IMPROVING THE QUALITY AND ACCURACY OF SMEs BOOK KEEPING

1. IMPROVING THE QUALITY AND ACCURACY OF SMEs BOOK KEEPING AUDIT DEVELOPMENT DIVISION TAX COMPLIANCE DEPARTMENT INLAND REVENUE BOARD OF MALAYSIA

2. INTRODUCTION • KEEPING PROPER RECORDS IS VITAL TO FACILITATE TAXPAYERS TO HAVE BETTER CONTROL OF THEIR TAX AFFAIRS. • EVERY PERSON CARRYING ON A BUSINESS INCLUDING SMEs IS REQUIRED TO KEEP PROPER RECORDS. • MALAYSIAN INCOME TAX ACT – TAX PAYERS (COMPANY, NON-COMPANY) IS REQUIRED TO KEEP AND RETAIN IN SAFE CUSTODY SUFFICIENT RECORDS TO ENABLE THE INCOME OR LOSS FROM THE BUSINESS FOR THE BASIS PERIOD FOR ANY YEAR OF ASSESSMENT TO BE READILY ASCERTAINED. TAX COMPLIANCE DEPARTMENT

3. INTRODUCTION • FROM THE COMPLIANCE POINT OF VIEW SMEs REPRESENT THE HIGH RISK GROUP BECAUSE THEYARE NUMEROUS, THEIR RECORD KEEPING INCOMPLETE AND NOT CAPABLE FOR EASY VERIFICATION AGAINST THIRD PARTY DATA • THEIR COMMERCIAL SET-UPS CAN LACK THE WELL DEVELOPED STRUCTURES FOR RECORD KEEPING AND INDEPENDENT AUDIT OF ACCOUNTS THAT HELP TO MINIMISE RISK OF UNDER-REPORTING • TAX ADMINISTRATION SHOULD HAVE STRATEGIES TO ENSURE THAT SMEs UNDERSTAND THEIR OBLIGATION UNDER REVENUE LAWS. TAX COMPLIANCE DEPARTMENT

4. DEFINITION OF SMEs IN MALAYSIA • NO COMMON DEFINITION OF SMEs – BENCHMARK AGAINST: 1) ANNUAL SALES TURNOVER 2) NUMBER OF FULL-TIME EMPLOYEES OR 3) SHAREHOLDERS’ FUNDS. • IN MALAYSIA SMEs WILL BE BASED ON 2 CRITERIA: 1)NUMBER OF EMPLOYEES OR 2)ANNUAL SALES TURNOVER • DEFINITION WILL APPLY FOR FOLLOWING SECTORS: 1) PRIMARY AGRICULTURE 2) MANUFACTURING (INCLUDING AGRO-BASED) 3) MANUFACTURING – RELATED SERVICES (MRS) 4) SERVICES (INCLUDING INFORMATION COMMUNICATIONS TECHNOLOGY) TAXCOMPLIANCEDEPARTMENT

5. DEFINITIONS OF SMEs BASED ON NUMBER OF FULL-TIME EMPLOYEES TAX COMPLIANCE DEPARTMENT

6. DEFINITIONS OF SMEs BASED ON ANNUAL SALES TURNOVER TAX COMPLIANCE DEPARTMENT

7. RECORDS INCLUDE: • A FULL SET OF BOOKS OF ACCOUNT RECORDING ALL BUSINESS TRANSACTION SRECEIPTS AND PAYMENTS OR INCOME AND EXPENDITURE • INVOICES, VOUCHERS, RECEIPTS AND SUCH OTHER DOCUMENTS NECESSARY TO VERIFY THE ENTRIES IN ANY BOOKS OF ACCOUNT • ANY OTHER RECORDS SPECIFIED BY THE DIRECTOR GENERAL TAX COMPLIANCE DEPARTMENT

8. RECORD MAINTAINED IN ELECTRONIC FORM • IF COMPUTERS ARE USED TO RECORD THE TRANSACTIONS, ORIGINAL SOURCE OF DOCUMENT SHOULD BE RETAINED IN THEIR ORIGINAL FORM. • WHERE ORPGINAL DOCUMENTS ARE IN ELECTRONIC FORM THE DOCUMENT CAN BE RETAINED IN SUCH FORM. • THE RECORD SHOULD BE KEPT IN AN ELECTRONICALLY READABLE FORM TAX COMPLIANCE DEPARTMENT

9. KEEPING RECORDS INVOLVES • SETTING UP SUFFICIENT RECORDS FOR ALL BUSINESS TRANSACTIONS • MAINTAINING THE RECORDS THROUGHOUT THE YEAR • RETAINING THE RECORDS FOR AS LONG AS NECESSARY TAX COMPLIANCE DEPARTMENT

10. THE IMPORTANCE OF KEEPING PROPER & SUFFICIENT RECORDS • TO MONITOR THE PROGRESS OF BUSINESS • ALL THE INFORMATION NEEDED IS READILY AVAILABLE • WHEN THE BUSINESSES ARE SELECTED BY IRBM FOR AUDIT IT WILL BE QUICKER AND LESS DISRUPTIVE IF ALL INFORMATION IS EASSY TO FIND • EXPEDITE REFUNDS IF DUE TAX COMPLIANCE DEPARTMENT

11. DUTY TO KEEP RECORDS • SEC. 82 ITA 1967 • KEEP & RETAIN FOR A PERIOD OF 7 YEARS [SEC. 82(a)] • ISSUED & KEEP PRINTED SERIALLY NUMBER RECEIPTS [SEC 82(b)] • NOT FURNISHED RETURN - RECORDS ARE TO BE KEPT FOR A PERIOD OF 7 YEARS [82(1A)] • ELECTRONIC RECORDS – READABLE FORM , READILY ACCESSIBLE & CONVERTIBLE INTO WRITING [82(7)] • BUSSINESS IN MALAYSIA – KEPT & RETAINED IN MALAYSIA [82(8)] • PUBLIC RULING NO.4/2000 • RELATING TO MAINTENANCE OF SUFFICIENT RECORDS TAX COMPLIANCE DEPARTMENT

12. ANY INCENTIVES OFFERED TO TAXPAYERS FOR PROPER RECORD KEEPING ? • NO INCENTIVES OR REWARDS OFFERED. • FAILURE TO KEEP SUFFICIENT RECORDS [SEC 119A]: 1) FINE BETWEEN RM300 & RM10,000 OR 2) A PERIOD OF IMPRISONMENT OF UP TO ONE YEAR OR TO BOTH TAX COMPLIANCE DEPARTMENT

13. WHY NO INCENTIVES OFFERED? • DEVELOP THE SENSE OF RESPONSIBILITY AMONG TAXPAYERS TO KEEP PROPER RECORDS DUE TO THE SPIRIT OF SELFASSSESSMENT • SELF ASSESSMENT STILL NEW IN MALAYSIA - AN ADVISORY APPROACH NEEDED TO BE DONE IN EDUCATING TAXPAYERS ON THE IMPORTANT OF BOOK KEEPING. • IN FUTURE – MAY BE CONSIDERED TAX COMPLIANCE DEPARTMENT

14. STRATEGIES TO IMPROVE QUALITY & ACCURACY OF SMEs BOOK KEEPING • ISSUED PUBLIC RULING – PUBLIC RULING NO. 4/2000 • TAX EDUCATION PROGRAM: • TAX AUDIT ACTIVITY TAX COMPLIANCE DEPARTMENT

15. PUBLIC RULING NO. 4/2000 • PUBLIC RULING NO. 4/2000 DATED 30 JUNE 2001 – KEEPING SUFFICIENT RECORDS (COMPANIES & CO-OPERATIVES) : • APPLIES IN RESPECT OF SEC. 82 ITA 1967. • EFFECTIVE YA 2001 ONWARDS • CONSIDERS: 1) WHAT CONSTITUTES SUFFICIENT RECORDS NEEDS TO KEEP 2) THE CONSEQUENCES OF FAILING TO KEEP SUFFICIENT RECORDS. TAX COMPLIANCE DEPARTMENT

16. TAX EDUCATION PROGRAM • SEMINAR • ROAD SHOW • TALK / BRIEFING • JOINT-VENTURE WITH PARTIES E.G. MALAYSIA CHINESE / MALAY CHAMBER OF COMMERCE TAX COMPLIANCE DEPARTMENT

17. TAX AUDIT ACTIVITY • CONDUCTED FIELD AUDIT • ALLOWED TO EXAMINE ALL BUSINESS RECORDS AND NON-BUSINESS RECORDS. • AUDITACTIVITIES CAN EDUCATE AND ENSURE PROPER RECORDS KEPT AND RETAINED ACCORDING TO IRBM REQUIREMENT. • REDUCE THE IRBM’S NEED TO RESORT TO INDIRECT METHOD OF DETERMINING INCOME TAX COMPLIANCE DEPARTMENT

18. CONCLUSION • MIXED APPROACH NEEDED IN IMPROVING QUALITY & ACCURACY OF SMEs BOOK KEEPING. • MIXED APPROACH: 1) AUTHORITARIAN APPROACH – ENFORCEMENT ON RECORD KEEPING 2) TAX EDUCATION / TAX ADVISORY APPROACH WITH FRIENDLY, HELPFUL, SATISFACTORY SERVICES TAX COMPLIANCE DEPARTMENT

19. THANK YOU TAX COMPLIANCE DEPARTMENT