MANY companies are taking unnecessary risks with their levels of unpreparedness for tax audits, said Ernst & Young Tax Consultants executive director Kenneth Lim.
With the tax self assessment system for companies already in place since 2001, and individuals and partnerships facing a similar regime from this year, almost every taxpayer in the country is faced with an urgent need to get his house in order, he said.
As the IRB increases its tax collection target by 16% this year to RM50bil from RM42bil in 2003, Lim has advised companies and individuals to make tax a key consideration in decision-making.
Preparation, he maintained, was absolutely crucial and yet, even in the largest Malaysian firms, the subject was frequently handled in an isolated and ad hoc manner that does not augur well in the current regime of tax self assessment.
In an interview with StarBiz after a series of seminars nationwide on mitigating the risks of tax audits and investigations, Lim said that IRB tax audits, on both companies and individuals, would increasingly become an integral part of the local taxation system.
It is unavoidable. Whats important is that taxpayers, including their consultants, are prepared for it, he said.
For companies, that would mean identifying tax as a business issue and incorporating it in strategic decision-making.
Lim said the practise of good corporate governance involved a holistic embrace of all aspects of operations that include the management and payment of tax by a company, something that does not receive sufficient focus currently.
Companies should view and deal with tax risk management in tandem with and as an integral part of wider corporate governance. In short, a companys corporate governance practices and policies should encompass the management of tax risks as well.
I would suggest that good corporate governance is the foundation and platform for effective risk management, he said, adding that the setting up of effective procedures could be a good start (see accompanying box in next page for checklist).
Lim said these steps should be incorporated in all good corporate governance practices. Risk can arise even in the best of companies if the procedures are not well documented, and a tax audit can escalate into a tax investigation merely because of bad handling that these steps would help avoid, he said.
Ernst & Young head of tax audit and investigation Lim Kah Fan said the IRB was serious in its endeavours to collect the higher revenues by beefing up its team.
The enthusiasm of the IRB can be attributed to the efficiency of its enforcement teams. The high success rate has brought in a good source of revenue to the Government and has motivated them to recruit experienced contract officers as tax auditors and investigators, he said.
Kah Fan added: In view of this success, we can definitely expect a substantial increase in the number of audit and investigation cases in the near future.
It is understood the IRB had been gearing up for tax audits for some time with over 70% of its staff having been retrained for this purpose. It has been actively recruiting new officers and upgrading its computer systems.
Industry sources believe it may also soon be testing its new powers by bringing some high profile cases to court.
The IRB has stated that they plan to audit every taxpayer at least once in every five years. Even so, the level of preparation has been slow.
According to an Ernst & Young survey last year, only 12% of Malaysian firms said they would be allocating resources within this year to get prepared, while more than half said they would only do so if there was an impending threat of an audit. More than a third of companies had accorded this a low priority or decided not to bother at all.
Chow Seong Chen, an ex-IRB officer and now director with Ernst & Young Tax Consultants, said the onus was now on taxpayers to review their standards of record keeping and documentation as it would be difficult to rebut the IRB on understatement of tax liability without proper documentation.
Penalties of up to 100% of the tax undercharged can be imposed depending on the severity of the offence and the degree of cooperation extended to the IRB during the audit or investigation, he said.
Generally, Chow said, the IRB would look favourably on a company that had taken steps to address and resolve the issues as compared to one that had not done so. Ultimately, if taxpayers have received good advice and are well prepared, there will be no need to fear a tax audit.
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