The Inland Revenue Board of Malaysia (LHDNM) has launched a new compliance initiative through the establishment of the Strategy Compliance Department (Cawangan Pematuhan Strategik), located at PJ Trade Centre. This department aims to tighten the enforcement and transparency of tax declarations and audits, particularly focusing on high-risk taxpayers. This initiative is a direct response to the long period after the Movement Control Order (MCO), during which physical visits to taxpayer offices were paused. However, this year, LHDNM has ramped up visits, reflecting a more robust approach towards compliance.
New Audit Strategies by LHDNM
Previously, LHDNM field audits followed a standard procedure, where tax officers would first request a desk audit, collecting documents from tax agents or taxpayers. This would be followed by a visit to either the taxpayer’s office or a meeting with LHDNM officers for further interviews and discussions.
However, the new compliance strategy introduced by LHDNM marks a shift from these traditional methods. The newly formed Strategy Compliance Department follows procedures similar to tax investigations, where officers may visit taxpayer or tax agent offices without prior notice. During these unannounced visits, LHDNM can request all relevant documents, computer data, and any other information they deem necessary. This increased power allows LHDNM to thoroughly scrutinize taxpayers without giving them time to prepare.
Preparing for Compliance Audits: Key Field Audit Issues
Although unannounced visits and stringent audits may raise concerns among taxpayers, preparation can mitigate these risks. Field audits generally focus on the accuracy of transactions, documentation, and compliance with the Income Tax Act (ITA) 1967. Common issues identified during audits include:
1. Benefit-In-Kind (BIK):
– The use of company-provided cars for directors or employees often raises questions during audits. These should be correctly declared as BIK in personal tax filings.
2. Repair and Maintenance:
– Another common mistake is the incorrect classification of repair and maintenance expenses. Under ITA 1967, only renewal or maintenance work that restores an asset to its original condition can be deducted. If the work is classified as an upgrade, it will be capitalized rather than deducted.
3. Controlled Director Medical Fees:
– The law restricts certain benefits for controlled directors. Medical fees and any other expenses claimed by controlled directors are disallowed unless they fall under specific categories such as remuneration or car benefits.
4. Withholding Tax for Licensing and Subscription Fees:
– Payments made to overseas vendors (e.g., Google, Facebook, and Instagram) for licensing and subscriptions have often been omitted from withholding tax declarations. As per the 2018 budget revision, software now falls under the royalty definition in ITA 1967, which means these payments are subject to Section 109 Royalty Withholding Tax.
5. Lack of Documentation for Travel Expenses:
– Claims related to business travel must be substantiated with proper documentation. Failing to do so may result in disallowance during audits.
These issues are just a few of the technical mistakes taxpayers make, but they often lead to significant tax liabilities during LHDNM audits.
Compliance Department’s New Focus: Real Transaction Verification
The Compliance Department’s audits now extend beyond basic transaction reviews. Officers are conducting in-depth investigations to verify the authenticity of transactions, scrutinizing both cash flow and supplier accounts. This strategy ensures that the recorded transactions genuinely occurred, and that no fraudulent or erroneous claims have been made. Additionally, auditors may check both company and personal capital statements to ensure consistency in financial reporting.
One of the most critical aspects of the new audit process is its unlimited power. The Compliance Department has the authority to investigate without the possibility of any preliminary adjustments. This means that any discrepancies found during these audits can lead to immediate action, such as further investigations, penalties, or legal proceedings.
E-Invoice System: A Path to Enhanced Transparency
Looking forward, the introduction of the E-Invoice system, slated for full implementation in July 2025, is expected to significantly reduce the challenges associated with audits. This new system will require all businesses to declare and approve transactions through LHDNM’s e-invoice platform. As a result, both online and offline transactions will be closely monitored, helping to eliminate black market and illegal cash transactions.
The E-Invoice system will promote transparency, improve efficiency in tax declarations, and ensure better compliance with the law. With this system, businesses will no longer be able to evade tax liabilities, and audit risks will be minimized.
Conclusion: Proactive Tax Planning for the Future
Given the growing complexity of LHDNM’s compliance strategies, businesses are strongly advised to plan their tax structures and operations proactively. Tax planning should start as early as possible to ensure compliance with the new regulations. The restructuring of business entities may also be necessary to align with the requirements of the new system.
Upgrading accounting and operational systems is another critical step, and companies should consider integrating artificial intelligence (AI) to improve efficiency and accuracy. As AI becomes more prevalent, it will undoubtedly become an essential tool for businesses, enhancing tax compliance and reducing the risk of audits.
In summary, the new Compliance Department represents a shift in LHDNM’s approach to tax enforcement, focusing on transparency, authenticity, and efficiency. By staying ahead of these changes and adopting modern tax and accounting practices, businesses can minimize the risks associated with audits and contribute to a more compliant and transparent tax environment in Malaysia.
Kim Heng is an accounting and taxation professional whose sterling reputation has drawn countless clients to the NKH Group. When the GST was first introduced, he was commissioned to give 100+ talks on GST implementation as well as over 20++ talks on E- Invoice implementation by multiple businesses and industry associations, showing the depth of their confidence in his expertise. In the following years, Kim Heng would go on to share his knowledge on (among others) branding, tax planning, and fundraising at 20+ seminars organised by business associates that were widely attended by the public. He has over 20 years of experience consulting and advisory on taxation, corporate structure planning, business valuer, company secretarial administration, constitution advisory, and etc.
