Tax evasion: penny wise, pound foolish
Say your company has had a spectacular year under your directorship.
Revenue is through the roof and shareholders are eagerly awaiting their annual dividends.
Then July comes along and it’s time to file tax returns and pay LHDN what is owed.
It can be sorely tempting to under-report income and take your chances. After all, as a director, your duty to the shareholders is to maximise profits, right?
We’re not saying you won’t get caught – but just know that the penalties associated with tax evasion outstrip any short-term financial gain acquired, which in our humble opinion, defeats the very idea of evading tax to maximise profits.
To prove our point, let’s look at two company directors who did get caught in 2023.
- Real life tax evasion cases in 2023
- Tax evasion penalty calculations
- Takeaways for Malaysian companies and directors
- Let MISHU handle your tax avoidance strategies
Real life tax evasion cases in 2023
Although you’ll find a lot more cases, we chose these two because of the huge sums involved.
The fact they’re both Johor-based companies is purely coincidental – we love Johor here at MISHU 😊
Case 1: Construction firm hit with RM1.28 million fine
Our first example involves a construction and maintenance company director who was given a RM1.284 million penalty for not submitting the company’s income statement to LHDN in 2019 and 2020.
The total taxable income across the two financial years totalled RM1.78 million, of which the company would have owed RM293,126 for 2019 and RM134,967 for 2020.
That would have come to RM428,093 for both years, and because the director wanted to avoid paying that, the company now owes three times as much.
It wasn’t all bad news though – he successfully pleaded to pay the fine in monthly installments!
Case 2: Recycling company gets a RM2.4 million fine
Our second case involves a recycling company director receiving a RM2.44 million penalty for not filing tax returns for more than RM3.3 million of taxable income over assessment years 2021 and 2022.
Specifically, the income was RM1.83 million for 2021 and RM1.56 million for 2022, which would have meant the company owed RM812,000 in taxes for both years.
Instead, she now owes three times that figure, and the judge also imposed a 12-month prison sentence in lieu of the fine.
Case 3: YOUR company!
Just kidding. Make sure you file your taxes accurately and on time.
Tax evasion penalty calculations
Specifically, the directors commited an offence under Section 114(1) of the Income Tax Act 1967 for trying to evade tax or assisting another person to evade tax, and which carries a penalty of:
- A fine of RM1,000 – 20,000
- imprisonment up to 3 years,
- both a fine and prison sentence, and
- triple the undercharged tax amount
You’ll notice that in both cases above, the penalty issued was triple the value of income tax evaded.
This means the bigger the amount of tax you avoid declaring, the more you end up having to pay if you get caught.
For a full list of offences, check out our post on LHDN penalties.
Takeaways for Malaysian companies and directors
We should emphasise that our intention here isn’t to bask in the misery of others – you know as well as us that the two directors above wish they’d never done it.
Unfortunately, it’s too little too late for them, but it doesn’t have to be that way for others.
Here are two takeaways for the rest of us.
1. Ensure timely and accurate tax filing
Company directors are the final decision makers in companies, and there’s nobody to stop you from not declaring tax if you are intent on it. However, there is no telling when LHDN will come knocking, and if long-term success is what you are after, getting hit with a seven-figure penalty is the last thing you want.
2. Use tax avoidance strategies
If tax avoidance and tax evasion were two halves of The Force, tax evasion would be the Sith Lord and Tax Avoidance would be Master Yoda.
Tax evasion refers to willfully hiding or under-reporting income – 100% illegal and can result in hefty fines or penalties, as seen above.
Tax avoidance involves utilising legal techniques to reduce your tax obligations, including taking advantage of tax credits and deductions or making certain investments that come with tax benefits. Of course, unless you are already familiar with the various strategies in Malaysia and how to maximally reduce your tax obligations legally, consider engaging a professional tax consultant.
We’ll take that as our cue to plug our services.
Let MISHU handle your tax avoidance strategies
MISHU’s team of tax experts is well-versed in the various tax avoidance strategies available to companies here in Malaysia. Get in touch with us today!