1.0 Introduction - the new era

Malaysia began implementing a self-assessment system on companies in 2001. Other taxpayers such as employees, sole proprietors, partnerships and trusts will join in, in 2004(Income Tax (Amendment) Act 2002). Under self assessment regime, taxpayers have the legal burdens of estimating their own income tax payable for the current year of assessment, informing the tax authorities of the estimate, paying the tax monthly, and submitting a tax return within 6 months of the end of their financial accounts.

Notices of assessment (Form J) will not be issued to taxpayers, under self-assessment. The final tax payable (the difference between the actual income tax payable and the estimate) must be paid, together with the submission of tax return, 6 months from the end of the accounting period. No tax computation, receipts or other documents are to be submitted to the tax authorities except the tax return. All computations, supporting schedules, relevant receipts etc, are now maintained by the company, and may be subject to tax audit in future years.

2.0 New role of the tax authorities

The tax authorities are released from the responsibilities of computing the estimates of tax, examining every tax computation submitted (for errors) and the issuing notices of assessment, however, they are now given new responsibilities to educate taxpayers, encourage voluntary tax compliance, widen the tax net, and lastly tighten up on tax compliance through tax audit and tax investigations.

The tax authorities will carry out an external tax audit at the taxpayer's offices at regular intervals. The primary function of the tax audit is to ensure that taxpayers are preparing their tax computations in accordance with the tax laws and Public Rulings issued. The amount of income tax reported must be in line with the tax activity, substantiated by primary evidence (receipts, vouchers, invoices, credit notes) and secondary evidence (accounting books, minutes and statement from banks, creditors). There must be a full disclosure of income. Any omission of income due to human error, in completing records will then be communicated to the taxpayer, resulting in an additional assessment being issued. Penalties may or may not be imposed depending on the merits of each circumstance and the adequacy of explanations made by the taxpayer.

Tax audit may detect tax evasion. Tax evasion is the blatant act of a taxpayer understating his income or overstating his expenses by illegal means (such as false invoices, receipts or keeping two set of accounts) with the intention of defrauding the tax authorities. When the tax audit personnel discover fraud or irregularities, they will refer the case to the tax investigation team. The tax lost coupled with a monetary penalty (up to 300%) will be imposed on the taxpayer. In serious cases, the taxpayer can also be prosecuted in court and imprisoned if he is found guilty by the court.

As well as tax audit, education the public and conducting street surveys are the new roles assumed by the tax authorities under self-assessment. Self-assessment allows the tax authorities to have additional human resources to educate the taxpayer on the importance of tax submissions. Seminars and discussions have been conducted, service counters have been set up at all branches, and more public rulings are issued to guide taxpayers on contentious technical issues. All these efforts are hoping to encourage voluntary tax compliance. Street surveys are crucial in creating a fair system of taxation, deterring under reporting activities and preventing the black economy.

3.0 The distinction of tax audit and tax investigations

Tax Audit must be clearly separated from tax investigation. Under tax audit, the tax authorities' personnel will advise the taxpayers of the date and estimate of the duration of the audit. The scope of audit will also be defined so that the taxpayer can adequately prepare the documentation required.

Public ruling 7/2000 spells out the responsibility of the taxpayer to provide reasonable facilities and assistance to the tax personnel while they are carrying on the tax adult. If they fail to do this the taxpayer may be liable to a monetary penalty of RM1,000 to RM10,000 and imprisonment for one year or both. The number of years of assessment subject to tax audit cannot exceed 6 years of assessment.

Tax investigation is conducted by surprise. It is also known as a back duty case. The tax authority's personnel will arrive at the taxpayer's premises and take possession of the required documents, books for investigation purposes. If required, additional notice may be served on taxpayers, creditors, and bankers of the taxpayer to obtain new information in order to formulate the best judgment of the tax affairs of the taxpayer. Additional assessments will be issued to recoup the tax lost, coupled with penalties, which can be up to 300%. In addition, the tax authorities are empowered under the Act to revise the tax computations, taking into account tax lost beyond the 6 years of investigation notwithstanding that the taxpayer may not have records for this period, if fraud, willful default or negligence is established. In serious cases, or for repeated offenders, the taxpayer may be prosecuted and if he is found guilty, imprisonment up to 3 years can be imposed.

4.0 Remedies for the taxpayer

A taxpayer who receives the additional assessments (which may incorporate the penalties) may appeal to the tax authorities within 30 days from the date of notice. The tax payable nonetheless has to be paid within 30 days from the date of the receipt of the assessment, notwithstanding the appeal. Failing which, a late payment penalty of 10% will be imposed, after the expiration of 30 days, and additional 5%, will be imposed after the expiration of 60 days from the date of additional assessment.

Taxpayers are required to provide explanations, with the required documentation, to the tax authorities to substantiate the appeal .The tax authorities will then review the appeal and try their best to reach an agreement with the taxpayer. The assessment will then be confirmed. If no agreement can be reached, among the parties or upon expiration of 12 months from the date of appeal, the tax authorities are under the legal obligation to remit the case to the special commissioners (SC) for decision.

The onus of proof is placed on the taxpayer to demonstrate or convince the SC that the assessment is excessive. The SC will decide on the question of fact and law. Any dissatisfied party can further appeal to the High Court and the Court of Appeal on the question of law or mixed fact and law. With the amendment to the Court of Judicature Act 1964, no further appeal is allowed to Federal Court.

5.0 Conclusion

The self-assessment regime is a new regime for taxpayers, tax professionals and also the tax authorities. It is therefore important for taxpayers to familiarise themselves with these new laws in order to avoid penalties and also to mitigate the tax in the event of a tax audit or a tax investigation.