Highlighting the rich and evasive; the line separating tax evasion and tax avoidance is blurring

Saturday June 29, 2013

Highlighting the rich and evasive

By ERROL OH

IN CASE you’ve missed it, we’re in the midst of a “global crackdown on tax evasion”. So far this month, Bloomberg, Los Angeles Times, Reuters,The Guardian and The New York Times have used this phrase in articles about recent measures to step up international cooperation in nabbing tax dodgers.

The most significant of these was the outcome of the two-day G8 Summit at Lough Erne, Northern Ireland, last week. Tax was clearly high on the agenda in this meeting of leaders from Canada, France, Germany, Italy, Japan, Russia, the United States and Britain.Among the documents issued at the end of the meeting on June 18 was the mandatory Leaders’ Communique, which identifies at the start three areas in which the eight nations have agreed to take certain actions trade, tax systems and transparency.

On tax, the G8 leaders say: “As we strive to maintain fiscal sustainability and to secure jobs and growth for our citizens, we commit to playing our part in developing global solutions to the problems of tax evasion and tax avoidance.

“We will act to restore confidence in the fairness and effectiveness of our international tax rules and practices, and to ensure that each country is able to collect taxes owing and that developing countries are also able to secure the benefits of progress made on this agenda.”

How the G8 economies plan to do this is explained in other parts of the 33-page publication, but for a shortcut, refer to the Lough Erne Declaration.

This is essentially a pledge by the G8 leaders to “make a real difference” by working towards fair taxes, increased transparency and open trade through 10 measures, of which the first four relate to tax.

The leaders say tax authorities across the world should automatically share information to counter tax evasion.

“Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where,” they add.

“Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily. Developing countries should have the information and capacity to collect the taxes owed them and other countries have a duty to help them.”

The last point is relevant to Malaysia; with globalisation, liberalisation and digitalisation, we are seeing an ever increasing volume of cross-border transactions and these are becoming more complex. So, sure, we could do with assistance from other governments in ensuring that businesses meet their tax obligations.

There has been some furore lately over reports that American corporate giants such as Amazon, Apple, Google and Starbucks have been paying disproportionate taxes because they used a variety of tactics, especially those relying on offshore entities, to slash their taxable profits.

In some cases, the authorities have launched probes on some of the corporations, although the latter insist that they had not done anything illegal. It’s tax avoidance, say the companies, not tax evasion. Even so, in the wake of the global financial crisis, people now are less tolerant of tax avoidance, especially when those who capitalise on it are large businesses and rich individuals.

In the current climate, when it has been reported that 39% of the world’s wealth is concentrated in the hands of the mega-rich 1%, who has much sympathy for celebrities who are hauled up for tax offences?

Household names who have been in the news in the past four months for tax troubles include footballer Lionel Messi; the founders of the Dolce & Gabbana fashion business; singers Mary J. Blige, Lauryn Hill and Dionne Warwick; rappers Snoop Dogg and Fat Joe; golfer Sergio Garcia; and South Africa’s double amputee Olympian Oscar Pistorius.

There’s power in naming and shaming. However, there’s not enough of this when it comes to tax collection in this country. Before Malaysia can expect help from the tax authorities of other jurisdictions, it must first help itself. And that includes publicly coming down hard on offenders to augment the deterrent effect of penalties.

The Inland Revenue Board (IRB) is widely acknowledged as one of the country’s most efficient and capable government agencies. Partly aided by the country’s economic growth, its tax collection has increased from RM86.5bil in 2010 to RM124.9bil last year. According to CEO Tan Sri Dr Mohd Shukor Mahfar (pic), the board is likely to achieve its 2013 target of RM130bil.

Nevertheless, there remains the perception that too few Malaysians are contributing to the government’s income tax revenue. In his lastTransformation Unplugged column (StarBiz, June 24), Pemandu CEO Datuk Seri Idris Jala points out that last year, only 1.5 million of Malaysia’s working population of 12.5 million people were registered taxpayers, and only 1.2 million paid taxes.

And how many times have we heard that many businesses maintain at least two sets of accounts each one set that actually reflects the financial health of the businesses, and the other showing understated profits so that the tax bills are lower?

It’s not that the IRB hasn’t been going after the tax scofflaws; it’s just that a new approach is necessary.

In October last year, Mohd Shukor of the IRB spoke about exactly that. In a press conference, he said the board would press criminal charges instead of taking civil action, when dealing with certain tax evaders, especially the stubborn offenders.

“Those who do not submit their return forms will be investigated and those who intentionally evade will face criminal charges,” he was quoted as saying. “This means they run the risk of being jailed for the offence.”

Since 2004, the IRB had investigated only 69 criminal cases, preferring to resort to civil action. “However, we have found that the civil action does not deter them from becoming repeat offenders,” said Mohd Shukor.

A conviction for tax evasion can lead to jail time. With or without prison sentences, there should be publicity to drive home the message that those who wilfully shirk their responsibilities as taxpayers, particularly the elite individuals and businesses, risk getting not only the punishments meted out by the courts, but also the scorn and distrust of the public.

● Executive editor Errol Oh believes that the line separating tax evasion and tax avoidance is blurring. Innovation can lead to bad results sometimes.