More behind the IRB investment controversy

By Chan Quan Min

If a bill to allow the Inland Revenue Board to accumulate stocks and corporate bonds isn’t contentious enough, there is the tradition of the tax agency grabbing a growing chunk of taxpayers’ money and paying itself very well. In the first part of this week’s series, KiniBiz examines the amendment bill to the IRB Act that has drawn flak from opposition politicians and tax experts.

____________________________________________________________________

The appearance of a bill before parliament that would open the way for the Inland Revenue Board (IRB) to dabble in the stock market shocked many, but not hardened tax experts who say this was just the latest in questionable practices by the tax agency.

On whether the IRB should be allowed to trade in stock and corporate bonds, the verdict could not be clearer.

Tax experts unequivocally agreed the Inland Revenue Board (IRB) has no place getting involved in the investment game and should stick to its intended function as a tax collection agency. But was this push back the reason behind the postponement of the bill?

Two weeks back, opposition MP Wong Chen broke news of an amendment bill that, if passed, would create an investment panel in the IRB with the majority of its seven members directly appointed by the Finance Minister Najib Abdul Razak, who is also Prime Minister.

The bill drew immediate criticism from tax experts, many of whom were not aware of the bill when first contacted by KiniBiz.

Chartered Tax Institute of Malaysia (CTIM) president SM Thanneermalai said he “cannot see the need” for the bill given that the government has “enough investment panels” as it is.

The Finance Minister has direct control of state investment fund Khazanah Nasional, worth billions, and more recently 1Malaysia Development Bhd, a shady strategic investment fund with almost as much in debt as assets.

Another two tax professionals, one of whom used to serve with the IRB, told KiniBiz the tax agency has no place venturing into investments as its sole intended role is to collect taxes on behalf of the government.

“What advantage would they have?” the ex-employee of the IRB asked, adding that investment activity is better left to the state investment bodies. “This is venturing into an area where they are not party to.”

Their views where also shared by Soh Lian Seng, an executive director of tax at KPMG. “Let’s go back to the intention of why IRB was set up, (which was to) focus on collecting taxes,” he said succinctly.

Wong, who is MP for Kelana Jaya was easily the most vocal critic. He said in a press conference outside parliament as early as June 12 that the amendments to the IRB Act 1995 “weakens democracy” and would effectively set up another “quasi-investment body under the personal control of the financial minister.”

“What if our tax money is used to buy shares to support and prop up a crony company?” Wong asked, alluding to an upcoming initial public offering of 1MDB power generation assets to pay down a RM6 billion loan.

Bill postponed to October

Just as Wong was gearing up to debate the bill in parliament, the Ministry of Finance abruptly announced the bill would be postponed to the next sitting in October.

The official reason for withdrawing the bill, according to a Ministry of Finance statement, was to “facilitate revisions to the proposed amendments.”

But Wong was of the opinion that public opinion had a part to play in the Ministry’s decision. “They won’t push back a bill so far back unless they sense that the goose is cooked and that they have to back pedal to avoid the wrath of the people,” he said.

He triumphantly described the move as “sweet victory for the rakyat,” but perhaps was too soon to cheer.

Second finance minister Ahmad Husni Hanadzlah later in the day said the bill was only withdrawn to exclude the Bank Negara governor from the investment panel and will be tabled at the next available opportunity.

“The IRB investment is not utilising taxpayers’ money, but surplus from its own account. I’m ashamed that some members of parliament just simply made certain statements,” Ahmad Husni retorted.

He was right to say that. The IRB is obligated to channel all tax collections to the consolidated fund and not even the amendment bill will change that, according to tax professionals.

From the same consolidated fund, IRB is allocated an annual sum for operational expenses. Given that this allocation has exceeded RM1 billion since 2008, the IRB often ends up spending less than it receives from the government.

The excess funds go into the IRB’s reserve account, currently earning low interest. The proposed investment panel, it seems, would put the money to work to change that.

A system open to abuse

Strictly speaking, only the balance of the reserve account can be invested in stocks, corporate bonds and the like. Therefore, the proposed investment panel (as Ahmad Husni said) would not be using taxpayers’ money – at least not directly.

But that is not to say the system is not open to abuse, an independent tax advisor told KiniBiz on condition of anonymity.

If more money is needed for investment purposes, the government’s annual allocation to the IRB can somehow “push the envelope” to accommodate, he said. “In the end, it’s the same as using taxpayers’ money really.”

In the nine years between 2002 to 2011, the annual allocation to IRB has doubled to RM1.16 billion. During those nine years, the annual allocation has fluctuated between 1.06% to 1.33% of total tax collections.

The IRB has not published its annual report for 2012 and 2013.

A Sin Chew news report last week quoted Deputy Finance Minister Ahmad Maslan as indicating the annual allocation has already grown to 1.5% of total tax collections. The IRB has not confirmed the report.

Assuming that this is true, the IRB would this year receive a government allocation of just under RM2 billion from an expected RM130 billion in tax collections.

According to Wong, who has done considerable work on the amendment bill, IRB accounts showed RM255 million in investments in 2011. “This number is relatively small but with the amendments I am certain that it will increase dramatically,” Wong said.

“The reason why is because the 1.5% used is not a fixed percentage mandated by law. As such there is no guarantee that this sum will not increase to 3% or 5% in 2016.

“There is no legal limit to what percentage commission the IRB will receive… Section 23 of the current IRB law allows the (Finance) Minister to increase the funds by many means,” he added.

IRB paying huge bonuses

As official statements go, the Ministry of Finance has been surprisingly direct in justifying the controversial amendment bill to the IRB Act 1995.

“The amendment was intended to improve the productivity of the IRB and provide flexibility…in terms of determining staff salaries,” a statement released on June 17 read.

IRB employees, following a ‘corporatisation’ exercise several years back, are among the highest paid civil servants in the country.

According to sources, the IRB paid out an across-the-board staff bonus equivalent to six month’s pay last year. The IRB has not replied to an email seeking confirmation on this matter.

Online message boards catering to job-seekers repeatedly pick the IRB as the government agency offering the best pay. A job with the tax collection agency appeared to be on the minds of many of the commentators.

While it is never wrong to pay well for work well done, the IRB has drawn criticism for paying out benefits and bonuses based on tax collections, KiniBiz learnt from speaking to tax advisors.

The second part of this series to be published tomorrow will explore in greater detail the conflict of interest that may arise from a tax agency awarding bonuses based on tax collections.

But that is not all. The second and final part will also return to the controversial amendment bill to the IRB Act, now postponed, to unearth the one glaring problem that comes with having too many fingers in the pie. Not to forget, a large and growing tax pie in the billions of ringgit.

Tomorrow: IRB tangled in conflicting interests