THE Finance Ministry’s (MoF) Pre-Budget Statement on Aug 31, 2021 was published to increase transparency in communicating the broad strategies which will form part of Budget 2022, in line with international best practices.
This move has clearly laid out the government’s areas of focus in the nation’s Covid-19 recovery journey, through economic growth driven by the services and manufacturing sectors, as well as strategies to achieve fiscal sustainability, particularly on the revenue side of the equation.
Both tax functions (direct and indirect taxes) play a vital role in increasing the country’s revenue collection. The government has taken various measures in doing so.
It has introduced measures such as the imposition of excise duty on all types of electronic and non-electronic type of cigarette devices and expanded the tourism tax scope to include accommodation provided via online platforms.
With tax revenue collection lower than expected in the first half of 2021, the government is considering measures to increase tax revenue from the angle of tax compliance.
This may be in the form of a special voluntary disclosure programme (SVDP), an amnesty programme to be administered by the Customs Department for indirect taxes (i.e. sales tax, service tax, repealed goods and services tax, customs and excise duties and tourism tax).
The SVDP would provide an opportunity for businesses to make good on any underpaid, underestimated or erroneously reported taxes and move forward with a clean slate.
Whether the programme would mirror the successful SVDP previously implemented by the Inland Revenue Board (IRB) remains to be seen.
However, this could be a golden opportunity for companies to revisit their current indirect tax treatments. One way of doing this would be to conduct health checks to identify areas that may need to be addressed.
Assessing risks
While the SVDP would benefit each company differently, there are a number of areas which companies can focus on across all industries in assessing their risks and determining if they should participate in the SVDP.
Let’s look at some areas relating to sales tax, which usually come under scrutiny. For a start, one needs to ensure that the prescribed conditions in the respective exemptions, such as the sales tax exemption and customs duty exemption, are met.
The latter would include Customs Duty (Exemption) Order 2017, MoF-approved exemption and free trade zone exemption, among others.
Prescribed conditions also apply to “drawback claims” that companies apply for upon the importation or purchase of dutiable/taxable goods.
Local manufacturing companies producing goods for export under these exemptions would need to ensure that they have adhered to all prescribed conditions.
Similarly, trading companies that import or purchase goods (from registered manufacturers) to be subsequently exported would be bound by the stipulated timeframe as one of the conditions for claiming drawback.
A detailed review of this should help identify any oversights in relation to compliance with these conditions and determination of items where a voluntary disclosure may be required.
Another area of focus would be the classification and valuation of goods using import pricing and harmonised tariff codes, as these require detailed understanding to ensure that the duties and taxes on imported goods are accurately declared.
Furthermore, import duty and sales tax adjustments arising from either transfer pricing (TP) adjustment or royalty, assist and commission payments on imported goods could also be an area of focus.
Local companies that receive invoices (for the use of royalties on trademarks, technology, know-how; assist and commission payments) or debit notes (from TP adjustments) from the overseas parent company would be required to make the necessary adjustments to the import duty and sales tax value on the affected imported goods declared.
Judgement call
These areas may sometimes require a judgement call and one would need to revisit the basis for taking certain positions in the Customs declarations and if these can be sustained in the event of a challenge.
Service tax and digital services tax also present some areas that warrant a closer look.
Services rendered that are classified and treated correctly under the service tax legislation may allow companies to utilise the available exemptions or reliefs such as business-to-business exemptions and group relief facilities, subject to meeting the prescribed conditions.
To utilise the facilities, companies would need to ensure that the prescribed conditions are met.
Hence a detailed review of such compliance requirements will help in determining if there are any “soft” areas which the company should consider to declare on a voluntary basis.
In addition, it is important to ensure that companies that fall within the registration threshold or the requirements of importing taxable services are registered correctly for the services rendered or acquired under sales tax, service tax or digital services tax, respectively.
This would avoid any non-accounting of the relevant taxes which includes imported taxable services and having to pay any underpaid tax and penalties.
The instances and examples shared above are not exhaustive but would form a starting point for companies to consider in reviewing the positions they have adopted in relation to indirect taxes.
One will certainly need to also consider issues and areas that are specific to a particular industry or transaction to determine compliance with the laws and regulations.
As with the previous SVDP implemented by the IRB, the proposed amnesty programme is likely to run for a fixed period, during which benefits such as waiver of penalties or reduced penalty rates and zero audits would be applicable.
This is certainly an opportunity for businesses to put their indirect tax affairs in order if they have not done so and it is important to do so before the taxman comes knocking.
Annie Thomas is senior manager while Thrishla Govindan is senior associate at PwC Taxation Services Malaysia. The views expressed here are the writers’ own.