Introduction

The Malaysian Government has passed and gazetted in Parliament the Income Tax (Amendment) (No. 2) Act 1999 making provisions concerning the change of basis to self-assessment. Companies will be the first group of taxpayers to come under self-assessment with effect from year of assessment 2001.

The Amendment Act No. 2 inter alia inserts a new s. 114(1A) to impose a penalty (monetary or imprisonment) on any person who assists in, or advises with respect to, the preparation of any return where the return results in an understatement for tax of another person. This is the kind of work often undertaken by tax agents and accountants. This article seeks to explore the scope of s. 114(1A) and also its consequence.

The new section 114(1A)

Section 114(1A) provides:

Any person who assists in, or advises with respect to, the preparation of any return where the return results in an understatement of the liability for tax of another person shall, unless he satisfies the Court that the assistance or advise was given with reasonable care, be guilty of an offence and shall, on conviction, be liable to a fine of not less than two thousand ringgit and not more than twenty thousand ringgit or to imprisonment for a term not exceeding three years or to both.

Section 114(1A) cannot be read in isolation and it must read in totality with the rest of s. 114, which deals with wilful evasion. Although the words "wilfully and with intent to evade" (which are found in s. 114(l)) are missing from s. 114(1A), that does not mean that this aspect can be ignored in s. 114(1A). The whole of s. 114 is coloured by the rubric heading of "Wilful evasion". If the intention of the legislators is for the proposed sub-s. 114(1A) to apply merely to negligence, a much less serious offence, then the proposed new provision should be numbered as s.114A and not sub-s. 114(1A).

Section 114 is concerned with criminal offences. Although sub-s. 114(1A) does not mention intent, its presence under the heading of wilful evasion, carrying a connotation of illegal and reprehensible acts, seems to infer that the person who assists or advises must do so with the intention of formulating or carrying out an illegal scheme or mode to understate the tax liability. It seems to contemplate an understatement that is illegal and not permissible under the provision of the Income Tax Act 1967. By definition sub-s. 114(1A) would not encompass a legal tax mitigation activity and any such scheme or plan must, of necessity, fall outside s. 114(lA) notwithstanding that it results in a lower tax payable.

Section 114(1A) is more specific than s. 114(l) and with its emphasis on a return. Return is not defined in the Income Tax Act 1967 ('Principal Act') and one would need to refer to Part V of the Principal Act for the scope of the provisions under which a return may be required by ss. 77 to s. 89. A closer examination of these sections reveals that the following would be included:

(a) Form B, C, P, T

(b) Form E, EA, EC

(c) Returns required from third parties

(d) Returns issued by the director general for investigation purposes

(e) Other miscellaneous return by the tax authorities

Returns of income may also demand such particulars as may be required for the purpose of ascertaining the chargeable income of a person. This extends the possible scope to accounts and tax computations accompanying returns.

Scope of person

Although the word "person" as defined in s. 2 includes both individuals and companies, s. 114(1A) can only apply to individuals when it comes to the penalty of imprisonment (you cannot jail a company) but it is indifferent in the case of a monetary penalty. This may be unfair in the case of tax agents and accountants and their staff members who are involved in advice or preparation of returns. Many tax agents who carry on such business do so through a company. In that case the primary responsibility lies with the company which acts for the client and receives a fee for doing so. To jail only unincorporated tax return preparers, or only the executive directors of companies and their staff employed to prepare clients' tax returns would be inequitable. The scope of the provision is wide enough to be of concern to such people.

Understatement of tax

Section 114(1A) can only be invoked when there is an understatement of tax. However, the reason for such an understatement appears to be irrelevant, except for the implication that sufficient care was not taken. With such a heavy penalty provision, the cause and intent needs to be positively and clearly established. Mere negligence of the person due to high volume of work or shortage of staff should not be sufficient to invoke sub-s. 114(1A).

Under the current regime, where the tax authorities find that the tax agent has failed in his duty by giving incorrect information, they may act under s. 113 of the Principal Act, which allows penalties as follows:

	No Prosecution	On prosecution and conviction
(i) Tax undercharged	Yes	Yes
(ii) Penalty	One time the tax undercharged	Two times the tax undercharged
(iii) Fine	Not applicable	Not <RM1,000 and not >RM10,000
(iii) Imprisonment	Not applicable	Not applicable

The mechanism of self assessment

Under the company self-assessment scheme which is to be effective from year of assessment 2001, the company must estimate its income tax payable one month before the commencement of the basis period and commence to make the monthly tax installment payments. Six months later, the company is permitted to revise its estimate of the tax payable for the year and, after taking into account payments made already, adjust payments for the remaining six months. A decision needs to be taken on whether the company should revise its tax estimate made earlier. The company can revise its tax estimates and top up or revise downwards the monthly tax payable for the remaining six months.

When the actual tax payable is determined, it is compared to the revised estimate, (or to the original estimate if no revised estimate was put forward). Where the actual tax payable exceeds the relevant estimate by more than 30% of the actual tax payable, the difference is subject to a penalty of 10%. (The new s. 107(C), which comes into effect in year of assessment 2002.)
In filing the estimates of income tax payable, the company is required to fill up a prescribed form (Form CP 204). The accountant of the company or the tax agents would estimate and fill up the form. In the event that the advice or assistance of the tax agent or the accountant had resulted in an underestimate of the tax payable, s. 114(1A) could technically apply if the tax authorities were of the view that such person had done something that resulted in an understatement of the tax liability.

The tax authorities may bring the parties involved to trial. The possibility of this could deter the tax agent from providing such services to the client (company) and would effectively halt the tax administration process. The company may not be in a position to do so after relying on the tax agent's service for many years. It is therefore hoped that the tax authorities will make a policy decision to refrain from invoking s. 114(1A) when dealing with tax estimates. After all s. 107C(IO) empowers them to impose a monetary penalty, which is sufficient to deter such practices.

Malaysia is newly into self-assessment. Both the taxpayer and tax authorities should be in a smart partnership towards such implementation and make self assessment a success. Certainty and trust are the key elements for such a success. The new s. 114(lA) creates fear and uneasiness in tax practitioners and changes are needed to clear the uncertainty and confusion.

Burden of proof

Section 114(1A) is a criminal offence. The invocation of s. 114(lA) would result in a High Court trial. The burden of proof would be on the tax authorities to submit evidence that:

(i) The assistance or advice given had resulted in an understatement of the liability for tax of the other person; and

(ii) The assistance or advice was without reasonable care.

Whether evidence must be also given of an intention to cause an understatement of the liability to tax would depend upon interpretation.

With the amendment in the Criminal Procedure Code in 1997, the tax authorities only need to establish a prima facie case in order for the judge to call the accused for the defence. Once the judge is satisfied that a prima facie case has been established, the accused is called to answer to rebut such accusation.

The legal burden to establish the guilt is on the tax authorities. The learned Lord President Lord Clyde made this requisite abundantly clear in Hillenbrand v.IRC (42 TC 617) on p. 623:

... I should like to make it perfectly clear that in my view there is no warrant whatever for the idea that under the Income Tax Acts people are presumed to be guilty of wilful default unless they can disprove it. To establish willful default ... the onus is quite clear upon the Crown and the tax payer is not in the position of having to prove himself innocent of such a charge without proof by the Inland Revenue that he is guilty ... proof ... default.

In a criminal case, the tax authorities have the legal burden to prove the facts in issue to be beyond reasonable doubt. The accused on the other hand only has the legal burden to prove or disprove a fact in issue on the balance of probabilities.

Reasonable care

This is the first time that such words have been introduced into the Principal Act and we may have to wait for judicial interpretation to find out exactly what they mean. It is not the same as "in good faith" used in s. 113. That has been held to include due enquiry and to imply not only an upright mental attitude but also a clear conscience. See Gopal & Anor v. Awang bin Mona [1978] 2 MLJ 251. Auditors, amongst other professionals, have long had to observe reasonable care in relation to the fulfilment of their duties. Some words used in a century-old case, which seem to put the emphasis on knowledge, experience and professionalism, may still have some relevance in this context "It is the duty of an auditor to bring to bear upon the work he has to perform that skill, care and caution which a reasonably competent, careful and cautious auditor would use". See In re Kingston Cotton Mill Co (No 2) [1896] 2 Ch 378.

The meaning of beyond reasonable doubt

Lord Denning has clarified the meaning of beyond reasonable doubt in the leading case of Miller v. Minister of Pensions [1947] 2 All ER 372 that:

... That degree is well settled. It need not reach certainty, but it must carry a high degree of probability. Proof beyond reasonable doubt does not mean proof beyond the shadow of doubt. The law would fail to protect the community if it admitted fanciful possibilities to deflect the course of justice. If the evidence is so strong against a man as to leave only a remote possibility in his favour which can be dismissed with the sentence "of course it is possible but not the least probable, the case is proof beyond reasonable doubt but nothing short of that suffices."

In PP v. Saimin & Ors [1971] 2 MLJ 16, Sharma J observed that:

The proof of a case against the accused depends for its support not upon the absence or weakness of the explanation on his part but on the positive affirmative evidence of his guilt by the prosecution.

The learned judge further emphasised that the falsity of the defence does not relieve the prosecution from proving the prosecution case beyond reasonable doubt.

Judgment

Section 114(1A) places the decision on the judge as final and conclusive. Although the tax authorities may have reason to believe that the tax agents or the accountants had assisted in the understatement of tax in the return, resulting in the accused being brought to trial, it is the finding of the judge that is important.

The accused would be acquitted in the following situations:

(a) the tax authorities fail to establish a prima facie case at the initial hearing. The accused would be dismissed as there is no case to answer.

(b) the prosecution fails to prove the facts in issue beyond reasonable doubt, or the accused manages to tender evidence to show that, even if there was an understatement of tax, it was not by his lack of reasonable care on his part.

In the event that the judge found in favour of the tax authorities, then the following penalties may be imposed on him:

(a) a fine between RM2,000 and RM20,000;

(b) an imprisonment of three years;

(c) both (a) and (b)

Conclusion

In the author's opinion, the existing s. 114 is wide enough to cover all criminal offences. The new s. 114(1A) may horrify potential tax professionals and deter them from joining the profession. On one hand, they are liable to be sued by the client for negligence if their work is not efficient or results in a tax liability that could have been legally avoided and, on the other hand, they are liable to a monetary penalty or, worse still, imprisonment at the instance of the tax authorities. To the author, these tax agents are just earning a living like other professionals. Professionals like doctors, lawyers, company secretaries, architects, etc, account to one party, but tax professionals account to two parties.

The tax profession serves an important bridge between the taxpayer and the tax authorities. At the moment, taxpayers would not be in a position to handle their cases directly with the tax authorities in view of costs, skill persons and complexity of issues. Furthermore, self-assessment further requires the assistance of the tax agent to impart knowledge to the taxpayer for a successful implementation.

One cannot deny that the tax authorities also need to ensure smooth collection of tax payable for the country's development. They have their duties to serve. It is therefore hoped that the tax authorities can/will exercise moderation and tolerance in the invocation of s. 114(1A) for the benefits of both parties.

(Originally Published in Current Law Journal, [2001] 5 CLJ Page i - vii)