Strategies In Dealing With Customs Audits & Disputes
3 September 2021
Customs audits by the Royal Malaysia Customs Department (the 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 adequate understanding of the areas of audit by the Customs, the pitfalls to avoid and consequences of non-compliance.
This tax alert highlights the strategies to effectively manage customs audits, handling appeals before the Customs Appeal Tribunal and the High Court and the potential civil and criminal sanctions that a company may face.
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. Sometimes, Customs audits are often very fast-paced and companies will be expected to allocate a significant portion of their resources in addressing the Customs’ queries. Should there be some gaps in a company’s customs compliance, some disputes will inevitably arise.
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. Therefore, it is crucial that companies are able to defend its position and be able to explain its tax and duty treatment based on provisions of the law, regulations and supporting guidelines. Having records, documentary evidence and electronic data be kept in an organised and safe manner will prove useful.
Another key aspect to also pay attention to is the risk of triggering a wider audit. A successful closure of one specific audit does not mean that the Custom will not initiate subsequent audits to assess a different aspect of the company’s operations. Therefore, a regular compliance review, either internally or by independent auditors, is essential and should be put in place as a standard operating procedure.
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, the 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 Customs Act 1967 (Customs Act) 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 the Customs of past non-compliance of Customs rules and regulation.
This can be contrasted with other laws in Malaysia which do expressly impose a duty on a person, including a company, to come forward voluntarily and report a breach of the law. One such example of this is the duty to report bribery to the Malaysian Anti-Corruption Commission under Section 25(1) of the Malaysian Anti-Corruption Commission Act 2009 (MACC) which stipulates that anyone who is offered or given gratification shall report the action, and if available, name the person who gave or made the offer to the police or MACC. Therefore, there is currently no legal obligation on companies to voluntarily disclose its non-compliance issues to the Customs.
However, companies are cautioned that the situation changes if Customs were to specifically request for information from the said company. Section 134 of the Customs Act 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, as provided under Section 17 of the Customs Act. Section 22B of the Customs Act provides that any Customs duty or penalty payable may be recovered as a civil debt due to the Government of Malaysia.
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.
In most cases, the Customs will first issue a BOD and will only proceed to initiate a criminal investigation in the event that the taxpayer challenges the validity or quantum of the BOD. Based on past experiences, if a company settles the outstanding amount due and payable on condition that there is no criminal investigation, then risk will be reduced but not necessarily eliminated. However, it must also be considered that the enforcement division of the Customs may choose to give precedence to criminal sanctions as a matter of policy and to give warning to other industry players, especially in cases involving criminal elements such as fraud and/or forgery.
Potential Criminal Liabilities
Section 133(1) of the Customs Act lists a number of offences:
“(1) Whoever –
a) makes, orally or in writing, or signs any declaration, certificate or other document required by this Act which is untrue or incorrect in any particular;
b) makes, orally or in writing, or signs any declaration or documents, made for consideration of any officer of customs on any application presented to him, which is untrue or incorrect in any particular;
c) counterfeits or causes to be counterfeited or falsifies or causes to be falsified any document which is or may be required under this Act or used in the transaction of any business or matter relating to customs, or uses or causes to be used or in any way assists in the use of such counterfeited or falsified document;
d) fraudulently alters any document, or counterfeits the seal, signature, initials or other mark of, or used by, any officer of customs for the verification of any such document or for the security of any goods or any other purpose in the conduct of business relating to customs;
e) being required by this Act to make a declaration of dutiable goods imported or exported, fails to make such declaration as required…
shall be guilty of an offence and shall, on conviction, be liable to a fine not exceeding five hundred thousand ringgit or to imprisonment for a term not exceeding seven years or to both.”
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: “Whoever –” is very broad and the 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 the Customs is Section 22C of the Customs Act 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 Customs Act include 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 (established pursuant to Section 141B of the Customs Act) or the High Court (via a judicial review application), depending on the nature of the dispute.
More recently, 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 established under Section 125 of the GST Act 2014 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 preparedness in addressing any potential questions that may be raised by the Customs throughout the audit.
Authored by Amira Rafie, an associate with the firm Tax, SST & Custom practice.