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Tax Avoidance and Tax Evasion

Nobody enjoys paying taxes. But taxes are the law. The terms “tax avoidance” and “tax evasion” are often used interchangeably, but they are very different concepts. Basically, tax avoidance is legal while tax evasion is not.

Tax avoidance arrangement

A tax avoidance arrangement normally involves an arrangement that is artificial, contrived or has little or no commercial substance and is designed to obtain a tax advantage that is not intended by Parliament. The actions may be against the spirit of the law and in this sense considered non-compliant.

Tax evasion

Tax evasion is a criminal offence which involves deliberately misrepresent the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.

Anti-avoidance

In Malaysia, Income Tax Act contains general and specific anti avoidance provision which empowers the Director General to disregard schemes that are not commercially justified or are merely set up to avoid tax, despite their legal form.

There are two sections in the Income Tax Act 1967 which are general anti-avoidance provisions meant to be applied in certain situations. These provisions are Section 140, Section 140A and Section 141 (with respect to transactions between residents and non-residents). Section 140 states the circumstances in which the Director General could invoke the anti-avoidance provision while Section 140A provides further insights into the Director General’s power to substitute the price and the disallowance of interest on certain transactions. In general, these provisions are intended to counter or challenge avoidance schemes which are “unacceptable” to the tax authorities.

Once a transaction comes within the scope of Section 140, the Director General may:

Treat the income of a person from any source as the income of another person;
Revise the tax liability of any person or impose a tax liability on any person;
Issue an assessment or additional assessment in respect of any person as may be necessary; and
Nullify the right of repayment of tax or require the return of any tax that had been repaid.

Tax planning

In view of the above, it is essential for legitimate tax planning to stay within the language and spirit of the law. Transactions must have been carried out for commercial reasons and not have the avoidance or reduction of tax as one of its main purposes.
At 3E Accounting, we work closely with you to identify tax strategies that work best within your organisation and manage your tax compliance.