AEOI and wealth management: How much do the tax authorities think you’re worth (vs how much you’re really worth)

29 August 2019
By Lim Phing Phing (Director) & Huang I-Hsiang (Manager), Global Mobility Services, PwC Malaysia

Three years ago, the Panama Papers investigation sparked public uproar and an investigation that remains ongoing today. While public interest continues to stoke regular announcements and updates on the progress of the investigations, the recovery of lost funds was slow-moving at the start. As with other financial scandals that have broken the news, the scope of investigations spanning multiple countries and the efforts involved in retracing the enormous audit trail presents a huge challenge in fund recovery. 

In response, countries around the world are ramping up measures to combat tax evasion and encourage more voluntary compliance. Many countries, including Malaysia, have adopted the Common Reporting Standard (CRS) (approved by the OECD Council on 15 July 2014). The global standard allows tax authorities in participating countries to gather information from their financial institutions and automatically exchange that information with other tax authorities annually under the Automatic Exchange of Information (AEOI) agreement. Previously, this information was only shared upon request, making it difficult to prevent and detect tax evasion.    

How does it work?

CRS calls for banks and other financial institutions in a participating CRS country to establish the residency status of their foreign bank account holders by obtaining information such as taxpayer identification number (TIN) and the country in which the account holder is a resident for tax purposes. 

This information is collected through the CRS Self-Certification Form issued by the bank/financial institution which is signed and acknowledged by existing or new account holders. This tax information together with the bank statements are then provided to the tax authorities of the individual’s country of tax residence.

What does this mean for Malaysian taxpayers?    

After receiving such information on Malaysian tax residents from other participating CRS countries, the Malaysian Inland Revenue Board (MIRB) will analyse and compare them against the income reported in the tax returns that had been lodged previously by the taxpayer. This will be done before the MIRB makes any further enquiry to request for additional information from the taxpayer directly.

Read more about the CRS and the review process from the MIRB’s website here.

What should you do if you receive an enquiry letter?

Picture this: you receive a letter from the MIRB stating that they have received financial information from the tax authorities from other participating CRS countries under the AEOI. The MIRB wants to interview you, and is looking for additional information such as your asset holdings, and local and overseas bank statements.   

Firstly, you would need to understand your own financial position. It’s also important to note that the information obtained under the AEOI may not be the only reason that could have triggered such a request. The MIRB may also have observed the following before making further enquiries with you:

  • Living a lifestyle inconsistent with the income reported
  • Discrepancies between the income reported and the deposits made into local and overseas bank accounts
  • Large or excessive tax refunds/credits
  • Year-on-year reporting of business losses

Under these circumstances, do you know what your sources of income and gains are and where they are derived from? Have you determined which are taxable and which are tax exempt? It is also equally important to understand your current capital resources and liability commitments. What assets do you have and how have you been financing them?  

For this reason, it may be a good idea to conduct a comprehensive tax “health check” on yourself and review your current tax position to see whether your financial position is realistic based on your own personal circumstances.

What kind of documentation do you need to support your financial position? 

Once you have established your tax and financial position, you would need to review the completeness and accuracy of the documentation trail which supports your financial position. This would include the following:

  • Local and foreign financial records (audited accounts, bank statements, tax returns, income statements, employment contracts, dividend vouchers, Form EA)
  • Receipts/invoices to support tax deductions and tax reliefs
  • Proof of ownership of assets i.e share certificates, vehicle ownership certificates, sales and purchase agreements
  • Proof of capital gains realised from sale of stocks, businesses and other assets including real property
  • Proof of liabilities such as bank loan statements   

It is important to note that the Malaysian Income Tax Act 1967 requires every taxpayer to retain sufficient records for up to 7 years to enable the MIRB to verify the reasonableness of the income reported. 

What are the areas of risk potentially arising from non-compliance? 

Without sufficient records to support the financial position and income reported to the MIRB, they may make adjustments to your tax position which may inevitably give rise to additional tax liabilities and potential penalties to be borne by you.  

It is crucial that you are able to justify and demonstrate the merits and reasonableness of the position taken based on the information and documentation available. Examples of potential areas of risks due to insufficient documentation include the following:

  • Disallowance of business expenditure considered personal or capital in nature

  • Commercial reasonableness of deductions claimed and business losses carried forward

  • Discrepancies between bank deposits, income reported and assets held by the taxpayer

  • Employment income from an offshore payroll which relates to the Malaysian employment but is not captured for tax reporting

  • Income versus capital gains recognition for tax purposes

In the course of your review, if you find reporting discrepancies or gaps that have resulted in non-compliance which cannot be reasonably defended, you may wish to consider approaching the tax authorities on a voluntary basis to resolve and regularise your tax position going forward. 

The Special Voluntary Disclosure Programme (SVDP) which runs until 30 September 2019 is the final chance for taxpayers to come forward to report and rectify any irregularities in their past tax filings. Taxpayers are encouraged to take this opportunity to close any reporting gaps during the SVDP period while lower penalty rates still apply.

Periods under the SVDP

Penalty rate based on period of voluntary disclosure

Period 1: Submissions disclosed to the MIRB from 3 November 2018 to 30 June 2019

10%

Period 2: Submissions disclosed to the MIRB from 1 July 2019 to 30 September 2019

15%


Read more about this in our Global Mobility Insight.    

Next steps

With only a few weeks left, it is important that you take stock and review your tax position quickly to take advantage of the lower penalty rates imposed under the SVDP before they expire on 30 September 2019. After this deadline, a minimum 45% penalty rate will take effect when audited by the MIRB. And once you have addressed any irregularities in your tax position, you will need to have a framework in place to track and monitor all your income, capital gains and cash flows and ensure that sufficient documentation are kept to support all your transactions and tax reporting going forward. 

For any further queries, speak to us today. 

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Contact us

Lim Phing Phing

Director, Global Mobility Services, PwC Malaysia

Tel: +60 (3) 2173 1651

I-Hsiang Huang

Manager, Global Mobility Services, PwC Malaysia

Tel: +60 (4) 238 9265

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