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TOPIC OUTLINE:

1 Objective of Tax Administration


2 Tax Compliance Voluntary Compliance
3 Tax Administration
4 Tax Audit
5 Authority & Responsibility of Director General
of Inland Revenue (DGIR)
6 Taxpayers & Employers Responsibilities
7 Tax Compliance & Ethical issues

Objective of Tax Administration

tax administration is to achieve the maximum degree of compliance to the ITA (total
compliance).

OBJECTIVES OF STUDY:
To introduce income tax administration and identifying the level of compliance
degree.
To determine the division of income tax administration in respect of return form,
assessment, appeal and collection.
To understand of audit system on taxation.

The main objective of income j 11.2 Tax Compliance - Voluntary Compliancej


Taxpayers will prepare and file the return form to declare the actual income
received.
The form will be submitted within certain period.
Tax payment will be made immediately.

Employers will be acquired to hold or deduct the tax from the employees income
and remit
to the IRB (the schedular tax deduction -PCB).

Towards achieving total compliance


Publicize through the media and opening counters to give explanation on the tax
payment procedure.
Administration on the tax law should be done immediately and consistently.
Identifying those who do not comply with the tax law and take appropriate action on
them.
lmproving the function of tax collection continuously e.g. by widely using the
schedular tax deduction.
Tax education through seminars, campaigns, Q&A sessions on radio and TV,
dialogues etc.
Types of return forms:
B - resident individuals with other
sources of income beside Employment
M - non-resident individuals
C - companies
C1 - co-operatives societies
P partnerships
T trusts, deceased person estates, club, association, societies and Hindu joint
family
E - return by employers

11.3 Tax Administration


Divided into four parts:
1. Returns

2. Assessments
3.Appeals
4. Collections and recovery

A return of income must be submitted to the assessment branch of the IRB within
30 days from the date of return.
The DG has the power to grant an extension of time to file a return if the person can
provide reasonable cause.
In practice, an informal extension of time is generally allowed up to 31 May each
year.

Notice of chargeability
Where a Return of Income Form has been issued by the Director General
A taxpayer must complete it and return to DG within 30 days.

Where no Return of Income Form has been issued to a taxpayer.


He must within 14 days (by 14 April) after 31 March in the year of assessment
declare his liability to tax.

Where a taxpayer newly arrives in Malaysia


He must give notice of his chargeability to income tax within 2 months of his arrival.

Responsibilities of employee
1. Notice of chargeability- notify the DG before 15 April of the following YA that he is
chargeable [sec. 77(2)].
2. The return issued to him must be completed and submitted within the time
allowed [sec.77(1 )1.

3. Change of address - employee has to inform IRB in writing within 3 month of the
change.

Responsibilities of employer
El Employer is required to file in the following return:
1. Form EAIEC details of remuneration paid to employee including contribution to
EPF and
tax deducted under monthly deduction scheme (PCB). EC is for government
employees.
2. Notice of employee commencing employment [sec. 83(2)] - sent to IRB not later
than 1 month from commencement date of employment - form CP22.
5. Retention of money - employer required to retain amount of money due to
employee until at least 90 days after the receipt by IRB of the notification of
cessation of employment.
6. Schedular tax deduction (PCB) employer is required to withhold tax under the
PCB system. Each month, the employer is required to deduct appropriate tax of the
employees and remit to the IRB not later of 10 day of each calendar month in
respect of tax in the preceding month. At the end of the year, the employer is
required to make annual return (form CP159) together with form E.
3. Notice of cessation [sec. 83(3)] submit to IRB not later than 1 month prior to
the date of cessation of employment using form CP22A. With effect from 1/1/97,
employer is no longer required to give written notice of cessation if the employee is
subject to PCB, or where monthly income of employee < minimum amount subject
to PCB, provided that it is known that the employee is not retiring from any
employment permanently.
4. Employees leaving Malaysia form CP 21 must be submitted if employee is
about to leave or intends to leave Malaysia for a period exceeding 3 months.
Notification 1 month before departure and written notice. No written notice if an
individual is required to leave Malaysia at frequent intervals in the course of his
employment.

Types of Assessment
1. Original assessment made in accordance to the particulars provided by
taxpayer or his agent in the relevant return, but the DG can exercise his discretion
under these circumstances:
a) DGs judgement - DG refuse to accept return submitted and determine the
amount of chargeable income based on his best judgement [sec. 90(1)(b)].
b) Non-submission of return the DG can determine the chargeable income of the
person and make assessment accordingly [sec. 90(2)].

Authority & Responsibility of Director General of Inland Revenue (DGIR)


ASSESSMENT
An assessment An official act or process by which the provisions of the Act are
applied to the affair of a person to ascertain the proper amount of tax payable by
the person.
Responsibility for making assessments ls the Director General
Basis of assessment Based on information provided by a taxpayer or his agent in
the relevant return of income ([if DG not satisfied with the return or with any
information provided by a taxpayer he may proceed to make an assessment to the
best of his judgment] 8- [if person does
not deliver a return, an assessment is made by DG]).
2. Additional assessment may be made under any one of the fo owing
circumstances:
a) where there is additional chargeable income which has not been taxed;
b) where the tax charged in the first assessment was too low [this can happen when
the first assessment is estimated and facts known later indicate that a further
assessment is warranted];
c) where an ovenrepayment (refund) of tax has been made;
d) where personal relief has been over-allowed or is withdrawn.
- time limit to issue original and additional assessment:
within 6 years [sec. 91(1)].

- exception to 6 years (not applied): if DG prove fraud, default or negligence,


additional assessment can be made any time [sec. 91(3)].

3. Advance Assessment (sec. 92)


The DG can issue advance assessment under the following circumstances:
a) where a taxpayer ceases to trade or to be employed or to carry on a profession or
vocation. If the
assessments are raised in the appropriate year, the taxpayer may not have the
funds at that time to settle his liability or it may be difficult to locate him. An
advance assessment would eliminate such problems;
b) where a taxpayer who has a Malaysian source income is planning to leave
Malaysia;
c) where employees who are in Malaysia for an unknown period and are employed
by persons who do not have a permanent establishment in Malaysia, ie. Who have a
non-resident employer;
d) where the Malaysian income is derived by a taxpayer who is a non-resident
shipowner, charterer or operator or an airline.

4. Protective assessment
- The DG issue this assessment to avoid assessment becoming time barred.
- Thus, an assessment for the year 1999 would become time barred if not issued
before 31 December 2004 because it would fall outside the six-year limit.
- Therefore, if a taxpayer is likely to incur a liability for 1999 but the DG has not fully
investigated the case or ascertained the liability he will issue a protective
assessment before the end of 2004 to protect the loss of revenue.

5. Composite assessment (sec. 96A)


issued when a taxpayer:
a) makes default in furnishing a return in accordance with section 77(1);
b) fails to give notice of chargeability under sec. 77(2) or (3);

c) makes an incorrect return by omitting or understating any income;


d) gives any incorrect information affecting his own chargeability.
- Normally are agreed between the DG and the taxpayer before been issued.
- Thus, latter the taxpayer has no right to object or appeal.
- Assessment is made after a tax investigation or field audit is conducted and is
discovered that the taxpayer has committed an offence.

6. Increased assessment [sec.101 (8),(9)].


It will be issued where:
a) the taxpayer reach an agreement with the DG during the review of assessment;
b) the Special Commissioners or the court had decided the issue in dispute which
resulted in
an increase in the tax liability.
- No right to appeal against an increased assessment where there is an agreement
between taxpayer and the DG [sec. 102(3)].

7. Reduced assessment
The DG may make a reduced assessment where:
a) the taxpayer's chargeable income is less than what has been assessed;
b) certain relief to which the taxpayer is entitled to had not been deducted in his
earlier assessment.
- The amount of tax reduced or discharged can either be refunded to the taxpayer
or carried forward to set off against the taxpayer's future tax payable.

APPEALS
A taxpayer has the right to appeal by objecting to the assessment made in writing
(objecting within 30
days after the date of the assessment notice).

The limit 30 days could be extended if the DG satisfied (reason of extension due to
absence from Malaysia, sickness or other reasonable cause).
lf the DG refused to extend the time, within 21 days of receipt of the notification,
could request from the Special Commissioners.
The decision by one of the Special Commissioners to refuse or grant the extension is
final.

An assessment will become final and conclusive when:


a) no appeal has been made within a stipulated time given;
b) an appeal has been made, and assessment is finally determined on appeal; or
c) an objection has been made by the taxpayer and has been considered by IRB,
and the taxpayer took no further extension.

Once a final assessment is arrived at, it cannot be reopened except in the


circumstances below:
a) where income has escaped assessment;
b) where deductions have been allowed erroneously;
c) where an error or mistake has been committed by the taxpayer; or
d) where a mistake has been made by the DG.

Section 103 ITA 1967, a taxpayer is required to pay the tax as stated in the return
form.
The payment should be made regardless whether the taxpayer intends to appeal or
not.
This means that the taxpayer must pay the tax first and appeal later.
DA taxpayer must make payments within 30 days from the date of the service of
notice.
A 10% late payment penalty will be imposed if the taxpayer fails to pay within the
time limit.

11.4 Tax Audit


An examination of a taxpayer's business activity records to ascertain that the right
amount of income should be declared and the right amount of tax should be
calculated and paid are in accordance with tax laws and regulations.
Cover a period of one to three years of assessment.
May extend beyond the period depending on the focus of audit and issues
identified.

Types of tax audit:


a) Desk audit
- office examination of tax returns, accounts and tax computations.
- to determine whether the tax returns, accounts and tax computations are correct
and supported by documents.

b) Field audit
- carried out at the taxpayer's business premise.
- examine records other than business records ie. Sole-proprietorship and
partnership.
- notification of audit is 14 days.

11.7 Tax Compliance & Ethical Issues


Tax Evasion vs. Avoidance
Tax evasion:
A deliberate act of non-compliance that results in the payment of less taxes than
actually owed
Marked by transactions or circumstances which involve some elements of
fraudulent conduct accompanied by a real intent on the part of the taxpayer willfully
or deliberately to mislead. deceive or conceal from the IRB.

Tax evasion is illegal.

Tax avoidance is the legitimate usage of tax commission he earns from selling
loopholes in order to reduce ones tax liability.
Achieved by means which are within the law and if caught may be subject to a
severe because steps are taken before tax liabilities penalty.
Tax avoidance is legal.

Example
If a salesman fails to declare to the IRB the commission he earns from selling
encyclopedias, then he is guilty of tax evasion and if caught may be subject to a
severe penalty.
On the contrary, if the saleman claims deductions for costs he has incurred in
selling the books, ie. taxi fare and telephone cost, then he is merely trying to reduce
his tax liability and regarded as tax avoidance.

Fraud
A declaration of an untruth with an intention to deceive.
Keeping 2 or more sets of accounts and concealing income by under-declaring in
come to the IRB with an intention to deceive the IRB is a fraud.

Indicators of fraud
Variation in size of items recorded in the balance sheet at the end of two or more
consecutive years of assessment;
sudden increase in sundry or other creditors;
insufficient drawings for private living expenses;

o investment income does not commensurate to earnings reported,


irregular patterns in income reporting;

deviation in inter-firm Comparison;

disproportionate deductions;
conspicuous operating expenditure;
ounreasonably low turnover or profits as compared to type of business, location and
number of customers.