Reaching implementation and filing of the first GST return is only part of the journey, though for many businesses this has been a challenging one already. When dealing with new tax systems, even those widely used elsewhere, the difficulty remains that until implementation, the Law exists only in theory. Only once implemented does the impact to businesses and consumers start to take effect and an appreciation of the practical challenges become clearer. The thinking in relation to how it applies will also evolve as taxpayers, advisors, the authorities and the courts come to grips with the nuances. However, at the point of implementation there is still a level of uncertainty and divergence of positions which can pose a real challenge for businesses trying to manage their risk exposure.
This article considers recent post implementation developments and what steps businesses should be taking to mitigate risks.
While GST commenced on April 1, amendments to the law were made just a few days before the start date. These were largely to rectify minor deficiencies in the law, but one substantial change severely impacted the insurance industry. Insurers had previously been given an entitlement to a 'deemed input tax credit' on any cash settlements paid to unregistered customers. The last minute amendments largely removed this entitlement except for very minor cases. This gave immediate difficulties for insurers in terms of adjusting systems and reporting requirements to meet the change. The impact to margins and pricing as a consequence is still being worked through, but is likely to be significant.
Aside from legislative change, the Royal Malaysian Customs Department (RMCD) continues to issue new and revised guidance on technical matters. Some address previously unanswered areas but others represent changes in view. Because much of this guidance does not have the force of law, there is uncertainty as to the level of reliance that can be placed on it.
Some industries have been more active in managing the ensuing uncertainty than others. The financial services industry, for example, has been able to reach agreement with the authorities on the GST treatment for the majority of its supplies.
Many other industries, however, continue to struggle with uncertainty. In the import and export sector, a lack of clarity remains as to when GST applies, whether non-residents taking ownership of goods in Malaysia are required to register, and the form and content of documentation to evidence input tax credit claims or the export of goods. Similarly, the property development industry still grapples with the treatment of property joint venture transactions, despite significant consultation and a number of re-writes to the guidance.
In addition, businesses also face the commencement of audit and review activity. As it is still quite early in this process, and much of the focus has been towards the integrity of refund claims, the level of detail and the veracity with which audits will be conducted – is unclear. Nevertheless, the penalty regime in Malaysia is severe with significant penalties (including jail terms) for incorrect reporting, and as yet, there is no promise of an initial amnesty.
Approaches to mitigating risk
As GST is still in its infancy, the application of the rules is still evolving. It is likely that initially there will be differences of opinions and approaches, which may result in differing treatments across businesses and sectors. Where differences exist, this creates the potential for price differentials, and increased or reduced margins.
A critical step to mitigating GST risk is ensuring that there are adequate controls and appropriate governance measures. Ultimately, any positions taken must be supportable in the law and stand up to audit scrutiny.
Importantly RMCD's understanding of the GST Law and how it is to be applied should improve, and they will fine-tune their approach over time. Given that they have six years to revisit past GST returns, there is ample time for them to build their knowledge, develop alternative positions to those currently accepted, and focus on risks. For businesses this means that uncertainty will potentially continue for a significant time to come.
The key focus areas therefore need to be compliance processes and regular revisiting of areas where conservative or ambiguous positions have been taken that can be challenged or changed. It is essential to stay abreast of the positions being developed by the RMCD, and adjust behaviours accordingly.
In the short-term businesses should focus on the following key areas:
- Documenting key technical positions and decisions made to date and storing these in a central repository where they can be made available during internal reviews and RMCD audits;
- Applying controls in the GST return preparation process such as exception reports, reconciliations and trend analyses;
- Ensuring that the key finance and tax personnel keep abreast of new developments through regular training programmes and technical updates;
- Building internal protocols and processes for the management of GST audits, including identifying key individuals within the organisation to address queries from RMCD;
- Seeking external advice and/or RMCD's opinion on the application of the GST Law to particular circumstances. There is a limited private ruling programme (referred to as 'Advance Rulings') available for prospective transactions, but so far RMCD have been willing to respond to specific questions outside of this programme, although such decisions would not offer the same level of protection as an official ruling.
Another area for businesses to pay special attention is the application of the anti-profiteering rules which took effect on January 1 2015 to prevent the increase of 'net profit margins' (in ringgit terms) until June 30 2016. The calculation excludes any increase in profit due to GST, but is very inflexible. It is unclear how the authorities will be enforcing these regulations, but businesses will need to take steps towards understanding the requirements to avoid risks to brand image as a result of being found to have contravened the provisions.