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How to encourage voluntary compliance among taxpayers

19 December 2021

IN an ideal situation, if taxpayers were to voluntarily comply with their tax obligations, both the taxpayer and the Inland Revenue Board (IRB) will be winners – certainty and finality to taxpayers, and reduction in cost of collection to IRB.

However, in many instances taxpayers and the IRB appear to be playing a cat-and-mouse game: “Try and catch me if you can” from the taxpayer’s perspective, and from an IRB’s perspective, “How far can I stretch the law to tax the taxpayer”.

Such an approach does not lead to a conducive relationship between taxpayer and IRB. Over the years, enforcement activities have overshadowed the importance of compliance. An example of an issue of dispute is capital versus revenue transactions, especially for property transactions. Although properties have been held by the taxpayer for many years, IRB tends to take the position that the person is a trader and not an investor. Consequently, assessments are raised, which leads to additional taxes and penalties and taxpayers have to incur litigation costs to prove that they are investors.

It’s time for both parties to change their thinking and approach as to avoid unnecessary disputes and further deterioration in the relationship.

The approach to date

IRB has in the recent years adopted the double-sided approach in encouraging taxpayer compliance. Voluntary compliance through self-assessment, enforced by random, but stringent, auditing and penalties.

Where should we be heading

The preferred approach would be for IRB to put greater emphasis on assisting taxpayers meet the obligations rather than attempting to penalise taxpayers after filing their tax returns.

How to assist taxpayers upfront

Taxpayers file their tax returns based on their understanding of the tax laws and there are many instances where there are difficulties in the interpretation of the law. IRB should open more channels beyond the existing advance ruling and public ruling mechanisms to clarify and provide their views on interpretation issues. The current mechanisms are too formal and the channels available are restricted to IRB’s headquarters. More centers with the necessary technical expertise are needed throughout the country.

For larger businesses whose turnover exceeds RM100 million in the manufacturing sector or perhaps RM30 million in the service business, continuous cooperative compliance should be the way forward.

Effectively, this would mean that the taxpayer is in constant touch with IRB throughout the tax year informing them of all the key activities and obtaining proactive feedback. This will provide transparency to the IRB and avoid penalties.

Voluntary compliance should also place obligations on the taxpayer to become transparent to the IRB. The taxpayer should disclose to the IRB any unique or one-off transactions affecting the structure of the business either before the transaction takes place, or at the time of the transaction. This will allow the IRB to provide their views and the taxpayer can take the necessary mitigating action to either make the necessary amendments to the transaction or to accept the additional tax liability and factor it into their business calculations. This will avoid any future surprises.

There are certain sectors in our economy where the taxpayers are known to be delinquent in discharging their tax compliance responsibilities.

In Finance Act 2021, Malaysia has introduced the concept of tax deduction at source applicable to payments made to agents, distributors, and dealers. This can be extended to sectors that are connected to the shadow economy and other sectors where accountability is missing.

Why not give incentives to diligent taxpayers?

We have a history of giving amnesty to tax defaulters. We do not give incentives to the good tax citizens. Why not consider giving discounts to taxpayers who file and pay their taxes on time? The good taxpayers should be rewarded, not the bad ones!

Collecting penalties should not be the focus. Increasing tax collections through encouraging compliance is the way forward.

This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.

This article was originally published on the Sun daily.

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