INSIGHT: Malaysia—Will its New Tax Disclosure Program Work?

A new special voluntary disclosure program (“SVDP”) was announced by the Malaysian Ministry of Finance during the presentation of the 2019 Malaysian Budget.

The primary objective of the SVDP, which expires on June 30, 2019, is to encourage both Malaysian and non-Malaysian resident taxpayers to voluntarily disclose any previously undeclared income and to settle any potential tax arrears, with the Inland Revenue Board of Malaysia (“the Revenue”) aiming to collect an estimated 10 billion ringgit ($2.4 billion) from 1 million taxpayers.

The SVDP was announced on November 2, 2018, in view of Malaysia’s participation in the automatic exchange of information with foreign tax authorities (Malaysia had signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information on January 27, 2016), where the Revenue should have already received the first batch of information on bank accounts in foreign countries held by Malaysian tax residents.

A tax amnesty program was previously implemented by the Revenue from March 1, 2016 to December 15, 2016. However, this was not considered successful, given that persons who came forward to the Revenue with disclosure had no certainty of obtaining a tax amnesty. In other words, persons who had disclosed their tax affairs to the Revenue were not guaranteed a reduced tax penalty/waiver of tax increment.

How the SVDP Works

The Revenue has issued several versions of operational Guidelines (“Guidelines”) and frequently asked questions (“FAQ”) on the SVDP. Under the Guidelines and FAQ, any person who makes a voluntary disclosure to the Revenue during the period from November 3, 2018 to June 30, 2019, will be offered reduced penalty rates. The SVDP is available for:

• unreported income, under-declared income and over-claimed reliefs, deductions or rebates for the year of assessment (YA) 2017 and the preceding YAs, under the Income Tax Act 1967 (“ITA 1967”) and the Petroleum Income Tax Act 1967 (“PITA 1967”). This also includes withholding tax cases;
• unreported real property gains for the YA 2017 and the preceding YAs, under the Real Property Gains Tax Act 1976 (“RPGTA 1976”);
• instruments where stamp duty was not paid after six months from the due date for stamping, under the Stamp Act 1949 (“SA 1949”); and
• where tax audits or tax investigations have commenced. However, the application of the reduced penalty rates under the SVDP is subject to the findings of the tax audits or tax investigations.

The SVDP does not apply to cases where criminal investigation has commenced or prosecution proceedings has been instituted in the courts pursuant to the provisions of the legislation above, or under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001.

Unlike the previous tax amnesty program in 2016, under the SVDP the Revenue is expected to accept the voluntary disclosures in good faith with no further questions expected to be asked. The Revenue has stated that further review on these disclosures and audit action should not be taken even if the Revenue subsequently receives information or complaints from third parties.

However, if an audit has already commenced or an audit letter has already been issued to the taxpayer prior to making any disclosures, the Revenue may still carry out an audit examination to verify the information disclosed.

Concessionary Rates under the SVDP

The percentage of reduced penalty rates under the SVDP will differ depending on the category the disclosure relates to, and the period in which the disclosure was made.

For unreported income, under-declared income and over-claimed reliefs/deductions/rebates under the ITA 1967 and the PITA 1967, or unreported real property gains under the RPGTA 1976, the reduced penalty rate is only:

• 10 percent of the tax payable if the disclosure is made within November 3, 2018 to March 31, 2019; and
• 15 percent of the tax payable, if the disclosure is made within April 1, 2019 to June 30, 2019. After the SVDP, the full penalty rate of 80 percent to 300 percent of the tax payable applies.

For instruments where stamp duty was not paid after six months from the due date for stamping, the reduced penalty rate is only:

• 10 percent of the stamp duty payable or a minimum of 50 ringgit, if the disclosure is made between November 3, 2018 and March 31, 2019; and
• 15 percent of the stamp duty payable or a minimum of 100 ringgit, if the disclosure is made between April 1, 2019 and June 30, 2019. After the SVDP, the full penalty rate of 20 percent of the stamp duty payable or a minimum of 100 ringgit applies.

To take advantage of the concessionary rates under the SVDP, the underpaid tax and the reduced penalties must be paid:

• on or before April 1, 2019 for disclosures made within the period of November 3, 2018 to March 31, 2019; and
• on or before July 1, 2019 for disclosures made within the period of April 1, 2019 to June 30, 2019.

Failing to pay according to the deadlines will result in penalties imposed based on the prevailing provisions of the law and legal action may be taken accordingly.

Planning Points

The introduction of the SVDP this time presents a unique opportunity for taxpayers seeking to regularize their tax affairs.

As a preemptive step, it is important for taxpayers to first undertake a comprehensive review of their tax compliance affairs to date, to ascertain any non-compliance in the past, and to evaluate associated risks with disclosure and corresponding tax exposure. It would be worthwhile to seek professional advice, and where appropriate, consider reaching out to legal professionals for help given that communications are protected by legal privilege.

A final point for taxpayers to note should be that the Revenue is ramping up its efforts to track down those with unexplained wealth. The Revenue has set up a special unit to monitor e-commerce businesses via social media to ensure that businesses and individuals in the digital space report and pay their fair share of taxes. The Revenue has also earmarked some wealthy taxpayers and has issued notices to approximately 80,000 persons (around 76,000 individuals and 4,000 companies) for additional information on their source of wealth used to finance the accumulation of their assets.

Adeline Wong is Head of Practice, Istee Cheah is a Senior Associate and Lisa Yeoh is an Associate at Wong & Partners, Kuala Lumpur.