Customs audits by the Royal Malaysia Customs Department (customs) are a common compliance mechanism to ensure that taxpayers comply with the law. As customs audit are more common than before, it is essential that taxpayers are equipped with an adequate understanding of the areas of audit by customs, the pitfalls to avoid and the consequences of non-compliance.
Customs audit – what to expect?
Customs audits will often affect various aspects of a company’s operations and supply chain. For example, companies may expect disruptions such as delays in delivery, delays in import and export declarations, restricted access to warehouse, revision to invoice format and various clearance issues. Therefore, first and foremost, companies must be able to co-ordinate effectively between the different functionalities within the business in order to address the customs’ needs as quickly as possible.
The aim must be to minimise interruptions to business operations. Our experience is that companies which have invested in creating a culture of effective communication between various departments within and outside of Malaysia are better prepared to manage the customs audits.
Customs audits may involve a wide range of issues especially for companies involved in different trades of goods and services. For companies committing non-compliance of customs rules and regulation, often it is only a matter of time before such gaps are discovered. Having records, documentary evidence and electronic data kept in an organised and safe manner will prove useful.
It is quite common that during an ongoing audit, the company themselves may discover gaps in its customs compliance. Common taxpayer mistakes are in inaccurate valuation of goods, wrongful classification or using the wrong tariff and failing to comply with conditions of exemption.
The question that arises at this juncture is whether the company should come clean to the customs and potentially seek leniency. Companies may choose to make a voluntary disclosure of incriminating information to customs to signal its co-operation and commitment in adhering to customs rules and regulation. However, customs, as a government agency and one of the country’s tax authorities, is unlikely to award leniency merely on the basis that the company had made voluntary disclosure.
Generally, there is no provision under the law which imposes a legal duty on a taxpayer to come forward and make a voluntary disclosure or to report internal discovery of customs non-compliance. In this regard, companies in Malaysia are not required to inform customs of past non-compliance of customs rules and regulation.
However, companies are cautioned that the situation changes if customs were to specifically request for information from the said company. The law provides that where an individual who is being required to give information which may be reasonably required by a customs officer, and is within his power to give, refuses to do so or provides false information, he commits an offence.
Potential civil liabilities
For any customs taxes or duty that is due and payable which has not been paid, the Customs may, pursuant to an audit, issue a bill of demand (BOD) for underpaid taxes, where the latter may be recovered as a civil debt due to the government.
The quantum of the civil liability will normally be the amount of shortfall of customs duties as determined by the Customs pursuant to the audit, in addition to a late payment penalty (if applicable) up to 50% of the amount of the shortfall. The BOD will be issued together with a tax computation of the shortfall duty.
Potential criminal liabilities
Criminal liability can attach to the company and also individuals within the company. However, it is important to note that the opening word of Section 133(1) of the Customs Act 1967 (CA): 'Whoever' is very broad and customs may go after various individuals in the company, i.e. the person who signed the incorrect declaration or document.
A further illustration of the wide-reaching powers of customs is Section 22C of the CA provides for the joint and several liability of directors for any customs duty payable. Unlike the Income Tax Act 1967, the concept of director under the CA includes nominee directors as well.
Challenging the BOD
Inevitably in some cases, taxpayers may wish to challenge the customs’ decision to raise a BOD against them, especially in cases where the taxpayers are confident of their tax treatment and compliance level. In such instances, the company may wish to appeal against the decision, either at the Customs Appeal Tribunal or the High Court (via a judicial review application), depending on the nature of the dispute.
There are a high number of disputes in relation to BODs issued pursuant to goods and services tax (GST) closure audits. Taxpayers being subjected to additional GST do not have the right to appeal to the GST Appeal Tribunal because the GST Act 2014 has been repealed. Accordingly, the GST Appeal Tribunal was effectively abolished. Therefore, the appropriate avenue for the taxpayer to seek relief is to file a judicial review application at the High Court.
In anticipation of customs audits, companies must review their internal compliance mechanism and make efforts to obtain professional advice on the customs import duty requirements. This is to ensure they are prepared in addressing any potential questions that may be raised by customs throughout the audit.
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