Competent Evidence: The Heart of Accountability and Fairness in Tax Audit

The Essence of Competent Evidence

A tax audit is not merely an activity to find faults, but a process of collecting and processing data, information, and evidence objectively. Based on Article 4 letter c of PER-23/PJ/2013, it is emphasized that audit findings must be based on sufficient competent evidence.

The phrase "competent evidence" contains two inseparable key elements: Validity and Relevance.

1. Validity: Measuring the Reliability of Evidence

Validity relates to the extent to which the evidence can be relied upon to conclude a fact. Not all evidence has equal value; its level of validity is heavily influenced by three main factors:

• Independence and Qualification of Source: Evidence obtained from independent third parties (external) has a much higher validity level compared to evidence created solely by the Taxpayer (internal). For example, a bank confirmation or an invoice from a counterparty is more valid than a mere internal company memo. Furthermore, the qualification of the information provider is crucial; information from an expert or authorized party is more valid than from an incompetent party.
• Condition of Evidence Acquisition: The situation in which evidence is obtained affects its weight. Evidence obtained from a strong and organized Internal Control System (SPI) is more valid compared to evidence from a weak or disorganized system.
• Method of Evidence Acquisition: Evidence obtained directly by the Tax Examiner through physical observation, surprise inspection, or stock taking has the highest validity. This is stronger than evidence obtained indirectly, such as photocopied documents submitted by the Taxpayer.

2. Relevance: Connection to Audit Objectives

Valid evidence is not necessarily useful if it is not relevant. Relevance means the evidence must be directly related to the items being audited as listed in the Audit Program. For instance, proof of land ownership (valid) is irrelevant if the examiner is testing the Employee Salary Expense item.

Sufficiency of Evidence and Professional Judgment

In addition to competence (quality), the aspect of quantity or sufficiency is also an absolute requirement. Evidence is considered sufficient if it is adequate to support audit findings. The measure of "sufficient" is subjective and relies heavily on the professional judgment of the Tax Examiner. The higher the risk of material misstatement, the more evidence is required.

Collection Techniques and the Digital Era

To obtain competent evidence, tax authorities use various techniques such as third-party confirmation (as regulated in SE-65/PJ/2013), cash flow testing, to digital forensics techniques (SE-36/PJ/2017). In the modern era, electronic data acquired through imaging and hashing techniques becomes vital competent evidence to ensure data integrity remains unaltered.

Legal Implications and Disputes

It is crucial for Taxpayers to understand that competent evidence must be presented during the audit. Based on Supreme Court Circular Letter (SEMA) Number 2 of 2024, evidence within the Taxpayer's possession that has been properly requested by the DGT but is not submitted during the audit or objection process, cannot be considered in dispute resolution at the Tax Court or Supreme Court.

Conclusion

Competent evidence is the currency that holds value in tax law. For Examiners, collecting valid and relevant evidence is a professional obligation to produce fair legal products. For Taxpayers, this understanding demands organized documentation readiness (audit readiness), because arguments without competent evidence are merely unilateral claims that will fail under fiscal scrutiny.