Updated tax audit framework on finance and insurance

Updated tax audit framework on finance and insurance

The Inland Revenue Board (IRB) has issued on its website the updated Tax Audit Framework – Finance and Insurance (TAF), dated 18 November 2020. This new 19-page TAF replaces the earlier TAF (2015 TAF) that was effective from 1 June 2015 (see Tax Alert No. 14/2015) and comprises the following sections:

1.0 Introduction
2.0 Statutory provisions
3.0 What is a tax audit?
4.0 Objectives of a tax audit
5.0 Years of assessment (YAs) covered
6.0 Selection of cases
7.0 Tax audit implementation
      7.1 Initial audit action
      7.2 Audit visit
      7.3 Duration of field audit visit
      7.4 Record review or examination
      7.5 Audit settlement
      7.6 Voluntary disclosure
8.0 Rights and responsibilities
      8.1 IRB
      8.2 Taxpayer
      8.3 Approved tax agents
9.0 Confidentiality of information
10.0 Offences and penalties
11.0 Complaints
12.0 Payment procedures
13.0 Appeals
14.0 Effective date and cancellation

The contents of the new TAF are broadly similar to those of the earlier framework and apply specifically to taxpayers in the finance and insurance industries.

Some of the key changes are outlined below.

Paragraph 5.2

The new TAF clarifies that under Section 91(3) of the Income Tax Act 1967 (ITA), tax audits can be extended beyond the statutory time limit for cases involving negligence.

Paragraph 7.1

The 2015 TAF provides that a taxpayer who has been selected for an audit would be notified by the IRB through a letter of notification of audit visit. The notification is to be provided at least 14 days before the audit visit.

The new TAF explains more comprehensively the audit procedures and stipulates the following:

• A “Request for Documents and Information Letter” (Request Letter) will be issued to the taxpayer officially by way of e-mail, fax or letter to obtain the required documents and information.
• In cases where taxpayers are required to submit documents and information, the feedback is to be provided within 14 calendar days from the date of the Request Letter.
• In the case of a field audit, a “Compliance Visit Notification letter” will be issued to the taxpayer at least 14 days prior to the date of the visit. Taxpayers may request for the date of the visit to be deferred due to unavoidable circumstances and reasonable grounds.
• In the absence of an audit visit, a “Letter of Determination of Commencement of Case Settlement Period” (Case Settlement Letter) will be issued to the taxpayer to stipulate the commencement date for the purpose of computing the audit case settlement period.

The new TAF also stipulates that the IRB may visit any of the taxpayer’s premises or related premises by notifying the taxpayer in advance. In addition, the audit may be extended to include companies and businesses connected to or controlled by the taxpayer, with due notice given to the taxpayer in respect of such an extension.

Paragraph 7.2

The new TAF stipulates that field audits can also be performed at the IRB’s office or any other venue as agreed by both parties. Previously, field audits were only to be carried out at the taxpayer’s business premises.

The new TAF also outlines the responsibilities and code of conduct of audit officers during the audit visit.

Paragraph 7.4

The 2015 TAF provides that audit officers, with the consent of the taxpayer, may obtain records for examination at the IRB’s office in cases where the workplace provided by the taxpayer was not conducive or where a copier facility is not available. The new TAF now stipulates that as long as there is a need for the taxpayer’s original documents, the audit officer can take away the documents and provide a list and an acknowledgement of receipt of the documents and records, which will be signed by the respective parties.

Paragraph 7.5

The 2015 TAF provides that in the audit settlement process, the taxpayer will be informed of the audit findings through a Letter of Audit Findings (i.e. Surat Penemuan Semakan Kes) which will address the following:

(a) Audit issues raised;
(b) Reasons and rationale for the issues raised; and
(c) The amount of proposed tax adjustments (if any) and the YAs involved

The new TAF now provides that item (c) above will only be addressed in the Case Settlement Letter, which is issued after any objections or agreement to the audit findings, as the case may be.

The new TAF stipulates that taxpayers are now given 18 calendar days (instead of 21 days previously) from the date of the Letter of Audit Findings to formally lodge an objection if they are dissatisfied with the audit findings. Otherwise, the taxpayers are deemed to have agreed to the audit findings after the said period.

The new TAF also provides an updated settlement period for tax audit cases to be resolved, which is outlined in the Appendix to this Alert.

Paragraph 7.6

The new TAF includes a new section on voluntary disclosures, which reiterates that voluntary disclosures will need to be submitted before an audit commences. The new TAF also clarifies that the audit will commence on the date the Request Letter is issued by the IRB.

Paragraph 10.1

The new TAF stipulates that in the event any understatement or omission of income is discovered during an audit, a penalty, which is equivalent to the undercharged tax amount (i.e. 100%), may be imposed under Section 113(2) of the ITA. However, for the purpose of the TAF, the penalty imposed will be at the rate of 45% instead. In addition, the Director General of the Inland Revenue (DGIR) may exercise his discretion to further reduce or eliminate the penalties imposed under Section 124(3) of the ITA.

Paragraph 10.2 and 10.3

The new TAF stipulates that where a taxpayer has committed repeated offences, the penalty imposed under Section 113(2) of the ITA will be at the rate of 55%. “Repeated offences” means a situation where a taxpayer has been audited or investigated and an original or additional or composite assessment with a penalty under Section 113(2) of the ITA has been raised, with the first offence taken into account from the first notice of assessment raised from 1 January 2020.

Paragraph 10.4

The new TAF emphasizes that voluntary disclosures have to be made prior to the commencement of an audit for concessionary penalty rates to apply.

Paragraph 10.5

The new TAF stipulates that the penalty rates under Section 113(2) of the ITA for voluntary disclosures are as follows:

*It is noted that pursuant to the Finance Act 2019, effective 1 January 2020, Section 77B (4) of the ITA was amended to remove the imposition of the further penalty of 5% on the increased sum (the increased sum being the amount understated plus the initial 10% penalty). Hence, the 10% penalty should be the final increase. It appears that the new TAF has not reflected this.

Paragraph 13

The new TAF has been updated to stipulate that appeals against a notification of non-chargeability can also be made pursuant to Section 97A (2) of the ITA.