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Alan Yoon Associates

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

Tax Risk Management

Practice & Law

Dr Alan Yoon 3 rd May 2008

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Seminar Schedule

2.00 - 3.00

3.00 - 3.15

3.15 - 4.30

4.30 - 5.00

Risks? What Risks?

Coffee Break Risk Management Discussion

AYA 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 Estimates b. Late Payment of Installments c. Non or Late Payment of Tax d. 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. Expenses not allowed c. Income Re-determined d. Additional Assessments e. 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 Records Bank Statements 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 For YA 2004 Submitted 25 June 2005 For YA 2002 Submitted 18 July 2007 Keep Until 2011 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 3. The records that should be made available 4. Years of assessment under audit 5. 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

AYA 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

AYA MEANS TEST Johan’s Asset and personal details are as follows: Investments (Shares) 31.12.2001

240,000 31.12.2005

860,000 Houses Fixed Deposits Motor Vehicles Household Effects 525,000 135,000 180,000 80,000 1,290,000 470,000 590,000 170,000

1,160,000

Johan and wife have 3 children, 1 studying in UK. Total Living Expenses 2002 – 2005: RM360,000 Declared Income 2002 – 2005: RM1,650,000

3,380,000

AYA MEANS TEST

Determination of Income Discrepancy:

Asset Position: 31. 12. 2005 Asset Position: 31. 12. 2001 Accretion of Assets Add: Living Expenses Deemed Income Declared Income

Undisclosed Income 3,380,000 1,160,000 2,220,000 360,000 2,580,000 1,650,000 930,000

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CP 103

Capital P & L Bal.

House Motor Cars Investments TOTAL Total b/f Accretion Liv. Exp.

Implied Inc.

Declared Inc SHORTFALL MEANS TEST 31.12.03

31.12.04

31.12.05

220,000 170,000 340,000 130,000 60,000 920,000 220,000 210,000 780,000 130,000 80,000 1,420,000 920,000 500,000 80,000

580,000 330,000 250,000

320,000 280,000 780,000 130,000 140,000 1,650,000 1,420,000 230,000 90,000

320,000 340,000 -

31.12.06

320,000 330,000 970,000 420,000 290,000 2,330,000 1,650,000 680,000 120,000

800,000 410,000 390,000

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USING GROSS PROFIT RATIO (A)

Sales Purchases Gross Pt.

GP %

Net Profit 2001 1,858,000 2002 1,479,000 1,600,000 1,194,000 258,000 285,000 13.9

195,000 19.3

208,000 2003 2,435,000 2,143,000 292,000 12.0

221,000 2004 1,761,000 1,487,000 274,000 15.6

213,000 What are the suspicious points in the table above?

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USING GROSS PROFIT RATIO (B)

Rev. Sales*

Av. GP %

2001 2,778,000

15.2

2002 1,985,000

15.2

2003 3,247,000

15.2

2004 2,501,000

15.2

Rev. Gr Prft 422,256 301,720 493,544 380,152 Rev. Net. Pt Orig. Net Pt 359,256 195,000 224,720 208,000 422,544 221,000 319,152 213,000 In. Not Dec.

164,256 16,720 201,544 *Deemed Revised Sales through means available to IRB 106,152

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Insufficient Drawings Adjusted Income declared

Drawings per Balance Sheet

Living Expenses

House Education (2) Installments Other Expenses 60,000 72,000 42,000 24,000 Shortfall of Income Revised Adjusted Income

137,000

112,000 198,000 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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5 6 7 1 2 3 4 EXAMINATION SEQUENCE

Notice of Dates, Issues, (Audit) Actual Inspection visit: 1 – 4 days Further information?

Proposed Computation Explanation and Evidence Finalization & Assessments 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.

AYA • 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

AYA 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

AYA • 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.

AYA • 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 .

AYA • 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.

AYA 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.

AYA • 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.

AYA • 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.

AYA • 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”).

AYA • 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

AYA 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.

AYA 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.

AYA 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.

AYA • 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!