On the 5th of December 2022, CTIM had a courtesy visit meeting with the Deputy Chief Executive Officer (Compliance) of the Inland Revenue Board of Malaysia (IRBM).
Also in attendance were representatives from the IRBM Tax Compliance Department and the IRBM Investigation Department.
This visit will allow the CTIM and IRBM Tax Audit and Investigation teams to get to know each other better, strengthen the rapport between CTIM and IRBM and discuss how CTIM and IRBM can carry out joint activities on tax audit and/or investigation matters.
After the courtesy visit meeting, IRBM also submitted its comments on the points brought up at the CTIM Tax Audit and Investigation Klang Valley Roadshow on May 26.
These responses were given about the following topics:
Service of Notice
Penalty
Form E and EA
CP 22
Scammers pretended to be IRBM officers to call the taxpayers
Refund
Delay in getting a response from the audit officer/update on the case
No clearance letter from IRBM after the audit is completed
Penalty for PCB-related offences
Tax appeal
The Form JA was issued without conducting a tax audit
Whether “Cukai yang kena dibayar” or “Cukai tambahan yang kena dibayar” is to be adopted in the Form Q
Absence of IRBM’s directors in dispute resolution proceedings
Insisting that taxpayers abide by the “industry standard’ of gross profit margin
Revisitation by the IRBM on the same issue
Reduced volume of letters from IRBM on tax audits and investigations
Resolution of tax disputes arising from the tax audit
Issuance of Composite Assessment
Penalty – in audit findings involving technical adjustment
What is the difference between a Settlement without Tax Adjustment Letter vs No Further Action Letter (NFA)?
Volunteer disclosure
If the case started before 1 May, but the Form JA only comes out after 1 May, should the Form JA follow the new penalty rate or the old rate?
1. Service of Notice
The issue of service of notice has been recurring frequently for several tax clients, as highlighted by a recent incident in 2021.
In this case, a client's tax assessment was received at the office via ordinary post just one day before the expiry of 30 days.
Despite promptly acknowledging receipt of the Form and filing Forms Q and N within 30 days to appeal against the assessment, the Inland Revenue Board (IRB) rejected it because it was after 30 days from their assessment date, not the date of receipt.
The case was appealed to the Special Commissioners of Income Tax (SCIT), who affirmed that the 30-day commences from the date of delivery, as per the income tax act, since there was no proof of service of notice before that date.
However, IRB rejected Form Q and demanded that Form N be filed with a supporting basis instead.
This highlights the need for a public ruling to clear all doubts for taxpayers, as the act specifies 30 days from the date of service of notice, not the date on the notice.
Furthermore, IRB needs to have a better delivery system for their notice of assessment and not rely solely on postal mail services that are frequently unreliable.
The taxpayers are then put in an untenable position to appeal their assessment way beyond the 30 days printed on their assessment notice. IRB raised the assessment without providing any basis to support that assessment.
In response to this issue, the Inland Revenue Board of Malaysia suggests advising taxpayers to file Form N, as it is also difficult for them to prove the delivery date. However, IRB acknowledges the need for a solution and may issue a ruling stating that the filing of Form N will not constitute an admission of guilt by the taxpayer.
2. Penalty
The first issue raised is regarding the penalty rate during a field audit, with a suggestion for reducing the penalty rate to less than 45% in certain circumstances, such as good tax compliance by the taxpayer.
The Inland Revenue Board of Malaysia (IRBM) has been asked to consider the circumstances in which the 100% penalty rate would be imposed during a field audit.
The second issue concerns a client who was fined 45% on tax liability for late filing of tax Form C, despite being late by only one month and facing lockdown restrictions.
After appealing to IRBM to reduce the penalty, it was reduced to 15%, but it took almost 5 months for a response. The client questions whether the 45% penalty was justifiable.
In response, IRBM stated that with the new penalty structure, they aim to address such cases and will ensure due consideration is given to the facts and circumstances of each case before imposing a penalty.
3. Form E and EA
One of the issues discussed was submitting Form E and EA for all employees, regardless of their tax status.
The submission of Form E, which contains all employee information, is mandatory for employers via e-filing to IRB.
Meanwhile, Form EA is given to employees for their personal tax returns.
During tax audits, IRB officers request Form E and Form EA for all employees, including non-taxable employees.
Failure to submit Form EA for non-taxable employees may result in penalties.
Extending the coverage for preparing Form EA for all employees can be massive for labour-intensive industries and a waste of resources.
In response, IRBM stated that employers must prepare a Form EA for each employee, including non-taxable employees, as per subsection 83 (1A) of the Act.
The Form EA serves as proof of remuneration received by the employee, and they may have other sources of income that could make all their income subject to tax.
Employers are encouraged to use computerised payroll methods to facilitate the preparation of EA Forms for all their employees.
4. CP 22
Employers must provide written notice to the Director General if they employ an employee who is or is likely to be chargeable to tax, as per Section 83(2).
However, during a tax audit, the Unit Majikan requests the production of Form CP 22 for all employees, including those not liable to income tax.
Failure to provide Form CP 22 can result in penalties.
In response, IRBM clarified that employers only need to provide CP22 for their taxable employees and not for non-taxable employees.
For audit purposes, the officer will review CP22 to ensure compliance with the provisions of the subsection.
There is no need to review CP22 for employees not subject to PCB.
5. Scammers pretended to be IRBM officers to call the taxpayers
There have been instances where scammers have pretended to be IRBM officers to call taxpayers, causing panic among those undergoing tax audits.
In response, IRBM states that they are taking this issue seriously and working with the police to monitor the situation.
They are also creating awareness about the issue through their online platforms and social media and taking action against scammers who do not comply with tax laws.
6. Refund
Much appreciate it if a refund could be made within the 30 days period as opposed to the IRBM guideline of 90 days without prejudice to the IRBM for further field audit.
IRBM acknowledges the recommendation to make refunds within 30 days instead of the current guideline of 90 days without affecting any further field audit by IRBM. The suggestion will be considered by IRBM.
7. Delay in getting a response from the audit officer/update on the case
A tax agent has reported a significant delay in receiving a reply from the Inland Revenue Board (IRB) on the progress of a tax audit case that commenced on 2 June 2020.
Despite many rounds of document submission, discussions, and changes to IRB personnel, the tax agent has been unable to obtain feedback on the case's progress, despite numerous attempts to contact the IRB.
This delay has caused unnecessary stress on the taxpayer, whose branch was intended to be closed by 2021 but has not yet reached that direction due to the stalling in the IRB's case.
The taxpayer has urgently requested the latest status of the tax audit but to no avail.
The tax agent and taxpayer hope that the IRB will note significant delays in tax audit cases and commit to adhering to the tax progress and closure of the audit case, especially since the taxpayer has extended all assistance during the tax audit.
In response, the IRB stated that based on their Tax Audit Framework, their audit officers should keep taxpayers informed of their tax audit cases and correspond with them occasionally. They will remind their audit officers on this matter to improve their services.
8. No clearance letter from IRBM after the audit is completed
Tax agents and taxpayers have reported a lack of communication from IRB officers during desk audits, leaving them uncertain about the progress of their cases.
In some cases, there is no notification from the officer even when no issues are found, and when the audit is completed, no clearance letter is issued.
Tax agents and taxpayers feel that they are expected to comply with the guidelines outlined in the audit framework, but the same is not expected of the IRB officers.
In response to this issue, the IRB has stated that according to the Tax Audit Framework, taxpayers should be notified of any income, tax, or penalty adjustments made and the years of assessment involved through a Case Settlement Letter.
If no adjustment is made, a letter notifying the taxpayer of the audit settlement without adjustment will be issued.
The IRB has also committed to reminding audit officers to follow the audit procedures as set out in the Tax Audit Framework.
9. Penalty for PCB-related offences
Taxpayers have raised concerns about the penalty for non-compliance with the PCB (monthly tax deduction) audit.
Even if the PCB under-deducted is less than RM10 per month, a minimum penalty of RM200 per month is charged, which seems excessive for a small amount.
The taxpayers have requested a review of such practices and suggested that only a RM200 penalty be imposed if the under-deducted PCB amount is greater than RM200.
They believe that the purpose of the audit is to improve compliance rather than to generate revenue for the country.
In response, the Inland Revenue Board has stated that compliance with PCB regulations is mandatory, and therefore, penalties are necessary to have a punitive effect and encourage compliance.
The IRBM has not agreed to the suggestion of a lower penalty, stating that it is a compliance requirement.
10. Tax appeal
A taxpayer encountered difficulty submitting Form Q for tax appeal at the Klang branch as the officer in charge was frequently absent and unable to acknowledge the submission.
The taxpayer suggested that the officer could simply stamp the acknowledgement on their copy of the form, but this was not allowed.
In response, the IRBM cited their Public Ruling No. 7/2020 – Appeal Against an Assessment and Application for Relief, which states that any officer at the relevant branch can acknowledge the acceptance of Form Q.
Therefore, any officer at the relevant branch can acknowledge acceptance of Form Q.
They also promised to investigate the matter and prevent similar incidents from happening in the future.
11. The Form JA was issued without conducting a tax audit
Taxpayers have reported cases where the Inland Revenue Board of Malaysia issued Form JA without conducting a tax audit, particularly in the Klang Valley.
The Form J Notice of Assessment was then raised, and a 45% penalty under S.113(2) of the ITA was imposed without any request or review of documentation.
There was also no notification or explanation for the additional assessment raised.
In response, IRBM stated that taxpayers would be notified of any income and tax adjustments issued through a Notice of Assessment.
Still, if audit officers have not followed the standard operating procedure underlined in their Tax Audit Framework, taxpayers have the right to complain.
IRBM also advised taxpayers to ensure their contact details are updated.
12. Whether “Cukai yang kena dibayar” or “Cukai tambahan yang kena dibayar” is to be adopted in the Form Q
Cawangan Pembayar Cukai Besar:
The IRBM requested taxpayers to fill in “tax payable before deducting the original tax payable (deemed assessment per Form C)” instead of the “additional tax payable” per Form JA.
IRBM's response is as follows:
In general, the amount of tax payable in the column "cukai yang kena dibayar" in Form Q refers to the amount of "Cukai Kena Dibayar" as per Notice of Assessment (Form J) or as per deemed assessment (Form C) that is under dispute.
If the appeal is related to an additional assessment notice (Form JA), then the amount of "Cukai Kena Dibayar" or "Cukai Tambahan Kena Dibayar" as stated in the Form JA can be accepted.
13. Absence of IRBM’s directors in dispute resolution proceedings
The taxpayer submitted Form Q to the "Cawangan Petaling Jaya" of the IRBM, which was then forwarded to the Pejabat Pengarah Negeri Selangor (PPNS) for review.
However, the taxpayer reported that there were multiple postponements of Dispute Resolution Proceedings (DRP), and none of the directors from either PPNS or the Dispute Resolution Department (DRD) attended the DRP session.
In response, the IRBM stated that DRP sessions held at the State Director’s Office (PPN) would involve the attendance of all relevant parties, including the DRD, PPN, and taxpayer/tax agent.
The session would be chaired by the State Director, Director of DRD, or Senior Officers appointed.
The IRBM also mentioned that all Form Q requiring DRP had been settled by PPN Selangor within the review period, and in case of any postponement, all parties would be notified in advance through phone or email.
14. Insisting that taxpayers abide by the “industry standard’ of gross profit margin
Recently, concerns have been raised by a member regarding the insistence of the Inland Revenue Board of Malaysia (IRBM) on taxpayers to accept the industry standard of gross profit margin.
This report aims to examine the issue and provide recommendations to address the concerns.
IRBM responds that industry standards should only be used as a guide by audit officers and should not be used to insist that taxpayers accept them as the standard.
In audit cases, it is the taxpayer's responsibility to provide sufficient records and evidence to support their claims.
If they fail to do so, IRBM will use its best judgement to determine the appropriate tax liability.
15. Revisitation by the IRBM on the same issue
A tax audit conducted by the IRBM on a construction industry taxpayer.
The taxpayer had undergone a tax audit from 2015-2017, which concluded without any tax adjustment.
However, in February 2021, the IRBM from "Cawangan Siasatan Klang" initiated another investigation for YA 2017, which extended to 2018 and 2019.
The taxpayer had provided full disclosure for the investigation, but the IRBM disregarded the documentation and raised the best judgment assessment for YA 2017 with a penalty of 60%. The taxpayer has submitted Form Q in response.
In its response, the IRBM stated that the facts of the case were not presented correctly, and the Klang Investigation Branch continued and concluded the investigation work.
The penalty imposed was 45% and not 60%, and the taxpayer had not submitted annual return forms for many years, leading to the extension of the investigation to YA 2019.
The IRBM also mentioned that since the facts were unique to the taxpayer, it would not discuss the case further. Still, the taxpayer or tax agent could contact the Klang Investigation Branch or the Investigation Department for further discussion.
16. Reduced volume of letters from IRBM on tax audits and investigations
According to a question raised by a member of CTIM, there has been a significant reduction in the number of tax letters from the Inland Revenue Board (IRB) on tax audits and investigations in the first few months of 2022 compared to previous years.
The questioner is curious whether this indicates a change in IRB's direction towards fewer audits and investigations or whether taxpayers are now more compliant.
In response, the IRB stated that they continue to conduct audit and investigation activities as usual.
However, they are also placing greater emphasis on increasing voluntary compliance through tax education and awareness programs. Therefore, the decrease in tax letters may reflect a shift in IRB's approach, encouraging more voluntary compliance.
17. Resolution of tax disputes arising from the tax audit
The Special Industry Branch audited the client in 2020, and the client lodged an appeal (Form Q) in Aug 2020, which was forwarded to the Dispute Resolution Department (DRP).
As no settlement was reached within the 12-month timeline, Form Q was forwarded to the Special Commissioners of Income Tax in August 2021.
However, discussions for a resolution continued with the IRB Legal Department and were then forwarded to the Special Industry Branch and/or the State Director for an amicable resolution.
The client is seeking clarification if the Legal Department no longer discusses out-of-court resolutions for tax disputes.
IRBM clarified that the Legal Department still reviews any resolution to settle the appeal amicably, considering the facts of the case and the question of law involved.
The resolution is then referred to the Branch for feedback on the Legal Department's view.
18. Issuance of Composite Assessment
CTIM members would like to clarify if it is no longer the practice of the IRB to issue a Composite Assessment under Section 96A upon settlement of tax investigation cases anymore?
Under what circumstances will a signed/Composite Agreement be issued if it is still the practice?
According to the IRBM, issuing a composite assessment upon settlement of tax investigation cases is not mandatory and is at the discretion of the Director General of Inland Revenue (DGIR). While a composite assessment is typically issued when the taxpayer and the IRB reach an agreement, it is not always the case.
Therefore, the circumstances under which a composite agreement will be issued depending on the specific case and the discretion of the DGIR.
19. Penalty – in audit findings involving technical adjustment
Based on the updated tax audit framework, effective from 1 May 2022, we understand that no penalty will be imposed regarding the audit findings involving technical adjustment if the IRB has issued current audit findings before 1 May 2022.
The taxpayer is still appealing, but the findings constitute a technical adjustment. Can IRB consider a nil penalty since a Notice of assessment is yet to be issued?
The response from IRBM is that the new penalty structure in the Tax Audit Framework issued on 1 May 2022 will be followed in case any penalties are to be imposed, even if the audit findings were issued before that date and the taxpayer is still appealing.
Therefore, it is unlikely that the IRB will consider a nil penalty in such a scenario.
20. What is the difference between a Settlement without Tax Adjustment Letter vs No Further Action Letter (NFA)?
What is the difference between a Settlement without Tax Adjustment Letter VS No Further Action Letter (NFA)?
Noted from the NFA letter that although no further review is required by the IRB, the taxpayer may be reviewed again if there are other issues or new information.
Can cases with NFA be reopened for the same Year of Assessment and for the same scope?
The difference between a Settlement without Tax Adjustment Letter and a No Further Action Letter is that the former signifies that the tax audit has been completed and an agreement has been reached between the taxpayer and the IRB on the tax position, while the latter means that no further review or action is required by the IRB.
However, it should be noted that even if a case has been closed with an NFA, it can still be reopened for the same year of assessment if new information arises or if other issues need to be addressed.
21. Volunteer disclosure
Para 10.7 of Tax Audit Framework says that "Kadar penalti konsesi boleh dikenakan bagi kes-kes di mana pengakuan secara sukarela dibuat oleh pembayar cukai. Pembayar cukai tidak layak membuat pengakuan sukarela apabilatindakan audit telah bermula".
What is the rationale for this as for tax investigation IRB still allow taxpayers to offer voluntarily?
IRBM's response: The risks involved have already been considered once an audit has begun.
Therefore, voluntary disclosure is not allowed after an audit has commenced.
However, for investigation cases, any voluntary disclosure made will be considered for the imposition of penalties.
22. If the case started before 1 May, but the Form JA only comes out after 1 May, should the Form JA follow the new penalty rate or the old rate?
If the case started before 1st May, but JA only comes out after 1st May.
Should the JA follow the new penalty rate or the old rate?
If a tax audit case started before May 1, but the Notice of Assessment (JA) was issued after May 1, the new penalty structure will be applied under the updated Tax Audit Framework.
The new penalty structure was implemented on May 1, 2022, and will apply to all notices of assessment issued after that date.
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