IRB’s carrot and stick approach

BUDGET 2017 is just round the corner and there are various expectations on what the budget will entail.

The economic environment for 2017 is expected to be challenging.

As such, people are hoping for tax cuts, balanced with prudent spending by the Government without impacting development costs that will be vital for the country’s economic growth.

A tax amnesty programme can be seen as a means for the Government to increase tax collection and thus contribute to the Government’s revenue.

Recently, the Indonesian Finance Minister, Sri Mulyani Indrawati, raised eyebrows when she issued a warning to tax dodgers in Indonesia to join its tax amnesty programme launched in July or face “hell”.

Like Indonesia, the Malaysian Inland Revenue Board (IRB) has introduced a tax amnesty programme to boost tax revenues by encouraging the payment of tax debts.

Launched on March 1, the 2016 Malaysian tax amnesty programme (which follows a similar offering from the IRB in 2015) is one of the attempts to counter the nation’s shrinking coffers due to the plunge in oil prices, whilst giving taxpayers the opportunity to regularize their tax affairs.

The programme runs until 15 December this year, and taxpayers are strongly encouraged to evaluate whether the tax amnesty programme will benefit them.

Under the Malaysian tax amnesty programme, penalties will be reduced or waived.

The following reduced penalties (depending on the payment terms) will be imposed, instead of the maximum penalty rates of 100% or 300%:

>Voluntary disclosure of non-submission of income tax returns: 15% or 20% of the tax charged

>Voluntary disclosure of incorrect tax returns submitted before the case is selected for tax audit: 15% or 20% of the tax undercharged

>Voluntary disclosure of incorrect tax returns (within a stipulated period after the taxpayer has been informed of the tax audit): 25% or 35% of the tax undercharged

>Voluntary disclosure within 14 days from the date of the IRB inspection (for tax investigation case): 20% or 25% of the tax undercharged; and

>Discovery by the IRB during a tax audit or investigation: 25% or 35%

The programme also provides for the waiver of late payment penalties for early settlement of tax arrears.

The eligibility of the offer will depend on the merits of the case and is subject to the relevant IRB regulations.

The tax amnesty applies to a range of taxes comprising corporate income tax; personal income tax; petroleum income tax; real estate property gains tax; stamp duty; withholding tax; late payment of taxes; and penalty on under-estimation of tax.

In recent years, the IRB has undergone a major re-organisation to strengthen its enforcement unit and increase its enforcement activities with the ultimate objective of stepping up the country’s tax revenue collections, through a widening of tax audit activities.

In 2014, the IRB introduced the Monitoring Deliberate Tax Defaulters (“MDTD”) Programme, which is designed to strengthen and enhance the effectiveness of tax audit activities and to encourage voluntary tax compliance through continuous education and monitoring activities.

Under the MDTD Program, taxpayers who are found to be non-compliant based on the results of the audit activities would potentially be listed in the MDTD for continuous monitoring until no offences are found to have been committed by these taxpayers.

The penalty for repeat offences by taxpayers under the MDTD is the maximum penalty, i.e. 100% of the amount of tax undercharged, instead of the concessionary penalty rates offered by the IRB.

Apart from monitoring programmes, the IRB has also stepped up its tax collection efforts.

There has been an increased number of civil suits and imposition of travel bans on delinquent taxpayers who fail to settle their outstanding taxes.

The IRB seems to have adopted a carrot-and-stick approach to strengthen tax compliance among taxpayers, ranging from small and medium enterprises to multinational companies and high net worth individuals.

With the current global economic conditions affecting all taxpayers, having tax amnesty programmes to assist taxpayers to regularize their tax affairs and move forward with a clean slate is useful.

It will also be helpful for regulators to provide clear and transparent guidelines so that taxpayers can settle their tax liability or back taxes and continue with their business operations at the same time.

As for taxpayers still considering whether to participate in the amnesty programme, they may wish to grab the carrot now! The offer is for a limited time only.

Farah Rosley is a Tax Partner with Ernst & Young Tax Consultants Sdn. Bhd. The views reflected above are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.