Updated tax audit frameworks

Updated tax audit frameworks

The Inland Revenue Board (IRB) has issued on its website the following updated tax audit frameworks (TAFs) in Bahasa Malaysia:

(a)       Tax Audit Framework, titled “Rangka Kerja Audit Cukai” (replacing the framework dated 15 December 2019)

(b)       Tax Audit Framework – Finance and Insurance, titled “Rangka Kerja Audit Cukai Kewangan Dan Insurans” (replacing the framework dated 18 November 2020)

(c)       Petroleum Audit Framework, titled “Rangka Kerja Audit Cukai Petroleum” (replacing the framework dated 15 December 2019)

The content of the TAFs are broadly similar to that of the earlier frameworks. Some of the important changes are discussed below.

Voluntary disclosures

The updated TAFs emphasize that voluntary disclosures are only applicable to taxpayers who have submitted their tax returns.

Offences and penalties

• The new TAFs reiterate that in the event any understatement or omission of income is discovered during an audit, a penalty, which is equivalent to the undercharged tax amount (i.e., 100%), may be imposed under Section 113(2) of the ITA or Section 52(2) of the Petroleum (Income Tax) Act 1967 (PITA), whichever applicable. However, for the purpose of the TAFs, the penalty imposed will now be at the following rates instead:
  • First offence: 15%
  • Second offence: 30%
  • Third and subsequent offences: 45%
• The new TAFs stipulate that the rate of penalty to be imposed will be determined based on the record of penalties raised under Section 113(2) of the ITA or Section 52(2) of the PITA (as the case may be) from 1 January 2020 to 30 April 2022.

 If no penalty has been imposed within the said period, any audit findings   from  1 May 2022, with penalties imposed under the said sections, will be   taken to be the first offence (i.e., penalty rate of 15% will apply).

However, if the taxpayer has been subject to penalties under the said sections between 1 January 2020 to 30 April 2022, any audit findings from 1 May 2022, with penalties imposed under the said sections, will be taken to be the second offence (i.e., penalty rate of 30% will apply).

• The new TAFs stipulate that for audit findings involving technical adjustments, the penalty that may be imposed due to the omission or understatement of income under Section 113(2) of the ITA or Section 52(2) of the PITA will not apply.

The TAFs clarify that “technical adjustments” refer to cases which involve different interpretations of the legislation, according to the facts and issues of the particular case. It does not apply to cases where public rulings, guidelines, practice notes, income tax regulations, income tax exemption orders or income tax rules have been issued by the IRB.

• The new TAFs emphasize that if a taxpayer intentionally makes an incorrect return, the penalty to be imposed under Section 113(2) of the ITA or Section 52(2) of the PITA will be at the rate of 100% (i.e., equivalent to the undercharged tax amount).
• The new TAFs stipulate that the penalty rate under Section 113(2) of the ITA and Section 52(2) of the PITA for voluntary disclosures is 15%. However, in cases where a taxpayer has made a voluntary disclosure, and subsequently makes an additional voluntary disclosure within six months from the due date of the submission of the return form, the penalty rate for the additional voluntary disclosure will be 10%.