1

News 1

Australia 2

China 5

Hong Kong 7

Indonesia

8

Malaysia 10

Singapore 12

2012 will be a busy year for election – in the United States, China, Taiwan and Hong Kong. If electoral promises are what they are, we should be seeing silver lining on the horizon after a rather dim 2011. A recent WSJ article said that franchising business will rebound in 2012 – thus promising a good start for the new year. With that, we wish our readers all the best in 2012.

APAC News

31 December 2011

Volume 3, Issue 4

Back in 2008, Obama’s

election slogan was

‚Change‛. A number of

our articles in this

Newsletter also cover

transformation and

changes. To start off,

Australia has the new

Clean Energy Plan –

introducing Carbon Pricing

for a greener tomorrow.

China will launch a pilot

program of BT-VAT

transformation in Shanghai

so that businesses in the

provision of goods and

services sectors will be on a

more level playing field

when it comes to paying

turnover (BT or VAT) tax.

Hong Kong has seen rapid

changes in treaty

networking. Following the

signing of a number of

comprehensive tax treaties,

some application issues

have been identified by the

profession. The authority

now has answers to these

issues.

Indonesia has followed the

footstep of other tax

developed nations and

issued regulations on

adopting arm’s length

principle for transfer

pricing.

Inside this issue:

News of our regional firms

Malaysia - ACCA –

Approved Employer

Certificate Presentation

Ceremony.

Russell Bedford Malaysia

has been awarded the

Approved Employer

Trainee Development

Silver Level and

Professional

Development by ACCA

in August 2011. In

conjunction with this, a

certificate presentation

ceremony was held on 12

October 2011 in our

office. Ms. Jennifer

We also feature a 2012

Malaysia Budget Highlights

where the theme is

‚National Transformation

Policy‛. Meanwhile, the

country has introduced a

new penalty regime for late

filing.

We close this issue with an

article by Singapore on

Analytical Review

Procedures – which

provides a good insight on

how these procedures can

be used to improve audit

effectiveness and efficiency.

Transformation & Changes

2

Highlights:

ACCA

accredited

employer

With the passing of the

Clean Energy Bill 2011 in

November 2011, the

Australian Government

is implementing its plan

for a Clean Energy

Future for Australia. The

plan is to introduce a

Carbon Pricing

Mechanism into the

economy, creating a

financial incentive to

reduce carbon emissions,

thus cutting pollution

and driving investment

into renewable energy

sources. This plan will

have accounting,

The Clean Energy Plan

management reporting

and tax implications for

businesses.

Who will the Carbon

Pricing Mechanism

apply to?

In general, the Carbon

Price will apply to

companies generating

over 25,000 tonnes of

CO2-e emissions each

year- covering around

500 of the businesses

operating in Australia.

This means the vast

majority of Australian

businesses will not be

covered by the carbon

price, and households

and small businesses will

have no direct

obligations under this

mechanism.

This is quick guide, taken

from The Government’s

Clean Energy Future

website, for determining

whether a business is

likely to have obligations

under the Carbon Price.

The NGER Act is the

National Greenhouse and

Energy Reporting Act

Lopez, Country Head of

ACCA Malaysia,

presented the award to

our Partner, Mr. Cecil

Chin Kim Chung for

Russell Bedford

Malaysia’s good

standards of practice

related to continuous

professional

development of our

people.

With this recognition and

award, ACCA and

Russell Bedford Malaysia

have strengthened our

relationship through a

professional partnership

which will see ACCA

provide enhanced

professional and career

development support to

grow and develop as

accounting professional

for the future.

AUSTRALIA

(Continued)

“…vast

majority of

Australian

businesses will

not be covered

by the Carbon

Pricing…

3

AUSTRALIA

“…the Government

will set the cap by

issuing a fixed

number of carbon

permits each

year…”

2007. Most Australian

businesses that will be

liable under the carbon

pricing mechanism

already have reporting

obligations under the

NGER Act.

As a guide, businesses

emitting more than

25,000 tonnes of CO2-e,

or consuming more than

25,000 megawatts of

electricity or 2.5 million

litres of fuel in a year, can

expect to be required to

report their greenhouse

gas emissions, energy

consumption and

production data under

the NGER Act. These

businesses are also likely

to have obligations under

the carbon price.

What is the Carbon

Pricing Mechanism?

Starting 1 July 2012, the

Government will require

covered businesses to

pay for each tonne of

carbon pollution emitted

into the atmosphere.

This will be a two-stage

mechanism.

First is a fixed price

period. For the first three

years, the price for each

tonne of carbon will be

fixed. The price will start

at $23 per tonne on 1 July

2012, rising by 2.5% per

year in real terms

(assuming inflation of

2.5% a year). The carbon

price will be $24.15 per

tonne in 2013-14 and

$25.40 per tonne in 2014-

15.

Second is a flexible price

period starting 1 July

2015. The carbon price will

not be fixed but instead set

by the market. An overall

cap will be placed on

Australia’s annual

greenhouse gas emissions

from all pollution sources

covered by the price. The

Government will set this

cap by issuing a fixed

number of carbon permits

each year, of one tonne of

pollution per permit.

Some permits will be sold

by the Government at

auction, while others will

be allocated to businesses.

Businesses will be able to

sell the permits they have

received from the

Government.

‘Safety valves’ will be built

into the system for the first

three years of the flexible

price period to prevent

sharp upward or

* Under the Carbon Pricing Mechanism the NGER Act will be extended to cover

Government facilities and facilities located in external territories, the exclusive economic

zone, waters of the continental shelf and the Joint Petroleum Development Area. Such

facilities could be liable under the Carbon Pricing Mechanism.

** Previous NGER reporting requirements only extended to constitutional corporations.

Liability under the carbon pricing mechanism will extend to a wider range of entities.

Consequently some liable entities under the mechanism will not have previously reported

under NGER.

*** Users with less than 25 kilotonnes of direct emissions from use of natural gas annually.

(Continued)

No

Yes

Do you currently report to NGERS, or operate a landfill, or are

you a natural gas supplier?

No

Yes

Yes

No

Yes Do you supply natural gas

to small end users?***

Are you a natural

gas supplier?

Do you operate any facilities that have over 25 kiotonnes ** of

direct (scope 1) emissions after deducting emissions from:

- liquid fuels, LPG, CNG and LNG;

- synthetic greenhouse gases (excluding PFCs from

aluminium smelting); and

- decommissioned coal mines?

You are

unlikely to be a

liable entity*

You are a

liable entity

You are a

liable entity

You are

unlikely to be a

liable entity*

4

AUSTRALIA

(Continued)

downward movements

in the price. The first

‘valve’ is a price ceiling,

to be set $20 higher than

the expected

international carbon price

at the start of the flexible

price period. The second

is a price floor,

preventing the carbon

price from falling any

lower than $15 a tonne in

2015-16. Both the price

ceiling and the floor will

increase gradually each

year.

How will this affect

households and small

businesses?

The companies with

direct obligations under

this mechanism will most

likely pass the cost of this

tax onto customers, in the

form of higher prices.

The Government plans to

support households and

small businesses using

the revenue generated

from the carbon price.

The Government has

committed to using over

50% of the carbon price

revenue to support

households. From 1 July

2012, all taxpayers with

incomes up to $80,000

will receive a tax cut,

with around 60% of

taxpayers getting a tax

cut of at least $300. No

one will pay more tax.

Further tax cuts will be

delivered in 2015 for all

taxpayers with incomes

up to $80,000, with most

receiving a tax cut of up

to $385 in total.

To support small

business, the small

business instant asset

write-off threshold is

being increased from

$1,000 to $5,000 from

2012-13, subject to the

passage of the Minerals

Resource Rent Tax

legislation. The

Government will further

increase the threshold

from $5,000 to $6,500.

This applies to small

businesses with an

aggregate turnover of

less than $2 million a

year from 2012-13.

Improving energy

efficiency in

communities,

households, and

business

The Government’s Low

Carbon Communities

program will be

expanded to provide

additional support

through competitive

grants for local councils

and community

organisations. This will

encourage them to

undertake energy

efficiency upgrades and

retrofits to council and

community-use

buildings, facilities and

lighting. This will reduce

their energy costs and

serve as demonstration

projects to promote long-

term energy efficiency

behaviour change in the

community. Funding for

the program will be

increased from $80

million to $330 million.

Households can also

reduce carbon pollution

and increase cost savings

by examining their

electricity, gas and fuel

consumption. The Clean

Energy Plan has outlined

these possible actions to

improve energy efficiency

and save money at home

(the following are

estimated for a family of

four):

- Washing clothes in

cold rather than hot

water could save

around $90 each

year.

- Using a clothesline

instead of an electric

dryer once a week

could save around

$55 a year.

- Switching off

appliances at the

wall could save up to

$100 per year in

standby power.

- Switching from

incandescent light

bulbs to compact

fluorescent lights

could save around

$160 per year.

- Fitting a low-flow

showerhead and

taking shorter

showers could save

up to $550 per year.

- Once installed, a

solar hot water

system replacing an

electric system could

save over $400 per

year.

(Note: savings for

individual households

will vary depending on

individual circumstances.)

“…to support small

business, the small

business instant

asset write-off

threshold is being

increased…”

5

China will launch the Pilot Program of BT-VAT Transformation in Shanghai

The Chinese State

Council announced on 26

October 2011 that it will

launch the much -

anticipated pilot program

of BT-VAT

Transformation on 1

January 2012. Following

the announcement, on 16

November 2011, the

Ministry of Finance

(‚MOF‛) and the State

Administration of

Taxation (‚SAT‛) jointly

released two important

implementation circulars

(‚Circulars‛) on the Pilot

Program in Shanghai,

which will be effective

from 1 January 2012.

Background

Under the existing

Chinese indirect tax

system, supply of goods

and provision of certain

services are subject to

VAT and Business Tax

(‚BT‛) respectively.

Under the VAT system,

VAT is levied on value

added in the

manufacturing/

distribution chain and

VAT incurred by

suppliers in the chain can

be credited (input VAT).

By contrast, without the

credit mechanism, BT

incurred by suppliers in

the supply chain is

irrecoverable for

taxpayers; neither can BT

payers recover any VAT

costs embedded in goods

and materials provided

by suppliers. The

different taxation

mechanisms of the VAT

and BT systems lead to a

number of issues, such as

double (or multiple)

taxation for BT payers as

no input tax credit is

available for them.

Expanding the scope of

VAT to include services

subject to BT has been

long anticipated to

resolve the issues arising

because of the non-

recoverability of BT.

The Shanghai Pilot

Program is expected to

undertake an initial

assessment of the

proposed changes and to

understand the full

impact of the changes,

before the transformation

is expanded to all service

sectors and nationwide.

Highlights of the Pilot

Program

The Circulars confirm that

the pilot program will

commence in Shanghai on

1 January 2012. The initial

pilot will be applicable to

specific service sectors

only in Shanghai; the pilot

will then be expanded to

other regions, or

nationwide, for specified

sectors when conditions

permit; and finally the

VAT reform is expected to

be rolled out nationwide

for all service sectors.

“the different

taxation

mechanisms of

the VAT and BT

systems lead to

a number of

issues…”

AUSTRALIA Businesses can seek to be

more energy efficient in

their offices. Commercial

Building Disclosure is a

national program for

disclosure of up-to-date

energy efficiency ratings.

This helps commercial

tenants identify buildings

that cost less to run.

From 1 July 2012, eligible

businesses that invest in

improving the energy

efficiency of their existing

buildings will be able to

apply for a tax break

through the $1 billion Tax

Breaks for Green

Buildings Program.

CHINA

(Continued)

6

“…the Program

makes

Shanghai very

attractive for

service

providers…”

CHINA

(Continued)

The Circulars also

address various related

issues, such as cross-

region supplies and

cross-border supplies.

For imported services,

the general rule is if

either the service

provider or the service

recipient is located in

China, the provision of

services under the pilot

will be considered to be

provided in China and,

thus, subject to VAT.

Thus, all services

supplied from overseas

to Shanghai are taxable in

Shanghai. For taxable

services supplied from

Shanghai to overseas, no

VAT is levied. However,

it is unclear whether such

supplies will be VAT

exempted or zero rated.

Observations

The Program makes

Shanghai very attractive

for service providers to

set up business

(companies) to engage in

Pilot Services there.

Similarly, in most cases,

Shanghai Pilot

Enterprises (being service

providers) will become

more attractive to

customers in purchasing

their services, in

particular where the

customers can claim

input VAT credit.

It is expected that the

State Council may decide

to further expand the roll

out of the Pilot Program

step by step to cover all

regions of China

ultimately as well as all

service industries that are

currently subject to BT,

based on the outcome and

experience gained from

the Shanghai Pilot

Program, in the next 3-5

years.

The scope of application and applicable VAT rates are as follows:

Pilot Industries (Services) Applicable

VAT Rates Prevailing

BT Rates

Transportation Industry 11% 3%

Certain Modern Service Industries:

- R&D and technical services

- Information technology services

- Creative cultural services

- Logistics and ancillary services

- Attestation and consulting services

- Tangible movable property leasing services

6%

17%

5%

Small Scale Pilot Enterprises (<5m)* 3%

Note: The mandatory VAT registration requirement for general VAT payers is set at RMB

5 million of annual sales revenue. Those unqualified enterprises will be classified as

small-scale taxpayers and subject to lower rate of 3% without input VAT credit.

7

Application of treaty

provisions

Hong Kong has entered

into comprehensive

double tax agreement/

arrangement ("CDTA")

with various countries.

Most of these CDTAs

include, in the dividends

/ interest/ royalties

articles, a provision that

requires the recipient of

such incomes to be the

beneficial owner of the

incomes. There is also a

limitation of benefits

clause that denies the

benefits of the relevant

article if the main

purpose of any person

concerned was to take

advantage of that article.

Furthermore, contracting

parties may also apply

their domestic laws and

measures concerning tax

avoidance to deny treaty

benefit.

As a result, the

contracting parties’

interpretation of

‚beneficial owner‛ and

application of their

domestic anti-treaty

shopping rules may

affect a Hong Kong

resident’s eligibility for

treaty benefits under a

CDTA.

Beneficiary owner

For example, Mainland

China has rules (in

Guoshuihan [2009] No,

601) on assessing

beneficial ownership for

the purpose of claiming a

treaty benefit whereas

Indonesia has issued a

series of anti-treaty abuse

regulations that impose

requirements (e.g.

claimant must have

substance) for enjoying a

treaty benefit under an

Indonesian treaty.

In the annual meeting

between the profession

(HKICPA) and the Inland

Revenue Department

(IRD), the profession has

sought clarification from

the IRD on differences in

the interpretation of

these anti-treaty

shopping rules and the

IRD’s interpretation of

‚beneficial ownership.

The IRD has confirmed

that whilst Hong Kong

was a common law

jurisdiction and the term

‚beneficial ownership‛

had a narrow technical

meaning in the domestic

law, many of Hong

Kong’s treaty partners

would interpret the term

in the context of a tax

treaty – with the view

that the object and

purposes of tax treaty

include the avoidance of

double taxation and the

prevention of fiscal

evasion.

Generally, the ‚beneficial

ownership‛ limitation

would exclude: mere

nominees or agents who

were not owners of the

income; and conduits

who, though formal

owners of the income,

had very narrow powers

over the income or did not

have the full privilege

directly to benefit from the

income which rendered

the conduits a mere

fiduciary or administrator

of the income.

In this regard, the IRD

advises that Hong Kong

would generally follow

OECD’s Commentaries

and interpretation

elaborated in the Model

Tax Convention, which

reflects the limitation as

above.

Domestic anti-avoidance

On the application of the

domestic anti-avoidance/

anti-treaty shopping rules

by treaty partners, the

profession asked the IRD

whether this can be

clarified in order to

provide greater certainty

to Hong Kong taxpayers.

The IRD remarked that

each treaty had, as one of

its main purposes, the

prevention of fiscal

evasion, and jurisdictions

were more than ever

adamant to avoid any

double non-taxation

brought about or

facilitated by the treaties

in a bid to protect the tax

revenue. There were also

sovereign issues

sometimes. Accordingly,

there were obvious

limitations in what the

IRD could do in this

respect.

“… Hong Kong

would

generally

follow OECD’s

Commentaries

…”

Serving Hong Kong Since 1994

Treaty provisions HONG KONG

8

Quoting an example, for

a special purpose vehicle

(‚SPV‛) established by a

Hong Kong company to

hold investments in the

Mainland, it is technically

possible for the Mainland

to adopt a narrow view

in the interpretation of

‚beneficial ownership‛ to

deny the treaty benefits.

The IRD explained that

the SAT (State

Administration of

Taxation in China) had to

act cautiously to avoid

abuses. However, the

IRD understands that the

SAT were aware that it is

a commercial norm to

hold investment through

SPV and the SAT were

reconsidering the issue to

allow ‘look-through’ and

grant relief.

Attributing profits to a

PE in Hong Kong

In determining the source

of a profit for Hong Kong

profits tax purpose, the

broad guiding principle

is to see what the

enterprise has done to

earn the profits in

question and where the

profit-producing

operations have been

performed.

The IRD explained that

Article 7(2) of the OECD

Model Tax Convention

stated that the profits that

were attributable to the

PE in each contracting

state were the profits it

might be expected to

make. For dealings with

other parts of the

enterprise, the PE should

be treated as if it were a

separate and

independent enterprise

engaged in the same or

similar activities under

the same or similar

conditions - taking into

account the functions

performed, assets used

and risks assumed by the

enterprise through the PE

and through the other

parts of the enterprise.

Accordingly, the IRD

would expect the PE in

Hong Kong to make up its

accounts and report the

profits according to the

arm’s length principle

endorsed by the OECD

Model. Thus if a profit of

the PE as shown in its

accounts was derived

from Hong Kong, the

profit would be fully

charged to profits tax and

would not be reduced

unless (a) there was an

upward profit reallocation

adjustment by the tax

administration of the other

CDTA jurisdiction and (b)

the adjustment was agreed

by the IRD both in

principle and in amount.

Such a reduction is in line

with the obligation to

provide relief as contained

in the Methods for

Elimination of Double

Taxation Article.

Arm’s length principle in transaction with related parties

“…the SAT has to

act cautiously to

avoid abuses…

INDONESIA

HONG KONG

(Continued)

Implementation of the

Arm's Length Principle in

Transaction between

Taxpayers and Related

Parties. The Regulation is

effective for Transfer

Pricing on transactions

conducted by Domestic

Taxpayers or Permanent

Establishment in

Indonesia with Foreign

Taxpayers outside of

In the context of giving

certainty and smoothness

in implementing the

Arm's Length Principle

between Taxpayers and

related parties, the

Government of Indonesia

on 11 November 2011

issued the Regulation of

Director General of Taxes

No: PER-32/PJ/2011 on

the Change of

Indonesia.

Pursuant to the

regulation, the Arm’s

Length Principle (ALP) is

a principle which

regulates that in case the

condition in transaction

conducted between non-

related parties is the same

with or proportional to

condition in transaction

9

Methods of Transfer

Pricing that can be

applied are:

a. Comparable Price

Method between

Related Parties

(Comparable

Uncontrolled

Price/CUP);

b. Resale Price Method

(RPM);

c. Cost Plus Method;

d. Profit Split Method

(PSM); or

e. Transactional Net

Margin Method

(TNMM)

Even though there are

varied Choices of

Transfer Pricing as

aforementioned, to

determine the most

appropriate transfer

price, the following

matters should be

considered:

a. strength and

weakness of every

method;

b. suitability of

Transfer Pricing

method for the basic

nature of

transaction between

related parties

which is

determined based

on the functional

analysis;

c. availability of

reliable information

(relating to

transaction between

non-related parties)

to apply the

selected method

and/or other

method;

d. Comparability level

between transaction

conducted between

related parties that

become comparer, price

or profit in transaction

conducted by related

parties shall be the same

with or be in the range of

price or profit in

transactions conducted

between non-related

parties.

The Regulation asks

Taxpayers to apply the

Arm's Length Principle in

implementing transaction

with related parties. The

Arm's Length Principle

(ALP) is based on the

norms; i.e. the price or

profit on the transaction

conducted by non-related

parties are determined by

the market power, so that

the transaction reflects

the Fair Market Value

(FMV). The Arm's

Length Principle is

conducted with the

following steps:

a. to conduct

Comparability

Analysis and

determine the

comparer;

b. to determine the

correct method of

Transfer Pricing;

c. to apply the Arm's

Length Principle

based on the result

of Comparability

Analysis and the

correct method of

Transfer Pricing in

the transaction

conducted between

Taxpayers and

related parties; and

d. to record every step

in determining Fair

Price or Fair Profit

pursuant to the

effective regulations

of law on taxation

Comparability Analysis

aforementioned in item a

and c can be made based

on the internal as well as

external comparability

data.

Included in the Internal

Comparing Data is the

Fair Price or Fair Profit

data in the transaction

proportional to that

conducted by the

Taxpayers with related

parties, while External

Comparing Data is the

Fair Price or Fair Profit

data in the transaction

proportional to that

conducted by Taxpayers

with non-related parties.

In case the Internal

Comparing Data already

meets factors that

influence the

comparability level, the

External Comparing Data

is not necessary.

In this Comparability

Analysis, Taxpayers are

obliged to document

initiatives, studies, and

study results of Internal

Comparing data and/or

External Comparing Data

as well as keep books,

notes, or documents

pursuant to the effective

regulations.

To determine the

method of Fair Price or

Fair Profit, it is

obligatory to perform

study to determine the

method of Transfer

Pricing as the most

appropriate method.

INDONESIA

(Continued)

“…Taxpayers are

obliged to

document

initiatives, studies,

ad study

results…”

10

among related

parties and

transaction among

non-related parties,

including the

reliability of

comparability

which is conducted

to remove the

material influence of

the existing

difference

“…the time bar for

tax audits be

reduced from 6

years to 5 years…”

INDONESIA

(Continued)

2012 Malaysian Budget highlights

RUSSELL BEDFORD MALAYSIA

MALAYSIA The 2012 Budget was

unveiled by the

Honourable Prime

Minister, YAB Dato’ Sri

Mohd. Najib Tun Razak

on 7 October 2011 with

the theme ‚National

Transformation Policy:

Welfare for the Rakyat,

Well-Being of the

Nation‛. The five key

focus of the 2012 budget

with the proposed

spending of RM232.8

billion are:

Accelerating

investment

Generating human

capital excellence,

creativity and

innovation

Rural

transformation

programme

Strengthening the

civil service

Easing inflation

and enhancing the

well-being of the

rakyat (people)

Some of the salient

proposed changes

include:

Amendment to the Real

Property Gains Tax

(“RPGT”) rate

As a measure to curb the

rising prices of properties

in Malaysia which was

spurred by the

speculative activities of

property investors, the

Government has in the

2012 budget revised the

RPGT rate to 10% for

disposal with holding

period of up to 2 years.

The existing rate of RPGT

is 5% for holding period

of up to 5 years.

Compensation for Late

Refund of Income Tax

As a measure to enhance

efficiency and to expedite

the repayment of tax

overpaid, it has been

proposed that a

compensation of 2% per

annum be given on the

amount of tax refunded

late by the Malaysian

Inland Revenue Board

with effect from YA 2013.

Time bar for tax audits

To encourage investors to

invest in Malaysia these

investors would want to

have a certain degree of

certainty in their business

affairs. In this respect, it

has been proposed that

the time bar for tax

audits be reduced from 6

years to 5 years from the

date a tax assessment is

made. This however,

does not apply to cases of

fraud, willful late

payment and negligence.

Rationalization of tax

incentive for shipping

companies

The shipping industry has

been enjoying 100% tax

exemption on its income

for a considerable length

of time. In the 2012

budget, this 100% tax

exemption has been

curtailed by limiting the

exemption to 70%. There

are also additional rules

being introduced on the

treatment of losses

determination of income

of each ship as a separate

and distinct business

source.

Tax incentives – Financial

services

In line with one of the key

focuses of the 2012 budget

which is to accelerate

investments, the

Government has been

escalating its effort to

develop Malaysia into a

competitive financial hub.

This initiative can be seen

through the proposal of

the following incentives:

(i) Treasury Management

Centre

To encourage

multinational corporations

to locate their businesses

to the Treasury

Management Centre in

Malaysia, the range of

11

MALAYSIA

(Continued)

Prior to this, the penalty

imposed for late filing of

tax returns is based on

the table published in the

MIRB’s website where

penalties are imposed

based on the number of

offences committed with

a minimum penalty of

RM200 for the first

offence up to a maximum

of RM20,000 for the tenth

offence.

In view of the massive

penalties involved if the

returns are submitted

late, it has now become

imperative for companies

to adhere strictly to the

filing deadline which is

seven months from the

close of the financial year

end.

“…the new

penalty rates will

range from 20%

to 35%...”

In September 2011, the Malaysian Inland Revenue Board (‚MIRB‛) announced the new

penalty regime for late lodgement of tax returns. The new penalty rate will range from

20% to 35% of tax payable before any set-off, repayment or relief as follows:

Period from the filing deadline of submitting tax return

Penalty rate %

Up to 12 months

> 12 months – 24 months

> 24 months – 36 months

> 36 months

20%

25%

30%

35%

incentives include 70%

tax exemption on income

from qualifying treasury

services rendered in its

related companies for a

period of 5 years and

withholding tax

exemption on interest

payments made to non-

resident banks and

related companies.

(ii) Kula Lumpur

International

Financial District

The Kuala Lumpur

International Financial

District (‚KLIFD‛) is a

proposed joint property

development comprising

office towers for finance

and banking, residences

and retail spaces.

To accelerate the

development of KLIFD,

the proposed incentives

include:

(a) Income tax

exemption of 100%

for 10 years

(b) Income tax

exemption of 70%

for a period of 5

years for property

developers in

KLIFD

(c) Stamp duty

exemption on loan

and service

agreements

(d) Industrial

Building

Allowance and

accelerated

allowance for

KLIFD Marquee

companies

Despite the need to

reduce the budget deficit

which has plagued the

Malaysian economy for

the past decade, Budget

2012 is rather tax neutral

as no new taxes were

introduced and neither

were there any

substantial increase in tax

rates. There was also no

mention on the

implementation date of

the much anticipated

Goods and Services Tax.

Late filing penalties – New penalty regime

12

Analytical review procedures

Analytical review

procedures are an

integral part of the audit

process. It is not merely

an analysis of financial

information such as

ratios and trends; it is the

study and comparison of

relationships among

financial and non

financial data,

performance indicators

and trends. The more

critical and useful aspects

of analytical review

procedures include the

resulting investigations

of significant deviations

and relationships that are

inconsistent with other

relevant financial

information or which

deviate a significant

amount from predicted

amounts. When used

correctly, analytical

review procedures have

the potential to increase

the efficiency of audits.

The successful

application of analytical

review procedures is

based upon the

expectation that certain

relationship among data

exist and will continue in

foreseeable future,

provided conditions

remain unchanged or

there is minimal change.

Analytical review

procedures involve the

following:

A comparison of

financial information

with prior periods,

budgets or

anticipated results,

forecasts, similar size

industry

information,

industry trends; and

Consideration of

predictable

relationships, such

as gross profit to

sales, receivables to

sales, payroll costs to

employees.

Analytical review

procedures are widely

used in substantive tests,

to obtain audit evidence

related to account

balances or classes of

transactions. In some

cases, they can be more

efficient and effective

than tests of details for

achieving particular

substantive testing

objectives. Analytical

procedures used in

substantive audit testing

are commonly referred to

as substantive analytical

review procedures; they

are more effective where

the volume of data is

large and the auditor is

using a limited sample

size.

The process

Step 1 – Form an

expectation

The underlying premise

of analytical review

procedures is, there are

credible or plausible

relationships that can

reasonably be expected to

exist among financial and

non-financial data. The

auditor seeks to first

identify those key

relationships, for

example, industry market

trends and client’s

revenues, square footage

and rental revenue, that

best achieve his objective

of substantiating or

corroborating the account

balances he is testing.

Then he develops an

expectation, based on his

knowledge of the

business, industry, trends

and from discussions

with his client.

Using sales as an

example, he might base

his expectation of the

current year’s sales to

prior year’s sales and

adjusts for factors such as

price increase or new or

loss of major customers.

He then compares the

expectation with the

current market trends

and economic

environment. This

procedure can be

extended to include gross

profit to sales ratio and

receivables to sales ratio

by obtaining the

industry’s or similar size

company’s gross profit

and receivables to sales

ratio and comparing with

his client’s.

The more reliable the

information, the more

precise will be the

expectation and

therefore, the greater will

be the potential reliability

of the analytical

procedure. This step,

“…they are more

effective when the

volume of data is

large…”

SINGAPORE

13

which is developing an

expectation, is the most

important step in using

analytical review

procedure effectively.

Step 2 – Define the

threshold

Next, the auditor

determines or defines

what amount of potential

misstatement is

acceptable to him (‚the

threshold‛), below which

he decides the amount of

difference or deviation

from the expectation can

be accepted.

Step 3 – Compare and

investigate

The third step is the

comparison of the actual

or recorded values or

results with the expected

values. This step

identifies the differences

from the expected results

and based on whether it

falls within or exceed the

threshold the auditor has

determined in Step 2

above, the auditor now

has a basis for

determining the extent of

any additional work he

may need to perform as

audit evidence to the

completeness, accuracy

and occurrence of

transactions/or balances.

If the difference exceeds

the threshold, he

investigates by obtaining

explanations and

performs the necessary

audit procedures to

corroborate the

explanation. For

example, the auditor

documentation

The fourth step is

documentation. The

auditor documents in his

audit work papers, the

nature of the assertion,

the identification of the

relationships and types of

data used and results of

the comparison of the

expectation with the

recorded amounts or

ratios. This is followed by

an explanation for the

material difference and a

description of the

additional audit

procedures he performed

and the evidence he

obtained that

corroborates the

explanation. Finally, he

documents his conclusion

as to the adequacy of the

explanation.

Timing and purpose of

analytical review

Analytical procedures are

performed at all three

stages of the audit; the

planning phase, detailed

testing phase and the

completion phase.

Planning phase

Analytical procedures are

used as risk assessment

procedures in the audit

planning stage. The

auditor performs

analytical procedures to

help him gain a better

understanding of the

client’s business, its

financial performance

relative to prior years and

its relevant industry.

These procedures aid him

to identify and prioritise

performs analytical

procedure on revenue at

the planning stage of the

audit. His client tells him

his major customer who

makes up 50% of

revenue, is not doing well

because of the Euro zone

debt crisis and sales have

fallen as much as a third.

All other factors remain

constant. With this

information and taking

into consideration also,

market and industry

trends, he forms an

expectation on the

current year revenue

results and determines

the threshold for

potential misstatement,

and an expectation that

the difference does not

exceed that threshold.

When it does, he needs to

investigate and obtain

adequate explanations

and appropriate

corroborative audit

evidence because the

difference may indicate

an increased risk of

material misstatement.

For example, the

difference can be a result

of omission; his client

may have omitted a

significant sale. He then

proceeds to obtain

evidence to support that

explanation, and perform

the necessary detailed

substantive audit

procedures until he is

satisfied that the work

performed is sufficient to

adequately explain a

significant portion of the

difference.

Step 4 – Drawing

conclusion and

SINGAPORE

(Continued)

“…performed at all

three stages of the

audit…”

14

potential areas of risk;

and assess the risk of

possible material

misstatements. The

results from the

analytical review

procedures performed at

the planning stage helps

him in determining the

nature, timing and extent

of audit procedures and

detailed testing, and in

the process enable him to

develop a more effective

audit strategy.

Testing phase

During the testing phase,

the auditor uses

analytical procedures as a

substantive procedure in

collecting appropriate

audit evidence when he

considers its use to be

more effective or efficient

than tests of details. It

aids him in reducing risk

of material misstatements

at the assertion level to

an acceptably low level.

Analytical procedures

can be performed with

other substantive

procedures. It can be

more effective than test

of details as it provides

conclusion on the

reasonableness of the

accounts tested. Most

common techniques

include reasonableness

test, ratio analysis, and

trend analysis.

Completion phase

During the completion

phase of the audit, the

auditor uses analytical

review procedures as

part of an overall review

of the financial

statements to aid him in

assessing whether they

are consistent with his

understanding of his

client’s business and also

in forming a conclusion

on the fair presentation of

his client’s financial

statements.

In summary

Analytical review

procedures is an efficient

and may be the only

effective tool for the

auditor to use when he

has to audit an entity

with a large volume of

transactions. The

effectiveness of analytical

review procedures

depends on the auditor’s

understanding of his

client’s business and the

use of his professional

judgment.

“..aids him in

reducing risks of

material

misstatements at the

assertion level…”

SINGAPORE

(Continued)

15

Business consultants with a global perspective

Australia - Melbourne

Bruce Saward

bruce@sawarddawson.com.au

www.youraccountant.com.au

Australia - Perth

John Van Dieren

jvdieren@stantons.com.au

www.stantons.com.au

Australia - Sydney

Greg Ralph

gralph@gouldralph.com.au

www.gouldralph.com.au

China - Beijing / Shanghai

Guoqi Wang

guoqi_wang@huaander.com

www.huaander.com

China - Hong Kong / Guangzhou /

Shanghai

Jimmy Chung

jimmychung@russellbedford.com.hk

www.russellbedford.com.hk

India

Shreedhar T. Kunte

sharp@bom3.vsnl.net.in

www.sharp-tannan.com

Indonesia

Syarief Basir

sbasir@russellbedford.co.id

www.russellbedford.co.id

Korea (South)

Kiwun Suh

kws@cjac.kr

www.cjac.kr

Malaysia

Loh Kok Leong

lohkl@russellbedford.com.my

www.russellbedford.com.my

Mauritius

Jaye C. Jingree

jjingree@krossborder.intnet.mu

www.krossborder.com

Pakistan

Rashid Rahman Mir

rsrirlhr@brain.net.pk

Philippines

Marcelino Mercado

info@mcjcpas.ph

www.mcjcpas.ph

Singapore

Douglas Tan

douglas@stcsamasmgt.com.sg

www.strb.com.sg

Taiwan

Arthur Lin

jsgcpa@russellbedford.com.tw

www.russellbedford.com.tw

Vietnam - Hanoi

Hung Duy Pham

hung.duy.pham@ktcvietnam.com

www.ktcvietnam.com

Vietnam - Ho Chi Minh City

Van Anh Thai

van.anh.thai@ktcvietnam.com

www.ktcvietnam.com

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