AYA
Alan Yoon Associates
Chartered
Accountants
Tax Risk Management
Practice & Law
Dr Alan Yoon
3rd May 2008
AYA
Seminar Schedule
2.00 - 3.00
Risks? What Risks?
3.00 - 3.15
Coffee Break
3.15 - 4.30
Risk Management
4.30 - 5.00
Discussion
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Speaker’s Profile
Dr Yoon worked many years in a public listed company
focusing on accounting, financial and treasury issues
before being an accountant in public practice. Dr Yoon is
a Fellow Member of the Association of Chartered
Certified Accountants and the Chartered Institute of
Management Accountants for more than a decade. Dr
Yoon also holds academic post-graduate qualifications
namely a Master of Business Administration awarded by
the University of Bath, United Kingdom and a Doctor of
Philosophy in Finance from University Putra Malaysia.
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Tax Risks
a.
b.
c.
d.
Late Submission of Estimates
Late Payment of Installments
Non or Late Payment of Tax
Omission or Late Submission of
Returns (Sec 77)
e. Incorrect Returns
f. Lack of Supporting Documents
(Public Ruling 4,5,6/2000)
g. Concealment - furnishing inaccurate
information
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Risk Consequences
a. Penalties
b.
c.
d.
e.
Expenses not allowed
Income Re-determined
Additional Assessments
Necessity of Immediate Response
(Sec 104 – Informing the
Commissioner of Police or DG of
Immigration)
e. Composite Assessments (Sec 96A)
& Prosecution
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Investigations & Audits - Differences
a. Notice given in Audit - an Investigation will be a
surprise visit or raid without warning.
b. Investigations directed by DG whereas Audit once
in five years. Fraud vs Compliance & Technical.
c. Investigations examine complex issues, while
audits are generally simpler.
d. Audit offence less serious. But if deliberate attempt
to understate income, case may be referred to the
Investigation Centre.
e. Audit cases usually settled within 3 or 4 months;
investigations can stretch much longer.
f. Investigation penalties tied to time to finalize case
and settle the taxes. Audit penalty now 45%.
g. Taxes and penalties in audit need not be less.
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Rights and Duties
Taxpayer (Public Ruling 7/2000)
a. Be co-operative, courteous, and honest
b. Provide reasonable assistance to IRB,
allowing access to all records and accounts,
including access to the computers.
c. Be prompt in response, furnishing required
material within a reasonable time.
d. Ensure that replies fully provide information
requested by the officers.
e. Not offer any gift, or reward to the officers
f. His accountant or tax agent can be present.
He can also have an interpreter to assist him.
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MINIMISING THE IMPACT
1. Fulfill your obligations correctly and
within time
2. Maintain proper records and accounts
3. Retain all supporting receipts,
agreements, and contracts
4. Canon of Taxation: Economy,
Accuracy, Affordability & Equity
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MAINTAINING PROPER RECORDS
SOURCE
DOCUMENTS
Bank
Statements
Records
Accounts
Tax Returns
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Records and Documents
Documents
Invoices
Receipts
Credit Notes Given
Credit Notes Received
Delivery Notes
Stock Books
Bank Documents
Statements
Bank-in Slips
Cheque Butts
Other Documents
Contracts
(S & P) Agreements
STD/Withholding Tax
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Records – How long to keep?
Section 82A(1)
Every person who is required to furnish a
return for a year of assessment shall keep
sufficient documents for 7 years from the
end of that year of assessment.
Section 82A(2)
Where return not submitted, the person shall
keep the documents for 7 years after the end
of the year in which the return is submitted.
(See later also)
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Keeping Records - Example
Return Submitted
Keep Until
For YA 2004
Submitted 25 June 2005
2011
For YA 2002
Submitted 18 July 2007
2014
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Selection Trigger Factors
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Consistently low profits
Sudden Increase in Sundry or other creditors
Expenses high and not relevant
Ratios different from industry
Ratios and scale too consistent!
Cross-border transactions
Inter-company dealings
Enormous Capital Injection
Acquisition of Private Assets
Contingent Liability as Actual
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SOURCES OF INFORMATION
•
•
•
•
•
•
•
Tax Files – including your own!
Publications, Newspapers
Congratulatory Messages
Land Office /ROC / Immigration
/ JPJ / ACA
Local Knowledge
Informers
Heavily qualified Auditor’s Report
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SOURCES OF INFORMATION
Purchase of:
• Houses, Apartments, Land
• Cars
• Shares, Unit Trusts, Insurance
Receipt of:
• Commission
• Fees
• Contract
Computerization
will increasingly
be of great help
to Revenue
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Cross Border Transactions
•
•
•
•
•
•
What is the relationship?
Details of transactions
Basis of payments
Liability to Withholding Tax
Details of payment
Payments & Quantum justifiable?
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Inter-company Transactions
•
•
•
•
•
•
What is the relationship?
Details of transactions
Basis of payments
Details of payment
Payments & Quantum justifiable?
Or shifting of income/profits
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Transfer Pricing Penalties
It would appear that Section 140(2) does not include
the imposition of any penalty on a transfer pricing
shortfall. Nevertheless, Revenue would argue that the
‘wrong usage’ of a pricing policy “despite such validity
as it may have” has resulted in an understatement of
income. Hence, a Penalty is warranted.
A sound defense would be that the person had just
cause to employ a pricing mechanism despite it being
not acceptable to Revenue. This may be viewed as
the mythical ‘technical adjustment’ in respect of which
no penalties would be imposed.
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NOTICE OF AUDIT VISIT
1.
Types : Source Verification, Desk
Field Industry, Schdular Tax
Deduction & Business Survey
2.
Date of impending visit;
at least 14 days notice will be given
The records that should be made
available
Years of assessment under audit
Names of the officers concerned
3.
4.
5.
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THE EXAMINATION PROCESS
1. Be Prepared – The IRB will be!
2. Discuss with accountant and tax agent
3. Review Returns, Accounts, and
Computations
4. A Table showing the performance for the
relevant years would be very helpful
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DETERMINING INCOME SHORTFALL
Assets (Accretion cf Declared Income)
•
•
•
•
Capital Statement –
Several years [CP 103]
Capital Statement – Two years
Living Expenses - [CP 102]
Assessing Income Shortfall
a. Evenly spread over total period or
b. Actual per year or
Means Test is for Individuals
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MEANS TEST
Johan’s Asset and personal details are as follows:
Investments (Shares)
Houses
Fixed Deposits
Motor Vehicles
Household Effects
31.12.2001
240,000
525,000
135,000
180,000
80,000
1,160,000
31.12.2005
860,000
1,290,000
470,000
590,000
170,000
3,380,000
Johan and wife have 3 children, 1 studying in UK.
Total Living Expenses 2002 – 2005: RM360,000
Declared Income 2002 – 2005: RM1,650,000
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MEANS TEST
Determination of Income Discrepancy:
Asset Position: 31. 12. 2005
3,380,000
Asset Position: 31. 12. 2001
1,160,000
Accretion of Assets
2,220,000
Add: Living Expenses
360,000
Deemed Income
2,580,000
Declared Income
1,650,000
Undisclosed Income
930,000
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MEANS TEST
CP 103
31.12.03
31.12.04
31.12.05
31.12.06
Capital
220,000
220,000
320,000
320,000
P & L Bal.
170,000
210,000
280,000
330,000
House
340,000
780,000
780,000
970,000
Motor Cars
130,000
130,000
130,000
420,000
Investments
60,000
80,000
140,000
290,000
920,000
1,420,000
1,650,000
2,330,000
Total b/f
920,000
1,420,000
1,650,000
Accretion
500,000
230,000
680,000
Liv. Exp.
80,000
90,000
120,000
Implied Inc.
580,000
320,000
800,000
Declared Inc
330,000
340,000
410,000
SHORTFALL
250,000
TOTAL
-
390,000
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USING GROSS PROFIT RATIO (A)
2001
2002
2003
2004
Sales
1,858,000
1,479,000
2,435,000
1,761,000
Purchases
1,600,000
1,194,000
2,143,000
1,487,000
258,000
285,000
292,000
274,000
13.9
19.3
12.0
15.6
195,000
208,000
221,000
213,000
Gross Pt.
GP %
Net Profit
What are the suspicious points in the table above?
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USING GROSS PROFIT RATIO (B)
2001
2002
2003
2004
2,778,000
1,985,000
3,247,000
2,501,000
15.2
15.2
15.2
15.2
Rev. Gr Prft
422,256
301,720
493,544
380,152
Rev. Net. Pt
359,256
224,720
422,544
319,152
Orig. Net Pt
195,000
208,000
221,000
213,000
In. Not Dec.
164,256
16,720
201,544
106,152
Rev. Sales*
Av. GP %
*Deemed Revised Sales through means available to IRB
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Insufficient Drawings
Adjusted Income declared
137,000
Drawings per Balance Sheet
112,000
Living Expenses
House
60,000
Education (2)
72,000
Installments
42,000
Other Expenses
24,000
Shortfall of Income
Revised Adjusted Income
198,000
86,000
223,000
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AFTER THE AUDIT
Making An Effective Appeal
1. Being emotional does not help
2. Substantiate facts with hard evidence
3. Support arguments with reference to
the law, case law, and Rulings
4. Submit your case in an organised and
professional way
5. Make your submission easy to follow,
with appendices, tags, etc.
6. Presenting your case in person is better
than only a written paper
7. Carry yourself in a professional manner
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EXAMINATION SEQUENCE
1
Notice of Dates, Issues, (Audit)
2
Actual Inspection visit: 1 – 4 days
3
Further information?
4
Proposed Computation
5
Explanation and Evidence
6
Finalization & Assessments
7
Appeal?
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ENFORCEMENT
1. Forensic Audit/Investigation
2. Criminal Prosecution
In the history of Income Tax prosecutions, only one taxpayer has so
far been imprisoned and fined. i.e. 1 Day and RM750 each for not
submitting returns for YA 84, 85,& 86. (Berita Harian 1.11.89)
However No Person is above the Law, it was reported a total of 106
prominent individuals were investigated between 1995 & 2003. They
paid a total of RM237 million (Star 11.2.2004)
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DETERMINING INCOME SHORTFALL
Trace Sequence
Transactions
Source Documents
Records
Bank Statements
Accounts
Income Tax Computations
Returns
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OFFENCES & PENALTIES
Incorrect Returns: Section 113
a. Omits or understates income
b. Gives incorrect information
Fine (By Court): a. RM1,000 min./RM10,000max.
b. Special Penalty of 2 x Tax Lost
Penalty (By IRB): Amount of Tax Lost
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OFFENCES & PENALTIES
Wilful Evasion: Section 114
a. Makes false statement
b. Omits income
c. Gives false answer
d. Falsifies or maintain false accounts and records
Fine (By Court): a. RM1,000 min./RM20,000 max.
b. Imprisonment of 3 years
b. Special Penalty of 3 x Tax Lost
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Tax Appeal Procedures
Section 99 of the ITA 1967
Notice of Assessment / Additional Assessment
Form Q SCIT HC CA
Section 100 of the ITA 1967
Notice of Assessment / Additional Assessment
Form N Form Q
SCIT HC
CA
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Notice of Assessment
(Form J / Form Q)
• Sections 90(1) & 90(2) of the ITA 1967
Under the self-assessment system, when a tax
return is submitted to the IRB, it shall be deemed
as a notice of assessment raise by the DGIR on
the day the return is submitted.
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Notice of Additional Assessment
(Form JA)
• Section 91(1) of the ITA 1967
DGIR may issue a notice of additional assessment
(Form JA) to a taxpayer if it appears to him that no or no
sufficient assessment has been made on the taxpayer in
a year of assessment within 6 years upon the expiration
of that year of assessment.
• Section 91(3) of the ITA 1967
In cases of fraud, willful default, and negligence, there is
no time limit within which the DGIR can raise an
assessment.
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Notice of Appeal ( Form Q)
• Section 99(1) of the ITA 1967
A taxpayer aggrieved by an assessment may appeal to
the Special Commissioners of Income tax within 30 days
after the service of the notice of assessment.
(see section 145 of the ITA 1967 for service)
• The appeal has to be made in prescribed form, i.e. Form
Q.
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• Form Q is the prescribed notice of appeal
• Form Q is to be filled within 30 days after the
service of notice of assessment/additional
assessment.
• Taxpayers may appeal if they are aggrieved by
the assessment raised against them by IRB.
• Form Q must briefly state the grounds of appeal
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Form Q will contain details such as:
• The name of the taxpayer
• The year of assessment disputed
• The date the disputed notice was served
• The grounds of appeal
• The signature of the company’s representative &
the designation
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• Form Q is available for free.
• There is no filing fee when you file Form Q.
• Once Form Q is filed, DGIR will review it for a year.
(unless an additional 6 months extension is granted)
• The review may result in reduction of the assessment or
settlement between both parties.
• Although Form Q is filed, parties can still negotiate.
• Upon the expiration of the review period, the DGIR must
forward Form Q to the SCIT.
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• SCIT will fix for a mention of the matter within a
month.
• Trial will take place within 6 to 8 months after the
mention.
• Trial will last between one and two days.
• Parties will be given 2 to 3 months to prepare
their written submissions.
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• Taxpayers are advised to file Form Q on time.
• By filing Form Q, you preserve your legal right to
appeal to the SCIT notwithstanding any ongoing negotiation with the IRB.
• Form Q can be withdrawn at any time before
trial.
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Public Ruling No.3/2001:
• “An appeal made by way of a letter is also acceptable,
and will be dealt with as if form Q had been received. If it
subsequently becomes necessary to forward the case to
the SCIT, the appellant will be requested to complete
Form Q accordingly.”
• As stated above, you may also appeal within 30 days
from the date of the notice of the assessment is served
on you by the way of a letter.
• Form Q can be filed later if the parties are unable to
agree on a settlement.
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• The grounds of appeal should be specific, referring top
particular items in the tax computation or the
assessment with which the appellant disagrees and
stating the reasons for doing so.
• Additional information or copies of documents should be
provided if necessary or required by the IRB after the
filing of Form Q.
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Extension of time of appeal (Form N)
• Section 100 of the ITA 1967
If the taxpayer fails to file Form Q on time, then the
taxpayer may at any time submit to the DGIR a form, i.e.
Form N, for an extension of time to file form Q.
• The application for extension is at the discretion of the
DGIR.
• Reasons must be given for the failure to file Form Q on
time.
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• If the DGIR rejects Form N, the application and reasons
for the rejection will be forwarded to one of the Special
Commissioners, who shall decide whether the
application is to be allowed or refused.
• The taxpayer may give written representation to the
Special Commissioners.
• The decision of the Special Commissioner shall be final.
• If the application is allowed, taxpayer may proceed to file
Form Q.
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Review Period By the DGIR Upon
Filing Form Q
• Section 101 of the ITA 1967
After receiving Form , DGIR has 12 months to review the
assessment disputed.
• DGIR may require taxpayer to:
– Furnish particulars relevant to the assessment in
dispute.
– Produce all books or documents relevant to the
assessment in dispute.
– Give evidence in respect of the assessment in
dispute.
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• DGIR may confirm, reduce, increase, or discharge the
notice of assessment raised at this stage.
• If there is no reasonable prospect of coming to an
agreement between the DGIR and taxpayer during the
12 month period, DGIR must forward the appeal to SCIT.
• At the hearing, there will be 3 panel members hearing
the appeal (known as Special Commissioners).
• A full trial will be conducted at this stage and a decision
will be given (“Deciding Order”).
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• If a party is satisfied with the decision, it may appeal on
question on law or mixture of law and facts to the High
Court.
• If a party is dissatisfied with the High Court’s decision, he
can appeal to the Court of Appeal, which is the final
appellate court for tax appeals.
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The Way Forward
• To preserve their rights, taxpayers are urged to file Form
Q on time.
• This can be done notwithstanding any negotiation with
the IRB pertaining to the assessment or other matter.
• It is the taxpayer’s right to file Form Q and Form N and to
be heard by the SCIT.
• Exercise your rights wisely.
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Section 97 of the ITA 1967
(Finality of Assessment)
• An assessment once raised against a taxpayer
is deemed to be final and conclusive if no
valid notice of appeal is given by the taxpayer to
the DGIR
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Section 303 of the ITA 1967 (Payment of Tax)
• Tax is payable on the due date whether or not that
person appeals against the assessment [unless a ‘stay’
is obtained]. If tax is not paid by the due date, late
payment penalty will be imposed.
Section 106 of the ITA1967 (Recovery by civil suit)
• Tax due and payable that is not paid may be recovered
by the Government by way of civil proceedings as debt
due to the Government.
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Section 97A of the ITA 1967
(Notification of non chargeability)
1. Where in ascertaining the chargeable income
of a person, it appears to the Director General
that no assessment shall be made in respect of
that person for any year of assessment by
reason of no adjusted income, statutory
income, aggregate income or total income, he
may notify that person in writing that no
assessment shall be made for that year of
assessment and the computation with regard to
it.
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2. Where a person is dissatisfied with the
notification made by the director General under
subsection (1), he may within thirty days from
the date of being so notified, appeal to the
Special Commissioners as if the notification
were a notice of assessment and the provisions
of this Act relating to appeals shall apply
accordingly with such necessary modifications.
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3. If no notice of appeal against a notification
made by the Director General under subsection
(1) has been given within the time specified
under that subsection or any extended period
thereof, the notification shall be final and
conclusive for the purpose of this Act.
4. Nothing in this section shall prejudice the
exercise of any power conferred on the Director
General by section 91.
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Section 131 of the ITA 1967
(Relief in respect of Errors / Mistake)
• A taxpayer who made an error/mistake in his
return and paid excess tax may within six years
make an application to the DGIR for relief.
• If the DGIR refuses to provide the relief, then the
taxpayer may appeal to the Special
Commissioners.
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Negotiating with the IRB
• You can still preserve your legal rights despite
the on-going negotiations with the IRB.
• Ensure all your letters are written on a “without
prejudice” basis.
• Instruct a reputable tax lawyer to vet your letters
and always obtain professional advice.
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• Record all meetings and discussions that take
place with the IRB.
• Do not make any concession unless you are
absolutely sure of the terms or conditions
attached.
• Ensure the IRB’s offer is in writing before you
make any concession.
• If tax is paid under protest, please state that in
your cover letter to IRB.
AYA
THANK YOU!