The High Cost of Playing It Safe
Cash flow is the lifeblood of any business, especially those operating in capital-intensive or cash-flow-critical sectors. A key component of corporate financial management in Malaysia is the payment of corporate income tax, which typically involves two stages:
- Monthly Installments: Paying estimated taxes via the CP204 schedule (or the revised CP204A).
- Final Settlement: Paying the balance of tax due (or receiving a refund) upon filing the annual Corporate Income Tax Return (Form C).
This article argues that, in the current tax environment, adopting a conservative (i.e., high) estimate for your CP204 is a costly strategic mistake that it may served as an interest-free loan to the Inland Revenue Board of Malaysia (LHDN).
The Cash Flow Crisis: Tax Refunds as Trapped Capital
With news report (source) as well as our experience in representing our client dealing with LHDN, we are of the opinion that many company are facing a long-delay in getting back the excess tax they have paid through tax instalments, which effectively turns the excess tax payments into a trapped, non-performing capital.
Our internal source: one client only get a 5% of the excess tax paid upon contacting the LHDN office and was told the remainder is subject to LHDN’s fund availability.
While the Income Tax Act 1967 provides for a 2% per annum interest payment by LHDN for refunds delayed beyond 90 days , this compensation is deemed insignificant when compared to the opportunity cost of the funds of which we further detailed in following section.
The situation is critically compounded by a recent report (source) mentioned by the Deputy Finance Minister that the LHDN does not allow companies to offset excess tax payments against future tax liabilities. This means that companies is not allowed to utilise their excess payments in prior year for upcoming tax liabilities, and have to fork out additional cash to settle this year liabilities, while the excess cash may still be trapped with LHDN, pending for refund.
Why Companies may fare better in estimating lower tax?
In light of the extensive refund delays, a business may fare better in terms of cash flow by plan for a diligent approach to CP204 estimation.
This involves calculating the opportunity costs and time value of money, which further detailed as follows:
| Scenario | Strategy | Return/Costs |
| Overestimating tax in CP204 and resulting in excess tax payments | Playing safe | Excess cash kept by Ministry of Finance where partially disbursed in first year and the remainder in second and/or third year, subject to availability. Company has the option to request for 2% compensation, but need to follow LHDN’s procedures. |
| Underestimating tax in CP204 and kept the excess cash with the company | Keeping cash flow with company for strategic deployment | Compliance Requirement: The estimate must be ≥ 85% of the prior year’s latest estimate/revision. Penalty Risk: A 10% penalty is applied only on the amount that exceeds 30% of the final tax liability (Section 107C(10), ITA). Opportunity Value: The cash retained can be deployed into core business operations yielding a Return on Working Capital (ROWC) often ≥10%, or short-term fixed deposits at ≥ 3%. Both are materially better than LHDN’s uncertain repayment or the minor 2% p.a. penalty on delayed refunds. |
Conclusion
In the current tax environment, a conservative CP204 estimation may could be a detrimental strategic decision. By overpaying, a company effectively compromises its own liquidity, transforming immediate, high-value working capital into a long-term, low-yield, and highly uncertain receivable trapped with LHDN.
We strongly encourage companies to plan their tax estimate better, always have their cash flow position in check, and reinvest capital where it generates the highest return for the company.
