These are a series of articles to offer some basic understanding of our Malaysian Tax audits .
(a) Tax Audit and its purpose:-
Tax audit is a detailed examination of the accounting and financial records of the taxpayer including third party records to establish that the return submitted by the taxpayer to the Inland Revenue is true and correct.
(b) How the tax audit relates to the self- assessment system (SAS)
Tax audit is fundamental to the self assessment system as it ensure the following:
- compliance of tax laws
- correct reporting of income and expenses
The tax audit ensures that under the SAS:
- the taxpayer reports his income correctly
- maintains proper records
- identify areas of difficulties in law faced by the taxpayer
- a broad based tax payer education implementation
© Tax audit can be conducted by two methods:-
- desk audit
- field audit
(d) The following described what a Desk audit is about:-
- the tax officers do not visit the premises of the taxpayer
- examination of a tax file on the office to verify submission of returns are in order, properly supported and documented.
- if there is any need of additional information, or verification the IRB will communicate
- At the desk audit stage, the following items in the Income Statement & Balance Sheet would have been examined:
– sales and turnover
– purchases
– stock movements
– other sources of income
– expenses
– leasing and rental payments
– advertisement and promotion expense
– traveling –local and overseas
– interest payments on loan, overdraft etc
– professional fees
– repairs, maintenance and upkeep
– fixed assets, motor vehicles, plant and machinery
– trade debtors and creditors
– directors accounts
– other debtors and creditors
– non-trade accounts
– investments
– reserves and provisions
- Some common issues examined includes the following:
– timing of income recognition (e.g. waiver year)
– transfer pricing-year end adjustments
– deductibility of expenses
– compliance and withholding tax provisions
– compliance with incentive conditions
– provisions treated as accruals
– inadequate documentation
– pertaining to related party transactions are issues like whether the transactions are charged, not being charged or without documentation or inadequate documentation or withholding tax compliance issues in off-shore transactions
(e) The following describes what are in a Field Audit:-
- the audit is carried out at the office, trading or the business premises of the taxpayer
- the tax authority will want to verify the accounting and financial records with the source documentations to ensure that the return submitted to the IRB fairly reflects the true picture on the ground
- the tax authority intends to audit all cases over a specific time period ( one to five years)