By SM Thanneermalai
It is no longer possible to hide your foreign assets and income from the taxman.
Although Malaysia does not tax foreign income, the Inland Revenue Board Malaysia (IRBM) has the right to scrutinise your tax affairs to determine the source of funds which gave rise to the overseas assets.
The IRBM is interested to know whether the source of funds (capital gains or income) which originated from Malaysia were disclosed to them in your tax returns during the earlier years.
The government has opened the door and provided an opportunity to taxpayers who have not declared income or capital gains which should have been subjected to tax in the earlier years without undergoing a detailed and sometimes painful scrutiny. As a sweetener, the government has provided a lenient penalty regime of 10% of the underdeclared tax until 31 March, and 15% until 30 June 2019.
This is provided for under the Special Voluntary Disclosure Programme (SVDP).
Can you carry on with a “hide and seek” game?
From September 2018, with the implementation of the Common Reporting Standards (CRS), under the Automatic Exchange of Information (AEOI) agreement, the foreign tax administrations are forwarding financial information to the IRBM. Waiting for the IRBM to seek you out is not advisable as they are reviewing the information received. They have started contacting taxpayers to explain their past tax position.
Since the SVDP works on a good faith and voluntary basis, it will be advisable for the taxpayer to approach the IRBM rather than wait. The voluntary approach will certainly add credibility to your disclosure and makes the settlement easier.
What information is available to the IRBM?
All financial information available with depository institutions, custodial institutions, investment entities such as banks, insurance companies, mutual funds, and share broking institutions, etc. This will cover bank balances, fixed deposits, insurance policies, shares, investment funds / instruments, etc.
What about real properties?
Although this is not covered in the first instance under the AEOI, the IRBM can ask the foreign tax authorities to provide the relevant information since most taxpayers will be declaring the rental income in the foreign countries. Alternatively, the IRBM can easily get this information through your foreign bank accounts. Although the offshore rental income will not be taxed in Malaysia, the IRBM is interested in the source relating to the purchase of the property.
Will the time bar protect you from disclosure?
No, it will not protect the taxpayer.
In the first place, if you have not filed a tax return in Malaysia or omitted such information in the earlier years, then the five year time bar can be breached on the grounds that there could be an element of fraud / wilful default / negligence.
Does SVDP provide a closure to your past?
The whole SVDP programme is based on good faith and honesty on the part of the taxpayer. Except in exceptional circumstances where the IRBM receives concrete evidence from third parties that the disclosure was significantly incorrect, the IRBM is unlikely to re-open the case.
The SVDP will give you assurance that your past affairs up to 2017 are up to date.
Can I declare any amount I like?
It is not advisable to declare without carrying out a due diligence on your past records of the amount of monies remitted out of Malaysia, which should have been taxed in the past.
My foreign assets would have grown over the years. How do I explain this?
It is best to be transparent to the IRBM to explain how the taxpayer has grown / multiplied their investments so that there is protection in the form of disclosure. It also prevents the IRBM from going back to the past again as they would have accepted your explanation.
To further protect your past position and to provide a clean slate from 1 January 2018, it will be advisable for the bigger taxpayers to prepare a net worth statement of your assets and liabilities as at 30 December 2017, and have it deposited with the IRBM as part of the SVDP.
The above approach will give you more or less absolute assurance that your past will not be scrutinised.
How will the IRBM reciprocate your goodwill?
Upon closure of an SVDP, the IRBM will provide you with a clearance letter.
Don’t miss this golden opportunity to come clean.
SM Thanneermalai is Managing Director of Thannees Tax Consulting Services Sdn Bhd and Chairman of the Board of Trustees of the Malaysia Tax Research Foundation. This article was first published in the Sun.