Cooperative tax compliance

THE National Anti-corruption Plan (NACP), which was launched in 2019, continues its five-year course well into 2023 with corporate governance being one of the priority areas.

With the recent release of the mid-term review of the NACP to monitor the progress of implementation and the focus on post-pandemic economic recovery, we expect that the government will remain committed to its implementation of the NACP initiative to ensure that the progress of the initiatives is on track and that the objectives are met as stipulated in the plan.

Within the Budget 2023 proposals, we expect more initiatives and a shift towards corporate governance in the tax system by adopting a cooperative tax compliance process to encourage and increase accountability, transparency, and integrity of Malaysia’s tax system.

This would be a vehicle to deliver the NACP framework so as to foster investors’ confidence and economic stability.

Cooperative tax compliance focuses on kickstarting an effective tax framework where the onus of the tax system lies upon both the taxpayer and the tax authorities to take a “proactive” stance in managing taxes rather than the “reactive” measures we are used to.

The shift towards a cooperative tax compliance could be seen in the Inland Revenue Board’s (IRB) efforts earlier this year with the introduction of A.E.S (Awareness, Education and Services) as well as various in-depth conversations held with other governmental agencies, business associations across industries, and non-governmental organisations to further improve relationships and understand the needs of the rakyat better.

Prior to the release of the recent Tax Audit Framework 2022, numerous dialogues were held with professional bodies to obtain their views and understanding to improve the framework.

As a result of this collaborative effort, the penalties laid out in the framework were reduced and clarifications were included on voluntary disclosures.

With increasing complexity in the current business environment, we hope to see further reduction in penalties announced in Budget 2023 to provide a “window of opportunity” for more taxpayers to come forward on a voluntary basis.

While it is important for taxpayers to take the initiative, having an effective discussion with the IRB will definitely help to bridge the gap between taxpayers and tax authorities.

Therefore, we hope to see more “dialogue sessions” between the IRB and the industry sectors in order for the tax authority to better understand the taxpayer’s business from the commercial perspective.

The presence of a platform to have an effective discourse with the IRB, industry sectors and tax practitioners will ensure that the tax policies are drafted in an effective manner, which ultimately benefits all stakeholders.

Roles at play

Currently, the tax authority’s intervention usually only takes place after the submission of tax returns, that is during a tax audit or investigation exercise.

More often than not, it is “reactive”, whereby tax authorities would only discover errors made by the taxpayer (whether willingly or not) after conducting a tax assessment where punitive actions are then taken against them.

The perfect tax system exists when taxpayers fulfill their statutory obligations without the need for intervention. Because such utopia is not attainable, an early intervention may be a more feasible alternative in which the tax authority’s role in cooperative tax compliance would begin at a much earlier stage.

This includes assessing the effectiveness of the taxpayers’ tax framework, examining and assisting with the maintenance of the framework, as well as constant liaison with the taxpayers to understand their business and tax controls better.

Cooperative tax compliance emphasises disclosure and transparency as recommended by the Organisation for Economic Co-operation and Development.

On top of the usual requirements for taxpayers to submit accurate tax returns, taxpayers’ roles include assessing their tax risks, disclosing willingly, and sharing of information about their internal control system to tax authorities.

At the same time, constant communication with tax authorities regarding tax control processes are expected as taxpayers play a crucial role in effective cooperative tax compliance.

Nevertheless, errors are bound to happen even with a well implemented and developed tax framework in place.

In these situations, the element of transparency is important where the taxpayer may share with the tax authorities any identified errors as well as suggestions for improvement to avoid recurrences of the error.

In return, tax authorities may discuss with the taxpayers areas that requires more attention or whether an audit would be appropriate.

How would this benefit you?

At the end of the day, an effective tax system benefits all businesses and even the individuals on the street.

Lowered costs, a significant reduction in tax administration work and better clarity in tax matters are some of the advantages of adopting a cooperative tax compliance effort.

Taxpayers may analyse, modify, and adopt the concept according to their organisations’ needs and what they deem fit.

Resistance can be expected when implementing change, perhaps due to the costs of implementation involved, a lack of resources or even organisational inertia.

Some organisation structures may not be suitable for an implementation of a cooperative tax compliance effort.

As such, the IRB would need to lay out a comprehensive framework to address the issues and concerns that may arise in the implementation of cooperative tax compliance.

Tax deductions for costs incurred in relation to cooperative tax compliance should also be considered to incentivise the rakyat.

The perfect tax system exists when taxpayers fulfill their statutory obligations without the need for intervention.

What’s next?

While the concept of cooperative tax compliance may sound overwhelming and foreign to some, there are some manoeuvre you can opt for to get a better outlook.

First, to prepare for the inevitable change, you will need to grasp the concept of cooperative tax compliance that Malaysia is planning to adopt in the long run.

Next, you should assess your internal controls. What are the tax strategies you are currently adopting?

Are tests constantly performed to ensure tax legislations are complied with at all times?

Are your stakeholders aware of the unavoidable reform in our tax system?

Do you have the sufficient resources to embrace the change?

Finally, you should keep an open mind to the possible change. Cooperative tax compliance has been adopted in many other countries including Denmark, Finland and the United Kingdom with positive outcomes noted in the long run.

The same aspirations for improvement should be envisaged for Malaysia’s tax system too.