MANY taxpayers have been taking a simplistic position that whenever they lend money to one another within the group, it can be lent on an interest-free basis since they have full control over the borrowers. The common statement we hear from the controlling shareholders is “After all, it’s our company. Why should we charge interest?”
What is the Inland Revenue Board (IRB) doing?
The scrutiny on taxpayers in relation to interest-free loans within groups started with one or two IRB branches but now it is spreading to other branches across the country. The IRB is retrospectively assessing taxpayers applying the interest rates prevailing during the respective years. Penalties are also being imposed on the recipient of the interest.
What is the basis?
The additional assessment relies on the fact that the transaction has not been carried out on an arm’s length basis which is provided for in the transfer pricing provision under Section 140A of the Income Tax Act 1967 (ITA).
The arm’s length principle requires transactions between related parties to be undertaken at the same terms/conditions and under the same circumstances that would have been comparable to similar transactions undertaken between unconnected/unrelated parties.
Related parties are where one person has control over the other or both persons are under control by a third party, or individuals who are relatives of one another.
Commercial rationality
The key question is: Will a third party lend an unconnected person a loan on an interest-free basis? If we accept the principle adopted in our tax legislation that each taxable person is treated as a separate entity entirely independent of one another, it will not be possible in the marketplace to obtain interest-free loans with or without security. There is always a cost to the use of money.
Are there exceptions?
Yes, there are exceptions where shareholders provide capital to their related companies. In the event the loan is not expected to be repaid for a very long time, such funding takes on the character of equity. There are other arguments to defend such a challenge by the IRB and it will depend on the characterisation and intention/facts surrounding the transaction.
Interest-free loans between company and shareholder directors
Interest-free loans and advances provided by a company to its shareholding directors who own more than 20% of the company’s ordinary share capital and involved in the management of the company will automatically trigger interest income to the company which is clearly stated in the ITA.
On the reverse where the shareholder provides interest-free loans to the company, the IRB has been silent on such transactions. However, reading the law strictly the IRB could come back anytime and impose an arm’s length interest rate on such transactions.
Fostering goodwill with taxpayers
The interest-free loan issue is not a new issue and has been around for a long time and the tax authorities are aware of this problem. Majority of the taxpayers have operated on the basis that since the IRB has been silent, there is tacit approval of interest-free loans.
Scrutinising taxpayers in 2022 and retrospectively assessing taxpayers may not foster goodwill, albeit, the law largely supports the position taken by the IRB. It may be advisable for the IRB to consider some form of relief to the taxpayers. It could be in the form of a penalty waiver together with a reasonable imposition of an interest rate which can be worked out based on criteria agreed between taxpayer groups and the IRB.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
Source: The Sun Daily
A word from our sponsor:
Need Help With Your Personal Finance / Money Issue or need a coach to help you structure or just want to learn the financial skill to self manage your financial matters and retirement. iLearnFromCloud.com
Need to solve a problem quickly, now you can solve it by learning the art of problem solving Art Of Problem Solving
Feeling hungry. Latest food news from Best Restaurant To Eat Malaysian Food and Travel Blog
Memory loss. Need to organize better. Solve problem fast with Free Mind Mapping Software Mind Mapping 101
Need A Customized System Development for your business or Going Paperless XPERT TECHNOLOGIES - Empowering The Paperless Economy
No comments:
Post a Comment