COVID-19 & MCO: Tax Management Strategies for SMEs - Part II

Taxes_theedgemarkets_8.jpg

Overview

Mr Saravana is an experienced and famous tax lawyer in Malaysia

Businesses in Malaysia are suffering financial difficulties and may undergo cost-cutting measures such as downsizing and retrenchment for survival.

On 7/4/2020 we attended Saravana tax seminar ((2 hours 30mins) organized by Learnable. Glad we can share our reflection from this seminar as below

Key takeaways

In this part of blog, we will share Mr Saravanan tax insights on retrenchment cost, wholly and exclusively concept, tax incentive for export, bad debts for unpaid bills and intercompany trading and loan.

Summary of learning

1.Retrenchment Cost

In this recession, companies forced to retrench their employee. However, incurring retrenchment cost is inevitable if you choose to retrench your staff.

Hence, what is the tax treatment of retrenchment costs?

Mr Saravana gave an example from the court case as below.

Pengkalen Holdings Bhd v James Lim Hee Meng (Industrial Court)

The company decided to close down after the staff redundancy. The retrenchment cost is not allowed for tax-deductible under Section 33 of the Income Tax Act 1967 as there is no income generated after the staff retrenchment.

We are opinion that the determining factor is whether you retrench your staff to close down your company or to save your company and continue operating.

2. Wholly and Exclusively

The taxpayers are wondering what expenses are allowed for deduction during their year assessment.

Mr Saravana highlighted the concept of wholly and exclusively in Section 33 of ITA 1967. 

He raised some examples to illustrate the concept.

KPHDN v Mercedes-Benz Malaysia Sdn Bhd

  • The taxpayer is a franchise holder and wholesaler of Mercedes-Benz vehicle in Malaysia. The company organized various high-profile events that attract lots of publicity. 

  • The company incurred expenses such as prizes, light refreshments for journalists, catering, food and accommodation for guests and dealers, advertisement expenses, launch for new products, etc.

  • The decision of the court is the cost incurred is tax-deductible as it is not considered as entertainment and dominant purpose is to promote for their business.

3. Tax Incentives for Exports

If your company is doing the export, you should claim for this increased export allowance. Before that, make sure you meet the conditions.

The exemption is given based on the level of increased value.

  • 10% of the value of the increase exports where the manufactured product attains at least 20% of the value-added; and

  • 15% of the value of the increase in exports where the manufactured product attains at least 40% of the value-added.

4. Bad Debts Treatment for Unpaid Bills

Mr Savarana highlighted the importance of “prevention”. If you are charging late payment interest for your debtors, and you know they are not going to pay, don’t charge them in the first place.

With this, we can avoid letting the interest become part of your “taxable income”.

Appropriate actions must be taken to recover the debts before you claim for any bad debts deduction.

To determine the appropriateness of your action taken, you must consider the volume of your debts, the timing of follow up, any letter of demand issued.

5. Inter-company Trading and Loans

Each entity is a separate entity. Every entity should comply with arms-length principles.

IRB may substitute the price which they deemed it is not arm’s length, under Section 140A (3).

For director's advances, money or loan from the company is subjected to deemed interest.

Section 140B will deem that the company shall receive interest income from loans or advances granted to the company’s directors from the company’s internally generated funds.

Reflection

When our government is giving free money to the raykat during MCO, we may question “where is the source of collection given the low price of commodities and oil?”

In the post MCO era, we believe IRB will intensify tax audit to “balance the account”.

Many taxpayers are confident that they are well compliant after filing their tax returns on time every year. However, as a taxpayer, our responsibilities didn't end here. We have to keep sufficient documentation to prove our claim.

Taxpayers are advised to retain documents such as receipts, original invoices for 7 years to support your tax claims and deductions. IRB reserves the right to question the taxpayer and add back your claim if you can’t prove the validity of expenses.

Feel worried about missing supporting documents for past transactions?

You may keep the trails of your transaction such as the photo, any correspondences whichever can track or identify the occurrence of this transaction. To make it simple, you can also keep your documents in softcopy.

Do not miss out on any tax benefits you can claim!

Sources:

Pengkalen Holdings Bhd v James Lim Hee Meng (Industrial Court)

KPHDN v Mercedes-Benz Malaysia Sdn Bhd

This message was brought to you by KTP.

taxKtp Ktptax, tax filing, covid 19