Managing Tax Cashflow in Challenging Times

Published: 2009/03/16

TOUGH times call for unusual and calculated measures. Businesses need to take these measures now to address the challenges they are facing or are about to face. In formulating appropriate strategies and measures, tax plays a pivotal role. And cash is, of course, king.

Cash is king

Every ringgit in the pocket counts. Businesses need to manage their tax cashflows effectively. They must closely monitor their tax estimates to ensure that they do not overpay taxes. They should continue asking themselves whether there is a need to revise downwards their tax estimates.

Where the tax liabilities are expected to be substantially lower than the permitted 85 per cent threshold, companies can appeal to the Inland Revenue Board (IRB) for lower tax estimates.

In this uncertain economic landscape, it is also hoped that as a concession, the IRB will consider giving companies greater flexibility to revise their tax estimates, in addition to the standard allowance in the sixth or ninth month of the basis period.

If tax overpayment is expected, companies should expedite the filing of their tax returns to crystallise the overpaid tax and thereafter apply for a tax refund or set off against their future tax payment obligations. Where there are future tax installments due, set offs may be a good option as processing of tax refunds generally take longer.

The recent announcement by the IRB that they are willing to consider staggering tax payments to ease the financial burden of deserving businesses is welcomed.

Goodies from the mini-Budget

The mini-Budget provides measures to ease taxpayers' cashflow burden. While a proposal to defer tax payments by deserving taxpayers (in particular SMEs) did not materialise, it is interesting to note that the government has introduced provisions for carryback of tax losses to improve business cashflow.

Taxpayers can use their current year losses of up to RM100,000 to deduct against the preceding year's taxable profits, which could result in a tax repayment of up to RM26,000 for year of assessment (YA) 2008. This proposal is effective for YAs 2009 or 2010.

The tax repayment can either be used to set off against future tax payment obligations or refunded to the taxpayer. The claimant would need to make an irrevocable election to carryback the current year's tax losses in their tax return; and submit a revised tax return for the preceding year to effect the claim.

How the carryback works

This is not a new concept as such provisions can be found in many tax jurisdictions including the UK, US and Singapore. In fact, in addressing the economic downturn, the UK and Singapore governments have recently enhanced their carryback rules.

UK tax legislation allows trading losses to be carried back without any limit to the immediate preceding YA. In the 2009 Budget, the UK government introduced a temporary extension of the tax relief - tax losses can now be carried back for three years, subject to a limit of STG50,000 (RM255,000) for the additional two years.

Singapore, which introduced similar rules in 2006, has enhanced its rules for YAs 2009 and 2010 to allow carryback of tax losses and capital allowances for three years, as well as increase the amount available for carryback from S$100,000 to S$200,000 (RM240,000 to RM480,000). It should be noted that the carryback provision in Malaysia does not include unabsorbed capital allowances.

In Malaysia, the carryback provisions would no doubt assist taxpayers to ease their tax burden by crystallising the tax benefits of the current year's losses immediately. However, the success of such provisions would depend on the tax authorities' effectiveness in processing the claims. Our tax authorities have indicated that they will process these tax refunds within three months, without having to carry out a tax audit first.

In comparison, the Singapore tax authorities have committed that the carryback claims will be processed within a month. The excess of tax liability arising from the claim will be first applied against any outstanding tax liability, or the tax will be refunded within 30 days.

To accelerate the tax refund process, Singapore also allows the election to carryback based on estimated losses at anytime before the filing of the relevant income tax returns. This, however, does not apply in Malaysia - the election for carryback can only be made upon the submission of the tax return for the YA in which the tax loss arises. Also, a penalty will be imposed on any overclaimed tax losses.

Under the Malaysian provisions, a company with tax losses may only see cash benefits from the tax loss carryback around 10 months (at the earliest) after the close of the financial year in which the tax loss arises. If the company is expected to turn around in the following year, it would be better for them to carry forward their losses, to avoid the administrative process of obtaining a tax refund.

Therefore, our tax authorities should consider fine-tuning the implementation rules to enhance the attractiveness of this incentive.

In addition to the carryback provisions, taxpayers can also now enjoy accelerated capital allowance (ACA) claims over two years, instead of six years, for the period of March 10 2009 to December 31 2010.

The ACA claims are for acquisitions of plant and machinery, as well as refurbishment and renovation expenses of business premises. The ACA seeks to reduce taxable income, which translates to lower tax cash outflow; and accelerate capital investment decisions to spur private spending.

Bold and impactful measures

The government should be applauded for taking bold steps in introducing some drastic tax measures. Businesses should take advantage of these proposals to better manage their tax positions. We hope that with the RM60 billion mini-Budget, corporate Malaysia will be better able to weather the storm.