Tax Update: Tax Audit Framework

Updated: Sep 26


What is a Tax Audit?


Tax Audit is an investigation into the books of business and financial affairs of a taxpayer to see whether the correct amount of income should be reported and the correct amount of tax should be computed and paid in conformity with tax law and regulations. The two types of audits that IRBM performs audit review, namely desk audit and field audit.


The objective of Tax Audit:


The fundamental goal of a tax audit is to promote voluntary compliance with tax rules and. compliance rate. In this regard, the audit officer is obligated to guarantee that the correct income has been recorded and the appropriate tax has been paid in compliance with the applicable tax laws and regulations.

Sources: INLAND REVENUE BOARD OF MALAYSIA TAX AUDIT FRAMEWORK (Effective Date: 01 May 2022)


The following update of Tax Audit Frameworks has been released by the Inland Revenue Board of Malaysia (IRBM) to help taxpayers understand the most recent tax audit policy, which the IRBM adopted with effect from 1st May 2022 and clarifies, among other things, that no penalty will be imposed on audit findings related to technical adjustments:


1.Tax Audit Framework which replaces the Tax Audit Framework dated 15th December 2019


2.Tax Audit Framework Finance and Insurance which replaces the Tax Audit Framework Finance and Insurance dated 18th November 2020


3. Tax Audit Framework Petroleum, which replaces the Tax Audit Framework Petroleum dated 15th December 2019.





The main changes and updates made in Tax Audit Framework are in Item 10 – Offences and Penalties.


Item 10.1


According to Section 113(2) of the Income Tax Act of 1967 (ITA) and Section 52(2) of the Petroleum (Income Tax) Act of 1967, penalties up to the amount of the tax undercharged may be applied if any income is understated or omitted as a result of the audit result (PITA). Penalties under Section 113(2) of the ITA and 52(2) of the PITA, however, shall be assessed at the following rates as of the publication of the amended Tax Audit Framework:

Offence

Rate

1st Offence Penalty

15%

2nd Offence Penalty

30%

3rd Offence Penalty and Subsequently

45%


How to determine whether this is my 1st,2nd, or 3rd offence?


Item 10.3

The taxpayer’s record on the penalty that has been imposed under subsection 113(2) of the ITA/subsection 52(2) of the PITA from 1st January 2020 to 30th April 2022 is referenced in determining the tax penalty rate for the first offence and second offence. Any audit findings from 1st May 2022 involving the imposition of penalties under subsection 113(2) of the ITA/subsection 52(2) of the PITA shall be considered the first offence (15%) if the taxpayer has not already been penalized under subsection 113(2) of the ITA/subsection 52(2) of the PITA during the period from 1st January to 30th April 2022. On the other hand, any audit findings from 1st May 2022 involving the imposition of penalties under subsection 113(2) of the ITA/subsection 52(2) of the PITA shall be considered the second offence (30%) if the taxpayer already been penalized under the subsection 113(2) ITA/subsection 52(2) of the PITA during the period from 1st January 2020 to 30th April 2022.


NOTE: The first repeated offence is recognized from the date of the notice issued from 1st January 2020 onwards.


What if I am detected as a tax fraud?


Item 10.6

If tax fraud is present and the taxpayer is found to have intentionally filed false tax returns, a penalty under section 113(2) of the ITA/subsection 52(2) will be applied at a rate of 100% on the underpaid tax.


Can I make a voluntary disclosure?


Item 10.8

In circumstances of voluntary disclosure, the penalty rate under Section 113(2) of the ITA and Section 52(2) of the PITA is 15%. However, the penalty rate for such a voluntary disclosure is 10% if the taxpayer has already made one voluntary disclosure through the Revised Income Tax Return Form (ITRF) and then makes another one within 6 months of the ITRF’s date.


So, do not hide any information from the tax auditors. Or else have to pay penalties.



Reference:


KPMG: https://home.kpmg/my/en/home/insights/2022/05/tax-audit-framework-2022-finance-and-insurance-tax-audit-framework-2022-petroleum-tax-audit-framework-2022.html


EY: https://www.ey.com/en_my/tax-alerts/updated-tax-audit-frameworks


Roedl & Partner: https://www.roedl.com/insights/newsflash-asean/2022-02/malaysia-update-tax-audit-framework

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