminar held in the country to gain knowledge.
His other experience beside tax audit/investigation was drafting policies and procedures for civil claim frame work with his team mates, preparing full means test or so called capital statements.
He quits senior tax examiner's post in 1996 to joins family business. A year later he set up his own firm, Ramli Tax Management & Services to enable him to serve public as full time tax consultant.
Among cases done were developers and a company with over RM5 million paid up capital and manage to save huge amount of tax and penalties.

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ramlitax-address

RAMLI TAX MANAGEMENT & SERVICES,

(Co. No. 001177504-H),

No 13B (2nd Floor) Jalan SG 3/17, Pusat Bandar Taman Seri Gombak,

68100 BATU CAVES SELANGOR D.E.MALAYSIA.

Tel: 603 61889334

Fax: 603 61887334

E-mail:

ramlitax@gmail.com

ramlitax@streamyx.com

The proprietor's name as well as trade name that you can trust as it was published in various website such as:

Ejen Cukai LHDN-hasil

Accountant, Audit, Statistic Consulting-hotfrog
Accountant, Audit, Statistic Consulting-701panduan

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Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, in order to reduce the amount of tax that is payable by means that are within the law. The United States Supreme court has stated that "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." See Gregory v. Helvering. Examples of tax avoidance include:

Country of residence
One way a person or company may lower their taxes due is by changing one's tax residence to a tax haven, such as Monaco, or by becoming a perpetual traveler. However some countries, such as the U.S., tax their citizens, permanent residents, and companies on all their worldwide income. In these cases, taxation cannot be avoided by simply transferring assets or moving abroad.
The United States is unlike all other countries in that its citizens, and legal permanent residents, are subject to U.S. tax on their worldwide income even if they reside temporarily or permanently outside the United States. Until 1999 the Philippines (a U.S. protectorate at the time of coming into force of the Sixteenth Amendment)) also taxed the worldwide income of its citizens. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating. According to Forbes magazine some nationals choose to give up their United States citizenship rather than be subject to the U.S. tax system; however, U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from U.S. tax. The 2008 limit on the amount that can be excluded was US$87,000.

Double taxation
Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation treaties with many other countries to avoid taxing nonresidents twice -- once where the income is earned and again in the country of residence (and perhaps, for US citizens, taxed yet again in the country of citizenship) -- however, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. nationals, renounce one's citizenship) to avoid tax.

Legal entities
Without changing country of residence (or, if a U.S. citizen, giving up one's citizenship), personal taxation may be legally avoided by creation of a separate legal entity to which one's property is donated. The separate legal entity is often a company, trust, or foundation. Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by the original owner. Usually one is only personally taxed on property and earnings that one actually owns; thus, by donating assets to a separate legal entity, personal taxation can be avoided, although corporate taxes may still be applicable. If the legal entity is ever liquidated and the assets transferred back to an individual, then capital gains taxes would apply on all profits.
The company/trust/foundation may also be able to avoid corporate taxation if incorporated in an offshore jurisdiction (see offshore company, offshore trust or private foundation). Although income tax would still be due on any salary or dividend drawn from the legal entity. In order for a settlor (creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be a trustee or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them.

Tax evasion
By contrast tax evasion is the general term for efforts by individuals, firms, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions).

Statistics
The difference between the amount of tax legally owed and the amount actually collected by a government is sometimes called the tax gap.
In the United States, the IRS estimated in 2007 that Americans owed $345 billion more than they paid, or about 14% of federal revenues for the fiscal year of 2007

Illegal income and tax evasion
Main article: Taxation of illegal income in the United States
In the United States, persons subject to the Internal Revenue Code who earn income by illegal means (gambling, theft, drug trafficking etc.) are required to report unlawful gains as income when filing annual tax returns (see e.g., James v. United States[5]), but they often do not do so. Suspected lawbreakers, most famously Al Capone, have therefore been successfully prosecuted for tax evasion when there was insufficient evidence to try them for their non-tax related crimes. The United States Supreme Court has ruled that this does not violate an individual's right to remain silent, and so tax evasion remains a popular method for catching criminals.[citation needed] Other times tax evasion can be used as a "one more nail in the coffin" by prosecutors by stating that if a person earns illegal income, s/he may also be guilty of tax evasion. Those who attempt to report illegal income as coming from a legitimate source could be charged with money laundering. By contrast: In the UK law enforcement agencies do not generally have access to tax returns and so illegal earnings can supposedly be safely declared[citation needed] but in practice those carrying on criminal activities generally prefer not to do so, and so can sometimes be prosecuted for tax evasion rather than for other crimes[citation needed]. Soviet spy Aldrich Ames, who had earned more than $2 million cash for his espionage, was also charged with tax evasion as none of the Soviet money was reported on his tax returns. Ames attempted to have the tax evasion charge dismissed on the grounds his espionage profits were illegal, but the charges stood.

[edit] Economics of tax evasion
In 1968, Nobel laureate economist Gary Becker first[citation needed] theorized the economics of crime, on the basis of which Allingham and Sandmo produced in 1972 an economic model of tax evasion. It deals with the evasion of income tax, the main source of tax revenue in the developed countries. According to them, the level of evasion of income tax depends on the level of punishment provided by law.[6]

This section requires expansion.

[edit] Evasion of customs duty
Customs duties are an important source of revenue in the developing countries. The importers purport to evade customs duty by (a) under-invoicing and (b) misdeclaration of quantity and product-description. When there is ad valorem import duty, the tax base is reduced through underinvoicing. Misdeclaration of quantity is more relevant for products with specific duty. Production description is changed match an H. S. Code commensurate with a lower rate of duty.[7]

This section requires expansion.

[edit] Smuggling
Smuggling is importation or exportation of foreign products through unauthorized route. Smuggling is resorted to for total evasion of leviable customs duties as well as for importation of contraband items. A smuggler does not have to pay any customs duty since the products are not routed through an authorized or notified Customs port and therefore, not subjected to declaration and payment of duties and taxes.[8]

[edit] Evasion of value added tax (VAT) and sales taxes
During the latter half of the twentieth century, value added tax (VAT) has emerged as a modern form of consumption tax through the world, with the notable exception of the United States. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. [9] The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states instead collect sales taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms.
In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that those consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are in fact breaking the law in most cases. Such evasion is especially prevalent in federal states like the US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. Intranational borders in such countries usually lack customs offices or similar facilities that could effectively control the movement of any goods carried in private vehicles from one jurisdiction to another and most of the respective state and provincial governments simply lack the manpower and resources to pursue and prosecute every case of state/provincial sales tax evasion arising from purchases which do not cross state or provincial borders other than for major purchases such as cars. [10]

[edit] Control of evasion
Level of evasion depends on a number of factors one of them being fiscal equation. People's tendency to evade income tax declines when the return for due payment of taxes is not obvious. Evasion also depends on the efficiency of the tax administration. Corruption by the tax officials often render control of evasion difficult. Tax administrations resort to various means for plugging in scope of evasion and increasing the level of enforcement. These include, among others, privatization of tax enforcement,[11] tax farming,[12] and institution of Pre-Shipment Inspection (PSI) agencies.[13]

[edit] Corruption by tax officials
Corrupt tax officials cooperate with the tax payers who intend to evade taxes. When they detect an instance of evasion, they refrain from reporting in return for illegal gratification or bribe. Corruption by tax officials is a serious problem for the tax administration in a huge number of underdeveloped countries.[citation needed]

[edit] Role of middleman
It is often alleged that tax lawyers and chartered accountants help taxpayers including firms and companies in evading taxes. In the same vein, the Clearing and Forwarding agents help in evasion of Customs duties. It has been suggested that removal of human interface is a reliable solution to this problem.[citations needed]

[edit] Level of evasion and punishment
Tax evasion is a crime in almost all countries and subjects the guilty party to fines and/or imprisonment - in China the punishment can be as severe as the death penalty. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion. Normally, the higher the evaded amount, the higher the degree of punishment.

[edit] Privatization of tax enforcement
Professor Christopher Hood first[citation needed] suggested privatization of tax enforcement for overcoming limitations of government tax administration in controlling tax evasion.[14] Some governments have resorted to privatization of tax enforcement in order to enhance efficiency of the tax system. The assumption is that leakage of revenue will lower under a privatized regime. In Bangladesh, part of Customs administration was privatized in as early as 1991.[15]

[edit] Tax farming
Tax farming is an old means of collection of revenue when it is difficult to determine the leviable amount taxes with certainty. Government leases out the collection system to a private entity for a fixed amount who then collects the revenue and shoulders the risk of attempts at evasion by the tax-payers. It has been suggested that tax farming may be a solution to the problem of tax evasion seen in developing countries.[16]

This section requires expansion.

[edit] PSI Agencies
Pre-shipment Agencies like SGS, Cotecna etc. are employed to prevent evasion of customs duty through under-invoicing and misdeclaration. However, in the recent times, allegations have been lodged that PSI agencies have actively cooperated with the importers in evading customs duties. Authority in Bangladesh has found Cotecna, a PSI agency of Swiss origin, guilty of complicity with the importers for evasion of customs duties on a huge scale.[17] The same company Cotecna was implicated for bribing Pakistan's prime minister Benazir Bhutto for securing contract for importation by Pakistani importers. She and her husband were sentenced both in Pakistan and Switzerland.[18]

This section requires expansion.

[edit] The distinction in various jurisdictions
The use of the terms tax avoidance and tax evasion can vary depending on the jurisdiction. In general, the term "evasion" applies to illegal actions and "avoidance" to actions within the law. The term "mitigation" is also used in some jurisdictions to further distinguish actions within the original purpose of the relevant provision from those actions that are within the letter of the law, but do not achieve its purpose.

[edit] The distinction in the United States
In the United States "tax evasion" is evading the assessment or payment of a tax that is already legally owed at the time of the criminal conduct.[19] Tax evasion is criminal, and has no effect on the amount of tax actually owed, although it may give rise to substantial monetary penalties.
By contrast, the term "tax avoidance" describes lawful conduct, the purpose of which is to avoid the creation of a tax liability in the first place. Whereas an evaded tax remains a tax legally owed, an avoided tax is a tax liability that has never existed.
For example, consider two businesses, each of which have a particular asset (in this case, a piece of real estate) that is worth far more than its purchase price.
Business One sells the property and underreports its gain. In this instance, tax is legally due. Business One has engaged in tax evasion, which is criminal.
Business Two consults with a tax advisor and discovers that it can structure the sale as a "like kind exchange" (formally known as a 1031 exchange, named after the Code section) for other real estate that it can use. In this instance, no tax is due because (legally, under Section 1031) no sale took place. Business Two has engaged in tax avoidance (or tax mitigation), which is completely within the law.
In the above example, tax may eventually be due when the second property is sold. Whether and how much tax will be due will depend on circumstances and the state of the law at the time. This is true of many tax avoidance strategies.

[edit] The distinction in the United Kingdom
The United Kingdom and jurisdictions following the UK approach (such as New Zealand) have recently adopted the evasion/avoidance terminology as used in the United States: evasion is a criminal attempt to avoid paying tax owed while avoidance is an attempt to use the law to reduce taxes owed. There is, however, a further distinction drawn between tax avoidance and tax mitigation. Tax avoidance is a course of action designed to conflict with or defeat the evident intention of Parliament: IRC v Willoughby.[20] Tax mitigation is conduct which reduces tax liabilities without “tax avoidance” (not contrary to the intention of Parliament), for instance, by gifts to charity or investments in certain assets which qualify for tax relief. This is important for tax provisions which apply in cases of “avoidance”: they are held not to apply in cases of mitigation.
The clear articulation of the concept of an avoidance/mitigation distinction goes back only to the 1970s. The concept originated from economists, not lawyers.[21] The use of the terminology avoidance/mitigation to express this distinction was an innovation in 1986: IRC v Challenge.[22]
In practice the distinction is sometimes clear, but often difficult to draw. Relevant factors to decide whether conduct is avoidance or mitigation include: whether there is a specific tax regime applicable; whether transactions have economic consequences; confidentiality; tax linked fees. Important indicia are familiarity and use. Once a tax avoidance arrangement becomes common, it is almost always stopped by legislation within a few years. If something commonly done is contrary to the intention of Parliament, it is only to be expected that Parliament will stop it. So that which is commonly done and not stopped is not likely to be contrary to the intention of Parliament. It follows that tax reduction arrangements which have been carried on for a long time are unlikely to constitute tax avoidance. Judges have a strong intuitive sense that that which everyone does, and has long done, should not be stigmatised with the pejorative term of “avoidance”. Thus UK courts refused to regard sales and repurchases (known as bed-and-breakfast transactions) or back-to-back loans as tax avoidance.
Other approaches in distinguishing tax avoidance and tax mitigation are to seek to identify “the spirit of the statute” or “misusing” a provision. But this is the same as the “evident intention of Parliament” properly understood. Another approach is to seek to identify “artificial” transactions. However, a transaction is not well described as ‘artificial’ if it has valid legal consequences, unless some standard can be set up to establish what is ‘natural’ for the same purpose. Such standards are not readily discernible. The same objection applies to the term ‘device’.
It may be that a concept of “tax avoidance” based on what is contrary to “the intention of Parliament” is not coherent. The object of construction of any statute is expressed as finding “the intention of Parliament”. In any successful tax avoidance scheme a Court must have concluded that the intention of Parliament was not to impose a tax charge in the circumstances which the tax avoiders had placed themselves. The answer is that the expression “intention of Parliament” is being used in two senses. It is perfectly consistent to say that a tax avoidance scheme escapes tax (there being no provision to impose a tax charge) and yet constitutes the avoidance of tax. One is seeking the intention of Parliament at a higher, more generalised level. A statute may fail to impose a tax charge, leaving a gap that a court cannot fill even by purposive construction, but nevertheless one can conclude that there would have been a tax charge had the point been considered. An example is the notorious UK case Ayrshire Employers Mutual Insurance Association v IRC,[23] where the House of Lords held that Parliament had “missed fire”.

[edit] History of the distinction
An avoidance/evasion distinction along the lines of the present distinction has long been recognised but at first there was no terminology to express it. In 1860 Turner LJ suggested evasion/contravention (where evasion stood for the lawful side of the divide): Fisher v Brierly.[24] In 1900 the distinction was noted as two meanings of the word “evade”: Bullivant v AG.[25] The technical use of the words avoidance/evasion in the modern sense originated in the USA where it was well established by the 1920s.[26] It can be traced to Oliver Wendell Holmes in Bullen v Wisconsin.[27] It was slow to be accepted in the United Kingdom. By the 1950s, knowledgeable and careful writers in the UK had come to distinguish the term “tax evasion” from “avoidance”. However in the UK at least, “evasion” was regularly used (by modern standards, misused) in the sense of avoidance, in law reports and elsewhere, at least up to the 1970s. Now that the terminology has received official approval in the UK (Craven v White[28]) this usage should be regarded as erroneous. But even now it is often helpful to use the expressions “legal avoidance” and “illegal evasion”, to make the meaning clearer.

[edit] Public opinion on tax avoidance
Tax avoidance may be considered to be the dodging of one's duties to society, or alternatively the right of every citizen to structure one's affairs in a manner allowed by law, to pay no more tax than what is required. Attitudes vary from approval through neutrality to outright hostility. Attitudes may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the tax being avoided.
In the judiciary, different judges have taken different attitudes. As a generalization, for example, judges in the United Kingdom before the 1970s regarded tax avoidance with neutrality; but nowadays they regard it with increasing hostility. See the quotes below for examples.

[edit] Responses to tax avoidance
Avoidance also reduces government revenue and brings the tax system into disrepute, so governments need to prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is no scope for avoidance. In practice this has not proved achievable and has led to an ongoing battle between governments amending legislation and tax advisors' finding new scope for tax avoidance in the amended rules.
To allow prompter response to tax avoidance schemes, the US Tax Disclosure Regulations (2003) require prompter and fuller disclosure than previously required, a tactic which was applied in the UK in 2004.
Some countries such as Canada, Australia and New Zealand have introduced a statutory General Anti-Avoidance Rule (GAAR). Canada also uses Foreign Accrual Property Income rules to obviate certain types of tax avoidance. In the United Kingdom, there is no GAAR, but many provisions of the tax legislation (known as "anti-avoidance" provisions) apply to prevent tax avoidance where the main object (or purpose), or one of the main objects (or purposes), of a transaction is to enable tax advantages to be obtained.
In the United States, the Internal Revenue Service distinguishes some schemes as "abusive" and therefore illegal.
In the UK, judicial doctrines to prevent tax avoidance began in IRC v Ramsay (1981) followed by Furniss v. Dawson (1984). This approach has been rejected in most commonwealth jurisdictions even in those where UK cases are generally regarded as persuasive. After two decades, there have been numerous decisions, with inconsistent approaches, and both the Revenue authorities and professional advisors remain quite unable to predict outcomes. For this reason this approach can be seen as a failure or at best only partly successful.
In the UK in 2004, the Labour government announced that it would use retrospective legislation to counteract some tax avoidance schemes, and it has subsequently done so on a few occasions.

[edit] Tax protesters and tax resistance
Main articles: Tax protester, Tax protester arguments, and Tax resistance
Some tax evaders believe that they have uncovered new interpretations of the law that show that they are not subject to being taxed: these individuals and groups are sometimes called tax protesters. However, many protesters are posing the same arguments that the Federal courts have rejected time and time again.
Tax resistance is the refusal to pay a tax for conscientious reasons (because the resister does not want to support the government or some of its activities). They typically do not take the position that the tax laws are themselves illegal or do not apply to them (as tax protesters do) and they are more concerned with not paying for what they oppose than they are motivated by the desire to keep more of their money (as tax evaders typically are).
In the UK case of Cheney v. Conn,[29] an individual objected to paying tax that, in part, would be used to procure nuclear arms in unlawful contravention, he contended, of the Geneva Convention. His claim was dismissed, the judge ruling that "What the [taxation] statute itself enacts cannot be unlawful, because what the statute says and provides is itself the law, and the highest form of law that is known to this country."

[edit] Definition of tax evasion in the United States
The application of the U.S. tax evasion statute may be illustrated in brief as follows, as applied to tax protesters. The statute is Internal Revenue Code section 7201:
Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.[30]
Under this statute and related case law, the prosecution must prove, beyond a reasonable doubt, each of the following three elements:
the "attendant circumstance" of the existence of a tax deficiency — an unpaid tax liability; and
the "actus reus" (i.e., guilty conduct) — an affirmative act (and not merely an omission or failure to act) in any manner constituting evasion or an attempt to evade either:
the assessment of a tax, or
the payment of a tax.
the "mens rea" or "mental" element of willfulness — the specific intent to violate an actually known legal duty;
An affirmative act "in any manner" is sufficient to satisfy the third element of the offense. That is, an act which would otherwise be perfectly legal (such as moving funds from one bank account to another) could be grounds for a tax evasion conviction (possibly an attempt to evade "payment"), provided the other two elements are also met. Intentionally filing a false tax return (a separate crime in itself[31]) could constitute an attempt to evade the "assessment" of the tax, as the Internal Revenue Service bases initial assessments (i.e., the formal recordation of the tax on the books of the U.S. Treasury) on the tax amount shown on the return.

[edit] Application to tax protesters
This statute is an example of an exception to the general rule under U.S. law that "ignorance of the law or a mistake of law is no defense to criminal prosecution."[32] Under the Cheek Doctrine (Cheek v. United States[33]), the United States Supreme Court ruled that a genuine, good faith belief that one is not violating the Federal tax law (such as a mistake based on a misunderstanding caused by the complexity of the tax law itself) would be a valid defense to a charge of "willfulness" ("willfulness" in this case being knowledge or awareness that one is violating the tax law itself), even though that belief is irrational or unreasonable. On the surface, this rule might appear to be of some comfort to tax protesters who assert, for example, that "wages are not income."[34] However, merely asserting that one has such a good faith belief is not determinative in court; under the American legal system the trier of fact (the jury, or the trial judge in a non-jury trial) decides whether the defendant really has the good faith belief he or she claims. With respect to willfulness, the placing of the burden of proof on the prosecution is of limited utility to a defendant that the jury simply does not believe.
A further stumbling block for tax protesters is found in the Cheek Doctrine with respect to arguments about "constitutionality." Under the Doctrine, the belief that the Sixteenth Amendment was not properly ratified and the belief that the Federal income tax is otherwise unconstitutional are not treated as beliefs that one is not violating the "tax law" — i.e., these errors are not treated as being caused by the "complexity of the tax law."
In the Cheek case the Court stated:
Claims that some of the provisions of the tax code are unconstitutional are submissions of a different order. They do not arise from innocent mistakes caused by the complexity of the Internal Revenue Code. Rather, they reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable. Thus, in this case, Cheek paid his taxes for years, but after attending various seminars and based on his own study, he concluded that the income tax laws could not constitutionally require him to pay a tax.
The Court continued:
We do not believe that Congress contemplated that such a taxpayer, without risking criminal prosecution, could ignore the duties imposed upon him by the Internal Revenue Code and refuse to utilize the mechanisms provided by Congress to present his claims of invalidity to the courts and to abide by their decisions. There is no doubt that Cheek, from year to year, was free to pay the tax that the law purported to require, file for a refund and, if denied, present his claims of invalidity, constitutional or otherwise, to the courts. See 26 U.S.C. 7422. Also, without paying the tax, he could have challenged claims of tax deficiencies in the Tax Court, 6213, with the right to appeal to a higher court if unsuccessful. 7482(a)(1). Cheek took neither course in some years, and, when he did, was unwilling to accept the outcome. As we see it, he is in no position to claim that his good-faith belief about the validity of the Internal Revenue Code negates willfulness or provides a defense to criminal prosecution under 7201 and 7203. Of course, Cheek was free in this very case to present his claims of invalidity and have them adjudicated, but, like defendants in criminal cases in other contexts who "willfully" refuse to comply with the duties placed upon them by the law, he must take the risk of being wrong.[35]
The Court ruled that such beliefs — even if held in good faith — are not a defense to a charge of willfulness. By pointing out that arguments about constitutionality of Federal income tax laws "reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable," the Supreme Court may have been impliedly warning that asserting such "constitutional" arguments (in open court or otherwise) might actually help the prosecutor prove willfulness.[36] Daniel B. Evans, a tax lawyer who has written about tax protester arguments, has stated that:
[ . . . ] if you plan ahead to use it [the Cheek defense], then it is almost certain to fail, because your efforts to establish your “good faith belief” are going to be used by the government as evidence that you knew that what you were doing was wrong when you did it, which is why you worked to set up a defense in advance. Planning not to file tax returns and avoid prosecution using a “good faith belief” is kind of like planning to kill someone using a claim of “self-defense.” If you’ve planned in advance, then it shouldn’t work.[37]

[edit] Failing to file returns in the United States
According to some estimates, about three percent of taxpayers do not file tax returns at all.[citation needed] In the case of U.S. Federal income taxes, civil penalties for willful failure to timely file returns and willful failure to timely pay taxes are based on the amount of tax due; thus, if no tax is owed, no penalties are due.[38] The civil penalty for willful failure to timely file a return is generally equal to 5.0% of the amount of tax "required to be shown on the return per month, up to a maximum of 25%.[39] By contrast, the civil penalty for willful failure to timely pay the tax actually "shown on the return" is generally equal to 0.5% of such tax due per month, up to a maximum of 25%.[40] The two penalties are computed together in a relatively complex algorithm, and computing the actual penalties due is somewhat challenging.
In cases where a taxpayer does not have enough money to pay the entire tax bill, the IRS can work out a payment plan with taxpayers.
For years for which no return has been filed, there is no statute of limitations on civil actions -- that is, on how long the IRS can seek taxpayers and demand payment of taxes owed.[41]
For each year a taxpayer willfully fails to timely file an income tax return, the taxpayer can be sentenced to one year in prison.[42] In general, there is a six-year statute of limitations on Federal tax crimes.[43]

[edit] Tax shelters
See also: Tax shelter and Tax haven
Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the IRA for the required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive.
The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. TAX SHELTER INDUSTRY: THE ROLE OF ACCOUNTANTS, LAWYERS, AND FINANCIAL PROFESSIONALS. Many of these tax shelters were designed and provided by accountants at the large American accounting firms.
Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions."
Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use the passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses.
In the Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under 26 U.S.C. § 469) on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the "at risk" loss rules of 26 U.S.C. § 465. Coupled with the hobby loss rules (26 U.S.C. § 183), the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses.

Guidelines On Advance Rulings

With effect from 1 January 2007, the Inland Revenue Board Malaysia (IRBM)
may issue advance rulings on the interpretation and application of the income
tax provisions under the Income Tax Act 1967 [Act] upon request by any
person.
The issuance of an advance ruling aims to ensure clarity and certainty of tax
treatment and consistency in the application of the income tax law. This in
turn will help to promote compliance and minimise disputes between the
IRBM and taxpayers.
An advance ruling is a written statement by the DGIR to a person giving an
interpretation on how any provision of the Act applies to a proposed
arrangement described in an application.

Click here to see scope of this guidelines issued by IRBM

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Tax Risks: Key to success

Tax Risk Management is an integral part of developing and executing a Business Plan. Sound and effective implementation of Tax Risk Management promotes best practice concepts at the corporate/strategic level as well as a means of improving tax payment scheme. A structured and proactive approach to Tax Risk Management should form a core part of the decision-making process at all levels within an organization, thus improving the ability to control negative consequence and exploit opportunities for tax knowledge and success.

Key to successful Tax Risk Management are:
By ramlitax™

1. Introduction:

• Self-assessment
• Tax audit/investigation
• Tax as a risk
• Solution

2. Self assessment:Integrity in reporting and compliance

• Tax agenda as main issue
• Tax issue require CEO, Proprietor and/or Tax Advisor to pay attention

3. Tax audit/investigation: Recognised taxpayer’s integrity

• Excellent tax administration
• Civil investigation
• Criminal investigation

4. Tax as a risk: Technical:

• Advise/knowledge
• Implementation
• Operational:
  People
  Procedures
  System

5. Reporting: Financial statement

• Risks profile
• Tax return
• Payment

6. Recognising changes: Reporting

• Policies
• Method
• History

7. Reputational risks: Corporate image/reputation

• Inaccurate tax figures in accounts
• More tax liabilities than required by law
• Decreasing investors support

8. Financial risks: Increased IRB audit focus

• Incidental cost incurred
• Increased/additional assessment with penalties

9. Personal risks: Fines and imprisonment

• Shifting of corporate risk to personal risk

10. Identification of risks: Understand business operations

• Understand tax obligation to it’s operation
• Review all process and procedures on tax compliance matters
• Review all technical position adopted in tax obligation

11. Business operations: Nature of business

• How it was carried out
• Suppliers chain form procurement, processing, ………sales of final product

12. Tax obligation: Corporate tax

• Individual tax
• Withholding tax (WHT)
• Indirect tax
• Cross border direct/indirect tax issues

13. Tax compliance: review process & procedures_Corporate/individual tax filing

• Filing of estimated tax/review of tax payment
• Determination of WHT
• Installment payment/STD/WHT/payment of underpaid tax

14. Tax compliance: review process & procedures_Preparation of corporate/individual tax requirement (reliable input data/accurate information)

• Evaluate them by a person with sufficient tax knowledge
• Steps and procedures should be established to meet the tax requirement (as provided in the legislation)

15. Technical position: Case study

• Impact/Weaknesses resulting:
  Paying more or less tax and penalties
  Depending on result of the accounts
  Open to risks
  Less enjoyment
  Increased IRB focus

16. Solution: Risks frameworkDefine key process

• People responsible
• Segregation of duties
• Proper documentation
• Check and balance

17. Solution: Free tax risks Set up internal audit

• Educate internal auditors with tax knowledge
• Frequently monitor monthly tax payment and yearly tax compliance
• Updating tax changes

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Winning Audit Case

Prepare for an IRB audit
A field audit by the Internal Revenue Board (IRB) can be unnerving. Even if you're the most confident, scrupulous controller, you cannot help feeling defensive when a branch of the federal government sets up a meeting at your place of business to scrutinize your financial records for tax compliance. And preparing for an audit can — pardon the pun — tax your already busy schedule.
Don't let a field audit alarm you. Read on to learn what to expect during a field audit and discover best practices that can help make your company's tax audit (relatively) pain free.

IRB audit letter
If you've been selected for an IRB field audit, you'll be notified through a letter from an IRB agent requesting a meeting to review your company's tax records for a particular year. This letter is an important document containing valuable information that should not be ignored. It will provide a date for the field audit, as well as explanations about your legal rights during a tax audit. The letter will include audit preparation instructions as well as a telephone number to reschedule the audit, if necessary.
The audit letter will also include a list of documents that you'll need to provide during the field audit. Some of the documents you may be asked to provide are:
Tax returns for the prior and subsequent years of the year under audit
Financial statements for the year under audit
Depreciation schedules
Payroll tax data

Creating an audit team
If you receive a field audit notification, you should immediately establish a team to prepare for the audit. In addition to collecting the requested documents for the audit, your team should review company tax records to assess tax compliance issues.
If you plan to handle the audit in-house, decide who on your audit team will serve as the primary contact person for the IRB agent. If you use an outside accountant to prepare your company's tax records, you may want to ask that person to act as the contact person for the and to also represent you during the field audit, answering questions about your business, its financial practices, and the preparation of the tax returns.
You may want to include your corporate attorney on your audit team. Your attorney will protect your interests and ensure that you provide only the information required — providing too much information might lead to a broader investigation. Your attorney would also know when it is appropriate to ask for more time to research an issue or an area of concern.
The audit notification letter might not detail the areas of your business that will be under review. You may find it helpful if your audit team researches the questions that IRB agents typically ask during a field audit. Helpful resources for this information include the IRB Audit Technique Guides, found in the business section of the IRB web site (www.hasilnet.org.my). These guides, sorted by business type, help IRB auditors with examination techniques, common and unique industry issues, business practices, and industry terminology.

Field audit
The field audit may last from one day to a week, depending on the size of your business, the industry type, and the condition and complexity of your financial records. During a typical field audit, you can expect the IRB auditor to perform the following tasks:
Question employees Be prepared for the auditor to question key employees about the operations of your company, including products, processes, accounting procedures, management structure, and internal controls. For example, the chief financial officer or accounting manager may be asked to explain the setup of your company's general ledger, while a production manager may be asked to describe the company's product line or production process.
If your employees are asked questions to which they don't have answers, encourage them to ask the auditor for some time to find information. It's better to request more time than to appear as if you don't have the requested information or are concealing information.
Review financial records Field auditors are required to survey the preceding and subsequent years' tax returns for the year under audit, confirming whether you treated similar items consistently over the years. If they discover inconsistencies, they may choose to audit (not just survey) those other years' tax returns.
Expect to verify any expenses that seem significant in relation to the size of your business, such as payments to independent contractors, commissions, or travel and entertainment expenses.

Tour business facilities
A tour of your business facilities will help the auditor corroborate the information obtained during financial reviews and employee interviews. For example, the auditor may want to observe the size of your operation, labor force, and physical facilities to understand your overhead allocations. He or she may also want to inspect your finished goods or raw materials.

Closing conference
An IRB auditor might present conclusions from a field audit at a closing conference. If the auditor identifies proposed changes to your tax return, you'll be presented with a report explaining the changes and any penalties and interests that are due. The report will also include research from the Internal Revenue Code and other legal resources that support the proposed changes.
You may feel pressured to accept the auditor's findings, but you shouldn't sign anything that you either don't understand or don't think is fair or correct. It's a smart idea to request from the auditor more time to review the proposed changes with your accountant and attorney. If necessary, set up another meeting with the auditor so that your audit team can have time to research or prepare calculations about any discrepancies or questionable issues.
Don't be discouraged if you are unable to reach an agreement with the IRB auditor during a closing conference. Remember that tax law is complicated and subject to interpretation. Explain that your company may want to enforce its right to appeal the IRB decision and end the meeting amicably.

Appealing an audit decision
If you feel an appeal is necessary, work with your tax accountant or attorney to determine the best approach. If you choose to appeal, your case will likely go to the appeals division of the IRB. Unlike the IRB auditor who performed your field audit, the appeals officer will consider the time and expense it will require for the IRB to try your case in court. Because of this, about 90% of all cases referred to the appeals division are settled.
If you disagree with the decision of the appeals officer after your appeal has been decided, don't give up — you may appeal to the Special Commissioner of IT. Or, as an alternative, you can pay the amount of tax due and file a suit for a judicial review to quash an assessment where there is no suggestion of unfair treatment or abuse of power, but purely based on contention that the assessment raised based on error of law.

Winning your audit
Follow these commonsense tips to ensure that your field audit is settled in a satisfactory manner:
Be prepared Make sure that your tax records are organized and complete for the field audit. More importantly, make sure that the person you designate as the primary contact person for the IRB auditor fully understands the tax compliance issues of your company.
Keep track of all correspondence Set up tracking systems for all audit-related communications and document requests, particularly the transfer of all original documents.
Forge a working partnership Establish a working relationship with the auditor from the first meeting. Define the agenda of the field audit, which part of your company's facilities will be used during the audit, and how many employees will need to participate in the audit. Develop a schedule so that the agent and your audit team understand the time frame for additional document requests.
Treat the auditor with respect and cordiality Even if you are angered by or frustrated with the field audit, treat the auditor as you would a respected client or business partner. Bite your tongue rather than complain or whine. If you disagree with the auditor, state your objection once — no need to raise the ire of an auditor by triggering a debate or, worse, an argument.
Don't babble Discuss only the sections of your tax return in question and nothing more. Providing more details than requested could lead to a broader investigation.
An IRB field audit can be time-consuming and worrisome. However, your audit will run smoothly if you create a competent audit team, approach the field audit with the same confidence and professionalism that you would devote to a meeting with an important client, and remember that you'll have the opportunity to appeal any decisions made by the auditor.

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Tips for Preventing Tax Audits

A tax audit is an experience every sane business person strives to avoid. Unfortunately, there's no way to guarantee that the IRB won't pay you an unwelcome visit; the government's exact formula for choosing who is audited remains a well-guarded secret. And even if you are chosen for a tax audit, you may face a variety of different types.

Even if you can't be sure you'll avoid an auditor's attention, however, tax experts have identified some factors that may flag a return for closer scrutiny. It pays to be extra careful when filling out your tax return, and to keep the best possible records to document your business operations and expenses, if you fall into one of the following categories:
Self-employed people:

1. Corporate returns reporting income of MYR1,000,000 or more;
2. Individuals who claim a home office deduction;
3. Sole proprietors in businesses:

• Where income is mostly attained from tips, such as waiters and cab drivers; Involving large amounts of cash, such as auto salespeople;
• Involving a lot of travel, such as airline pilots and flight attendants;
• That are service-oriented, such as lawyers and doctors;
• Recreational-type businesses that could be classified as hobbies;
• Businesses using subcontractors instead of employees;
• Returns with large deductions relative to one's income for charitable gifts, travel, meals, and entertainment.

Whether your business is more likely to be an IRB target, experts say you can still reduce your risk of an audit by:

1. Answering all questions on your tax return;
2. Using exact numbers, not nice round numbers (use MYR4,892.18, not MYR5,000.00);
3. Double-checking your math for errors;
4. Preparing your report neatly and accurately;
5. Attaching explanations for any items that may appear questionable.

If you do get audited, the burden of proof lies with you (click here to see Preparing For A Tax Audit ) for more information.

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How to Prepare for a Tax Audit

A tax audit is an experience every business person hopes to avoid. If the IRB does pay your business a visit, however, understanding what an auditor might look for can make the difference between a minor inconvenience and a major hardship.

During a full-fledged audit, an IRB agent may look at several specific items in your tax return and business records, including:

Income. The IRB will compare your bank statements and deposits to the income you reported. They will also review your invoices, sales records and receipts, along with your general ledger and other formal bookkeeping records. If you received gifts of money or an inheritance, keep records to document how much you received. Without proof, the IRB may classify these as income and tax them as such. They will also classify any exchange of goods or services in lieu of cash (such as barter transactions) as taxable income.

Expenses and deductions. An auditor may compare canceled checks, bills marked “paid,” bank statements, credit card statements, receipts for payment or charitable gifts, and other business records to the expenses and deductions you reported on your return. They may pay special attention to reported debts or business losses; charitable gifts; and travel, meal and entertainment expenses. Keep a log to substantiate travel, meal and entertainment expenses, and be sure to deduct only legitimate business expenses. Read Tax Deductions and Your Small Business for additional information.

Loans and interest. An auditor may review loan paperwork, deposits, bank statements, credit card statements, receipts and canceled checks to verify that you used borrowed money only to cover business expenses. This is important, since you may deduct interest on business-related loans.

Employee classifications. The IRB will review employee classifications on your return and check this data against time cards, job descriptions, benefit plans, invoices, canceled checks, contracts and other business records. Auditors will pay particular attention to independent contractor classifications, since many firms improperly classify regular employees as contractors. For more information about IRB rules, click here to read The Proper Classification of Workers.

Payroll. Auditors will examine canceled checks, tax returns, deposits, business records and other forms to check for completeness, accuracy and timely filing. The IRB will also examine salaries and bonuses paid to owners and officers of your business to be sure they are legitimate and within industry standards.

Other records. An auditor can also inspect records from your tax preparer or accountant, bank or other financial institution, suppliers, and customers.
In addition to inspecting your business, an auditor may inspect your personal finances. The IRB may compare your current lifestyle with the income presented on your tax return to determine if they are compatible. An auditor may also talk with others who are knowledgeable about you and your financial situation.

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The Proper Classification of Workers

To determine whether a worker should be classified as an employee or an independent contractor, the IRB will use different common law criteria to examine the degree of control your company has over that worker. If you have the right to direct or control the specific tasks and the where and the how of the worker's activities, the IRB will likely consider that person an employee, regardless of the title you've given them.

The IRB prefers to classify workers as employees rather than independent contractors because it collects more tax revenue if the worker is an employee. If the person qualifies as an employee, the IRB rules require that the employer to deducted income taxes from emolument and making direct remittance to IRB every month.

Rules to Determine Worker Classification

• Section 2 of the ITA 1967 gives clear definition where "employee", in relation to an employment, means-
  (a) where the relationship of master and servant subsists, the servant;
  (b) where that relationship does not subsist, the holder of the appointment or office which constitutes the employment;

• and suggests officers to check three areas to show the degree of control a business has over a worker — behavioral control, financial control, and the type of relationship between the worker and the business.

Behavioral Control

• Worker instructions. An employee is generally subject to the business's instructions about when, where, and how to work.
• Worker training. An employee may be trained to perform work in a certain way. Independent contractors ordinarily use their own methods.

Financial Control

• The extent to which the worker has unreimbursed business expenses. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important.
• The extent of the worker's investment. An independent contractor often has a significant investment in a home office, including computer equipment.
• The extent to which the worker is available to work for other businesses. Employees generally are not free to take on other work. Independent contractors may work on several projects at the same time.
• How the business pays the worker. An employee is generally paid by the hour, week, or month. An independent contractor is usually paid by the project.
• The extent to which the worker can realize a profit or incur a loss. Depending on how quickly a project is completed or how long a project takes, an independent contractor can make a profit or loss.

Type of Relationship

• Written contracts describing the worker-business relationship. It is desirable to have a written independent contractor agreement or consultant agreement that states the worker is an independent contractor.

• Whether the business provides the worker with employee-type benefits, such as insurance, vacation pay, or sick pay. Independent contractors typically don't receive any of these benefits.

• The permanency of the relationship. Engaging a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, can be considered evidence that your intent was to create an employer-employee relationship.

• The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you will have the right to direct and control the worker's activities.

Certain Workers Are Automatically Classified as Employees

• The IRB rules provide that certain workers are automatically classified as employees for tax purposes. Such employees include some sales agent running the business at showhouse or shops, certain delivery drivers, certain insurance agents, workers working at their home using materials or goods that are supplied by the company, and certain business-to-business salespeople.

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Business Commencement and Cessation

by Choong Kwai Fatt 10 Sep 2002

Introduction The Malaysian Income Tax Act 1967 (The Act) divides classes of income into 6 categories, as defined in section 4 of the Act. These are: gains or profits from a business, for whatever period of time carried on; gains or profits from employment; dividends, interest or discounts; rents, royalties or premiums; pensions, annuities or other periodical payments not falling under any of the foregoing paragraphs; gains or profits not falling under any of the foregoing paragraphs. Income from a business source is a pertinent source in the Act as it has been accorded many preferential tax treatments. It contributes at least 60% of the total revenue collected by the Government. Thus, it is important to understand when a source of business income commences and when it ceases. Commencement of business Business in Malaysia can be categorised into trading, manufacturing and service providers. There are different types of business operation such as sole proprietors, partnerships, trusts and co-operatives but the most commonly is the use of a company. (These are known as business operators). The tax implications of the commencement of business are: a. Basis period The commencement date will trigger the basis period for taxation. Generally, the basis period of a financial year of 12 months will be the basis year of assessment for taxation. The financial year for 1.3.2001 - 28.2.2002 will be the year of assessment 2002 for taxation. The business operator is advise to close the accounts for a 12 month period running from the commencement date in order to avoid any tax adjustment of the basis period because of overlapping profits. The Act has been amended to ensure that the adjusted income from the overlapping period will not be taxed twice. The Act also allows the basis period from the commencement date to 31 December to form the basis period for the first year of taxation. A business operator who commences in business on 12.2.2002 and closes his accounts on 31st December, would have 12.2.2002 - 31.12.2002 as the basis period for the year of assessment 2002. Thereafter 1.1.2003 - 31.12.2003 will form the basis period for the year of assessment 2003. 31st December is a convenience year-end for business operators who happen to commence business part way through a month. b. Expenses Revenue expenses that are wholly and exclusively incurred 'in the production' of income will be tax deductible against the gross income. The phrase 'in the production of income' means that the business source must exist and have commenced. Any expenses incurred prior to commencement will not be tax deductible. These expenses are preparatory in nature or incurred in order to produce income. c. Current year loss Where the revenue expenses exceed gross income, a current year loss can be declared. This current year loss can be deducted from aggregate income (of both business and non business sources), the excess amount can be carried forward indefinitely to future years but the set off is restricted to business statutory income and not other sources of income. Upon commencement of business, the revenue expenses will be deductible and recorded as a current year loss in the event that there is no income generated. The availability of the current year business loss means that the operator will have lower income tax payable in the current year, or future years (if losses are carried forward). d. Disposals of assets The disposal of an asset before the commencement of business source is treated as a capital transaction. The gain would be a capital gain while loss is a capital loss. In the case of property developer, the land disposed at gain before commencement will be a capital gain. (HT Devt Sdn Bhd v KPHDN, 1996) The concept of 'trading stock' only crises once a business has commenced. Trading stock is the asset that an operator acquires with the intention to resell at profit. Therefore, the tax authorities will impose income tax on the trading stock disposed of. The test The ascertainment of the commencement date is a question of fact, supported by documentary evidence. A trading business is said to commence its business when it opens its door to the public. This is straightforward. The same applies to a service provider who opens his door to the public, ready to render their services. The question of income generation is of no relevance. Example 1 Bags Trading Sdn Bhd was incorporated on 1.1.2002 to operate a supermarket in Bukit Limau, Selangor. In February 2002, the company signed a tenancy agreement for its business premises, purchased plant and machinery, trading equipment, recruited its staff and placed orders for the various products to be sold. The retail stocks arrived on 1.4.2002 and were arranged on the shelves. The supermarket was opened to the public on 9 April 2002. The first sale was made on 10 April 2002. The Menteri Besar Selangor opening the supermarket was on 1.6.2002. Required: State, with reasons, the date of commencement of business. A retail business such as a supermarket commences business when it opens its doors and offers its goods for sale to the public. Thus the date of commencement would be 9.4.202. The fact that sales were made only on 10 April does not affect the date of commencement. Further, the Menteri Besar Selangor opening is merely ceremonial and does not affect the date of commencement. The difficulty in determining the date of commencement arises with manufacturing businesses. Manufacturing businesses acquire raw materials, process them into completed products and then sell these to either trading businesses or directly to customers. The trading stock consists of raw materials, work in progress and finished products. The test to ascertain the commencement date was laid down in CIT v Saurashtra Cement and Chemical Industries Ltd. (91 ITR 170). If there is more than one manufacturing process in order to produce the finished product, then manufacturing commences at the commencement of the first stage of the manufacturing process. Documentary evidence is required to substantiate this date when the tax authorities carry out their tax audit. The acquisition of raw materials, employment of manufacturing staff and acquisition of plant and machinery are activities preparatory to the commencement of business. The expenses incurred are expenses in order to produce income and not 'in the production' of income. Example 2 Christ Bhd was incorporated in 1.10.2001 to manufacture palm oil products. The factory building was acquired in December 2001 and was substantially overhauled in February 2002. Plant and machinery was installed on 15.3.2002 and its employees reported for work on 1.4.2002. Technical personnel were sent for a two weeks training course. All raw materials needed for the manufacturing process were received on 4.5.2002. The manufacture of the first batch of components was commenced on 6.6.2002 and completed on 20.7.2002. The components were sold in September 2002. Required: State, with reasons, the date of commencement of business. The business of manufacturing commences when the company is in a position to start its first process of the production cycle that is 6.6.2002. Renovation work, installing of plant and machinery, recruitment and training of staff were preliminary work done in preparation for the commencement of business. The income from the goods sold was not relevant. Cessation of business Business cessation is also a question of fact. When the operator disposes of plant and machinery, the factory is said to have ceased business. The operator needs to document the cessation date for the inspection of tax audit team. The tax implication of the cessation of business is that revenue expenses incurred in the process of cessation of business are not tax deductible, affirmed by the Malaysian High Court decision, Ampat Tin Dredging v Director General of Inland Revenue (1982). These expenses especially legal fees, retrenchment or compensation expenses are said to be incurred in the cessation of business source and not in the production of income. Once the cessation date is established, any expenses incurred after this date are also not deductible. Any unabsorbed capital allowance available at the time of cessation will be lost. There will not be any tax relief available to the operator. The disposal of plant, machinery, factory or qualifying assets will trigger off balancing adjustments being either balancing charges or balancing allowances. The balancing charge will reduce the unabsorbed capital allowance while the balancing allowance will increase the unabsorbed capital allowances. Malaysian income tax does not impose tax on capital gains. Thus, the amount of balancing charge will be restricted to the actual allowance claim. (The initial allowance plus accumulated annual allowances, which is the 'C' amount.) The disposal of land which was held for long-term investment gives rise to a capital gain, which will be liable to real property gain tax, ranging from 30% to 5%, subject to the holding period of such landed properties prior to the sale. The disposal of trading stock will be liable to income tax at the market price of such stock. The Act does recognise the 'hardship' of imposing market value. It allows the operator to sell the trading stock below market value i.e. strictly based on 'sale consideration' if the following conditions are fulfilled: the disposer permanently ceased to carry on the business; the acquirer will accept the trading stock in this business; there is a valuable consideration. Trade debtors are disposed either at book value or below it. The loss on disposing of trade debtors below book value is a capital loss. To avoid such a loss, the disposer should take advantage of sec 34(2) of the Act, providing an additional specific provision for bad debts with supporting evidence such as bankruptcy or the liquidation of the trade debtor to secure the specific provision of trade debt as an expense. This will certainly reduce the taxable income of the year of cessation. (see Public Ruling 1/2002 on bad debts deductions.) Cessation of business does not however prohibit the carry forward of any unabsorbed business loss. The operator will continue to carry forward the amount to utilize against other business income or future business income, which it commences in a later period. In the case of company, it should be noted that the cessation of business source is distinct from the liquidation of company. A business operator may have more than one business source. The separation of business sources is a question of law, to be ultimately decided by the courts in the event of disputes. Business operators can have more than one trading business simultaneously and manufacturing business sources of 1, 2, 3… The segregation of business sources merely an administration matter but with one tax implication factor on capital allowances. Capital allowance on business one cannot be utilized against adjusted income of business two or vice versa. In the case of an asset is used in both businesses, then the capital allowance of the asset will be dividend among the businesses in accordance to a reasonable basis such as usage, gross income or agreed ratio as accepted by the tax authorities. In the case of company, the surplus from the cessation of business source return to the shareholders will be deemed as payment of dividend. Shareholders will be taxed accordingly. Unless the company undertakes capital reduction scheme approved by the Court or there is a liquidation of company, then such repatriation of profits to the shareholders will be capital gains, free from income tax. (CIR v Burrell, 9 TC 27) Conclusion Commencement and cessation of business is an important aspect in the Income Tax Act 1967. The understanding of it's consequence will no doubt reduce the income tax payable of the business operator. source: http://www.accaglobal.com/archive/sa_oldarticles/635924 BACK TO TOP