What is the first thing that you would do when you receive a tax audit letter? This question may cause some concern to people in business corporations and SMEs as tax audits are often associated with additional taxes and hefty penalties. But what could be a practical way to navigate through this process?

Episode 3 of Tax Made Easy which is the final episode of the talk show series features host Amanda Andrea Koh as she and the speakers dive into the common issues arising from tax audits.

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.

Alongside Zen, the second speaker who represented the SMEs’ perspective on the show was Chin Chee Seong, National Vice President of SME Association of Malaysia, while the third speaker representing the business owners’ perspective on the show was Ili Zawani, a committee member from Peniagawati, Malaysia.

How do we know which or what expenses are deductible in Malaysia?

“Very simple, I always ask my tax agent or my accountant,” Chin said. He said as a businessman, one needs to have some knowledge about tax deductible expenses, but it would be better to leave the detailed work to the professionals.

Ili Zawani agreed with Chin's statement and mentioned that based on her sharing sessions among SME entrepreneurs, the general assumption is that anything that is related to business expenses are tax deductible. In reality, that is not the case, but many entrepreneurs are not aware of it. “Some even put in their personal expenses under the company account and deduct everything – that is not right!” Ili said.

While Zen also agreed that professionals should be brought in, he also advises his clients that they must have some knowledge on the deductibility of expenses to cross-check the treatments applied by tax agents.

He further explained that if we were to look at the technical aspect, Section 33(1) of the Income Tax Act states that for an expense to be deductible, it has to be wholly and exclusively incurred in the production of gross income. “In layman terms, if I spend this money, would this help me generate more income? If it does, then it satisfies the definition,” Zen said, before going on to caution that one should also take note of the prohibited expenses listed in Section 39 of the Act.

Most SMEs prefer to outsource their accounting services, concentrate on making sales and are not willing to engage a tax consultant. Many will only realize its importance when they face a tax audit or have to pay a penalty. What is your advice to the SMEs on this matter?

Zen concurred that a business’s cost structure is important to keep in mind because, as the saying goes, a penny saved is a penny earned. However, the deductibility of business expenses is not always straightforward. Relying on only an accountant who may not be well-versed with tax laws could cost more in the long run if we consider the penalties that could arise when mistakes are discovered during a tax audit.

The more tax you pay as an individual, the more “likeable” you are by the bank - Is it true or is it just a myth?

According to Zen, it is somewhat true in the sense that a higher tax payable indicates higher profits made. Since this would suggest a higher capability of paying back the loan, banks may be more willing to loan larger amounts or offer better terms to such companies.

Most entrepreneurs prefer to pay as little as they can when it comes to tax expenses. What are the legit ways to reduce company taxes?

Zen emphasised his belief that we must pay the correct amount of tax – not a single cent more, and not a single cent less. However, there are ways to optimise the tax amount, such as looking into tax incentives like double deductions and additional allowances granted to businesses when certain expenditures are incurred. Therefore, it is important for business owners to always keep up to date with the latest developments in government tax incentives and know about all the incentives that are available for a particular industry, as that could make all the difference in having an edge over competitors.

What is your advice on withholding tax?

Zen started off with a brief explanation that withholding tax is the tax that should be paid by a non-resident. The concept is when one utilises a non-resident’s service, the non-resident would be earning money from Malaysia and hence, they should pay Malaysian tax. However, since it is hard for the authorities to enforce tax rules on non-residents which are usually foreigners, the responsibility of ensuring that this tax is paid lies instead with the party utilising the non-resident’s service.

Malaysian businesses need to be cautious when it comes to paying non-residents. Before paying a non-resident in full, the payer is required to deduct a certain amount, and that amount is the withholding tax that should be paid to the Inland Revenue Board (IRB). The balance is then paid to the non-resident. In a situation where the non-resident service provider insists on being paid the full amount, some SMEs may neglect to deduct the withholding tax, but doing so would bring about additional costs to the business. If withholding tax regulations are not complied with, the business would not be able to get a tax deduction for the expense incurred, and would still be required to pay the withholding tax to the IRB in full. What was supposed to be a tax on the non-resident then becomes an extra cost borne by the business.

Has Malaysia created an agreement with any countries in not paying a withholding tax?

According to Zen, Malaysia has actually signed many double tax agreements or treaties with a lot of countries but signing this does not automatically mean you don't have to pay the withholding tax. It just means that the payment may be subject to withholding tax at a lower rate depending on what is agreed between Malaysia and the other country. Zen’s advice is to always check on the double tax agreements between Malaysia and the foreign country you are dealing with.

Can you share a big NO NO for a company to avoid doing, so that the tax audit process will be smooth?

Zen cautioned that refusing to cooperate with the IRB during a tax audit would most certainly be a wrong move. “If you’re trying to put a lot of obstacles and hurdles in their way when they come to do an audit, that is going to make their work tougher and could drive them to make things tough for you too!” he exclaimed. “Be cooperative, tell the truth, and provide the information and documentation requested by the IRB,” Zen advised. If something that is requested for is truly not available, or if you are unsure about any of the IRB’s queries, it is always an option to courteously ask the IRB for more time to check with the company’s accountant or tax agent before getting back to them.

How should you prepare yourself when the IRB officers come to visit your office premises?

Before the IRB officer comes to your office premises, they will send you a letter at least 14 days in advance which states the documents that you would need to prepare. If the IRB officers specifically request for sensitive documents, you may want to check with your tax agent to get advice. “My advice is that it's always good to anticipate what kind of questions they could be asking you and check with tax professionals to ask about the exposure you could be facing,” Zen commented.

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