If you own a 20% or more stake in a company, you will be deemed personally responsible for taxes due
by HABHAJAN SINGH / pic by TMR
Company directors, beware. The tax laws demand that those holding the position must ensure that the company furnishes the tax returns, as well as pay the amounts due.
Otherwise, they may be liable to face actions under the Income Tax Act 1967, the legislation at work when it comes to tax matters in Malaysia. Failure to do so may entail personal repercussions.
Since 2014, the Inland Revenue Board (IRB) has upped the ante in going after errant directors when it lowered the threshold for those deemed responsible.
Earlier, only a director holding a 50% stake in a company may have been hauled to court when the company failed to pay up its taxes. Not anymore.
In 2014, the threshold was lowered to 20%, allowing the taxman to go after a much larger group of directors.
“For tax purposes, we have made it clear under Section 75A that we can go after the directors as long as they are within the threshold,” IRB legal department director Abu Tariq Jamaluddin (picture) told The Malaysian Reserve.
The figures are telling. The number of directors facing legal actions has more than doubled after the threshold was changed. In 2015, 440 cases were taken to court. The year after, it jumped to 1,031.
Hence, if you are a director of a company and own more than 20% shares, any tax liability of the company is also considered your personal liability.
“When it comes to payment, we can file a suit against the company, the second defendant can be a director. So, in a suit, we can name directors as second defendants.
“But we must ensure that they hold at least a 20% stake in the company. If the company doesn’t pay, we get judgement against the director and can initiate bankruptcy proceedings,” Abu Tariq said.
On director’s liability, Section 75A(1) states that where any tax is due and payable under the Act by a company, it is the responsibility of “any person who is a director of that company during the period in which that tax is liable to be paid by that company”.
“They (company directors) are obviously worried. It is a personal liability and we have in our seminars explained the impact of the clause,” he said.
At times though, the tax authorities face the challenge to determine the total shareholding of a person in a company.
“We must be sure (of the stake) before initiating actions against the directors. To get the information can be challenging. In a straight forward case, we can get the relevant documents from SSM.
“The more complicated shareholding structures may take some time to check. It is done by our recovery units. Once identified, they pass the case to our litigation unit,” he said.
SSM refers to the Companies Commission of Malaysia, a statutory body whose main activity is to serve as an agency to incorporate companies and register businesses as well as to provide company and business information to the public.
The tax authorities can also initiate legal actions, as per Section 112 of the Act, against directors who fail to ensure that companies furnish the tax returns.
Company directors may also be well advised to pay attention to another crucial detail — they may be held liable for unpaid earlier taxes, even though they were not directors of the company at that point of time.
“Directors keep changing. We look at the directors at the time the assessment was raised.
“Hence, directors must ensure they undertake proper due diligence, otherwise you may be exposed to possible liabilities,” said Abu Tariq.