As some of our clients and readers know from direct experience, the Myanmar Internal Revenue Department (IRD) has recently instituted a tax audit system for review of historic filings and assessments for specific periods. Myanmar has long had relatively low levels of tax compliance and tax collection, with the lowest tax take as a percentage of GDP in ASEAN. That being the case, and in particular in the current constrained economic circumstances, the IRD taking a more pro-active role in tax enforcement and collection is a positive development. However, anecdotal experience to date indicates that the new tax audit process is hampered in practice by the technical and capacity constraints that unfortunately frequently make dealings with the IRD more difficult than they might otherwise need to be.
Audit scope
Based on audit request letters sent to our clients, the IRD is specifying a particular financial reporting period to be audited and requesting that the relevant company provide the following documents and information for that period:
General ledger
Journal of assets and liabilities
Trial balance and adjustments
Fixed assets record
Bank passbooks and bank statements for all bank accounts
Audited financial statements
Manuals of internal accounting policies and procedures
Detailed information, contracts and other documentary evidence relating to assets and liabilities
Evidence of income sources
Organizational chart and chart showing the structure/process/distribution of the business
List of salary/wage earners, copies of employment contracts, accounting information for payroll and social security contribution payments
Annual (Wa Nga -16) and monthly (Wa Nga – 15) employee personal income tax and payroll filings
Minutes of all board of directors meetings
List of associated companies
Original personal income tax challans
Copies of loan contracts, copies of invoices
Copies of contracts in relation to audit fees
Copies of lease agreements with evidence of related stamp duty payments
Original advance tax payment challans
This list of information appears to reflect a more or less typical scope of background information for a full company audit. In Myanmar, audits are often perceived as being a necessary aspect of tax filings. This is the case because the IRD usually insists on audited financial statements being provided to it in support of annual tax returns – regardless of whether the relevant company is required to conduct an audit under the Myanmar Companies Law 2017. However, this is not the typical situation. To our knowledge, in most countries audited financial statements are not required to be submitted as part of tax returns, and companies that are exempted from audit requirements under local companies law do not have to conduct audits at all.
Company audits are actually a corporate governance measure that is required under companies law. Audits are required to be undertaken to ensure that shareholders are provided with a reasonably detailed report on the company’s financial performance that has been reviewed and prepared by an independent expert (that is, the auditor). Small companies are usually exempted from audits as the process can be expensive and onerous for a small company and small companies often have few shareholders and relatively simple finances, reducing the need for independent review as a shareholder protection measure.
There therefore should not be any need for the scope of an IRD audit to reflect the full scope of a typical company audit. The IRD is not responsible for compliance with corporate governance or financial reporting standards and should be able to limit its audit review to only items relating to tax compliance. One example of requested information that appears unnecessary is internal accounting policies and procedures.
A reduced scope of requested documents and information should make the tax audit process more efficient and less onerous for both the company being audited and the IRD audit staff.
Audit inquiries
We have responded to a number of inquiries and requests from IRD audit staff that appear to reflect a lack of understanding of basic concepts of tax and accounting, and a lack of familiarity with the content of Myanmar tax laws and regulations. Unfortunately, this is a common experience in dealing with the IRD. However, these technical and capacity constraints are potentially more problematic in the context of audits of historic reporting periods as inaccurate auditing could affect not just the assessment for the period being audited, but also subsequent periods. On that front, given that tax assessment processes tend to generally be somewhat inefficient, we are also seeing tax audit processes cause further delays to finalization of assessments for later periods.
It is to be hoped that the introduction of an IRD audit function will ultimately result in an improvement in the IRD’s overall technical capacity. However, companies that are subject to an audit at this early stage of the new process should be prepared to discuss and defend the company’s position on basic issues in relation to the presentation of accounts and the application of Myanmar taxes.
Conclusion
If you would like any further information on the IRD audit process, or assistance in responding to IRD queries for an audit of your company, please feel free to contact us.