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

The pandemic has put a dent in the coffers of governments worldwide. Closer to home, we saw Malaysia implementing eight economic stimulus and aid packages worth RM530 billion to address the health crisis. With an ambitious target of achieving a fiscal deficit of 3% to 3.5% of GDP by 2025, this puts pressure on the government to find ways to beef up its tax collection to continue funding such expenditures.

The 2020 Fiscal Outlook and Federal Government Revenue Estimates Report (FOR) revealed that at end-2017, 62.4% of the 1,251,190 companies were registered with the Inland Revenue Board (IRB), but only 7.8% were subject to tax. At the same time, only 16.5% of the 15 million workforce are paying individual income tax.

The shadow economy is one of the culprits. In 2019, Malaysia’s shadow economy accounted for 18.2% of GDP, or almost 50% of the total stimulus packages that the government had to incur for managing the impact of Covid-19.

The numbers speak for themselves. The FOR recognises the need to address tax evasion and under-reporting of income, which undermine the self-assessment system as well as public trust and confidence in the whole tax system. The existence of hidden, informal and “hard to tax” sectors places an unfair burden on compliant taxpayers.

The digitalisation of tax administration and tax reporting is an important consideration towards achieving higher tax compliance and revenue collection. This is based on the premise that adoption of technology will enable a wider net to be cast to capture those that are required to not only pay taxes but pay the right amount too.

To simplify tax compliance and tax audits as well as reduce tax evasion and fraud, the Organisation for Economic Cooperation and Development (OECD) introduced an international standard for exchanging data in an electronic format named the Standard Audit File for Tax Purposes (commonly known as SAF-T) between organisations and local tax authorities. The SAF-T is designed to enable tax authorities to conduct inspections more efficiently and effectively.

The SAF-T has been widely adopted in countries such as Portugal, Hungary, Poland, Norway, Lithuania, Luxembourg and Austria. Non-OECD countries have also introduced similar approaches.

In Malaysia, an online platform for submission of tax worksheets electronically, known as the Malaysian Income Tax Reporting System (MITRS), was introduced. This paved the way for digitalisation and standardisation of tax reporting and the exchange of information electronically — replacing paper-based submissions.

The implementation of the MITRS is being done in stages, from Sept 1, 2020, starting with companies that are subject to tax audits or investigation. Currently, the MITRS is not compulsory. Therefore, setting up a roadmap towards a mandatory adoption of the system would enhance efficiency in tax audit processes and identification of tax leakages.

The OECD report titled “Technology tools to tackle tax evasion and tax fraud” advocates the adoption of technology to combat tax evasion. Electronic invoicing has been touted as an effective mechanism to tackle incidents such as false invoicing, which seeks to over-report deductions and camouflage non-deductible expenses as legitimate deductions.

Electronic invoicing has been implemented in countries such as Argentina, Brazil, Colombia, Costa Rica, Ecuador, Mexico, Italy, Indonesia, South Korea and China. Italy was the first EU member state to introduce mandatory B2B (business-to-business) electronic invoicing effective from Jan 1, 2019. The Italian model requires e-invoices to be issued in a specific format and exchanged through the Sistema di Interscambio platform (managed by the Italian Revenue Agency), enabling the tax administration to get real-time information and monitor compliance. China’s State Taxation Administration has an electronic value-added tax (VAT) invoice management system, where all VAT special invoices must be issued and tracked by the system. Vietnam and the Philippines are catching up and will be making electronic invoicing mandatory in 2022.

Some of the more developed countries have implemented electronic invoicing, coupled with real-time reporting and reporting of tax returns and accounting transactions based on the SAF-T.

Malaysia should take a leaf from these international developments and seriously consider adopting an electronic invoice management system that is integrated with the government’s systems. The use of digital tools facilitates the detection of fraudulent transactions, enhances efficiency in tax audits and captures more businesses into the formal economy. A phased implementation, starting with B2B transactions, can be considered.

The simpler the tax system, the greater the desire to comply with our tax laws, especially if we want to encourage small businesses to be part of our tax system. Technological advances have led to more and more people venturing into the sharing or gig economy, and this may be the future trend of employment. A downward trend in traditional salaried employment would dampen personal tax collection and the way forward is to look for a simplified tax compliance model that would encourage taxpayers in the sharing economy to report their income accordingly.

In Malaysia, businesses are subject to the same tax filing requirements, regardless of size. The only difference is the lower tax rate for small and medium enterprises. Where statutory audits are concerned, the Companies Act 2016 has relaxed requirements to prepare audited financial statements for small businesses that fall within certain parameters. One reason is to help businesses reduce compliance costs. We should provide a different set of tax filing requirements for small businesses. A presumption taxation model can be considered for this group of taxpayers. In India, small businesses that meet certain revenue thresholds can opt for the scheme of presumptive taxation, where eligible taxpayers do not need to maintain books of accounts but declare 8% of gross receipts as taxable income. To incentivise businesses to go digital, the rate is reduced to 6% of gross receipts.

Malaysia’s tax-to-GDP ratio is relatively low compared with its peers in Asia. At a tax-to-GDP ratio of 12.4% in 2019, it was below the Asia-Pacific average of 21% and below the OECD’s average of 33.8%. From 2007 to 2019, Malaysia’s tax-to-GDP ratio decreased by 2.4 percentage points. Yet, the country places heavy reliance on taxes to finance its expenditure. Budget 2021 projected 73.6% of the government’s total revenue to come from taxes (direct and indirect tax combined). While the government is mulling the introduction of new taxes to broaden its tax base, it is worth examining its current tax framework and accelerating digital adoption to close the gap and rein in tax leakages.

Sim Kwang Gek is Deloitte Malaysia’s tax leader

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