In the entertaining world of soccer, teams adopt various formations, 4-3-3, 4-4-2, 3-5-2 and so on. In addition, they create various innovative set pieces. Players display uncanny anticipation and are found at the right place at the correct time and strikers are efficiently fed. Similar strategies and efforts mark the more confidential and therefore, understandably, less entertaining field of taxation. Nevertheless, with tax intelligence, the results can be large and dwarf the huge amounts star footballers earn.
In developed countries, companies regularly compare their effective tax rates with those of their competitors. Effective tax rates form a KPI for the intelligent evaluation of companies.
Just as the World Cup teams all have their favourite formations, so do today’s corporate groups. The most popular current corporate formation is the supply chain structure. Even as there are strikers, wingers, mid-fielders and defenders in a soccer team, there are toll manufacturers, regional headquarters, research and development entities, limited risk distributors and the all important central company in supply chain organized groups.
Functions, assets, and risks which used to be decentralized globally across many operating companies, are now largely concentrated in the central company(ies) under this latest global structure. Imagine the management efficiencies arising from centralisation - CEOs love it. As a consequence of functions, assets and risks being mainly located in the central company, it follows that most of the group’s earnings accrue to that company. Think of the bonus which is added if the central company is favourably taxed. That would be the creme de la creme topping the latest efficient group structuring craze. Such formations often contribute to lower effective tax rates, a result oriented KPI which can be used as a measure of the tax intelligence of companies in Malaysia.
Intelligent tax structuring of groups also includes the interposing of immediate holding companies located in suitable jurisdictions to help minimize transactional costs upon divestment and also, assuming the beneficial ownership test is passed, withholding tax on profit repatriation.
Innovation is seen in the soccer field when opponents are caught standing and the fans are mesmerized by a new and efficient set piece. Innovation also yields efficient results in the tax arena.
As a preamble, I am surprised that more companies are not paying much attention to indirect taxes in the current economic environment. Responsibility for this function often resides in the logistics department and is frequently outsourced to forwarding agents without the level of internal management which marks direct taxation. A tax intelligent organization should have in place competent staff who manage the indirect tax compliance and planning of the company. While forwarding agents are used for customs clearance purposes, fundamental issues involving classification, valuation and strategies are managed by the company with professional assistance.
I recall assisting a company to transform itself through realizing import duty savings which it passed on to the market through product price reductions. Through this set piece, the company’s market grew exponentially and being the market leader, it gained a huge head start over its competitors. This single innovative move permanently transformed its business in Malaysia and promoted the company into a superior league. Companies can save on import duty in several ways including the use of free trade agreements, reviewing valuation and seeking improved classification and coupled with a marketing initiative, the results can trounce the competition.
Another example of tax intelligent innovation relates to the sunset years of monetisation of franking credits. Very often the expense which gives rise to a 25% tax refund is interest. Where the holding company concerned is not resident in Malaysia and the borrowing involved is intra-group, among other set pieces, the use of tax treaties can eliminate, not merely alleviate, Malaysia’s withholding tax on interest.
Some footballers have the intelligence to uncannily anticipate moves so well that they are fluidly at the right place at the appropriate time. In this connection, I recall how a distributor in Malaysia exhibited great tax intelligence. It anticipated a duty increase so well that it outclassed its competitors and cleared a large consignment of its products through Customs soon before a higher rate of duty took effect. Its products were at the right place at the correct time. It is certainly possible to anticipate potential duty rate changes through proper research and tracking.
The same anticipatory skill can also apply in the direct tax arena. Prior to Budget 2010, there were those who expected the re-activation of real property gains tax. Changes in corporate and personal tax rates can also be foreseen together with amendments to capital allowance rates as well as the introduction of new incentives. With such intelligence in anticipation, transactions may be undertaken at the appropriate time to take advantage of the new regime.
The subject of anticipation cannot be complete without considering the implementation date of GST in Malaysia. GST will be implemented after the introduction of the Anti-Profiteering Act. Thus technically, GST could be introduced in January 2012 but in the interests of a non-January commencement date when many other fiscal and financial requirements abound, July 2012 is the expected deferred go-live date. With just about two years to prepare, it behoves companies to intelligently avoid the bottleneck of resources which will arise and commence the in-depth mapping phase of GST preparation currently.
The proper teaming of strikers with mid-fielders and overlapping full backs also contribute towards a winning team. Likewise, where the HR and tax people in any corporate team cooperate well, the latest changes in legislation being communicated and properly implemented. Additionally, where the sales and production sections combine well with tax and finance, accurate estimates of tax will be produced thus avoiding penalties.
In FIFA 2010 World Cup, various country teams will be going for goal. They will undoubtedly soon unveil intelligent ways in their quest. Likewise, organizations can exercise tax intelligence and thereby gain scorching goals for their team such that whether it be in South Africa or Malaysia, your team will emerge victorious.
Ronnie Lim is the Country Tax Leader of Deloitte Malaysia. He can be contacted at firstname.lastname@example.org.