HAVE you ever wondered what should you do when you receive an email or letter from the Royal Malaysian Customs Department (Customs)?
Do you pause and digest the contents of the email/letter, forward it to the finance/tax department (if you are not from this department), or do you keep it for later together with the other to-do list?
There is no hard and fast rule on how to handle a tax audit but one should not leave it unattended.
After all, Customs has the legal authority to request information and conduct audits, making it important for business to respond appropriately to ensure compliance.
Understand the purpose and types of audits
To effectively manage an audit, firstly it is important to understand the purpose.
Typically, Customs conducts compliance audits to ensure taxpayers comply with relevant tax legislation and accurately account for, report and pay duties and taxes.
This helps preserve and protect the national revenue of the country.
Common areas which Customs would check include whether taxes have been duly levied or imposed accordingly, timing of when taxes are due have been paid and remitted appropriately and invoices have been issued with the prescribed particulars.
Checks on exemptions utilised are also conducted to ensure that the specified conditions are met.
Hence companies that enjoy exemptions must ensure that there is proper documentation kept proving that all the conditions have been complied with.
For some businesses, this may require coordination across multiple departments, particularly when the accounting, finance, logistics, procurement and payment roles are managed by different functions.
For importers, audits may take place after goods have been imported through what is commonly known as a post-importation audit.
This occurs when the goods need to be cleared at Customs import checkpoint promptly with the duties and taxes paid first, based on the declaration submitted.
Any adjustments or non-compliance, for example on the tariff code, value, units and country of origin, will be verified post event.
More recently, the Customs Compliance Verification Audit Program (AViP) was introduced to encourage voluntary tax compliance and self-assessment for indirect taxes.
Although it is still an audit undertaken by Customs, it places greater emphasis on taxpayer cooperation and voluntary disclosure.
It is also worth noting that an audit does not automatically mean that there’s non-compliance or errors. Sometimes there may just be reporting errors that do not result in any tax underpaid.
On the other hand, there may be cases where there is reasonable suspicion of misconduct or deliberate non-compliance,
Customs may undertake enforcement audits, which typically involve a higher level of scrutiny and carry more significant consequences.
The audit stages
> Before commencement of an audit: Before commencing an audit, Customs would typically profile the taxpayers to identify the risk and the types of audit to be conducted.
Thereafter, Customs would initiate contact with the taxpayer through letters, emails, phone calls or even site visits.
It is important to note that the Customs audit officers would identify themselves through official letters and inform the statutory provisions under which they are conducting the audit.
> The documents requested: There will be a list of documents that Customs would typically request to conduct the audit for example:
> Organisation chart/business entity profile,
> Business entity registration documents,
> Summary of calculation of duties/taxes accounted for and paid, and
> Accounting documents/records, for example, audited financial statements, ledger, bank statement, invoices, for a specified period. The period of assessment is six years though in the case of fraud and wilful default, it can go beyond six years.
There will be a deadline set by Customs to furnish the requested documents though if the taxpayer needs more time due to genuine business reasons, a request for extension of time can be made subject to the approval of the Customs audit officers.
The audit completion period depends on the completeness of business records/documents, the complexity of the audit case and the cooperation of the taxpayer.
> During an audit: During the audit, the Customs audit officers may ask for further information, conduct site visits, and interview key relevant personnel to understand the business.
Taxpayers should take this opportunity to explain their business operations and where required, justify the tax position taken.
In all cases, taxpayers should extend their cooperation and support, to ensure a smooth and effective audit for both parties.
> Round table discussion (RTD): Before closing an audit, Customs would conduct an RTD to:
> Provide information and advisory services to the taxpayer so that any non-compliance can be corrected and improved,
> Inform on the audit findings and any under-paid duty/tax detected,
> Inform about errors committed by the taxpayer under the law, and
> Inform about the issuance of a Bill of Demand (BOD) for any tax or duty underpaid.
Where there are no non-compliance identified, depending on the circumstances, Customs may or may not issue a clearance audit letter.
To accept or not to accept
Depending on the audit findings, if the non-compliance is true and accepted by the taxpayer, the taxpayer will typically acknowledge the findings and a BOD will be issued accordingly.
Note that the BOD will need to be paid within the prescribed period, as otherwise there will be risk of trade embargo, travel restrictions and court action.
Should the taxpayer disagree with the audit findings, the taxpayer may appeal to the Director General of Customs, appeal to the Customs Appeals Tribunal or appeal to the Finance Minister.
It is important to note that each appeal is subject to different procedures and there are prescribed timelines on when such appeal can be made by.
Hence, taxpayers aggrieved by the audit findings should quickly establish and understand the appeal procedures to avoid any disqualification. Subject to the status of the appeal, there is also an avenue to appeal to the Courts.
Having said all that, it is important to remember that a tax audit does not automatically mean that a wrong-doing or non-compliance has occurred.
Understanding the purpose of the audit, maintaining proper records of supporting documents, and responding proactively to Customs are helpful in making the audit process more manageable and help minimise potential dispute.
When the taxman knocks, being prepared makes all the difference.
Ng Sue Lynn is head of indirect tax for KPMG in Malaysia. The views expressed here are the writer’s own.
