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Tax Risk Management

Dr Alan Yoon3rd May 2008

Alan Yoon Associates

C h a r t e r e d A c c o u n t a n t s

Practice & Law

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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. Late Submission of Estimatesb. Late Payment of Installmentsc. Non or Late Payment of Taxd. Omission or Late Submission of

Returns (Sec 77)e. Incorrect Returnsf. Lack of Supporting Documents

(Public Ruling 4,5,6/2000)g. Concealment - furnishing inaccurate

information

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Risk Consequences

a. Penaltiesb. Expenses not allowedc. Income Re-determinedd. Additional Assessmentse. 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 honestb. 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 officersf. 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 contracts4. Canon of Taxation: Economy,

Accuracy, Affordability & Equity

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MAINTAINING PROPER RECORDS

SOURCE DOCUMENTS

RecordsBank

Statements

Accounts

Tax Returns

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Records and Documents

DocumentsInvoicesReceipts

Credit Notes GivenCredit Notes Received

Delivery NotesStock Books

Bank DocumentsStatements

Bank-in SlipsCheque Butts

Other DocumentsContracts(S & P) AgreementsSTD/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 20052011

For YA 2002

Submitted 18 July 20072014

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Selection Trigger Factors

1. Consistently low profits2. Sudden Increase in Sundry or other creditors3. Expenses high and not relevant4. Ratios different from industry5. Ratios and scale too consistent!6. Cross-border transactions7. Inter-company dealings8. Enormous Capital Injection9. Acquisition of Private Assets10. 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

3. The records that should be made available

4. Years of assessment under audit5. Names of the officers concerned

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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

AYAMEANS TEST

Johan’s Asset and personal details are as follows:

31.12.2001 31.12.2005Investments (Shares) 240,000 860,000Houses 525,000 1,290,000Fixed Deposits 135,000 470,000Motor Vehicles 180,000 590,000Household Effects 80,000 170,000

1,160,000 3,380,000Johan 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

AYAMEANS 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

TOTAL 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 - 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

Gross Pt. 258,000 285,000 292,000 274,000

GP % 13.9 19.3 12.0 15.6

Net Profit 195,000 208,000 221,000 213,000

What are the suspicious points in the table above?

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USING GROSS PROFIT RATIO (B)

2001 2002 2003 2004Rev. Sales* 2,778,000 1,985,000 3,247,000 2,501,000

Av. GP % 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

*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 24,000 198,000

Shortfall of Income 86,000

Revised Adjusted Income 223,000

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AFTER THE AUDIT

Making An Effective Appeal1. Being emotional does not help2. Substantiate facts with hard evidence3. Support arguments with reference to

the law, case law, and Rulings4. Submit your case in an organised and

professional way5. Make your submission easy to follow,

with appendices, tags, etc.6. Presenting your case in person is better

than only a written paper7. 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

TransactionsSource DocumentsRecordsBank StatementsAccountsIncome Tax ComputationsReturns

Trace Sequence

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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

AYA 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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• 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 on-going 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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• 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.

AYA 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.

AYA 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.

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THANK YOU!