Under the Self Assessment System, the burden of computing the taxpayer’s liability is shifted from the Inland Revenue Board (IRB) to the taxpayer and accordingly, taxpayers are expected to compute their tax liability based on the tax laws, guidelines and rulings issued by the IRB.
The Income Tax Returns (Form C) submitted by the companies will no longer be subject to a detailed review by the IRB.
The main objective of the Self Assessment System is to inculcate a practice of voluntary compliance by the taxpayers and at the same time reduce the workload of the IRB to enable them to concentrate on areas which have a high tax risk and a potentially significant loss in revenue.
The implementation of the self assessment system has also resulted in changes to the tax compliance cycle and the penalty provisions. These changes are explained in greater detail below.
Tax Audits by IRB
Under Self Assessment System, tax audits will be IRB’s key enforcement tools to ensure that the tax returns submitted are correct and have been prepared in accordance with the provisions of the laws, guidelines and rulings issued by IRB.
Essentially, an audit is an examination of a taxpayer’s records to ensure that the income and tax liability declared to the IRB in the Income Tax Return are true, correct and comply with the tax laws and rulings.
Desk Audit and Field Audit
IRB carries out 2 types of audits, namely Desk Audit and Field Audit.
The Desk Audit will involve the review of documents or information obtained by correspondence and interviews at the IRB’s offices whilst the Field Audit would entail a visit to the taxpayer’s premises for a detailed review of all revelant documents.
Cases for audit are selected through the computerised system based on risk analysis criteria and on various criteria such as business performance, financial ratios, type of industry, past compliance records, third party information, etc.
How does the IRB Conduct an Audit?
Once a taxpayer is selected for an audit, the IRB will inform the taxpayer via a telephone call followed by an official notification letter sent via mail or fax.
The period between the date of notification and the audit visit is 14 days. A shorter period of notification may be fixed by IRB with the consent of the taxpayer.
The scope of a tax audit under the self assessment system normally covers a period of 1 to 3 years, unless there are valid reasons to go beyond that period. The time frame for the conclusion of a tax audit is normally within 3 months.
Upon the completion of an audit, the IRB will issue a tax computation summarising the tax adjustments based on their findings and subsequently an additional assessment to collect the additional taxes from the taxpayer.
The taxpayer may still appeal against this assessment by submitting the appeal, through the prescribed Form Q to the Special Commisioners of Income Tax within 30 days from when the assessment is raised.
With effect from 1 Jan 2014, the time-bar for tax audits is reduced from 6 years to 5 years.+
Penalty Provisions under Tax Audit System
(a) Penalties for omission/non-disclosure
Under the tax audit system, the IRB has also introduced a new penalty regime for non-disclosure and omission of information that affects a taxpayer’s tax liability. The penalty regime is summarised as follows:
|Voluntary disclosure before selection for audit||Within 60 days from the due date for furnishing the return form||10%|
|More than 60 days but less than 6 months form the due date for furnishing the return form||15.5%|
|6 months to 1 year||20%|
|1 year to 3 years||25%|
|3 years & above||30%|
|Voluntary disclosure after the case is selected for audit but before audit commences||35%|
|Non-disclosure (discovery during audit)||100% of tax undercharged (may consider for 45% for 1st offence)|
|Repeated offences||+10% for each repeated offence not exceeding 100%|
(b) Penalty for not providing reasonable facilities and assistance
Based on Public Ruling 7/2000, failure by a taxpayer to provide reasonable facilities and assistance to the IRB when conducting an audit is an offence and upon conviction, the taxpayer may be liable to a fine of between RM1,000 to RM10,000 or face imprisonment for a term not exceeding 1 year or both.
(c) Failure to keep sufficient records
The company or persons responsible, upon conviction will be liable to a fine of between RM200 to RM2,000 or face imprisonment for a term not exceeding 6 months or both.
Under the self assessment system, every company is required to determine and submit in a prescribed form (Form CP204) an estimate of its tax payable for a year of assessment, 30 days before the beginning of the basis period.
New company must submit CP204 within 3 months once started business
However, when a company first commences operations (ie during the first period), the estimate of tax payable must be submitted to the IRB within 3 months from the date of commencement of its business and thereafter no later 30 days before the beginning of the basis period.
Coming year’s tax estimation cannot be less than 85% of previous one
With effect from YA 2006, the estimate of tax payable submitted for a particular year cannot be less than 85% of the revised estimate of tax payable for the immediate preceding year of assessment, of if no revised estimate is furnished, cannot be less than 85% of the estimate of tax payble for the immediate preceding year of assessment.
A company is still required to submit the CP204 within the stipulated deadline even if it expects its estimate of tax payable to be NIL.
SME do not need to submit CP204 within first 2 years of assessment
With effect from YA 2008, where a SME first commences operations in a year of assessment, the SME is not required to furnish an estimate of tax payable or make instalment payments for a period of 2 years beginning from the year of assessment in which the SME commences operations.
With effect from YA2011, where a company first commences operations in a year of assessment and the basis period for that year of assessment is less than 6 months, that company is not required to furnish an estimate of tax payable or make instalment payments for that year of assessment.
SME may still be penalised if no CP204 submitted, even though is not required
A SME which is exempted from furnishing an estimate of tax payable mentioned above is advised to submit the CP204 notifying IRB of its SME status without having to state the amount of estimate of tax payable for that particular year of assessment to avoid any penalty for under-estimation of tax or penalty for non-submission being wrongly imposed by IRB.
The Inland Revenue Board (IRB, or common known as LHDN, Lembaga Hasil Dalam Negeri) has issued an notice to all professional associations on 9 June 2011 for the clarification of submission requirements for CP204.
Small & Medium Companies are advised to submit CP204
IRB has in its letter informed all companies to submit its tax estimation (CP204) for avoiding any possible unnecessary penalty due to administrative issues, even though these companies are not required to submit CP204.
Pursuant to Section 107C(4A) of the Income Tax Act 1967 (ITA), a Malaysian resident company need not submit the estimate of tax payable in a prescribed form for the first two years of assessment in which it first commences operations, provided it is an SME.
SME (stands for Small And Medium Enterprises) are those companies having paid up ordinary share capital of not more than RM2.5 million at the beginning of the two basis periods and that it does not control or is controlled by a related company which has a paid up ordinary share capital of more than RM2.5 million at the beginning of the basis period for a year of assessment.
LHDN may still penalise companies even though they are not required to submit CP204
However, the IRB is unable to identify an SME when:
1.imposing a penalty on underestimate pursuant to Section 107C(10) ITA 1967.
2.issuing notification of legal proceedings for offences committed under Section 120(1)(f) ITA 1967.
As such, the IRB has amended the Form CP204 to allow a taxpayer to inform the IRB of its ‘SME’ status without furnishing the estimate of tax payable. A similar amendment is made in the e-Filing Form CP204.
The amendment is effective from 3 March 2011. However, the SME that does not submit a Form CP204 in the first year, is requested to submit a Form CP204 in the second year if it is still an SME.
LHDN informed companies to request their tax agent to appeal the case
Where a penalty under Section 107C(10) is imposed or notification of legal proceedings under Section 120(1)(f) is issued to an SME, please refer to the IRB Branch where the Company income tax returns are maintained, or contact your company’s tax agent to assist on the matter, for waiver of the penalty.
Click here to read: 00710_IRB Letter – Submission requirement for Form CP204
It is important to know what will happen to a company if a company fails to submit Form CP204 within the stipulated period, Form CP204 submitted but fails to pay the tax instalment or under-estimated tax payable for a particular year of assessment.
Each offence may result in penalty ranging from RM200 to RM2,000 being charged by LHDN.
The following are the penalty provisions for such failures in complying with the income tax requirements for CP204:
Failure to Furnish Estimate of Tax Payable
Under Section 120(1)(f) of the Income Tax Act 1967 (ITA), any company which, without reasonable excuse fails to submit the estimate of tax payable for a year of assessment shall be guilty of an offence and upon conviction, be liable to a fine ranging from RM200 to RM2,000 or face imprisonment for a term not exceeding 6 months or both.
With effect from YA 2011, where no prosecution is instituted by the Director General and no direction is issued by the Director General under the Section 107C(8) of the ITA 1967; but there is a tax payable by that company for that year of assessment, such amount of tax payable will be subject to a penalty of 10%
Late Payment Penalty
Monthly payments should be remitted to the LHDN by the due dates, that is by the “10th” day of the following month. Failure to remit the instalments on a timely basis will result in an automatic penalty of 10% being imposed on the unpaid amount.
Difference Between The Estimate Submitted and Final Tax Payable
When the tax payable for a particular year of assessment exceeds the original or the revised estimate (if a revision is submitted) by an amount exceeding 30% of the tax payable, the difference will be subject to a penalty of 10%