RECENT
developments in parts of Europe have sparked a debate in the eurozone
on austerity and growth. Those who argue for austerity or “fiscal
prudence” claim that debt management is key to restoring investor
confidence and, therefore, long-term prosperity.
Borrowing more
is not an acceptable response to a crisis caused by over-borrowing and
over-spending. In contrast, those who prefer greater stimulus claim
that, without further investment, growth will simply not return, and
without some Government stimulus, no economy can pull itself out of
recession to achieve long-term stability and growth.
Whilst there
is no clear “right” answer, there is one aspect of
Government policy
that is absolutely central to this taxation.
Governments must ensure a
balanced system of taxation that provides the right incentives to
business and citizens, while enabling the Government to meet its debt
and spending obligations. Getting this balance right can drive increased
confidence among the investor community and stimulate economic
activity, international competitiveness and long-term growth.
A new approach
In
the past, many countries have relied on the support of international
bodies and other inter-governmental assistance to begin the process of
tax reform in respect of designing the tax system itself and in
improving the ability to collect taxes. In the post “credit-crunch”
world, it has become apparent that the operational ability to increase
tax revenues is somewhat limited. A new hands-on approach is required to
assist the public sector, generating increased tax revenues and driving
corporate activity without raising taxes or damaging international
competitiveness.
Malaysia has never had a comprehensive review of its tax system
Like
any business, a Government has costs and it has revenues. A framework
is required to help Governments optimise their tax revenue and balancing
this need with the creation of the right incentives for citizens and
businesses to stimulate the economy. To achieve this, our experience in
working with Governments is typically structured around three core work
streams:
●
Tax reform design - Modeling the economy and designing
a new system of taxation appropriate for the jurisdiction, with the
emphasis on simplicity, fairness, participation and
economic stimulus;
●
Tax compliance - Building the taxpayer base to ensure all taxpayers
have paid the correct amount of tax under the law and will continue to
do so and;
● Tax operational improvements - underpinning both
streams, identifying and delivering detailed operational improvements,
ensuring transparency of data and processes within the tax
administration, across
Government departments and with taxpayers.
Malaysia
has never had a comprehensive review of its tax system. The setting up
of a Tax Review Panel a few years ago basically focussed on the proposed
Goods & Services Tax and has done some good work in this area but
the focus on income taxes was limited and too restrictive. A
comprehensive review is now timely given that Malaysia is aggressively
driving its transformation programme towards achieving developed nation
status by 2020.
Tax reform design
A tax system is
at its best when it is at its simplest, levying the minimal number of
taxes, thus making compliance easy for taxpayers and the tax
authorities. Headline rates should be minimised, often in exchange for
the removal of reliefs or deductions. In addition, it is essential to
improve the quality of the taxpayer base. Finally, international trends
are to shift the burden of taxation towards indirect taxes to ensure
participation in the tax system, improve the reliability of collections
and increase fairness.
An effective communications strategy is
critical to the success of any tax reform project. To succeed, these
projects require a proactive approach to ensure that stakeholders are
aware of their progress.
Tax reform projects should have four key phases:
Understand
- Work closely with the Government and external bodies to gather and
verify data. Quickly establish a detailed understanding of the current
tax system and understand the issues from a number of different
perspectives. At the same time, model the economy and current tax
collections, benchmarking them against other jurisdictions.
Model
- Develop an outline model for the proposed tax system, meeting
regularly with stakeholders to develop and test ideas and model
alternative taxation methods. Produce a detailed proposal for the new
tax system, including clear legislative and operational proposals, for
political approval.
Implement - Bring the approved model to life.
This can include taking a lead drafting new legislation and guidance. A
highly operational approach, working to ensure systems, processes and
controls are best-in-class and fit-for-purpose is essential at this
stage.
Roll-out - Roll out the new system to the various groups
of taxpayers and stakeholders and train the
Tax Administration teams,
including training on tax technical and operational / systems issues.
Tax compliance
In
many developing economies, the
incidence of tax evasion is certainly
not small. Broadening the taxpayer base and ensuring current taxpayers
are paying the correct amount of tax under the law helps keep taxes low.
Economic and forensic analysis must be applied to identify areas of the
economy requiring particular attention. A range of techniques is
typically required to provide a complete picture of the tax-paying
community.
To deliver real change for the tax administration,
forming a single team to identify taxpayers, initiating assessments,
managing taxpayer responses and building IT databases is key.
Enhancements to processes and systems also drive improved service levels
to taxpayers (whether this be speed or quality), which is vital to gain
support for the tax system and for improving participation.
Tax operational improvements
Real
operational improvements are essential to the successful delivery of
any tax reform project. This may include improvements to existing IT
systems to automate processes and controls and improve the way data is
managed. This applies both to the tax administration's systems and the
way it interacts with other Government departments. For example, the tax
administration should automatically be informed whenever a new business
registers with the Companies Commission.
On a practical basis,
it is essential to ensure new tax documents and forms are produced where
required, both in paper and electronic form. It makes sense to consider
these as part of a wider programme of improving taxpayer interaction,
for example, with the implementation of a new website or the ability to
file tax returns online. Key to the success of any new document is
simplicity both for the tax administration to review and process and for
the taxpayer to understand.
Conclusion
The post
credit-crunch world has generated a renewed focus on how a Government
raises its revenue the right balance of fiscal prudence and stimulus is
difficult to achieve. However, with a clear view on what taxes are
levied, who pays them and how they are administrated, jurisdictions can
drive real improvements in tax collections, real efficiency gains and,
in doing so, drive the participation of the taxpaying community. This,
in turn, can provide assurance for the investor community, enable the
Government to meet its obligations and drive long-term growth for the
wider economy, its businesses and citizens.
It is timely that
Malaysia announces a comprehensive fiscal reform which is wide-based and
wide-ranging and puts into place a long-term plan to mould a world
class tax system that will be comparable to the leading developed
nations in the world. It is time to let go of the ad-hoc approach of
tinkering with the tax system let us get on with it!
By Dr Veerinderjeet Singh and Andrew Burman
●
Dr
Veerinderjeet is chairman of Taxand Malaysia and Andrew Burman is senior
director at Alvarez and Marsal Taxand in the United Kingdom. Both
entities are part of the Taxand Global Organisation. They can be
contacted at vs@taxand.com.my and aburman@alvarezandmarsal.com
respectively.
