At a glance: tax law enforcement in Malaysia

Enforcement

How does the tax authority verify compliance with the tax laws? Does this vary for different taxpayers or taxes?

Malaysia adopts a self-assessment system, where the taxpayers are responsible for computing their own tax payable and submitting their tax returns accordingly. The Inland Revenue Board (IRB) and the Royal Malaysian Customs Department (RMCD) have the power to conduct tax audits on taxpayers from time to time to verify their compliance with tax laws.

What is the typical procedure for the tax authority to review a tax return and how long does the review last? What limitation periods apply?

Tax audits, conventionally, follow a process of desk audits, conducted from the tax authority’s office, followed by field audits at the taxpayer’s premises. There will be numerous exchanges of correspondence during a tax audit where the tax authority will request for relevant documents and explanations on issues raised. Taxpayers, generally, have 14 days to respond, but they can request an extension on reasonable grounds. After the audits, the tax authority will issue a letter to the taxpayer detailing its final audit findings.

The duration of a tax audit depends on the extent of the tax audit conducted and the cooperation of the taxpayer.

Under the ITA, the limitation period for the IRB to conduct an audit and raise an assessment or additional assessment is five years from the expiration of the relevant year of assessment (section 91); under the Customs Acts 1967 (the Customs Act), the RMCD has six years to raise a bill of demand from the date on which customs duty, surcharge, penalty, fee or other money was payable or deficient customs duty, surcharge, penalty, fee or other money was paid or the refund was made, as the case may be (section 17). However, under the ITA, the limitation period does not apply where there is fraud, wilful default, or negligence. Whereas, under the Customs Act, the limitation period does not apply in cases where the underpayment is due to fraud or default.

What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?

The Director General of Inland Revenue (DGIR) and the Director General of Customs and Excise (DGC) have the authority to request taxpayers to provide various particulars and records related to relevant taxes. The DGIR can request, among others, income and expenditure statements and banking accounts as well as particulars relating to assets and tax liabilities (sections 27 and 28 of the Real Property Gains Tax Act 1976; sections 78, 79, 80, 82 and 82A of the ITA). The DGC can request records related to, among others, taxable goods and services, import and export transactions, payments, accounting, sales, business contracts and inventory (section 110A of the Customs Act; section 24 of the Sales Tax Act 2018 and the Service Tax Act 2018).

The tax authorities also have the power to require taxpayers to give orally all such information or particulars as may be demanded by the tax authorities (section 81 of the ITA; section 116A of the Customs Act).

Under sections 82 and 82A of the ITA, a taxpayer only has a duty to keep sufficient records for a period of seven years from the end of the year of assessment, or where the taxpayer has not furnished a return for a year of assessment, for a period of seven years after the end of the year in which the return is furnished. On the other hand, under section 100A of the Customs Act, a taxpayer must keep the records for a period of seven years from the latest date to which the record relates. In this regard, tax authorities may only request particulars or records up to the period that the taxpayer is obligated to keep them.

Further, tax audits must be specific. Tax authorities cannot exercise their power to call for information to undertake fishing expeditions. (Genting Malaysia Bhd v Pesuruhjaya Perlindungan Data Peribadi & Ors [2022] 11 MLJ 898; Bar Malaysia v Ketua Pengarah Hasil Dalam Negeri [2018] 9 MLJ 557.)

What actions may the tax authority take if the taxpayer does not provide the required information?

If a taxpayer does not provide the information as required by the tax authorities under the law, the taxpayer may be guilty of an offence, on conviction of which shall be liable to:

• a fine of 200 ringgit to 2,000 ringgit or imprisonment of up to six months or both pursuant to sections 81 and 120 of the ITA; or
• a fine of up to 500,000 ringgit or imprisonment of up to seven years or both pursuant to section 133 of the Customs Act, or a fine of up to 1,000 ringgit or imprisonment of up to five years or both pursuant to section 134 of the Customs Act.

How may the tax authority collect overdue tax payments following a tax review?

Generally, for direct tax, the IRB will issue a notice of assessment or additional assessment to the taxpayer, and for indirect tax, the RMCD will issue a bill of demand to collect unpaid taxes. The unpaid taxes will be due and payable upon the service of the notice or demand (section 103 of the ITA; section 17 of the Customs Act).

If the taxpayer failed to make any payment for the taxes that is due and payable, the Malaysian government may recover such taxes by civil proceedings as a debt due to the government (section 106 of the ITA; section 22B of the Customs Act).

The tax authorities may also prevent a taxpayer from leaving Malaysia by issuing a notice to the Director General of Immigration. The Director General of Immigration may then remove or retain any travel documents of the taxpayer (section 104 of the ITA; section 17A of the Customs Act). Further, under section 17 of the Customs Act, the Director General of Customs and Excise may detain, seize, and sell any goods under customs control belonging to the taxpayer to pay the taxes due and payable.

In what circumstances may the tax authority impose penalties?

There are many circumstances where the tax authority may impose penalties.

Under the ITA, the IRB may impose penalties for, among others:

• failure to furnish income tax returns or give notice of chargeability to tax (section 112);
• furnishing an incorrect return by omitting or understating income or giving incorrect information that affects the tax liability of the taxpayer (section 113);
• failure to furnish contemporaneous transfer pricing documentation (section 113B);
• wilfully and with intent to evade or assist another person to evade tax (section 114); and
• distribution of assets by the executor or liquidator without making provision for the payment in full of any tax that he or she knows or might reasonably expect to be payable (sections 74 and 75).

Under the Customs Act, the RMCD may impose penalties for, among others:

• failure to make a declaration of dutiable goods imported or exported, making incorrect declarations and falsifying documents (section 133);
• refusing to answer questions or giving false information (section 134);
• smuggling offences, evasion of duty and fraud (section 135);
• offences relating to data stored in a computer (section 135A);
• offence relating to drawback claims (section 135B);
• offence relating to refund claims (section 135C);
• assaulting or obstructing officers of customs and rescuing goods (section 136); and
• offering or receiving bribes (section 137).

Can criminal consequences arise as a result of tax non-compliance? Are these different for different types of taxpayers?

Failure to comply with tax obligations can result in criminal consequences. These are specifically set out in the respective tax legislation.

Offences under the ITA are prescribed under Part VIII, sections 112 to 126 of the ITA. Failure to furnish tax returns and the submission of incorrect tax returns (section 113) are offences where the DGIR commonly imposes a civil penalty in lieu of prosecution (sections 112 and 113). Other offences include wilful evasion (eg, by giving false statements or information) and obstruction of officers. All offences could result in fines and imprisonment terms upon conviction.

Offences under the Customs Act are prescribed under Part XIV, sections 133 to 141. Offences include the making of incorrect declarations and falsification of documents, smuggling, and the offering or receiving of bribes. Similarly, all offences could result in fines and imprisonment terms upon conviction.

What is the recent enforcement record of the authorities?

Both the IRB and the RMCD are active in conducting audits and investigations on taxpayers. This is to ensure compliance given that the Malaysian tax system operates on a self-assessment basis. Failures to make payment of disputes taxes or duties upon receipt of a notice of assessment from the IRB or a bill of demand from the RMCD will result in civil recovery action by the respective tax authorities and potentially a travel restriction on the taxpayer or its directors.