Saturday, January 22, 2022

On LHDN accessing taxpayers’ bank accounts

The new power granted to LHDN may not be widely applicable or implemented against people on the street who have been complying with their income tax obligations.

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The much talked about proposal to introduce a new section, i.e. Section 106A, of the Income Tax Act 1967, was passed through the Finance Bill 2021 in the Dewan Rakyat on Dec 15, 2021. This new Section 106A grants the power to the director general of inland revenue (DGIR) to call for bank account information for the purpose of making a garnishee order application.

Following the passing of the Finance Bill, there have been various headlines, discussions, and speculations surrounding this topic. Many have wrongly interpreted the true intention of the introduction of this new section. A simple interpretation is that now the Inland Revenue Board of Malaysia (LHDN) can ask for one’s bank account information and use that information to impose income tax and collect additional tax. It is intended to promote tax compliance and provide the ability to recover tax debts due to the government.

It is important for Malaysian taxpayers to really understand this new power granted to LHDN under Section 106A so that they are not misguided. The power to call for bank account information must be for the purpose of making garnishee order application. One must be clear of the definition of garnishee proceedings.

Garnishee proceedings is a process of enforcing a money judgment by the seizure or attachment of debts due or accruing to the judgement debtor that form part of his property available in execution. This would mean that a civil proceeding must have been instituted against a person and a judgment has been obtained against that person for LHDN to be able to obtain the bank account information of that person from the financial institutions. The purpose of obtaining such bank account information is for LHDN to make the application to the court for a garnishee order (i.e. to recover tax due and payable by the person to the government).

The DGIR must have a notice under his hand to request for such information. The new Section 106A does not permit or extend the power to the DGIR/LHDN to obtain such information for other purposes.

In addition to the above, Subsection (2) of the proposed Section 106A prohibits the financial institution from disclosing to any person that such request was made to the financial institution. This does not mean that LHDN has a free hand to ask for bank account information of a taxpayer from financial institutions in “secret” or “private” without the taxpayer’s knowledge. The personal and bank account information of taxpayers is still protected by the respective banking secrecy laws, such as the Personal Data Protection Act 2010 (PDPA).

There are also a few other observations that can be made from this Section 106A. “Financial institutions” in question here only covers the banks (including Islamic banks and development financial institutions). This shows that the new power granted does not extend to investment accounts with asset managers, fund managers, and life insurers.

Another important point is the term “bank account information” itself. It is unclear which bank account falls under the purview of the request to be made under this new section, i.e. Would it be confined to savings and current accounts? Would LHDN consider the financing accounts/loan accounts that the taxpayer needs to serve? Would LHDN consider the commitment attached to the bank account, e.g. capital commitment for a loan, standing order to pay bills or staff salaries etc?

From another point of view, the banks themselves would need to set up robust processes to address the request for bank account information by LHDN under the new Section 106A and protect the confidentiality of such request. Failure to do so would expose the banks to a fine of RM200 to RM20,000 or imprisonment for a term of 6 months or both under Section 120A of the Income Tax Act 1967.

The public at large should not be worried by the introduction of the new Section 106A. The new power granted to LHDN can be seen as far-fetched but in reality, it may not be widely applicable or implemented against people on the street who have been complying with their income tax obligations.

Mohd Fariz Mohd Faruk is tax audit and investigation executive director of Deloitte Malaysia.

The views expressed in this article are those of the author(s) and do not necessarily reflect the position of MalaysiaNow.

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