Tax Controversy 2019

Last Updated June 06, 2019

Malaysia

Law and Practice

Authors



Wong & Partners is a member firm of Baker McKenzie International, with 78 offices in 46 countries, that houses the largest number of dedicated tax practitioners among Malaysian law firms and offers a comprehensive range of tax expertise, making it a one-stop shop tax powerhouse. The firm is uniquely positioned in the market to provide clients with specialised tax advice on local and cross-border matters. It prides itself on providing clients with sound technical analysis, strong dispute resolution and litigation skills, and the ability to implement and defend the tax structures that it sets up and advises on. The team concentrates its tax practice in the following areas: local and international tax planning; global structuring; transactional tax; tax controversies (tax audits, raids, investigations and litigation); indirect tax, trade and diagnostics; transfer pricing (benchmarking, valuation, audit and defence); supply chain; employment-related taxes; and private banking/wealth management.

Malaysia practises a self-assessment regime, so tax controversies are generally the result of tax audits or investigations.

Tax Audits

There are two types of tax audits.

  • Desk audit – prior to commencing a desk audit, the Malaysian Inland Revenue Board (IRB) will issue a letter to the taxpayer notifying it of the desk audit, and listing the documents and information that are to be provided by the taxpayer. The deadline to comply is typically seven to 14 days. The taxpayer may request for an extension by writing to the IRB before the expiry of the deadline. The taxpayer may send photocopies of the requested documents to the IRB or provide electronic copies on a CD.
  • Field audit – prior to commencing a field audit, the IRB will issue a letter to inform the taxpayer of a potential visit to its premises.

A desk audit may be followed by a field audit if the IRB deems it necessary.

Tax Investigations

Alternatively, the IRB may conduct a tax investigation. Typically, this will entail a dawn raid on a taxpayer's place of business without prior notice. Upon gaining entry into the premises, the IRB may seize documents and retrieve information from any electronic media equipment. During a tax investigation, the IRB may also interview relevant persons (eg, the C-suite or senior managers of the company).

Issuance of Notice of Assessment

Following a tax audit or investigation, the IRB will issue an Audit Finding Letter or Investigation Finding Letter. A taxpayer may respond to an unfavourable finding by rebutting the IRB's allegations or it may negotiate with the IRB to settle the matter. This may be carried out by way of detailed correspondence or meetings with IRB officers. Depending on the outcome of these discussions, the IRB may proceed to issue a notice of assessment that sets out the amount of additional tax adjustments and penalties. The taxpayer may appeal against the notice of assessment.

Tax controversies may arise for a variety of reasons. For example, individuals with unexplained extraordinary wealth have come under increasing scrutiny. In the case of companies, tax controversies may arise due to transfer-pricing conflicts, tax-avoidance issues or perceived non-compliance with the law.

Tax managers of any organisation should assume that an audit or investigation will happen at some point. The IRB may find fault with datasets, financial figures or documents even when the taxpayer has prima facie complied with the law. As such, a prudent strategy to adopt is not merely to comply with the IRB's requirements, but rather improve defensibility in the event of litigation. Risk mitigation should take place even before preparing and filing the tax return. Taxpayers are required to maintain records, but it should also be borne in mind that these records will form the basis of the taxpayer's case in a controversy. As such, taxpayers should consider whether their tax policies are justifiable and whether their records will stand up to scrutiny in the event of litigation. Taxpayers may consult tax lawyers and other specialists, who are able to review their policies and records to identify areas of weakness and advise on how to address them.

Malaysia is a member of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and as such is committed to the implementation of the four BEPS minimum standards. The IRB has been taking a more vigilant stance on permanent establishment and transfer-pricing issues, and these issues have become key areas of focus in tax audits and investigations.

After a notice of assessment is issued, the taxpayer is required to pay the tax within 30 days. This is the case whether or not the taxpayer appeals against the assessment.

If the taxpayer fails to pay the tax, that in itself would not bar the taxpayer from appealing against the assessment, but the IRB may take further actions against the taxpayer. In particular, the IRB may:

  • impose further penalties in the form of late payment penalties;
  • commence a civil suit under Section 106 of the Income Tax Act, 1967 (ITA) to recover the tax payable, including any applicable penalties; and/or
  • cause travel bans to be imposed on individuals liable for the tax payable.

The taxpayer may seek a stay of enforcement if it files a judicial review application. If a stay of enforcement is granted, the taxpayer will not be required to pay the disputed taxes until the determination of the case.

A taxpayer may become the target of a tax audit or investigation for a variety of reasons.

Individuals

An individual with unexplained extraordinary wealth may be particularly at risk of being subject to a tax audit or investigation. The IRB may seek information by looking at social media and determining whether an individual's lifestyle is comparable with his or her declared income. The IRB may focus on personal aspects of a taxpayer, such as the number of cars or properties owned by the individual, or whether the taxpayer pays private school fees for his or her children.

Companies

A company may be particularly at risk of being subject to a tax audit or investigation if there is an unusual variance in the company's taxable income in any year of assessment compared to other years of assessment. There may also be increased scrutiny of a company if it indicates in its tax filing that it has a substantial related party transaction but did not prepare transfer pricing documentation.

A tax audit may be initiated at any time after the filing of a taxpayer's tax return. Under the Tax Audit Framework 2018, the IRB is expected to complete an audit within three months. In practice, however, the IRB seldom adheres to this timeline. It is often the case that the IRB does not issue a letter to notify the taxpayer of the completion of an audit without further adjustments, resulting in uncertainty for the taxpayer. Additionally, there have been instances where the IRB requested additional information/documents or issued a notice of assessment more than a year after conducting an audit.

Under Section 91 of the ITA, the limitation period for raising a notice of assessment is generally five years from the relevant year of assessment. The limitation period for making transfer pricing-related adjustments is seven years from the relevant year of assessment. The initiation of an audit does not suspend the limitation period. There is no time limit for adjustments made by the IRB if there is fraud, wilful default or negligence on the part of the taxpayer.

Desk Audits

Documents submitted by taxpayers to the IRB are typically reviewed at the IRB's premises.

Field Audits and Investigations

A field audit typically takes place over three to five days at the taxpayer's premises. In the case of an investigation, officers of the IRB may raid the taxpayer's premises without prior notice. During a field audit or an investigation, officers of the IRB will review physical or electronic documents on-site and may also take physical or electronic copies of the documents off-site. Interviews may be conducted with the taxpayer's employees.

During a tax audit or investigation, the IRB will typically examine the taxpayer's records to identify irregularities. Common areas of focus include related party transactions and withholding tax issues relating to royalty payments.

Malaysia has adopted the Common Reporting Standard (CRS) developed by the Organisation for Economic Co-operation and Development (OECD) to implement the Automatic Exchange of Information. Under the CRS, the IRB automatically receives information on Malaysian residents' financial accounts in other participating jurisdictions on an annual basis. The IRB received financial accounts information from other tax authorities for the first time in late 2018. It remains to be seen if this will contribute to an increase in tax audits, but it is likely that the IRB will scrutinise the information to identify taxpayers with higher audit risks.

During a tax audit or investigation, the taxpayer should co-operate with the IRB officers. The IRB may examine any of the taxpayer's records and is not obliged to notify the taxpayer of its intended areas of focus in the audit or investigation.

The obstruction of an audit officer is a serious offence. If the IRB requests additional information, the taxpayer should respond in a timely manner.

Nonetheless, taxpayers should be aware of their rights to withhold documents that are protected by legal privilege.

It would be prudent for the taxpayer to consider engaging a tax lawyer to handle the audit or investigation.

A taxpayer can object to a notice of assessment only by appealing to the Special Commissioners of Income Tax (Special Commissioners) or by applying for judicial review. See 4 Judicial Litigation: First Instance.

As discussed below in respect of appeal to the Special Commissioners.

A taxpayer may challenge a notice of assessment through two routes.

Special Commissioners

A taxpayer has the right to appeal to the Special Commissioners under Section 99 of the ITA. A taxpayer may initiate such an appeal by filing a notice of appeal (Form Q) with the director general of the IRB (DGIR) no later than 30 days after the service of the notice of assessment. After receiving the notice of appeal, the DGIR has twelve months to review the assessment. Thereafter, the DGIR is required to forward the notice of appeal to the Special Commissioners if the matter is unresolved.

Judicial Review

Alternatively, a taxpayer may apply for judicial review by filing an application for leave with the High Court as soon as practicable, or, in any event, no later than three months from when the grounds for judicial review arose. However, the High Court will only grant leave for judicial review in exceptional circumstances, or where there is a clear instance of illegality, irrationality or procedural impropriety by the IRB.

Special Commissioners

Once the DGIR has forwarded the notice of appeal to the Special Commissioners, the taxpayer will be notified in writing. The Special Commissioners will issue a letter to the taxpayer stating that the appeal has been received and will provide additional information about the appeal. During the first mention, the Special Commissioners may fix the case management or hearing dates, and provide directions on the preparation and filing of documents such as witness statements. Witnesses will be examined, cross-examined by opposing counsels and then re-examined by their own counsels during the hearing of the appeal.

Judicial Review

After the filing of an application for leave for judicial review, an ex parte hearing will take place before the High Court. The Attorney General's Chambers may contest the leave application. If leave is granted, the matter will proceed to the next stage; ie, the judicial review hearing before the High Court. The High Court will provide directions to the taxpayer and the IRB on the filing of further affidavits and written submissions prior to the hearing date.

Appeal to the Special Commissioners

The Special Commissioners will provide directions to parties to file a bundle of agreed documents. Each party may also file a separate bundle of documents. Witness statements may be filed prior to the hearing. During the hearing, witnesses will be examined, cross-examined by opposing counsels and then re-examined by their own counsels.

Judicial Review

A judicial review application is supported by the filing of affidavits. The affidavits, along with exhibited documents, should contain all information relevant to the appeal. No witnesses will be called to give oral evidence. The judicial review application will be decided based on the evidence contained in the affidavits.

Generally, the burden of proof is on the taxpayer. The standard of proof in such cases is based on the balance of probabilities. However, if a criminal proceeding is initiated in respect of a tax offence, the burden of proof will be on the prosecution and the standard of proof will be proof beyond a reasonable doubt.

Where an assessment is contested, the taxpayer must still pay the tax within the stipulated time, unless the taxpayer applies for judicial review and the High Court orders a stay on enforcement pending the determination of the judicial review. However, the granting of leave for judicial review is discretionary, whereas the taxpayer may appeal to the Special Commissioners as of right. Therefore, even if a taxpayer has filed a judicial review application, the taxpayer should file a notice of appeal to the Special Commissioners before the 30-day deadline expires to preserve its rights to appeal should the judicial review application fail.

Ideally, taxpayers should provide all information/documents in support of their case to the IRB during the audit or investigation stage. If the IRB neglects to examine the information/documents at the material time, this may present a strategic advantage to the taxpayer during trial, especially if the IRB adopts inconsistent positions.

Jurisprudence from other jurisdictions and international guidelines may be persuasive, but is generally not binding on the Malaysian courts.

Special Commissioners

An aggrieved party may appeal to the High Court against a decision of the Special Commissioners and may appeal further to the Court of Appeal. Generally, no further right of appeal lies to the Federal Court.

Judicial Review

An aggrieved party may appeal to the Court of Appeal against a decision of the High Court and subsequently to the Federal Court. The appellant must first obtain leave to appeal to the Federal Court prior to the matter being heard by the Federal Court on its merits.

Special Commissioners

An appeal from the Special Commissioners' decision is made by way of requesting the Special Commissioners to state a case for the opinion of the High Court on a question of law. This requisition must be made in writing and sent to the clerk of the Special Commissioners within 21 days after the service on the aggrieved party of the deciding order. No fresh evidence can be introduced before the High Court and the High Court will decide only on questions of law.

Judicial Review

An appeal from the High Court to the Court of Appeal is made by way of filing a notice of appeal with the Court of Appeal within a month of the decision of the High Court. Within eight weeks of filing the notice of appeal, the taxpayer must file cause papers including the memorandum of appeal and the record of appeal. The parties will make oral submissions during the hearing, after which the Court of Appeal will decide on the appeal.

Appeals to the Special Commissioners are decided by three commissioners, at least one of whom must be a person with judicial or other legal experience. Appeals to the High Court are decided by a single judge. Appeals to the Court of Appeal and the Federal Court are usually decided by three or a greater uneven number of judges.

There is no formal ADR process available for tax disputes in Malaysia. However, the DGIR has a statutory period of twelve months from the date of the filing of a notice of appeal to consider the appeal. Typically the IRB's Dispute Resolution Department will undertake a review of the notice of assessment, which may entail the Dispute Resolution Department reaching out to the taxpayer to discuss the matter in further detail. The Dispute Resolution Department may also request for additional information/documents to aid its review. Through this process, both parties may explore the possibility of reaching an amicable settlement.

As discussed in 6.1 Mechanisms for Tax-related ADR in this Jurisdiction, there is no formal ADR mechanism. However, parties may negotiate and arrive at a settlement at any time before the Special Commissioner gives its decision. Settlement positions are typically driven by parties agreeing and conceding on points of law, resulting in a lower taxable income.

As discussed in 6.1 Mechanisms for Tax-related ADR in this Jurisdiction and 6.2 Settlement of Tax Disputes by Means of ADR, parties may attempt to arrive at a settlement, resulting in lower taxes, interest, or penalties.

Advance Rulings

A taxpayer may apply to the IRB to make an advance ruling on the application of any provision of the ITA to the proposed arrangement of the taxpayer. An advance ruling is binding on the IRB, but only in relation to the specified taxpayer, arrangement and year of assessment. The IRB may withdraw an advance ruling at any time by giving written notice to the taxpayer. As such, an advance ruling may not necessarily provide absolute certainty.

Advanced Pricing Arrangements

A taxpayer may apply to the IRB to enter into a binding advance pricing arrangement, which will determine its transfer-pricing methodology over a specified period under specified terms and conditions.

As discussed in 6.1 Mechanisms for Tax-related ADR in this Jurisdiction, there is no formal ADR mechanism in Malaysia. However, taxpayers may engage in negotiations with the IRB to settle the matter. The IRB may request for further information/documents relating to the relevant related-party transactions (for example, detailed information on the comparables used by the taxpayer in its benchmarking study).

Upon issuing a notice of assessment, the IRB may impose a penalty in addition to making tax adjustments. The IRB may also refer the matter to the public prosecutor.

If an offence has been committed, the taxpayer may be charged, and if convicted, subjected to criminal sanctions (for example, a fine and/or imprisonment). In practice, the IRB usually opts to impose administrative fines rather than pursue criminal charges.

The IRB may make a referral for the prosecution of tax offences, especially where the infringement is egregious and there is a clear intent to defraud on the part of the taxpayer. In practice, criminal referrals are uncommon and are typically reserved for high-profile cases or made ancillary to the prosecution of non tax-related offences.

A criminal tax case is heard at first instance by the Sessions Court or the High Court. In contrast, an appeal against a tax assessment is heard at first instance by the Special Commissioners (or the High Court in the case of a judicial review).

Where the quantum of the additional tax payable is large, there have been instances where the IRB agreed to a reduction of the penalty if the additional tax is paid upfront (and not in instalments).

Where a taxpayer has been charged, the prosecution may subsequently withdraw the charges. This may happen following a settlement between the taxpayer and the IRB.

Where a conviction has been rendered by the Sessions Court, the taxpayer may appeal to the High Court. Where a conviction has been rendered or maintained by the High Court, the taxpayer may appeal to the Court of Appeal. Where a conviction has been maintained by the Court of Appeal, the taxpayer may appeal to the Federal Court.

In Malaysia, transfer pricing and anti-avoidance rules operate to affect the tax consequences of a transaction, but not the validity of the transaction itself. As such, even if the IRB imposes additional taxes or penalties in respect of a transaction, the taxpayer may proceed with the transaction (provided that it is lawful).

Additional assessments that result in a double tax situation are commonly challenged through domestic litigation. Taxpayers may also wish to explore if the mutual agreement procedure is a worthwhile option for resolving their cross-border and treaty-related tax disputes.

The Malaysian courts have held that Section 132 of the ITA provides that the terms of a double taxation agreement has priority over the ITA. As such, the IRB is unlikely to challenge the terms of a treaty that is relied on by a taxpayer. However, in the event that there is a series of transactions across multiple jurisdictions, it is not uncommon for the IRB to apply general anti-avoidance rules to disregard certain transactions, resulting in a net tax payable in Malaysia.

Many of Malaysia's double taxation agreements require Malaysia to make a corresponding adjustment to the profits of a Malaysian entity following an adjustment made by another jurisdiction to the profits of an associated entity therein. Likewise, if an adjustment is made on a Malaysian taxpayer, corresponding adjustments should be made in the other jurisdiction. However, in practice, it does not appear that the IRB in Malaysia has been adhering to making such a corresponding adjustment. Nevertheless, given the IRB's increasing focus on transfer-pricing issues and the increase in tax transparency initiatives globally, such as the exchange of information between tax authorities from different jurisdictions, such corresponding adjustments may occur in the near future.

A taxpayer may apply for an advance pricing arrangement (APA) with the IRB to determine in advance the transfer-pricing methodology for specified transactions over a specified period. The taxpayer must first attend a pre-filing meeting with the IRB to discuss the suitability of an application. After the pre-filing meeting, the taxpayer may submit the APA application. If the taxpayer and the IRB are able to agree on terms and conditions, an APA can be concluded. The taxpayer will be required to file an APA Annual Compliance Report for each year of assessment covered by the APA. Successful applications for APAs are still uncommon in Malaysia.

See 1.4 Efforts to Combat Tax Avoidance. Permanent establishment and transfer pricing issues have become key areas of focus for the IRB and are increasingly the subject of tax controversies. Other common issues pertaining to cross-border transactions include withholding taxes, as well as digital economy-related issues.

Special Commissioners

The Special Commissioners do not have the power to make any order as to the payment of costs. The only exception is where the appeal is vexatious or frivolous, in which case the taxpayer may be ordered to pay a sum not exceeding RM5,000 to the Special Commissioners.

Judicial Review

The High Court typically makes an order as to the payment of costs amounting to between RM10,000 and RM15,000 in favour of the successful party.

Special Commissioners

There is no fee required to initiate an appeal to the Special Commissioners.

Judicial Review

There are several court fees that may be applicable, such as filing fees. The filing fees will usually amount to RM1,500. Other fees include fees for the filing and extraction of the court order, which will usually amount to RM500. This is subject to change from time to time.

The taxpayer cannot request for an indemnity from the IRB.

As discussed in 6.1 Mechanisms for Tax-related ADR in this Jurisdiction, there is no formal ADR mechanism.

Currently, no official statistics are available.

Statistics regarding tax court cases have not been published since 2015.

Statistics regarding tax court cases have not been published since 2015.

Tax controversies have been on the rise and are expected to increase in Malaysia, with transfer pricing, compliance with tax incentives, withholding tax issues and permanent establishment issues in particular becoming key areas of focus in audits and investigations. As such, taxpayers should consider the following strategic guidelines in order to handle tax controversies.

Before an Audit or Investigation

Taxpayers may wish to consider undertaking a review of their policies and documentation even before they are targeted for an audit or investigation, so as to improve their defensibility in the event of an audit or investigation. However, a taxpayer may wish to be prudent in ensuring that findings of a pre-audit assessment are subject to privilege.

During an Audit or Investigation

It would be advisable to involve a tax lawyer as early as possible in the audit or investigation, so that taxpayers can be advised of their rights and avoid potential litigation pitfalls. During an audit or investigation, taxpayers should co-operate with the IRB but remain firm in defending their case. Although the IRB has wide investigation powers, taxpayers should be aware of their rights (for example, privileged documents may be withheld). This means that although taxpayers ought to avoid being confrontational, it would be equally advisable to avoid being pliant or deferential to the IRB. Where any relevant documentation was not produced prior to the audit or investigation (eg, an expert's report), taxpayers should produce such documentation for the IRB before the conclusion of the audit or investigation. Lastly, taxpayers should retain records of all correspondence with the IRB and produce minutes of any meetings with the IRB, as these may become relevant in the event of litigation.

After an Audit or Investigation

Preferably, taxpayers should maintain a consistent position during the audit or investigation and thereafter; it may be necessary to justify any variations. Taxpayers may reach a settlement with the IRB at any time. However, taxpayers should not settle with the IRB if they disagree with the grounds of the settlement, as any agreed grounds in a settlement may be used against the taxpayer in future tax controversies. Additionally, whilst taxpayers may find it advantageous to settle with the IRB, they should also preserve their rights to appeal pending the resolution of negotiations. It is crucial for taxpayers to observe deadlines for the filing of appeals to the Special Commissioners of Income Tax or of applications for judicial review. Where the IRB issues a notice of assessment that is time-barred, taxpayers should raise objections on that basis, which would put the IRB on a defensive footing and require the IRB to particularise reasons for lifting the time bar. Nevertheless, it is worthwhile highlighting that the IRB typically ignores a time bar and would rarely exercise restraint from issuing assessments in the face of taxpayers' objections.

Wong & Partners, member firm of Baker McKenzie International

Level 21, The Gardens South Tower
Mid Valley City
Lingkaran Syed Putra
Kuala Lumpur 59200
Malaysia

+603 2298 7888

+603 2282 2669

adeline.wong@wongpartners.com www.wongpartners.com
Author Business Card

Trends and Developments


Introduction

"The hardest thing in the world to understand is the income tax."

Most would agree. Some would go further to say "all taxes," but few would outright disagree with Albert Einstein, who expressed the above sentiment. Whilst income tax is far from the hardest subject to understand, it is certainly fair to say that the quickly evolving Malaysian tax landscape represents a challenge for individuals and companies.

The sands are indeed shifting, and there are a few emerging trends and new developments in Malaysian tax disputes and controversies. We have identified four such areas, namely:

  • an increase in audits and investigation activities;
  • an increase in transfer-pricing disputes;
  • greater scrutiny of the digital economy; and
  • greater scrutiny of individual wealth.

In the current tax climate, taxpayers should be aware that mere compliance with the law may be insufficient to protect them from tax audits and challenges.

Audits and Investigations

During the years 2014 to 2018, we observed a significant rise in the number of tax audits and investigations by the Inland Revenue Board of Malaysia (IRB). Furthermore, there was widespread media coverage of the IRB's scrutiny of several high-profile individuals and companies, which led to large tax adjustments. It is particularly concerning that the IRB was at times perceived to be prone to raising assessments and imposing penalties after completion of an audit, regardless of the accepted tax principles. It is widely known that the IRB has collection targets, resulting in concerns that the IRB is driven principally by these targets. 

In the second half of 2018, there was a shift in the focus of media coverage from high-profile assessments to the Special Voluntary Disclosure Programme (SVDP). This is not to say that there has been a drop in the level of tax audit activity, but the approach taken by the IRB has been more reasonable and conciliatory. This is a welcome development. Given that the new Pakatan Harapan government has signalled its intention to adhere to the rule of law, the IRB is expected to focus on genuine technical disagreements and not be put under pressure to collect a predetermined amount of tax annually.

Transfer Pricing

In our experience, tax audits have focused on key areas where the IRB perceives the potential to collect more taxes. We expect one of these key areas to be transfer pricing.

The base erosion and profit shifting (BEPS) initiative promulgated by the Organisation for Economic Co-operation and Development (OECD) has been breathtaking in its ambition and scale. Malaysia is a member of the Inclusive Framework on BEPS and is committed to ensuring that its tax laws are aligned with the four BEPS minimum standards, including transfer-pricing documentation and Country-by-Country (CbC) reporting, as well as other international standards. The IRB has updated its transfer-pricing guidelines in response to BEPS Actions 8 to 10, and amendments to the transfer-pricing laws have recently been made. Over time, the IRB has become increasingly adept at identifying tax-planning strategies undertaken by multinational enterprises (MNEs) in Malaysia, which may be inconsistent with international tax and transfer-pricing standards.

Malaysia has introduced the Income Tax (Country-by-Country reporting) Rules 2016 (CbC Rules), which took effect on 1 January 2017. Generally, the CbC Rules apply to MNEs with:

  • a total consolidated group revenue of at least MYR3 billion in the preceding financial year; and
  • a permanent establishment or entity in Malaysia.

Under the CbC Rules, MNEs are required to prepare and file CbC reports and master files that reveal aggregate, jurisdiction-wide information on the global allocation of income, taxes paid and economic activity in all jurisdictions in which the MNE operates. Armed with additional information from these documents and information exchanged between jurisdictions, the IRB has gained a broader understanding of MNEs and is well positioned to assess transfer pricing risks. 

On the litigation front, transfer pricing is a relatively new area in Malaysia with few decided cases. However, we should expect more transfer-pricing cases to be heard before the Malaysian courts. A transfer pricing audit may result in litigation if the IRB disputes the choice of comparables or factual analysis provided by the MNE. Litigation will usually entail the preparation of voluminous documentary evidence by experts to support the taxpayer's position and rebut the IRB. Taxpayers should be cognisant of the importance of fact management during a transfer-pricing audit. For example, information/documents provided to the IRB during an audit may be adduced as evidence in court. It is important that the taxpayer maintains a consistent position, unless there is a reasonable explanation for a variation.

Digital Economy

Technological advancements and digital transformations are taking place rapidly on a global scale. The taxation of the digital economy is becoming increasingly high profile around the world, and major players in this space have been put under pressure to pay their "fair share" of taxes.

A number of jurisdictions have put in place, or are looking to implement, some form of digital service tax. For example, the UK has announced its intention to introduce digital service tax on UK revenues arising from digital businesses and activities, such as the provision of search engines, social media platforms and online marketplaces.

Whilst we have yet to see similar levels of scrutiny of the digital economy in Malaysia, global trends and developments are being watched closely by the IRB. To date, the IRB has focused on using withholding tax and transfer pricing arguments against companies, but we can expect the IRB to explore other approaches (for example, recommending new domestic laws or applying new audit approaches).

Individuals

The Malaysian Minister of Finance, Lim Guan Eng has announced that the IRB will be scrutinising individuals who display extraordinary wealth. As such, individuals with lifestyles that are incomparable with their declared income will be particularly at risk of being subject to a tax audit or investigation. The IRB may seek information on individuals by looking at social media.

In addition, the IRB has e-mailed individuals in its database, reminding them of their tax-filing obligations and the availability of the SVDP to minimise their exposure to tax penalties. The IRB has also e-mailed reminders to taxpayers of the hefty penalties of 80% to 300% that may be imposed if they do not voluntarily disclose their unreported income, under-declared income and over-claimed reliefs/deductions/rebates, and settle their tax arrears before the SVDP ends. Under the SVDP, the applicable reduced penalty rate is 10% if the voluntary disclosure took place between 3 November 2018 and 31 March 2019, and 15% if the voluntary disclosure takes place between 1 April 2019 and 30 June 2019.

Beyond Mere Compliance

In our experience, what usually sets a taxpayer that is successful in litigation apart from a taxpayer who may be forced to concede to the IRB is the foresight to ensure that its tax affairs are not merely compliant with the law, but are defensible in the event of litigation. A taxpayer that has given thought to improving the defensibility of its tax positions will have a discernible advantage during the course of audit and, of course, litigation.

Take the preparation of transfer-pricing documentation, for instance, which should not be undertaken merely to check off a box in the company's tax return. From a litigation lawyer's perspective, transfer-pricing documentation may also be regarded as a form of legal brief, which sets out the evidence and arguments in support of the taxpayer's transfer pricing position.

Going beyond mere compliance will allow a shift in the focus of the tax team from simply satisfying compliance requirements to questioning the narrative, evidence and numbers underlying each and every line of tax filings and other tax-related documents. Whilst this may be an onerous exercise, it will yield many benefits in the event of an audit or investigation. Taxpayers should assume that the IRB will scrutinise and challenge every detail of their affairs.

Although an audit or investigation can be a daunting experience, we believe that the risks may be managed effectively by strategically evaluating all points of weakness, identifying tax-risk mitigation potential, and implementing best strategies to pre-empt and defend against challenges by the IRB. It may also be prudent to engage a tax lawyer, who can navigate through potential pitfalls, as early as possible in the audit or investigation process. For example, even if a taxpayer has not yet initiated processes to improve its defensibility, it could still manage its response during the audit process to obtain the best outcome possible, and in the event of a full-blown dispute, mount a successful challenge against the IRB.

Wong & Partners, member firm of Baker McKenzie International

Level 21, The Gardens South Tower
Mid Valley City
Lingkaran Syed Putra
Kuala Lumpur 59200
Malaysia

+603 2298 7888

+603 2282 2669

adeline.wong@wongpartners.com www.wongpartners.com
Author Business Card

Law and Practice

Authors



Wong & Partners is a member firm of Baker McKenzie International, with 78 offices in 46 countries, that houses the largest number of dedicated tax practitioners among Malaysian law firms and offers a comprehensive range of tax expertise, making it a one-stop shop tax powerhouse. The firm is uniquely positioned in the market to provide clients with specialised tax advice on local and cross-border matters. It prides itself on providing clients with sound technical analysis, strong dispute resolution and litigation skills, and the ability to implement and defend the tax structures that it sets up and advises on. The team concentrates its tax practice in the following areas: local and international tax planning; global structuring; transactional tax; tax controversies (tax audits, raids, investigations and litigation); indirect tax, trade and diagnostics; transfer pricing (benchmarking, valuation, audit and defence); supply chain; employment-related taxes; and private banking/wealth management.

Trends and Development

Authors



Wong & Partners is a member firm of Baker McKenzie International, which has 78 offices in 46 countries. It houses the largest number of dedicated tax practitioners among Malaysian law firms and offers a comprehensive range of tax expertise, making it a one-stop-shop tax powerhouse. The firm is uniquely positioned in the market to provide clients with specialised tax advice on local and cross-border matters. It prides itself on providing clients with sound technical analysis, strong dispute resolution and litigation skills, and the ability to implement and defend the tax structures that it sets up and advises on. The team concentrates its tax practice in the following areas: local and international tax planning; global structuring; transactional tax; tax controversies (tax audits, raids, investigations and litigation); indirect tax, trade and diagnostics; transfer pricing (benchmarking, valuation, audit and defence); supply chain; employment-related taxes; and private banking/wealth management.

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