Reduced rates for tax penalties
Updated: Aug 29
Effective 1 May 2022, the penalties imposed under Section 113 (2) of the Income Tax Act, 1967 (ITA) are at a new, reduced graduated scale. - include updates on recent tax audit/investigation findings with regard to Section 113 (2) as of Aug 2022.
Section 113 of the ITA relates to incorrect returns due to omitting or understating any income or giving incorrect information in relation to changeability to tax.
We believe the change is due to a court case in which the Court had affirmed that the imposition of penalties under section 113 (2) of the ITA is not mandatory, and that LHDN is vested with a discretionary power to decide whether a penalty should be imposed in a particular tax audit case.
This article focuses on the Tax Audit Framework (TAF) issued by the LHDN, dated and effective 1 May 2022, which replaces the TAF dated 15 December 2019. In this article, the current TAF will be referred to as the TAF 2022 and the previous TAF as TAF 2019.
We note that the contents of the TAF 2022 are generally similar to that of the TAF 2019, except for:
Reduced rates for penalties, where the imposition of penalties are now at a graduated scale based on the record of penalties raised under Section 113 (2) of the ITA from 1 January 2020 to 30 April 2022.
No penalties shall be imposed under Section 113 (2) for audit findings involving technical adjustments (pelarasan teknikal).
Some of the salient features in the TAF 2022 are as follows:
1. Reduced rates for penalties under Section 113 (2)
Under the TAF 2019, a penalty could be imposed under Section 113(2) of the ITA at the rate of 100% for any additional taxes imposed after a tax audit. However, in practice, penalties are automatically imposed at the rate of 45% with no consideration given to taxpayers for any special circumstances. Under the TAF 2022, the penalty imposed will now be at the following rates:
First offence: 15%
Second offence: 30%
Third and subsequent offences: 45%
According to the above graduated scale, penalties to be imposed will be determined based on the record of penalties raised under Section 113(2) from 1 January 2020 to 30 April 2022.
If no penalty had been imposed during the period from 1 January 2020 to 30 April 2022, any audit findings from 1 May 2022, with penalties imposed under the said sections, will be considered as the first offence, i.e., penalty rate of 15% will apply.
However, if the taxpayer had been subject to a penalty under the said section between 1 January 2020 to 30 April 2022, any audit findings from 1 May 2022 with a penalty imposed under the said section will be considered as the second offence, i.e., penalty rate of 30% will apply, and so on.
2. No penalties for cases involving technical adjustments
The TAF 2022 states that no penalty shall be imposed under Section 113 (2) due to the omission or understatement of income which involves technical adjustments. Technical adjustments refer to tax audit cases which involve different interpretations of the legislation, according to the facts and issues of the particular case. However, this consideration does not apply in cases where the LHDN has issued public rulings, guidelines, practice notes, etc.
3. 100% penalty under Section 113 (2)
The TAF 2022 emphasises that if a taxpayer intentionally submits an incorrect return, the penalty to be imposed under Section 113(2) of the ITA will be at the rate of 100%.
4. Voluntary disclosures
The TAF 2022 emphasises that voluntary disclosures are only applicable to taxpayers who have submitted their tax returns.
The penalty rate under Section 113(2) of the ITA for voluntary disclosures is 15%.
In cases where a taxpayer has already made a voluntary disclosure, and subsequently makes an additional voluntary disclosure within six months from the due date of submission of the tax return, the additional voluntary disclosure will incur a penalty rate of 10%.
Updates on penalties charged for offences under Section 113 (2), based on our recent experience in tax audit/investigation engagements
- In August 2022, an investigation branch of LHDN audited a taxpayer and found that there was understatement of income. The taxpayer was charged a penalty under section 113 (2) of 45% instead of 15% as per the TAF issued on 1 May 2022. The reason given was that the investigation branch was following "tax investigation framework" which has no change in the penalty rate. Our argument was that the offence and penalty imposed were under Section 113 (2) and therefore, being a first time offence, the penalty should be 15%. Eventually, the penalty was reduced to 25% as a partial compromise.
Gunalan Appalasamy (GSK & Associates - Partner)
+603 2705 6630
Ms. Tan Pei Hong (External tax consultant, Maple Leave Red Tax Sdn Bhd)
+603 2783 4478
All information contained herein is summarised based on the Tax Audit Framework issued by LHDN on 1 May 2022 and it is intended to provide a general overview of the subject matter and should not be regarded as a basis for ascertaining the tax liability in specific circumstances or as a a basis for formulating business decisions. No responsibility for loss to any person acting or refraining from acting as a result of any material in this publication can be accepted by GSK & Associates. Readers should not act on the basis of this publication without seeking professional advice.
Should you require further clarification, please do not hesitate to contact us as per the contact details above or Manager whom you are accustomed to dealing with.