There is a distinct difference between tax evasion and tax avoidance. Tax evasion is a crime, while tax avoidance is legally right as long as it is in accordance with the law.
Serial tax evaders will forever look at ways to evade paying taxes. They do not fret about officers from the Inland Revenue Board (IRB) nor fear investigations into their sources of income.
Even when there are amnesty programmes such as the Special Voluntary Declaration Programme (SVDP), they look at ways to minimise their taxes to make their black money white. The tendency is not to declare their entire wealth and sources of income.
Serial tax evaders would consider taking on the tax department in the courts and it would take years before a settlement is reached. Amnesty programmes targetting serial tax evaders generally do not yield the desired results. These people have no qualms about committing a crime and are of the view that they are entitled to get away without paying taxes.
Tax avoidance is technically accepted, although in spirit, some deem it wrong. People take advantage of tax laws all the time to avoid paying full taxes. This is the very reason for the existence of tax experts.
From tax lawyers to consultants, their job is to look at the law and see how their clients can minimise the tax bill legally. For instance, individuals sometimes open a company and channel all their income and expenses to that company to enjoy lower taxes. It is common because the tax rate on high-income wage earners is higher than the taxes on companies.
The SVDP has had an impact on the existing pool of taxpayers.
In this respect, the 8.3 million letters and emails that the IRB sent out to registered taxpayers urging them to take advantage of the SVDP have rattled the recipients. It was the hot topic in the business community during the Chinese New Year period and continues to be so.
Under the SVDP, the penalty on unaccounted earnings is 10% if declared by the end of March and rises to 15% if undeclared income is unveiled by end-June. The normal penalty is 300%.
The IRB has targeted to get an additional RM10bil from the SVDP. This means targeting unaccounted for income of more than RM30bil. That is a lot of money.
It would have met its target and even exceeded it if the IRB was after the tax evaders; those who make money from criminal activities and live a life of luxury from kick-backs.
However, the ones who are anxious about the SVDP are the existing pool of taxpayers.
Generally, taxpayers fret when they get letters from the IRB. The first thing that comes to mind is that they have to cough up more money because the government needs it. In this instance, repeated reminders from the IRB to not take lightly the e-mails and letters exacerbate the matter.
The latest message from the IRB is for those with overseas bank accounts. The IRB has advised taxpayers who have not reported their income in overseas bank accounts to take advantage of the SVDP.
Although the IRB assuaged taxpayers that they have nothing to worry about if their income has been reported or taxed before it was channeled overseas, it has caused anxiety.
Many with overseas accounts have filed their taxes faithfully. Most have consulted tax consultants.
Previously, they had been told that they did not have to declare their overseas income as it would have been taxed at the source.
Now, they are to declare their income and take advantage of the SVDP if their accountability of the trail of funds is not satisfactory.
Many have not declared their overseas income. It could have been on purpose, upon the advice of tax experts or unintentionally.
But the point is that they were not required to do so in the past, and they had filed their income statements and paid the taxes if required to.
The retrospective nature of the current tax drive has cast a shadow of doubt on the objective of the SVDP.
Is it to carve out more from the existing pool of taxpayers? Or is it to encourage tax evaders to come clean on their income that is unaccounted for?
The tax drive has also cast some doubts on the advice of the tax experts – be it consultants or lawyers. Can advice from tax experts be counted on to withstand scrutiny from the IRB?
The tax drive has even affected those who did not get the e-mails and letters. It has left many second-guessing whether the IRB would expand its scope to go beyond those with overseas bank accounts.
For instance, there is no tax on capital gains made from stock-market investments. There are many investors who have made money from the stock market and have never declared their income because they were not required to.
However, some are wondering if they would be subject to scrutiny from the IRB from now on.
The view is that if those with bank accounts overseas can be called to declare their income when they were not required to previously, where would the focus of the IRB be next?
Leaving taxpayers second-guessing, especially when a tax amnesty programme is in overdrive, is not really good.
When the IRB launched the SVDP, many thought it was to primarily target tax evaders and not those avoiding paying tax. The IRB’s assurance that all information furnished would be received in good faith without any questions being asked had added to the belief that the target was politicians with huge stashes of cash.
But now, many are not so sure anymore.