The Inland Revenue Board of Malaysia ("IRB") actively conducts tax investigations or "raids" on taxpayers. The main purpose of these raids is to deter tax evasion and/or aggressive tax planning with the ultimate aim of enhancing tax compliance. It is not uncommon for the IRB to have obtained a reasonable amount of information – either through its own global intelligence or through informers – prior to conducting a dawn raid on a taxpayer.
What is a Dawn Raid?
Tax investigations that were carried out without prior notice to the taxpayers are commonly known as "dawn raids". At the break of dawn, the IRB's officers ("officers") simultaneously arrive at the taxpayer's business premises, residences, tax agent's premises, third parties' and other relevant premises where necessary.
Under the Income Tax Act 1967 ("ITA"), the officers have full and free access to search all land, buildings, and places. They are equipped with the power to access and inspect, take possession or make copies of any documents required for the investigation. Taxpayers and occupiers are required to permit entrance and provide reasonable assistance to the officers. Otherwise, one would be guilty of an offence which entails a fine and/or an imprisonment term not exceeding one year.
Additionally, the IRB may also carry out a dawn raid separately or concurrently with the relevant authorities under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 ("AMLA"). Under the AMLA, the officers are cloaked with extensive powers to freeze, seize or forfeit the taxpayer's movable or immovable property obtained using proceeds from tax offences. The officers may enter premises, break through obstructions, detain items or articles, inspect or make copies of documents detained, perform searches on persons, detain any persons on the premises until the search is completed, arrest without warrant any person whom he reasonably suspects to have committed or to be committing any offence under the AMLA.
Preparation before a Dawn Raid
The officers usually arrive at the beginning of the business day when businesses are least likely to be prepared.
In preparation for a dawn raid, the taxpayer should prepare a dawn raid manual and the relevant checklists ("Manual"). The Manual should be circulated to the relevant employees of the business. Next, a dawn raid response team ("Response Team") should be assembled, ideally, comprising members from the legal/compliance, information technology ("IT"), finance, tax, operations and corporate communication teams, including the receptionists. An email group should be established for the Team to ensure efficient and timely communication. Similar to a fire drill, a dawn raid drill should be conducted at regular intervals to ensure that the Team is sufficiently prepared to react to a real dawn raid and for the Team to familiarise themselves with the Manual.
Sufficient records must be kept and retained (at least for a period of seven years). Failure to retain sufficient records, without a reasonable excuse, may result in an offence which entails a fine and/or imprisonment for a term not exceeding one year. Where records are destroyed due to unforeseen circumstances, such as fire, flood or destruction by pests, before the expiry of the retention period, the taxpayer must maintain sufficient documentation of such incidents. If necessary, the taxpayer should consider lodging a police report to document the same.
The Team and relevant employees should be aware of their rights and obligations in raids and be able to identify documents that are legally privileged.
Procedures during a Dawn Raid: Initial Response
The officer is obligated to introduce himself with an authority card, explain the purpose of his visit and inform the taxpayer of the relevant legislation(s) under which the tax investigation is initiated. The receptionists, as the first point of contact, should be trained to greet the officers and ask for their credentials and their authorising documentation. This is important as it is not uncommon for bogus individuals to masquerade as IRB officers.
Whilst conducting the preliminary check on the identity of the officers, the receptionists should endeavour to contact the Team by sending an email to the Team's email group, and also contact the legal advisors in particular. Thereafter, the receptionists should escort the officers to a waiting area to await the arrival of the legal advisors. Never leave the officers unattended! The legal advisors should then verify the identities and the written authorisation of the officers again to confirm their authorisation and identity.
Where legal advisors are not available, the taxpayers can appoint external legal advisors or approved tax agents.
Procedures during a Dawn Raid: General Rule on Dealing with the Officers
Pursuant to the tax investigation framework issued by the IRB, the officer is obliged to inform the taxpayers of his powers available under the relevant legislation and more crucially, inform the taxpayers about their rights and responsibilities during the dawn raid.
Ideally, questions by the officers should only be answered in the presence of a legal advisor, whether internal or external. Taxpayers must give full cooperation to officers and not mislead them. Care should be taken not to: (i) speculate if facts cannot be recalled, (ii) volunteer information not requested, or (iii) sign anything in the absence of a legal advisor. This applies across the board to all teams dealing with the officers, in particular, IT, finance and operations teams.
Taxpayers need to be alert to ensure the officers do not inspect or seize documents that are outside the scope of the raid or that are subject to legal professional privilege. Any documents that are legally privileged should be clearly marked as such and should not be produced or disclosed to the officers. If you believe a document (or part of a document) may be privileged, ask the officers to allow you to review the document first. If it is a legally privileged document, inform the officers of the reason why such document cannot be furnished or show the officers just enough of the document to demonstrate that it is privileged.
Note, however, advice from an internal legal department is not privileged unless the contents of such advice contain text or content of advice from an external legal counsel. When in doubt, consult the legal advisor or compliance officer.
Procedures During a Dawn Raid: The Team
The taxpayers should identify a working room for the officers. Preferably, this room should not contain any sensitive documents or information, and it should be a lockable room. Access should be provided to the officers for everything that is requested, insofar as this is consistent with the advice of legal advisors. This may include access to hard copy documents and/or electronic documents and records.
If the officers request access to copying facilities, the taxpayer should ensure that these are supervised by a team member. Ensure that two copies are taken of every document copied (i.e. one for the officers and one for the business). If the officers insist on taking possession of the original documents, taxpayers should make a copy of the same and request the officers to acknowledge the seizure of the original documents. Do not destroy or conceal documents under any circumstances.
If the officers request access to the company's central IT systems, take advice from the IT Leader and legal advisors.. The officers will want to understand the structure of the IT system and may want to know how they can access individual accounts from a central source. The taxpayer's IT team's involvement is critical, they must be careful to provide access to the extent necessary but not beyond or unrestricted access. The IT team should ensure access is provided to the officers as requested, insofar as this is consistent with the advice of legal advisors. This is especially so when access is required to central IT systems and where bulk downloading of information is needed. Where search terms in electronic searches are used by the officers, take careful note of the search terms employed.
On the whole, the Team should be instructed to cooperate fully and to not obstruct or hinder the officers in any way during the investigation process. Any form of obstruction to the officers in the investigation may result in an offence committed under the ITA exposing the taxpayer and/or the employees to a fine of not more than RM10,000 and/or risk of imprisonment for not more than one year. In the event the investigation is initiated under the AMLA, the same obstruction will attract a fine of not more than RM3,000,000 and/or imprisonment not exceeding 5 years. Beware that officers can be unsympathetic to delays in obtaining information, authorisation or access.
Procedures during a Dawn Raid: Interviews
If an officer wishes to conduct an interview, a legal advisor should be present with the interviewee to give support and advice during the interview and to ensure that the taxpayer's rights are safeguarded.
Here are some general tips for the interviewee:
(i) Be prepared, stay focused, do not speculate, and understand the content of the interview;
(ii) Answer questions asked but do not volunteer information not asked for;
(iii) If the question is unclear, ask for clarification. Do not interpret, as you might misinterpret;
(iv) Provide specific answers to the questions, do not spontaneously extend the question or give examples when you feel that the officer tries to direct you (by asking suggestive questions). Do give general conclusions, especially on topics which are not within your knowledge and responsibility;
(v) If the officer is relying on outdated information, take the opportunity to update them appropriately;
(vi) Under the AMLA, the officer has the power to request that the interviewee sign a recorded statement of the interview. A refusal to do so and the reasons therefor should also be recorded by the officer. Before signing such a statement, the officer must read the statement to the interviewee and provide an opportunity to the interviewee to make any correction, if any. In this regard, a legal adviser should be present during the interview to ensure that all due processes are complied with;
(vii) Prepare a detailed and accurate report after the interview outlining the questions raised and answers supplied. The report should be retained for future reference.
After the Dawn Raid: Immediate Steps and Review
Should the Team notice any gaps during the dawn raid, immediate steps must be taken to correct or give further clarification. At the end of the dawn raid, the officers should provide a list of documents and information seized during the raid.
It would also be helpful to check whether the officers are proposing to return the next day. If they are or do return, make sure the Team is available to assist the officers and make the necessary arrangements to facilitate the investigation. From anecdotal experience, the IRB is known to revisit the taxpayer within a week or two to uncover information that may surface after the raid especially post-mortem reports.
The Team should meet promptly to review the investigation and information provided and to coordinate/manage the following:
(i) Announcement to staff/press release;
(ii) Preparation of a report of the dawn raid;
(iii) Ensure that any sealed items left by the officers are guarded safely;
(iv) Subsequent follow up action (if any); and
(v) Report to the Operational Risk Committee or any relevant committees.
Dawn raids can be handled wisely, and the risks can be mitigated with the proper Manual, protocol and reinforce through drills.