The process of Tax Audit and Investigation may sound scary. Malaysia's tax collection target for 2021 has increased. However, with the right techniques and preparations, unnecessary tax issues can be avoided.

Episode 1 of Tax Made Easy features host Amanda Andrea Koh as she delves into some of the tips and tricks that SMEs and corporations should pay attention to in order to successfully navigate through a tax audit or investigation process with our guest speakers.

The first speaker to be introduced in the show was Zen Chow, Tax Executive Director of YYC Group. Zen has been involved in tax compliance and tax advisory works for more than 15 years in various industries. YYC is a group of professional chartered accountants, tax specialists, and business consultants dedicated to advise and assist Malaysian businesses grow.

The firm has been established for more than 47 years since 1974 and it has trained more than 130,000 business owners. It is widely recognized by entrepreneurs from many industries for its commitment to empower entrepreneurial success and has over 20,000 clients to-date.

Alongside Zen and representing the SMEs as well as the business owners’ perspective on the show are Dato Tony Looi, National Vice President of SME Association of Malaysia, and Pennie, CEO and Founder of HOMA2u.

What’s the common misconception among businesses when it comes to tax auditing in Malaysia?

According to Zen, the most common misconception is that many people tend to think that tax audits mean having to pay extra tax and penalties. Meanwhile, answering from a business owner’s perspective, Pennie said that she is not an expert in taxation hence she thinks that the process is very complicated and difficult to understand. In reality, all it takes is for some proper guidance and education in helping us understand taxes and not be afraid of them.

What can SME companies do to understand tax better?

According to Zen, it is first important to stay calm and not get scared after receiving a tax audit bill. One should not immediately agree with the Inland Revenue Board (IRB) but should instead consult an accountant or tax agent regarding the tax audit issues.

It’s important to understand and have a little extra knowledge regarding tax auditing. Not all issues are real issues, some of them can be dropped or discarded as errors.

One main thing businesses should know is that a company’s document stores should be kept for at least 7 years. It is the company’s responsibility to keep the documents for up to 7 years but may choose to destroy them thereafter. The investigation branch cannot remand them for this matter, but it is advisable for the company to retain important documents – such as significant contracts or proof of purchase of assets still in use – as these would come in useful should the company ever need to defend itself during a tax audit or investigation process.

Even if all hell breaks loose, one can always hire a professional tax agent to help manage taxes in a hassle-free manner.

What’s the difference between tax audit and tax investigation process?

Zen explains that both terms have different processes. First, the letter you receive is a key element. Tax audit letters would come from the regular tax audit branch but if it’s a tax investigation, the letter would be from an investigation branch.

Tax audits are a routine process wherein they will be carried out randomly. Tax investigation on the contrary is usually done when tax evasion is suspected to have occurred, or if someone snitches about the matter to the branch. The investigation branch is permitted to investigate the business and personal records of directors and owners of the company in order to resolve the issue.

Evolving markets are requiring tax practitioners to innovate and move away from the traditional practice model. Some are choosing to specialize in non-tax compliance services, whereas some smaller tax practices may be looking towards market consolidation to achieve scale. What do you think about these developments in the tax practitioner industry?

Some practitioners are indeed moving away from tax compliance services - that is, the routine service of helping clients compute and submit tax returns every year. The reason why it is not as profitable as it may seem is because the fee is not high, almost affordable by any business.

“Nowadays, we should really look into tax. Tax today is on a self-assessment system which means you declare your taxes and once submitted it’s deemed as a final and official tax assessment,” Zen commented.

Zen also mentioned that the IRB will not tell the company if the tax assessment they’ve submitted was correct or wrong. Instead, policing is done by way of a tax audit, which could result in penalties for mistakes in the tax assessment submitted.

Hiring your own tax agent for the routine work of tax submission could be helpful, but significant additional long-term value could be delivered by engaging a tax practitioner to look into the tax efficiency of the company as well. On the other hand, we have to remember that the bigger a company, the larger the volume of transactions, and hence more work and effort is required on the part of the tax practitioner to carry out the analysis on tax efficiency. Due to this, most tax practitioners today tend to invest in certain software to complete routine tasks and use tools to analyse the assessments.

Tips on dealing with trade debts and taxation for freelancers, casual workers, or those who own a hawker stall.

Zen advises that “Tax is on an accrual basis”. Generally speaking, this simply means that once you make an accounting profit, you have to pay your taxes regardless of whether you’ve received payment. We should also always be consistent when dealing with trade debtors and take appropriate actions to remind them on credit terms and due payments.

If a bad debt write-off is ever required, proof of having taken such debt collection actions could be the key in determining whether the write-off is tax deductible. As to what constitutes “appropriate actions”, Zen cautions that it is also important to consider the value of the debt. Sending reminder letters or statements of accounts to chase for payment is a common action for most debts, but if a debt is of a significant amount, the business could be expected to take further action such as issuing letters of demand or taking legal action for the write-off to fulfill the criteria for tax deduction.

For those owning small businesses or hawker stalls, it is important that they record their sales digitally or manually. Apart from that, they can consider having a designated bank account for business transactions to avoid adding personal transactions into the mix, as that could complicate matters should a tax audit arise.

Is it good for companies to have tax planning when doing annual budgeting?

“If you don’t plan beforehand, you wouldn't get certain tax incentives because you were not aware of what’s available,” Zen said. He then mentioned that tax rules and accounting rules vary. “You need to know what kind of expenses would give you a tax deduction,” he said.

So how frequently do we have to plan our taxes? It is advisable to do it quarterly, or more than once a year. In this case, when making a profit, the company is able to estimate how much tax there is to be paid.

Word of advice from the guru himself

Don’t be afraid to receive a tax audit or investigation letter if you’re certain that your taxes are in order. If you’re not sure about tax treatments, be sure to seek help from a tax professional. After all, tax is unavoidable if you’re making profits, but you want to pay just the right amount – not a cent more, and not a cent less.

Need more tax-saving knowledge? YYC Group has recently launched TaxPOD, a platform developed by YYC that offers unlimited access to decades of tax-saving knowledge from video format to live webinars. Register your interest for TaxPOD at: bit.ly/taxpodmk1

While you’re at it, don’t forget to watch more episodes of Tax Made Easy on how to handle your taxes, sign up for free and join us on Zoom for the second episode titled ‘Tackling Tax: Myths and Facts About Transfer Pricing’ on 2 July at 3pm.