IN a pre-budget statement for Budget 2022, the Finance Minister caused a stir of interest when he mentioned that tax compliance is being considered as one of the measures to potentially increase Malaysia’s tax revenue.
In Malaysia, the introduction of the self-assessment tax regime in 2001 for companies and 2004 for businesses, partnerships, co-operatives and salaried individuals have effectively shifted the duty of computing taxpayer’s annual tax liabilities from the Inland Revenue Board (IRB) to the taxpayers.
Since 2001, tax audits became a primary activity of the IRB to ensure that taxpayers are compliant with tax laws and regulations upon their submission of income tax return forms (ITRF). Tax audit is also used to enhance the voluntary disclosure by the taxpayers.
With RM120bil direct tax collection targets announced in the pre-budget statement, we expect that the IRB will intensify tax audit activities into the taxpayer’s financial business affairs from 2022. This is expected to ensure that taxpayers are paying their taxes responsibly.
In general, all companies, limited liability partnership, trust body or co-operative society are obligated to submit their ITRF within seven months from the date following the closing of their accounting period.
A tax audit is carried out to ensure the right amount of income has been declared and the precise amount of tax has been computed as per the ITRF submitted. Overall, the IRB can conduct two types of tax audit: desk audit and field audit.
When a taxpayer is selected for a tax audit, the first consideration is if there will be any additional taxes with hefty penalties being imposed for incorrect returns.
The inconvenience of locating past documents/information for tax audit purposes can be arduous for taxpayers to resolve the tax audit in the shortest possible manner.
A taxpayer is required to keep sufficient records for the IRB to ascertain the income or loss from the taxpayer’s business.
The taxpayer is guided by Section 82 of the Income Tax Act 1967 (ITA), which states the duty to keep records and provide receipts.
Also, Section 82A of the ITA states that it is the taxpayer’s duty to keep documents for ascertaining chargeable income and tax payable.
So, how does IRB select the taxpayers for a tax audit? Unfortunately, there are no formula or secret clues to reveal a definitive answer. That said, based on our observations of recent cases, there may be some cases likely to be cherry-picked by the IRB such as:
> Big data analytics computerised systems that assess the risks analysis of taxpayers
> Specific industries – property developers, manufacturing, investment holding company, services and etc
> Significant controlled transactions between related companies especially for transfer pricing cases
> Tax planning involving shell companies
> Companies that enjoy certain tax incentives – pioneer status, investment tax allowances etc. The IRB will review fulfillment of the condition granted for each tax incentive.
We also understand from the National Tax Conference 2021 that the IRB will focus on multiple sectors and stakeholder groups including food and beverage, tobacco, healthcare, existing government or ongoing contracts, high net-worth individuals, digital media and entertainment, insurance companies and agents.
Some industries severely impacted by the pandemic such as tourism, aviation, property and construction are not within the focused sectors announced by the IRB, which is a commendable approach.
Notwithstanding the above, we will likely see increased scrutiny by the IRB on transactions related to business restructuring without commercial substance.
Common issues generally afflicted by the IRB includes the provision of interest-free loans to related companies, disposal of real properties – whether it should be subjected to real property gains tax or income tax and withholding tax compliance for payment to non-residents.
Managing tax controversy and the resolution process
Those who have experienced a tax audit commonly testify to the strain and disruption the process can cause to one’s business operations.
Should your company find itself under the IRB’s microscope, the stress of a protracted resolution process may be avoided if organisations engage a tax consultant to conduct tax risk assessment reviews, which will include guiding the organisation to answer these key questions:
> What protocols do you have in place to actively manage and address tax risks to avoid tax disputes and exposures?
> Have you proactively and thoroughly documented your tax transactions and uncertain tax positions?
> Are analyses of your tax position well stated, complete and supported by relevant documentation?
> Are you engaging with the IRB in the most effective way?
By identifying tax issues in advance, you will be well-equipped to take control and manage the tax controversy and resolution process toward its best possible end.
Soh Lian Seng is the head of tax dispute resolution, KPMG Malaysia. The views expressed here are the writer’s own.