The legacy of GST: Closure audits

November 2018
By Tim Simpson, Tax Managing Consultant, PwC Malaysia

The reintroduction of the Sales and Services Tax (SST) has kept corporates across Malaysia busy for the last three months or so. The focus has certainly shifted to dealing with the new taxes as well as the related transitional issues, putting the now abolished GST-related positions and open issues on the back burner. Having said that, it is important to remind ourselves that legacy issues relating to GST are very much alive as the authorities have 6 years to review GST returns and the positions adopted by taxpayers.

The Royal Malaysian Customs Department (“RMCD”) has already commenced GST closure audits, even arranging for tax professionals to conduct some audits for and on their behalf. With a target to close all GST audit-related activity by the end of 2019, it’s unlikely that all 480,000 GST registrants will be audited. Regardless, it would be beneficial for businesses to have an understanding of the process to be better prepared in the event they are selected for an audit.

Are you at risk of being audited?

While the audit selection criteria is not publicised, the following are generally regarded as factors that could result in a company being selected for a GST audit:

High turnover – with a larger turnover, even small errors are amplified, resulting in greater exposure quantum wise.
GST refund position – companies in a net refundable position could present the risk of fraudulent activity. So before confirming the refund, the authorities would likely want to verify how these refunds arose.
Discrepancies in GST data – the GST return form provides the RMCD with critical data points. Based on these data points, the RMCD can conduct a detailed analysis including comparisons over a period of time and across industries. Unexpected fluctuations in annual trends or key ratios could result in further scrutiny.
Poor compliance – persistent late filing and poor compliance history are indicative of a lax approach to tax matters. Companies with key findings arising from earlier audits may also be revisited, to determine if the correct treatments have been adopted post audit.

What you can expect – The 3 key focus areas of an audit

1. Systems and processes

A GST auditor would want to understand the GST systems and processes relied upon by the business. If these are mainly automated and well documented, the auditor would be more confident with the level of compliance. The focus in such cases would be to test how effective the control framework is. But this may also help reduce the sampling of documents, shifting the emphasis to the review of technical positions such as reimbursements/disbursements or classification of items.

Conversely, a weak GST control framework (manual and poorly documented environment) is indicative of a higher possibility of substantial errors that may exist in the reporting process. An auditor would likely then spend significantly more time reviewing and vouching documents, on top of reviewing technical positions.

2. GST returns

Generally, an audit is expected to be structured around specific GST returns. This would potentially involve an assessment of 3–6 separate returns, which are likely selected based on the trending analysis discussed above. From the return sample, documents will be vouched. The sample size would depend on the auditor’s level of comfort with the GST control framework, but at a minimum, we would expect a ‘top 5’ or ‘top 10’ approach. This means an auditor will select the 5 or 10 largest invoices by quantum and by frequency/volume. The invoices selected would cover both output and input tax, as well as those for zero-rated, exempt and out-of-scope supplies, in order to confirm that the GST treatment has been accurately ascribed.

Transaction listings would also be analysed and used to select a wider sample of documents. An experienced auditor would be able to quickly identify high risk invoices by scanning transaction descriptions for keywords such as ‘recovery’ or ‘payment on behalf’, which indicate a reimbursement/disbursement decision. Other keywords such as ‘motor vehicle’ or ‘entertainment’, for example, could trigger an analysis of blocked input tax considerations.

The auditor may also seek to validate the return by matching the figures disclosed with alternative information sources. For example, a high-level reconciliation with annual accounts would reveal if there were material discrepancies in the figures disclosed. If so, further investigation may be required.

3. GST technical positions

This assessment to determine the GST technical position of a business will be carried out as part of the steps outlined above. However, if the auditor perceives a higher risk, this may call for a more detailed analysis of specific transactions. The increase in risk could be due to a known industry issue, an earlier finding from the audit, or complex tax issues such as transitional issues or partial exemptions.

So what can you do to minimise risk?

There are several ways to respond to the possibility of a GST closure audit. Some businesses may adopt a wait-and-see approach. This may mean they are either comfortable in their level of compliance or hopeful that they will not be selected for an audit. Others may be more proactive in minimising risk by conducting their own review to reassess their level of compliance. In the past, the RMCD has shown a willingness to remit penalties in the event a business voluntarily discloses their GST shortfall. It is unlikely that such leniency will be offered for errors detected during an audit.

No one knows for sure if or when they may be audited. But to deny its possibility, would be to deny yourself the chance to correct any unintended errors. At a minimum, we recommend companies assess their risk of being subject to an audit by reviewing their systems and processes, going through their GST returns, and revisiting their GST technical positions – the 3 key areas a tax auditor would scrutinise.