By SM Thanneermalai
What an excellent move!
We have been talking too long about reforming our tax system. The income tax legislation and the indirect tax legislations go back to 1967, but times have changed, and our economy is now entirely different.
In the 1960s, Malaysia was largely dependent on rubber, palm oil and tin and we were not an open economy as we are today. The tax regime at that time did not focus on the internationalisation of our economy, the subsequent inflow of foreign direct investments, the extent of the use of transfer pricing, shifting of profits offshore, the current digitalisation of businesses or the emergence of double non-taxation through sophisticated tax planning.
Finance Minister Lim Guan Eng plans to reduce the existing tax gap, address tax leakages, explore new sources of revenue, study the taxation of the digital economy, and review the effectiveness of various tax incentives. He also wants a more efficient, neutral and progressive tax system, at the same time strengthening the enforcement and compliance measures against abuses of transfer pricing and tax planning activities, fraud, tax evasion and the smuggling of controlled items that contribute to the loss of revenue.
Fundamental points to ponder
Composition of the current tax committee
The composition of the current tax committee needs to be extended to include personalities with greater experience in dealing with indirect taxes. The current committee appears to be slanted towards direct taxes.
There is no representation from the current operatives of the tax system – the Inland Revenue Board Malaysia (IRBM) and the Royal Malaysian Customs Department (RMCD). We need them in the committee to provide insights on the current operational inputs and the impediments they face in enforcing the current tax regime.
The tax reform committee must obtain feedback from various stakeholders (i.e. public, industries, chambers of industry, NGOs, tax professionals, the legal fraternity, IRBM, RMCD, and other government ministries / agencies).
Review of tax incentives
The criteria for granting tax incentives should be reviewed. Incentives should not appear to be discriminating against one set of taxpayers over another or giving an advantage to selected taxpayers. In return for providing incentives, the Malaysian economy must receive far greater economic benefits beyond the tax forgone.
Currently, the general observation is that once incentives are given, there is a lack of comprehensive monitoring on whether the conditions attached to the incentives are being adhered to or not. The post monitoring needs to be strengthened.
Merger of IRBM and RMCD?
Should the IRBM and the RMCD be merged into one revenue enforcement and collection entity?
There is a good case for merging the two agencies as there will be economies of scale, cost savings, sharing of information to avoid evasion or abusive avoidance, and easier monitoring of tax revenue generation activities for the government.
Safeguarding of taxpayer’s rights
It is absolutely important that taxpayer rights be reviewed and strengthened. The bureaucracy in the IRBM and the RMCD should be accountable to an independent third party. The powers of the IRBM and the RMCD also need to be examined to ensure that there is a balance between the taxpayer exercising his rights without impeding the two agencies from enforcing the tax laws.
Discretionary powers of IRBM, RMCD and the Minister of Finance should be examined
These powers should be subject to checks and balances and there must be transparency. Powerful forces such as large corporations or influential individuals should not be allowed to influence the use of the discretionary powers of the above parties.
Improving the efficiency of the tax administrators
A key area that needs to be focused upon is the level of empowerment given to the officials down the line and the speed at which they are dispersed. Both agencies need to streamline and digitalise their processes on an ongoing basis. It is recommended that they be given bigger allocations to invest in big data analytics and education of their personnel.
Sanctions to deter tax evasion and abuses of tax avoidance and transfer pricing
The sanctions should be commensurate with the seriousness of the offence. Feedback may be needed from the Securities Commission, Bursa Malaysia, Royal Malaysian Police, etc.
Extending the tax jurisdiction
Currently, Malaysia is on a territorial system of taxation. We only tax income that arises from a source in Malaysia (except for banking, insurance, shipping and airline income) and capital gains on real properties in Malaysia.
Since our economy is now an open economy, it is time to widen our scope of taxation to encompass a worldwide basis. All our important neighbours in ASEAN except Singapore and Brunei are using the worldwide scope of taxation. The same goes to most countries in the world.
Under the current territorial scope and the non-taxation of capital gains other than real property in Malaysia, corporations operating across borders and rich individuals could be using this legally to avoid taxes. In contrast, the ordinary taxpayers such as smaller companies and poorer individuals cannot enjoy this luxury.
There are many issues to be addressed and we hope the government will give the reform committee sufficient time to come up with a comprehensive report. This report should be made available to the public for their feedback before any of the recommendations are implemented.
SM Thanneermalai is Managing Director of Thannees Tax Consulting Services Sdn Bhd and Chairman of the Malaysian Tax Research Foundation. In his next post, he will address more specific recommendations for tax reforms.