IRB tangled in conflicting interests

By Chan Quan Min

A ‘corporatisation’ exercise credited for improving productivity and derided for paying tax agents huge bonuses tied to tax collections, a contentious law amendment that could put the tax agency at risk of breaking the law, and a habit of changing the rules to suit its needs. Read on to find out more on the Inland Revenue Board’s questionable practices.

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The Inland Revenue Board (IRB) came into its current form two decades ago with a sole purpose. It is the country’s centralised tax collection agency, but in recent years it has strayed into questionable practices. The latest of the lot is a contentious Bill before parliament in October that could create an investment panel with powers to invest taxpayers’ money in stocks and corporate bonds.

Tax experts see the ‘corporatisation’ of the Inland Revenue Board (IRB) several years back as a turning point for the government agency, although not one of the four practising tax professionals surveyed by KiniBiz seemed to be able to pinpoint when exactly the IRB was ‘corporatised’.

The term itself is surprisingly vague but often taken to mean more say in hiring staff and setting wages, among other things. When this happens, “a government department becomes a board,” said Soh Lian Seng, an executive director of tax at KMPG.

This distinction is important given that  Treasury secretary-general Mohd Irwan Serigar Abdullah has given the go-ahead for the Customs Department to be ‘corporatised’ as soon as next year.

Since ‘corporatisation’, the IRB has become many things. For one, it has got better at its job. In the seven years between 2006 and 2013, total tax collections doubled from RM66 billion to RM130 billion, outpacing both population and economic growth.

“It appears (from the tax collection numbers) that the IRB has reached a certain efficiency,” said Soh. “IRB has done very well, collections have increased.”

Government officials often attribute the improvement in tax collections to the ‘corporatisation’ of the IRB. Mohd Irwan for example hopes that Customs can emulate the “success” of the IRB through ‘corporatisation’.

Depending on who you ask, the IRB has either “upped its game,” as Chartered Tax Institute of Malaysia (CTIM) president SM Thanneermalai puts it, or become unnecessarily aggressive in tax audits, according to another tax advisor.

It is apparently common nowadays to see up to 20 tax officers turning up unannounced at business premises. In April last year, Supermax CEO and vocal opposition supporter Stanley Thai received a surprise visit from the IRB of just as many officers demanding to investigate his accounts.

No wonder then, that a small but vocal minority of tax advisors and business owners accuse tax agents of being too “aggressive” with their tax audits, a source told KiniBiz.

The source, a tax advisor, said IRB tax agents became more aggressive after the IRB introduced key performance indicators (KPIs) based on tax collection targets.

Employees reportedly received an across-the-board staff bonus equivalent to six months pay last year. An email to the IRB seeking confirmation on this matter did not attract a response.

According to the source, tax collection numbers should never be taken as a performance indicator. “Tax collections logically rise with economic growth,” the source said. “What will you do in a recession when tax collections fall? Take the bonus back?”

Most tax professionals, however, welcome this new fangled “aggression.”

“They are are doing what tax enforcement must do… Compared to before they are well trained now,” Thaneermalai said. In his experience, “appeals have been favourable… People speak much better of them now.”

Insider information

Tax experts were unanimous in rejecting a bill before parliament that would create an investment panel right under the nose of the IRB.

Four tax professionals surveyed by KiniBiz gave their damning verdict on grounds that the investment panel would duplicate government functions and “split the IRB’s focus.” Their views were presented in greater detail in yesterday’s part one of this series.

Debate on the bill, a controversial amendment to the IRB Act 1995, was last week abruptly postponed by the Finance Ministry to the October sitting to “facilitate revisions.”

If passed in its current form, an investment panel with the majority of its seven members directly appointed by the Finance Minister Najib Abdul Razak (who is also Prime Minister) would be given powers to invest taxpayers’ money in stocks and corporate bonds.

Meanwhile, a much larger stumbling block has gone largely unnoticed. The tax agency faces the very real danger of getting on the wrong side of the law if it plays the investment game.

“The IRB has access to information the public doesn’t,” an industry source said, alluding to the reams of tax returns the agency receives from practically every company in the country.

“Now consider that it also holds shares in the same companies it audits,” added the source, an independent tax advisor. “You’ll need to check on this, I can’t be sure but it could constitute insider trading.”

The crime in question, insider trading, is defined as the buying or selling of company securities with beforehand knowledge of relevant but non-public information that can move the market.

It’s a narrow enough definition but one that casts a net wide enough to implicate the IRB, if it inadvertently (or not) makes moves in the stock market using insider information.

Insider trading or not, the IRB will certainly find itself conflicted when “enforcing audits against the very party they have an interest in,” said another source, who used to serve at the tax agency.

The two sources who refused to be named for this article said they did not want to offend the IRB with their views. After all, the IRB has certain powers.

Moving the goalposts

Tax professionals are especially wary of the IRB because the tax agency can be stubborn in its ways. Those in the know point to a small but growing list of changes to tax law put through presumably to strengthen the IRB’s own interpretation of the law.

A pharmaceutical company, Eli Lilly (M) Sdn Bhd had just won a case against the IRB in the Court of Appeal when the IRB just last year introduced a new clause in the Income Tax Act to expand the definition of ‘entertainment’.

For years, Eli Lilly was fighting the IRB on the definition of ‘entertainment’. Eli Lilly wanted to classify money spent on conference participants as business expenses but the IRB was insistent that they go under ‘entertainment’. Under Malaysian tax law, ‘entertainment’ is tax deductible up to 50% whereas business expenses are usually fully tax deductible.

The battle in the courts lasted several years. The judgement in the highest court for such matters, the Court of Appeal, eventually favoured Eli Lilly.

Going against the judgement, the IRB then added a clause in the Income Tax Act to expand the definition of ‘entertainment’ to include “expenses incurred by a person for the purpose of promoting his business with or without consideration.” As a result, Eli Lilly will have to toe the IRB’s line from this year onwards.

Other cases with a similar chain of events involve the definition of capital allowances also argued in the courts.

The IRB’s many questionable practices, of which only a portion have been discussed in this article, point to a growing arrogance within the organisation.

This is not necessarily wrong because the same qualities have made the IRB into an organisation that can meet financial targets, but at what cost?

Yesterday: More behind the IRB investment controversy

Next up: Working for a very, very rich bully