Aspects of tax administration in Malaysia


Relevant to P6 (MYS)

This two-part article is relevant to candidates preparing for the P6 (MYS), Advanced Taxation exam. The article is based on the prevailing laws as at 31 March 2017. Candidates are presumed to have a working knowledge of the subject matter.

This article collates and discusses the provisions in the Income Tax Act 1967 (the Act) and the Real Property Gains Tax Act 1976 (RPGTA). While reading this article, candidates are expected to refer where necessary to the relevant provisions of the Act and RPGTA, as amended, and the relevant public rulings issued by the Inland Revenue Board.

This article is relevant to the section of the syllabus and study guide falling under items A7(b), B5 and B8. The areas covered are:

Part 1
A. Responsibilities as a taxpayer
B. Responsibilities as an employer
C. Rights of a taxpayer

Part 2
D. Powers of the director general (DG)
E. Liabilities of a director
F. Responsibilities as a payer/acquirer
G. Statutory time bar
H. Advance/private rulings
I. Tax audits and investigations

D. Powers of the director general (DG)

The DG's powers include due authority to:

  • call for a specific return and production of books
  • call for bank account statements
  • require full and free access to all lands, buildings, places, books, documents, objects, articles, materials, and things
  • require any person to provide information or particulars within a time specified, for the purposes of the Act and which may be in possession or control of that individual
  • prevent a person from leaving Malaysia – a certificate can be issued under s104 (the Act) and s22 (RPGTA) certificate if the DG is of the opinion that the person may leave Malaysia without paying taxes, sums and debts payable by him.

Note: The DG may issue a certificate to  the Commissioner of Police or Director of Immigration to prevent a person from leaving Malaysia. The DG must also serve notice personally or by registered post to the taxpayer/person. Alleged non-receipt of the notice by the person is no defence, and the taxpayer cannot sue if the certificate is issued lawfully.

E. Liabilities of a director

Compliance requirements
As a company is an unnatural person with no tangible/physical presence, the directors and the secretary of a company are jointly and severally responsible for doing all acts and things required to be done by the company. This includes the various compliance requirements such as furnishing of tax returns, information etc.

Personal liability
For a director who, directly or indirectly, holds at least 20% of the ordinary share capital of the company, there is a more onerous liability with regard to the company: they are jointly and severally liable to pay any tax (income tax or RPGT) or debt liable to be paid by that company. The aforementioned debt includes sums due and payable by the company as an employer and also in respect of withholding tax provisions. 

By extension, 'the person' on whom the s104/s22 certificate is issued may be an individual in his personal capacity or in his capacity as a director of a company.

Deemed interest on loan to a director
Another liability relating to a director who controls not less than 20% of the ordinary share capital pertains to loans or advances. Where a company makes a loan or advance to such a director from its internal funds, the company is deemed to have derived interest income, at the prevailing average commercial lending rate, from such loans or advances for that basis period. [Note: Refer to s140B(2) and (3) for the details relating to the calculations and treatment of such interest income.]

It is to be noted that the interest income thus deemed derived by the company is compulsorily treated, by virtue of s4B, as interest income of the company under s4(c) rather than as part of business income under s4(a). Also, note that this provision aims to impose tax on the company for making loans or advances to a director at low or no interest: there is no wish to treat it as a corresponding taxable benefit on the director. 

F. Responsibilities as a payer (the Act) or acquirer (RPGTA)

Payments to non-residents
If a resident, or a non-resident person carrying out a business in Malaysia, makes a payment of interest, a royalty, technical services, rent for the use of movable property, other income [under s4(f)] or contract payments to a non-resident, the payer is obliged to withhold tax at specified rates and pay over the sum to the DG within one month of paying or crediting the payment.

The penalty for non-compliance or late compliance is:

  • the payer has to bear the withholding tax and pay it over to the DG
  • there is also a penalty of 10% of the withholding for the late compliance, and
  • until the above amounts are paid, the payer will not be given a tax deduction for the payments made to the non-resident.

There is a right of appeal for the payer under s109H provided the withholding tax has been paid, the non-resident recipient has not appealed, and the payment in question has not been disallowed under s39 in arriving at the adjusted income of the payer.

Payments to an agent, dealer or distributor
If a company makes a payment to an agent, dealer or distributor, the company is required to prepare and complete a prescribed form (CP58) containing particulars of the recipients of payment (whether in cash or otherwise) and provide the information when called for by the DG. 

Acquirer of real property or shares in Malaysia
As an acquirer of a real property or real property company (RPC) shares, there is a duty to do the following within 60 days after the purchase date:  

  • to make a return in respect of the asset acquired, and
  • to withhold the entire cash consideration restricted to 3% of the purchase price and pay over to the DG

If the acquirer fails to retain the money, that amount plus a 10% penalty is payable from him to the Government.

If the consideration is not in cash (hence no monies to be retained) and both the acquirer and the disposer fail to furnish their RPGT return, the DG may make an assessment on the acquirer equal to the RPGT payable by the disposer.

This is onerous indeed for the acquirer. Therefore, due compliance in furnishing the return and retaining the money by the acquirer is of utmost importance.

G. Statutory time bar

Generally five years
The general time bar under the Act and RPGTA is five years after the end of the relevant year of assessment. The fact that queries have been raised or a tax audit has been conducted does not extend that five year period.

Illustration 6
ABC Sdn Bhd (ABC) closes its accounts annually to 31 December. ABC submitted the annual tax return for YA 2010 on 20 July 2011. In August 2014, the IRB conducted a tax audit on ABC and disallowed some expenses based on differing technical interpretation. An additional assessment dated 12 January 2016 was raised.

The year of assessment 2010 ends on 31 December 2010. The five years after 31 December 2010 runs from 1 January 2011 and ends on 31 December 2015. Therefore, the additional assessment for YA 2010 was time-barred. The tax audit in August 2014 was not an assessment, neither does it reset the five-year time bar to 2014.

Fraud, wilful default or negligence
The five-year time bar does not apply if it appears to the DG that there is any form of fraud, wilful default or negligence.  In this case, the DG may make an assessment 'at any time' for any year of assessment.

Fraud involves omission, false statement/entry in a return, false answers, false books/records, falsification of books/records, fraud, art and contrivance, all of which involves mens rea – ie intention.

Transfer pricing (TP) adjustments
For TP adjustments, however, the time bar is seven years, as provided for specifically in s91(5) of the Act.

The DG has three years from the end of the year in which he was notified of the death of the taxpayer. See Illustration 3 in Part 1 of this article.

Group relief
In s44A(9), in respect of group relief, the time bar is five years after the year during which the DG discovers that the loss relief ought not to have been deducted in arriving at the total income of the claimant company. The DG may raise an assessment or additional assessment on the claimant to make good any loss of tax. What is more, the DG may also penalise the surrendering company for giving incorrect information by issuing a notice in writing requiring the surrenderer to pay a penalty equal to the amount of tax undercharged on the claimant company.

Illustration 7
For YA 2010, a loss of RM200,000 was surrendered by Rugee Sdn Bhd (Rugee) to its fellow group company Untung Sdn Bhd (Untung). On 20 December 2015, a tax audit conducted on Rugee led to a revised tax loss of only RM50,000.

The DG is said to have discovered, on 20 December 2015, that the loss relief of RM150,000 (200,000 – 50,000) ought not have been deducted in arriving at the total income of Untung.

The DG has five years from 1 January 2016 – ie till 31 December 2020, to raise the additional assessment on Untung to collect tax on the RM150,000 loss over-claimed by Untung, and to require Rugee to pay a penalty equal to the tax undercharged on Untung.

H. Advance/private rulings

An advance ruling is a private ruling issued by the IRB on application by the taxpayer on the specific tax treatment to be accorded to the taxpayer. This is specifically provided for in s138B.

A taxpayer can apply for an advance ruling when they encounter some transactions or circumstances for which they would like some certainty in the tax treatment, going forward. The application is made in a prescribed form, a fee is charged by the IRB, and may apply for a specified period.

The DG reserves the right to withdraw the advance ruling.

The ruling also does not apply if:

  • the arrangement is materially different from that stated in the ruling
  • there was omission or misrepresentation, or
  • the assumption upon which the ruling was made subsequently proves to be incorrect, or
  • the stipulated conditions were not satisfied.

I. Tax audit and investigation

Under the self-assessment system, tax auditing (desk audit or field audit) is a primary activity to encourage voluntary compliance with tax laws. The 'visit' is pre-scheduled and due notice is given to the taxpayer to prepare and make available the relevant records and documents for examination by the IRB. Tax audits will normally cover the 'open' years – ie those assessments which are not time-barred.

Tax investigation, on the other hand, involves the surprise element: the 'raid' – ie a simultaneous searching of multiple premises of the taxpayer's activities and residence, for evidence that would otherwise not be disclosed. Tax investigation may unravel some element of fraud, wilful default or negligence which may render it criminal in nature. The period covered by a tax investigation may exceed the five years if there is evidence suggesting fraud, wilful default or negligence.

Candidates are encouraged to refer to the following IRB guidelines for more details to obtain a comprehensive understanding:

  • Tax Investigation Framework dated 1 October 2013, and
  • Tax Audit Framework dated 1 February 2015.   

Written by a member of the P6 (MYS) examining team