Five practical tips to stay on top of employer’s tax obligations

02 March 2018
By Lim Phing Phing, Director, Global Mobility Services, PwC Malaysia

Late last year, a magistrate’s court charged and fined a company director close to RM50,000 for failing to remit his employees’ monthly tax deductions to the Inland Revenue Board (IRB) without any reasonable grounds for defence.  His actions led immigration authorities to blacklist the company’s employees, preventing them from leaving the country. Even though he was a first time offender, the court denied leniency, arguing that it was necessary to educate employers on the consequences of not fulfilling their tax responsibilities.

The case clearly demonstrated three things:

  1. Without a proper understanding of employer’s tax obligations, your business will be exposed to various financial and reputational risks,
  2. It is highly unlikely that penalties for non-compliance would be waived upon appeal as you are expected to understand the tax obligations as an employer under the Self-Assessment System (SAS), and
  3. The IRB can recover any outstanding taxes or penalties due from an employer directly from company directors under Section 75A of the Malaysian Income Tax Act, 1967 (the Act).

The tax audit is a primary activity under the SAS environment. And according to the IRB, they expect to implement the 100% rate hike in tax penalties sometime in 2018. How do you know that you have complied with all your tax obligations as an employer? As a starting point, here are five practical tips to help you achieve compliance before IRB officers make that unexpected appearance at your doorstep.

1. Read and familiarise yourself with the tax obligations

If you still haven’t quite figured out what are your employer’s tax obligations, look up the Act. Section 83 is a good place to start. 

employment cycle

Image 1: Summary of employer’s tax obligations under Section 83


You should also understand the implications of employer’s tax obligations on individuals who accept directorship positions. When your company fails to comply with any of these obligations, the IRB has the right to recover the penalties and outstanding taxes from your directors under Section 75 of the Act. 

Having said that, it can be challenging to interpret and understand any legislation.  The IRB regularly publishes and updates public rulings and other publications on its website.  Written in plain language, these public rulings and publications help employers interpret the relevant tax laws and provide examples of how a law is applied in different circumstances.   

2. Review your Human Resource (HR) policies and procedures 

It is possible that your HR practices and procedures may no longer reflect or support the original intent of the relevant HR policies.  For example, the inconsistent classification of workers hired from time to time.  Any unintentional misclassification of your employees as independent contractors with no proper basis could lead to your company being held liable for not complying with the employer’s tax obligations. 

Similarly, staff compensation and remuneration policies may not accurately communicate the nature of the income leading to inaccurate or under-reporting in Form EA and Form E.  For example, employers are often confused and misunderstand the concept of allowances versus expense reimbursement, and whether these are considered employment income for tax reporting purposes.

As an employer, you should undertake periodic reviews of your current HR policies and procedures to determine whether they comply with the current legislative provisions. This will enable you to face any potential challenges from the IRB and take timely remedial actions for any gaps identified.

3. Conduct regular tax and payroll health checks

Are you aware that benefits-in-kind and cash remuneration are reported and treated differently for tax purposes? Do you know that taxable off-payroll payments have to be reported?

The complexities around employment and assignment arrangements, remuneration structures and payroll calculations have created hundreds of wage type codes under different earning and deduction categories of a payroll system.  How the tax calculation engine configures and treats these codes will impact how you report them in Form E and Form EA. Any misconfiguration could lead to incorrect deduction of taxes from your employee’s monthly earnings.

As the IRB expects you to accurately report the taxable value of all your employment earnings and benefits for tax reporting, it would be useful to conduct a comprehensive tax and payroll health check on a regular basis.  These checks will help you review the existing tax positions of the wage type codes and correct any errors in the data reported to the IRB.  Simulating a tax and payroll mock audit is not only useful for you to understand the areas of risks but also equips you to handle questions and clarifications required by the IRB during an actual audit.  

4. Maintain good records and documents

Did you know that you need to keep sufficient records for at least seven years?  Can these records be kept in an electronic format?  What happens when you have poor record keeping habits and a weak documentation trail?  Chances are the IRB could argue that all payments made to your employees need to be reported and penalties will be imposed for under-reporting of income. 

 To eliminate or reduce such risks you should:

  • Review and ensure that employee records (electronic or printed) have complete audit trails in HR and Finance 
  • Include the details and nature of payments made to all employees for documents such as employee handbooks, payslips, employment contracts, payroll and expense records 
  • Familiarise yourself with the general guidelines on the records that are to be retained for the purpose of income tax under Public Ruling No. 4/2000 (revised) on Keeping Sufficient Records.

5. Seek guidance and help

If you still feel unsure or can’t keep up with the legislative changes, speak to the tax officers of the IRB or seek professional advice.   The IRB’s Hasil Care Line is available to provide support and advice to employers on their tax obligations.  You can also sign up for the numerous IRB road shows that are held nationwide regularly to educate employers on their tax responsibilities.

With businesses facing heftier tax penalties for non-compliance from 2018 onwards, it is absolutely critical that you understand your tax obligations thoroughly and ensure your current business processes and controls are tax compliant in line with the current legislative requirements.   But if  you’ve followed or embraced any of the recommendations above, then you’re already heading in the right direction towards complying with your employer tax obligations.

 

Coming up next: Completing Form EA and Form E - is it really just another paper pushing exercise?

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Lim Phing Phing

Director, Global Mobility Services, PwC Malaysia

Tel: +60 (3) 2173 1651

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