THE frequency and intensity of tax audits by the Inland Revenue Board of Malaysia (IRB) is on the increase. There is a perception that if an audit has been started, you cannot close it without paying additional taxes. This is not a true reflection of the current environment.
The IRB knows that whatever it does, it has to do it within the law and cannot arbitrarily impose taxes. It is not uncommon to find situations where an audit is closed without any additional taxes.
The “secret” to avoiding any additional taxes is being prepared on the tax sensitive areas surrounding your business. In many instances, the taxpayers make mistakes in the basic areas such as the claims for capital allowances, claiming deductions that is not in accordance with the law, accelerating tax claims into an earlier period versus the later period, deferring income to a later period, lack of understanding in differentiating capital versus revenue expenditure, attempting to get a tax deduction on provisions of expenditure, failing to deduct withholding taxes, etc.
Where is the focus of the IRB?
All the above items would be seen as the “low hanging fruits” for the IRB. The reason for regarding the above as “low hanging fruits” is because it is very easy for the IRB to pick up the errors if they did the basic reconciliation between your tax returns, accounts, tax computations the general ledger and the underlying documents.
The majority of these errors will get picked up. An example would be if an item has been claimed as revenue expenditure, but it may contradict the underlying descriptions in your general ledger and the supporting documents such as the invoices, purchase orders, etc.
Another common example would be incorrect claims for capital allowances or tax depreciation where the taxpayers may attempt to claim the write-offs at a higher rate of 20% versus 14%. This can be quickly verified with the underlying documents. The failure to disclose the deferred income is not difficult to identify because if one looks at the balance sheet and reconciles it with the legal and underlying documents, it may become clear that such income that is kept in the balance sheet as a liability should have been recorded as income in the profit and loss account.
Another “low hanging fruit” is the completeness of the declaration of the benefits-in-kind and perquisites. Very often this is an area that received little attention from the taxpayers.
The IRB has enough simple issues to unearth before it moves on to the complex areas such as aggressive tax planning, tax avoidance scheme, transfer pricing, domestic source versus foreign source, etc. Abusing the use of tax shelters and shifting profits into the tax shelters both locally and overseas without substance would be a little bit more difficult for the IRB.
What should taxpayers do to avoid the problem?
Although taxpayers in most instances are not tax experts, they should exercise tax stewardship by asking the basic questions to their tax agents and doing the back of the envelope calculation. The starting point for a corporate entity would be to take apply the 24% standard corporate tax rate (excluding SMEs) to the net profit and compare it against the computed tax liability.
In the event the tax rate is higher or lower than the 24%, as the board of directors or the owner of the company, you should ask the person responsible for your tax affairs the reasons for the discrepancy and ensure the explanation given is plausible in commercial and legal terms.
The other behaviour that is required by the owners of the business is to ensure that the issues highlighted above have been addressed by your management throughout the year. In case your management hasn’t got the necessary expertise, you must seek help from your tax consultants on more complex matters and for other straightforward issues, you may even approach the IRB for assistance.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).