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With the particular focus of Government to enhance tax compliance and increase tax revenues, it is crucial for taxpayers to ensure compliance with indirect tax legislation and strategize the overall approach to the Voluntary Disclosure & Amnesty Program (VA) submission, if required.
In brief
- In Malaysia, indirect taxes include import and export duties, sales tax, service tax, excise duties, tourism tax etc.
- It is crucial for companies to understand the common errors and take corrective measures where required.
- Through the VA, taxpayers will be encouraged to voluntarily disclose any underpaid or unpaid indirect taxes, with the opportunity to reduce the potential penalties and audit scrutiny from the Royal Malaysian Customs Department (RMCD).
In Malaysia, indirect taxes include import and export duties, sales tax, service tax, excise duties, tourism tax, etc. The Malaysian Government targeted to collect an estimated RM162.1 billion worth of taxes for the year 2021, consisting of RM120 billion direct taxes and RM42.1 billion indirect taxes. However, as of July 2021, the taxes collected totaled only RM92.2 billion in direct tax and indirect tax (i.e. 56.9% of the target).
Based on the above statistics, the COVID-19 pandemic has severely impacted the revenue collection capacity of the Federal Government, particularly due to shrinking corporate earnings, individual incomes and consumer spending. Nonetheless, the year 2021 was expected to be a transition year as the nation will shift from the recovery phase towards achieving its growth potential in the new normal, where the Government is aiming to retain the overall revenue performance, on the back of improving economic growth and business prospects. The higher revenue is largely attributed to better tax revenue collection, and as a percentage to gross domestic product (GDP), tax revenue constitutes 11.1%, while non-tax revenue is at 4%.
The current worldwide trend is shifting from direct tax to indirect tax, by decreasing direct tax rates and increasing indirect tax rates. The Malaysian Government is anticipating an improvement in tax revenue collection by having a focus shift from taxing employment and business activity, to taxing consumption. Indirect tax will be an important area of tax policy to monitor in the coming years. This is also aligned with the Organisation for Economic Co-operation and Development’s (OECD) recommendation to reintroduce goods and services tax (GST) as part of the country’s medium-term fiscal strategy.
Based on their recent initiatives, the RMCD has been actively conducting indirect tax audits with the purpose of identifying any errors, non-compliance or incorrect usage of the exemption facilities provided, among others. With that, businesses should ensure that transactions are compliant with the relevant tax legislations, where businesses would have the opportunity to approach RMCD, if any non-compliance has been identified, following the Budget Speech announced by the Ministry of Finance (MoF) on 29 October 2021. The main measure which businesses should pay immediate attention to, is the proposal for a VA for indirect taxes, which is part of the Government’s objective to increase tax revenue via an increase in tax compliance.
Common errors and business implications
The RMCD releases various updates such as legislative amendments, tax policies and other guidance from time to time, which would certainly assist taxpayers with clearing out ambiguities, addressing gaps and having a stricter tax enforcement in place. Notwithstanding that, there are still instances where companies are not complying with the legislation.
Some common errors faced by companies are as follows:
1
Chapter
Incorrect classification and valuation
An accurate harmonized system (HS) code would enable companies to declare import duty and/or sales tax correctly.
A common error we have noticed is that importers and/or registered manufacturers are not declaring the correct harmonized system (HS) codes, which result in incorrect import duty and/or sales tax rates being applied on the imported or manufactured goods. This may lead to the underpayment of import duty and/or sales tax to the RMCD and be subject to penalties in the event of an audit.
In addition, determining the right import and sales tax value is another area of concern, particularly on the importation made from related parties and finished taxable goods sold by the registered manufacturers to connected persons, where the customs or sales tax rules of valuation shall be adhered to.
Businesses should be mindful that the duty or tax exposure may be relatively significant given that these are applicable on a transactional basis. Hence, having the correct HS code, tax treatment and valuation method are key in avoiding hefty fines and penalties.
2
Chapter
Oversight and misinterpretation of the law
The rapidly changing tax legislation could lead to oversight or misinterpretation of the law which causes errors to happen.
Companies often overlook the requirements under the legislations or may have incorrectly interpreted the legislations and guidance published by the RMCD.
For instance, under the sales tax legislation, imposing sales tax on the disposal of goods otherwise than by sales, is required for taxable goods. However, there are some manufacturers who are unaware of this requirement, where sales tax was not accounted for on the disposal of taxable goods.
With regard to service tax, it is also worthwhile to note that the scope of service tax has been expanded to cover a wide range of services. For example, there is a “catch-all” provision where a service performed on behalf of another person may fall within the ambit of management services, which businesses may not be aware of, and thus fail to be registered for service tax where such services are provided.
Due to an oversight or the misinterpretation of the law, and the rapid changes of the legislation, companies would need to strive to remain compliant with the requirement to mitigate the risk of submitting an incorrect return or underpaying duties or taxes to the RMCD.
3
Chapter
Excise open market value (OMV) computation
A detailed understanding of the regulations and requirements could assist companies to declare excise duty and/or sales tax in a correct manner.
Prior to 1 January 2020, there was a lack of clarity under the legislation for the determination of value of locally manufactured goods for the purpose of levying excise duty. However, with the publication of the relevant regulations at the beginning of year 2020, the RMCD provides clarification on the valuation method to determine the OMV.
Nevertheless, companies would still need to be alert with interpreting and understanding the requirements detailed in the updated regulations, as there are many instances which companies overlooked, which resulted in the under-declaration of the OMV, followed by the underpayment of excise duty and sales tax due to a lower excise duty base.
4
Chapter
Registration and filing of returns
Companies have the sole responsibilities to comply with registration and filing obligations.
There are various types of registration and filing requirements under the indirect tax legislation. Upon registration, companies are required to file the relevant documents and returns on a periodic basis, as required.
In the early stages of sales tax and service tax (SST) implementation, there were some businesses which were automatically registered by the RMCD, based on pre-existing GST information, where companies may have been incorrectly registered for SST, overlooked for SST registration, or even registered under an incorrect category. This would eventually lead to the incorrect filing of returns, or the failure to file the returns, as required.
Separately, for imported taxable services which came into effect from 1 January 2019, companies (i.e. the recipients of the imported taxable services) would need to self-account and pay the 6% service tax to the RMCD via the submission of the SST returns, which is similar to the “reverse charge mechanism” under the GST regime. However, there are instances where companies, particularly those located in special area, overlook the requirement to self-account the 6% service tax to the RMCD.
Hence, companies have the responsibility to self-assess and comply with the registration and filing obligations accordingly.
5
Chapter
Non-compliance with exemptions
Exemptions are benefiting companies, however conditions must be fully adhered otherwise it will be considered null.
There are numerous exemption facilities available for taxpayers under the indirect tax legislation. Generally, where exemptions are granted, there would be several conditions to comply with, in order for the taxpayer to be eligible in utilizing the exemption.
The RMCD, for instance, introduced the business-to-business (B2B) exemption for specific taxable services which came into effect from 1 January 2019. This particular exemption is intended to prevent the tax cascading effect. Companies, however, must fulfill all the prescribed conditions in order to utilize the exemption, e.g., the same taxable service must be acquired and onward supplied to the end customer, and the services must be acquired for the furtherance of the business and not for personal consumption.
As such, all of the conditions outlined in the exemptions must be met, in order for businesses to enjoy the exemption facility offered by the RMCD. In the event the conditions for the exemptions are not met, the exemption would be considered null and void.
6
Chapter
Inadequate record-keeping practices
The 7-year record keeping rule must be complied by companies.
Companies must keep records relating to indirect tax in the national language (Malay) or English in Malaysia, unless the Director General approves otherwise, for seven years, as required by the law. All relevant documents must be readily available, in the event that these documents are requested for, during an audit.
Issues concerning record-keeping, generally involve manual and incorrect tax data entry by the companies’ personnel. Human errors are unavoidable when performing manual adjustments and coupled with the tax and accounting personnel retention problems, these become the leading causes for the problem. Other causes may also include the lack of a proper Standard Operating Procedure (SOP), or limitations in storage space for document retention.
As a consequence, companies may face hefty penalties due to non-compliance of the above and travel restrictions may also be enforced on the company’s directors, who fail to settle any outstanding duties and/or taxes. In short, managing tax risk and compliance is important to ensure that there are no adverse reputational risks towards the company.
Remedial actions
The VA for indirect taxes, as announced during the Budget 2022 Speech on 29 October 2021was introduced as part of the Government’s objective to increase tax revenue via an increase in tax compliance.
Through the VA for indirect taxes, taxpayers will be encouraged to voluntarily come forward to declare any tax that either has not been paid, underpaid or erroneously reported to the RMCD. The VA covers all indirect taxes, e.g., sales tax, service tax, goods and services tax, import duty and excise duty, except for anti-dumping duty, safeguard duty and windfall profit levy.
Those subject to indirect taxes in Malaysia should capitalize on this opportunity to regularize their tax positions and make voluntary disclosures where relevant. This would be beneficial for those who have underpaid and/or erroneously reported to the RMCD.
Similar to the Special Voluntary Disclosure Program administered previously by the Inland Revenue Board, RMCD will grant a reduction in penalties to participating taxpayers in the VA for indirect taxes i.e., 100% penalty remissions for Phase 1 and 50% penalty remissions for Phase 2. Remission of taxes may also be considered, on a case-by-case basis. Participating taxpayers may also face reduced audit scrutiny for the period in which a voluntary declaration is submitted. It is possible that the RMCD will enhance enforcement actions and increase penalties, once the VA period has lapsed.
Being aware of the common errors from an indirect tax perspective may help businesses to identify weaknesses and issues in their indirect tax compliance approach and perform any remedial actions, where necessary
Indirect taxes in Malaysia are complex and the legislations have been changing from time to time and thus, it is challenging for companies to always be in compliance. Regular reviews and assessments are key to identify weaknesses and rectify issues, in order for companies to move forward with a clean slate and a clear direction toward indirect tax compliance.
Summary
It is indeed a challenge for businesses to keep abreast of the ever-changing indirect tax legislations. Therefore, it is crucial for taxpayers to perform internal due-diligence and reviews on its business activities and the respective indirect tax implications on a timely basis, with a view to ensure compliance, as well as take proactive measures towards any adverse implications identified during the review, prior to an audit conducted by the RMCD.
In view of the introduction of the VA for indirect taxes, taxpayers should take this opportunity to undertake a health check exercise to identify contentious issues, errors in indirect tax submissions or underpaid or unpaid taxes, and strategize the overall approach for the VA submission with a view to regularize tax positions with reduced penalties and move forward with a clean slate to indirect tax compliance.