Taxing questions need proper answers


There should be clear explanations before Bill to amend IRB Act is debated.

MAYBE, just maybe, it’s indeed a “sweet victory for the rakyat”, as Kelana Jaya MP Wong Chen puts it, but the deferred tabling of the contentious Bill to amend the Inland Revenue Board of Malaysia Act 1995 won’t amount to much if little is done to adequately explain the reasons for the proposed changes.

For that matter, there probably wouldn’t have been any brouhaha in the first place if the powers that be had publicised the plan earlier, making clear the ideas behind it.

It’s a mistake to underestimate how strongly people identify themselves as taxpayers and thus, how sensitive they are about where the taxes go and what the tax collection agency does.

Therefore, when Wong, an opposition member, revealed to the media on June 11 that the Inland Revenue Board of Malaysia (Amendment) Bill provides for a panel to handle the IRB’s investments and for a longer list of assets that the board can invest in, many sat up and took notice.

Nobody had seen this coming and the news came out the week before the Bill was scheduled for its second and third reading in the Dewan Rakyat. The surprise quickly turned into suspicion and criticism.

Wong conjures up the fear that the proposed new provisions will put at risk the Government’s tax collection – the figure he quotes is “roughly RM130bil a year” – and that the IRB will be transformed into “a quasi-investment body like 1MDB”, a refence to the Government-owned 1Malaysia Development Bhd.

(1MDB has been under a cloud of controversy pretty much since its inception, dogged by allegations of cronyism, questionable deals and lack of transparency.)

Such worries seem overdone. The Finance Ministry denies that the IRB will use taxes to invest, and assures that all direct taxes collected by the board will be channelled to the Federal Consolidated Fund.

The Government pays the IRB a fee for its services as a collection agent for direct taxes. This fee enables the board to settle its operational and development costs, and any surplus goes to the board’s reserves.

The current Act allows the board to invest its funds, which may also include grants, proceeds or income from property, returns from investments, and borrowings.

The Ministry explains that the amendments proposed in the Bill are meant to raise the board’s productivity and to give it flexibility in hiring and salaries.

At the same time, the Ministry has put the Bill on hold to review the proposed amendments. Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said this was because currently, the investment panel members include the Bank Negara governor or a representative.

“At the last minute, we realised that the Bank Negara governor shouldn’t be there as she is in charge of the financial sector,” he added.

Is the review limited only to this matter? If so, that would be disappointing.

Although, the Government has already clarified that the amendments would not empower the IRB to freely dip into the annual tax collection, there are still more questions about what the Bill seeks to change.

There ought to be a comprehensive package of answers instead of information that comes in dribs and drabs.

Below are some aspects that the Government will hopefully address before the Bill is tabled:

• A structural issue?

Section 28 of the Act allows the IRB (with the Finance Minister’s approval) to invest. This section, which also sets out what the board can invest in, has been unchanged for almost two decades.

Why the decision now to set up the investment panel and to broaden the menu of investment options (including shares in listed companies, corporate bonds, loans to the Federal Government and the catch-all “any other form of investment with the approval of the Minister”?

Can it be that the board is seeking better returns from its funds? And has this anything to do with the introduction next April of the goods and services tax (GST), which is expected to lead to lower income tax rates?

That may result in the slower growth of direct taxes and consequently, of the IRB’s revenue.

If the new investment provisions are indeed to offset the GST effect, how is permitting the IRB to put money in riskier assets the most effective response to a revamp in the country’s tax system?

• Potential conflicts of interest

The IRB has vast powers to obtain information from taxpayers. That may give it an unfair advantage in evaluating investments. How will this be avoided?

And what about how it treats companies in which it has significant investments? What safeguards will be in place so that there won’t be conflicts of interest?

• Transparency

According to some news reports, the fee the Government pays the IRB for its services is equivalent to 1.5% of the total tax collection. Wong points out that this is not a fixed percentage mandated by law.

Nor is it stated in the IRB’s annual reports although between 1999 and 2011, the fees disclosed in the board’s accounts come to an average of 1.12% of the gross direct taxes collected.

This is an area that could do with more transparency. Wong speculates that once the Act is amended, the Government will raise the fee rate so that the IRB will have more funds to invest.

The best way to counter this allegation is to be open about how the Government works out its annual fee to the IRB.

Also, the IRB should provide details of its investments in its annual reports. And while we’re on this subject, it’s hard to understand why the IRB is slow in issuing its annual reports.

The latest available on its website is the 2011 edition, which was tabled in the Dewan Rakyat on July 1 last year.

• Other amendments

Apart from the investment-related amendments, the Bill proposes to increase the maximum number of the IRB’s members from seven to nine, including the automatic appointment of the IRB CEO.

The Act says the board must comprise the Treasury secretary-general (as chairman); the Attorney-General or his representative; the Director-General of Public Service or his representative; not more than two Government representatives appointed by the Finance Minister; and not more than two other persons appointed by the Minister.

The last two should be “persons of standing and experience in financial, commercial, tax or legal matters”.

The two men in this category who are on the board at present are described as private consultants.

The plan now is to have three board members from this category instead of two.

So the question is, how will the new board composition improve the IRB’s governance? Another proposed amendment will allow the IRB, with the Minister’s approval, to set up companies to undertake “any project, scheme or enterprise”.

Why the need for this new provision?

Executive editor Errol Oh acknowledges that the IRB’s efficiency and performance are commendable and still improving. That’s why people want the board to stick to what it does best.

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