AT THE moment, some sections of IRB are attempting to use the information provided to Customs to validate against the income or expenditure in the income tax returns. In the future when e-invoicing becomes mandatory and any information in the e-invoice will be shared with Customs.
The values used for submitting returns to the IRB and Customs could be different for valid reasons. There is a danger that using this information indiscriminately by the authorities without undertaking a proper reconciliation or understanding the underlying reasons for the differences in the numbers can lead to taxpayers being wrongfully assessed.
As long as the taxpayer is able to show his numbers were genuine and were conducted on an arm’s length basis (related party transactions) for income tax purposes and transactions were carried out on an open market basis for Customs purposes (both SST and Customs duties), there is no legal basis for either authorities to insist that the information provided to the other authorities should be used to uplift or issue additional assessments.
Even at the global level, on an important issue such as transfer pricing, there is no “meeting of minds” between the World Trade Organisation and OECD as to what should be the correct transfer price. In Malaysia, there are no specific rules that both authorities have agreed on such valuation pricing matters.
Where it can go wrong
It is not uncommon for companies to be exporting goods from one location to another, the values used for Customs declaration purposes could be the insurance value or any other estimated value based on their past knowledge for expediency purposes. In many cases, such movement of goods may not attract any customs duty or sales tax on importation or may be subject to import duty exemptions. In such cases, if the IRB refers to customs disclosure documents, it would be incorrect to assess the taxpayer on such prices.
The same error can occur when it comes to importation of services or purchase of local services because service tax is accounted for on a paid basis while income tax is accounted for on an accrual basis. If a proper reconciliation is not done, an incorrect assessment will arise.
The reverse can occur if Customs uses the e-invoicing information from IRB incorrectly. A perfect example would be in the area of transfer pricing. Normally transfer pricing for income tax purposes will be based on one of the five OECD recommended methods. These methods will always involve bringing the budgeted charges to actual on a regular basis (either bi-annually or annually). When such adjustments are made, e-invoices or credit notes will be issued, and there is a possibility of Customs using the information from an earlier point in time which will be subsequently adjusted hence will be incorrect.
Both tax authorities are happy to collect the taxes when there is additional tax. However, when there is a reduction of the tax, they are reluctant to give you back the refund although the law does not prevent the taxpayer from claiming the refund. It is very likely that such a request will lead to an audit of your tax files which is uncalled for.
How to avoid this problem
It is crucial for both authorities to talk to one another on the basis of the information being shared and all the potential scenarios where misinterpretation can arise. It is very important for IRB officials to understand the documentation and information in the hands of Customs, and vice versa for Customs to understand how the information has been collected by IRB. It is extremely important to involve external parties in this discussion such as the professional bodies, industry groups, and experts familiar with such issues.
E-invoicing should lead us to simplified taxation and add transparency to the whole system. It should not be used against taxpayers to collect additional taxes.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
