This article first appeared in Forum, The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

Since the start of the Covid-19 pandemic, Malaysia, as with many other nations, has had to spend billions on stimulus measures to save lives and livelihoods. There is now the need to increase the nation’s revenue to fund these measures, and one obvious option is tax.

There are many views on the best methods to increase tax revenue. In Malaysia, some of the widely mentioned, and sometimes hotly debated, options are the introduction of a capital gains tax — moving to a worldwide scope of taxation (as opposed to our existing mainly territorial regime, where foreign-sourced income is generally tax-exempt) — or reinstating other taxes such as the Goods and Services Tax (GST) and inheritance tax. Each of these options has its pros and cons.

The bigger opportunity, in my view, is not so much in introducing new taxes, but rather in rethinking and redesigning the tax administration systems.

Today, the tax administration systems place a heavy reliance on voluntary compliance. While tax is not voluntary, the term “voluntary compliance” recognises that in many aspects of the current tax system, taxpayers make their own choices on the reporting, calculation and payment of tax. As long as these voluntary compliance choices remain, some of the choices made will inevitably result in certain amounts of tax not being paid. This could be deliberate, or due to a lack of reasonable care or genuine mistakes made on the part of the taxpayer.

In Malaysia, it is estimated that the shadow economy accounted for 18% of our GDP in 2019. In today’s terms, this roughly translates into RM250 billion. Malaysia’s shadow economy is largely formed by non-registered businesses, the under-reporting of business income, unreported sources of income and trafficking. Imagine the increase in tax revenue if we could bring these activities into the tax fold.

With the digital revolution, there are now technology options that provide opportunities for the authorities to integrate the taxation processes into the systems used by taxpayers as part of their daily lives and businesses, that is, making tax just happen.

To use an analogy from the OECD Tax Administration 3.0 report, this would be akin to the development of automated, self-driving cars. Today, car safety is a combination of set requirements, such as vision standards, driving tests, traffic rules and speed limits, coupled with enforcement processes such as the installation of cameras to detect speeding and other moving violations, patrolling by the traffic police and the imposition of parking fines. Despite these set conditions and controls, in essence, there is still an expectation that drivers will voluntarily exhibit responsible behaviour and comply with the relevant rules.

In a world of driverless cars, however, the vehicle is an integral part of a wider system, which builds in safety through the use of algorithms and features for the vehicle to make complex decisions such as sensors picking up information from road conditions and other cars. As such, driving will be largely based on compliance-by-design systems, with drivers freed up to undertake other activities.

Similarly, the future in tax administration systems is in increasingly embedding compliance-by-design outcomes as well as possible step-change reductions in compliance costs for taxpayers.

The core features of digital tax administration systems are: (1) Tax will be embedded within taxpayer natural systems, such that paying taxes will become a more seamless and automated experience over time, integrated into daily life and business activities; (2) Many digital platforms will become “agents” of the tax authorities carrying out tax administration processes within their systems; and (3) Tax authorities will no longer be the single point of data processing and tax assessment. Instead, tax administration is conducted within a resilient network of seamlessly interacting trusted actors without one single point of reliance. The tax administration processes will therefore be increasingly in real time or close to real time.

The use of technology has the potential to address various areas and identify players within the shadow economy, therefore creating the opportunity to recover lost tax revenue, improve taxpayer morale and restore trust in the system. At full capacity, technology solutions can significantly drive down the level of informal activity and revolutionise the operations and organisation of the tax authorities, and their interaction and relationships with taxpayers. Mandatory e-invoicing and the increase in the use of electronic payments are just two digitisation options that can help curb the loss of tax revenue arising from the shadow economy.

What has been described above is not an imaginary future state. It is already taking place. The digital revolution, particularly with the Internet of Things, is already transforming tax administrations around the world.

In Russia, data from many checkout terminals feed directly into the country’s Federal Tax Service. The Russian tax authorities have a comprehensive view of the entire Russian economy. With minimal human involvement, their system tracks and matches transaction data from buyers and sellers across the country. They receive the receipts of every transaction in Russia within 90 seconds. The information has exposed errors, evasion and fraud in the collection of its consumption tax, VAT, which has allowed the government to raise revenue more quickly than the general Russian economic performance.

Russia is just one example, and perhaps the most advanced. Many other jurisdictions such as Mexico, India and Brazil, to name a few, have also gone digital. These countries have introduced some form of digital tax administration, such as e-invoicing, which results in transactional data being posted to the tax authorities almost in real time.

This is the future of tax administration — digital, in real time and with probably no tax returns even needing to be submitted. In other words, remove the “voluntary” aspects and make tax just happen.

Amarjeet Singh is EY Asean tax leader and Malaysia tax leader at Ernst & Young Tax Consultants Sdn Bhd

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