Strategizing & Managing: Critical Tax Issues 2018 With focus on Tax Audit and Tax Investigation Chow Kuo Seng l Tuesday, 30 January 2018
Are you prepared during critical moments with the IRB? 01 02 03 Borang J / JA / JR by the IRB Key considerations on tax appeal Documentation Key takeaway - Moving forward 2
1. Borang J / JA / JR based on the tax findings by the IRB Following a tax investigation or tax audit 3
Critical moments When the Borang J/JA/JR is received by a taxpayer He has 30-days to pay up (notwithstanding any appeal) Sec. 103 10% and 5% late payment penalty Sec. 106 Civil proceedings at the courts Sec. 104 Travel restrictions on Co. Directors 4
Tax investigation framework in Malaysia IRB Income Tax Act 1967 Penal Code (Act 574) Criminal Procedure Code (Act 593) Evidence Act 1950 (Act 56) Whistleblower Protection Act 2010 (Act 711) Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (Act 613) aka AMLATFPUA Taxpayer 1 January 2007 1 October 2013 Tax Investigation Framework Tax Investigation Framework 5
Updates on tax audit frameworks in Malaysia January 2007 January 2009 April 2013 1 February 2015 Tax Audit Framework (Superseded) Tax Audit Framework (Amendment 2009) (Superseded) Tax Audit Frameworks (Superseded) Tax Audit Framework (Amendment 1/2015) (Superseded) Petroleum Tax Audit Frameworks Transfer Pricing Tax Audit Frameworks Latest 1 June 2015 Tax Audit Framework On Finance and Insurance 1 August 2015 Tax Audit Framework On Withholding Tax 1 May 2017 Tax Audit Framework (Amendment 1/2017 dated 01 May 2017) 6
Tax Audit Framework 2017 Snapshot (Para 1) Intro Under the Self-Assessment System, tax audit is a primary activity of the IRB. Assist audit officers to carry out their tasks efficiently and effectively. Assist taxpayers in fulfilling their obligations (Para 4) Objectives Enhancing voluntary compliance with the tax laws and regulations. (Para 5) Years of assessment covered Full audit for 3 to 5 years of assessment. 5-year time limit is not applicable to cases involving fraud, wilful default or negligence. (Para 7.4.5) Examination of records Where the books or accounting records are kept electronically, instead of requesting taxpayers to make available hard copies of such records, IRB officers can access those financial data from the taxpayer s computer system by downloading into any portable pen drive, hard disk or suitable storage media. (Para 10) Offences and penalties Reduced tax penalty will be imposed by the IRB where a taxpayer submits a voluntary disclosure on any tax under declared in the past years. However, a taxpayer would not be considered for Voluntary disclosure to mitigate penalties after a tax audit has commenced. 7
Tax Audit Framework 2017 Snapshot Commencement of an audit (Para 7.2.1) For field audit cases, commencement date is upon issuance of the Letter Requesting for Documents. In the absence of such letter, on the 1 st day of visit at the taxpayer s premises. (Para 7.2.2 and 7.2.3) For desk audit case, the date when taxpayer was contacted via CP 800 / CP800A. A taxpayer is required to respond within 21 days from the date of the Letter Requesting for Documents / CP 800 / CP 800A, otherwise the IRB can visit the taxpayer s premises without any notification. Notification letter will indicate the following: i) The records that should be made available for audit. ii) The relevant years of assessment to be audited. iii) The name of audit officers who will conduct the audit. iv) The expected timeframe required for the audit visit. 8
Tax Audit Framework 2017 Something new by the IRB (Para 7.2.4) A notification letter will be sent to a taxpayer selected for field audit (at least 14 days prior to the visitation date). Nevertheless, the IRB may conduct a field audit without any prior notification on the taxpayer. (Para 7.2.5) A tax audit can be extended to any related company / business having the same director without notification to the taxpayer. (Para 7.2.9) The IRB can, in any condition, visit any premises of the taxpayer without prior notification. 9
(Para 7.7) Monitoring Deliberate Tax Defaulters Programme (MDTD) Media Release dated 18 April 2014 Noncompliant Taxpayer Upon being listed as a non-compliant taxpayer. Official letter from the IRB Non-compliant taxpayers will receive a official letter from the IRB. Full Audit A full audit will be conducted by the IRB for the impending audit visit. Comply Taxpayers will be delisted if no repeated offences are committed. 10
Capital statement in a tax investigation by the IRB Date of Tax Audit Visit; 22 February 2017 Capital Statement Encompasses Statement of Net Asset Statement of Personal & Private Expenses CP103.pdf Pin.5/96 CP102.pdf Pin.10/80 IRB s request for Information/Documents General Ledgers Sales/Purchases Ledger Cashbook 11
Sample letter from the IRB (Capital Statement) Date of Tax Audit Visit; 22 February 2017 IRB s request for Information/Documents General Ledgers Sales/Purchases Ledger Cashbook 12
CP103 (page 1 of 2) Salient points 1. Harta-harta dan Tanggunantanggungan Perniagaaan. 2. Harta-harta dan Tanggunantanggunan Kepunyaan sendiri 3. Butir-butir Harta 4. Butir-butir Tanggungan 5. Syer 6. Pinjaman-pinjaman 7. Jika ruangan tidak mencukupi di bawah satu-satu kepala, senarai mestilah disediakan. 8. Senarai ini mestilah termasuk harta-harta yang dibeli dan dijual dalam tahun yang sama. 13
CP103 (page 2 of 2) 14
CP102 (page 1 of 1) 15
Voluntary disclosure Period after the prescribed deadline for tax submission Before being selected for tax audit Penalty rates (Jan 2009 to 2017) Penalty rates (w.e.f. 1 May 2017) Tax Audit Framework 2017 Within 60 days 10% 10% >60 days < 6 months 15.5% 15.5% >6 months < 1 year 20% >1 year < 3 years 25% 35% >3 years 30% After being selected for tax audit VD after taxpayer has been informed of the tax audit Non-disclosure (Discovery of omission during audit and investigation) 35% 45% for 1st offence 45% for 1st offence 100% for MDTD 100% for MDTD Max. penalty to be imposed on a taxpayer is 100% under Section 113(2) penalty, where the taxpayer has omitted or understated any income liable to be taxed. 16
100% 113(2) Penalty w.e.f. 1 January 2018 Media Release dated 17 April 2017 issued by the IRB Repeated offences of undeclared or incorrectly declared income received by way of a return form. Refusal to give full cooperation during an audit or investigation process. Failure to give information or documents requested to assist in an audit or investigation process. Carrying out an organized tax evasion scheme. Failure to comply with the tax law even though the taxpayer has been audited or investigated before. Note: The proposal to increase the rate of penalty to 100% of the tax payable on the undeclared or under-declared income beginning 1 January 2018 is a step towards elevating the level of voluntary compliance among tax payers by dealing with tax payers who are hardcore tax law defaulters. 17
Tunggakan Cukai LHDNM MEDIA RELEASE dated 25 July 2017 LHDNM Litigation Branch Kuala Lumpur (Cawangan Guaman Kuala Lumpur CGKL ) which was established on 1 May 2017 started operation on 1 August 2017. The CGKL will take over the civil suit and litigation functions from the Legal Units of seven LHDNM Branches Duta Branch, Non-Resident Branch, Large Taxpayer Branch, Kuala Lumpur Bandar Branch, Cheras Branch, Wangsa Maju Branch and Bangi Branch. This is part of the LHDNM s continuous efforts to improve the tax collection and civil suit process where the CGKL will also focus on court cases involving taxpayers who fail to comply with the agreed tax instalments. 18
2. The remedies Tax appeal 19
Preserve your right Appeal against assessment Form Particulars Provision of the Act Due date for submission Form Q Notice of Appeal to SCIT Section 99/97A Within 30 days after the Notice of Assessment served Form N Notice of EOT for Appeal Section 100 Extension of time after the abovementioned 30 days CP15C Relief (Error or Mistake) Section 131 Within 5 years after end of year of assessment CP15D Notice of Appeal (WHT) Section 109H Within 30 days from the date the WHT-in-dispute is due PR 12/2017 dated 29 Dec 2017 replaces the PR No. 7/2015 dated 22 Oct. 2015: Taxpayer who is aggrieved by an assessment which has been made on him by the IRB is entitled to appeal against that assessment pursuant to Section 99/97A of the Income Tax Act. 20
Tax appeal To submit Form N if Form Q is not submitted within 30 days from the date of issuance of Form J/JA/JR/NONC. To submit Form Q within 30 days from the date of the Form J/JA/JR/NONC or upon approval of the Form N. The IRB branch is given 30/60/90 days to forward the appeal to DRBSD/PPN. The IRB has within 12 months to register the Form Q with the SCIT. Note: J =. Notice of Assessment JA = Notice of Additional Assessment JR = Notice of Reduced Assessment NONC = Notification of Non Chargeability Dispute Resolution & the Secretariat Department (DRBSD) Taxpayer Form Q (IRB Branch) Tax Litigation Division (Legal Department) State Director s Office ( PPN ) Special Commissioners of Income Tax (SCIT) In case of a relief application for error or mistake, if the branch decides not to grant the relief, taxpayer has 6 months to request the IRB to forward the relief application to the SCIT. The IRB to discharge tax-indispute High Court Appeal Allowed Appeal Allowed Court of Appeal Where an amicable resolution is achieved for tax settlement, the file will be returned to the PPN/DRP for revision. 21
Tax Appeal against disallowance of suspicious payment Oren -Puba v KPHDN Issue: Whether the payment made by the Appellant be disallowed on the ground that the transaction is suspicious ( diragui ) as contended by the Respondent 22
Chronology of Events - a Diligent Taxpayer in his critical moments with the IRB Events Time taken by the IRB Communications between the taxpayer & the IRB Officers Notification of tax field audit to the taxpayer by the IRB 2 weeks E-mails / Telephone calls Audit at taxpayer s premises Tax audit findings letter(s) issued by the IRB 3 weeks to 3-6 months 1 or 2 post- tax audit meeting(s) and the Final computation is determined by the IRB Example 1 as per PR12/2017 Appeal Against Assessment and Application for Relief: Description Date Late payment penalty Form Q Form JA dated 10/4/2017 Form JA served to taxpayer 15/4/2017 Imposition of penalty under S.103 @ 10% 10/5/2017 Imposition of penalty under S.103 @ 5% 10/7/2017 Deadline for filing of Form Q 15/5/2017 23
3. Documentation to the Inland Revenue Board 24
PR 3/2015 dated 29 July 2015 Failure to furnish information within the stipulated period 25
PR3/2015 Failure to furnish information within a stipulated period Example 4 Rania Beauty Sdn Bhd ( RBSB ) After the expiry of the time stipulated in the notice, RBSB still failed to furnish the supporting document. Therefore, the expense of RM250,000 will not be allowed as a deduction under subsection 39(1A) of the Income Tax Act 1967. Example 5 RBSB furnished the supporting document within the extended time. Thus, RBSB is allowed to claim the payment of RM250,000 as sponsorship expense for arts, cultural and heritage activities in the year of assessment 2014. Example 7 If the Director General discovers that the supporting documents can be obtained from a third party but the company has not endeavoured to get them, then the report will not be accepted as a substitute for the invoices on maintenance expense. Therefore, the maintenance expense of RM25,000 will not be allowed as a deduction under subsection 39(1A) of the ITA. 26
Key takeaway - Moving forward Be equipped: Know your rights and responsibilities and apply the Tax Law and Regulations correctly Be prepared: How you respond to a tax audit and investigation and the documents you provide will determine the outcome. Prepare now! 27
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