This article deals with the manner in which businesses and tax administrators can collaborate to achieve tax efficiency.
TAX administrations worldwide have increasingly recognised that businesses can contribute positively towards improving the efficiency in administering and complying with a particular tax system.
Administrators from some 35 countries (Malaysia included) met in Seoul in 2006 and signed a joint declaration known as “Sharing Knowledge of Developments & Reforms in Revenue Bodies and Meeting the Challenges of International Non-Compliance With Domestic Tax Laws”.
The participants also expressed the need to give attention to the link between tax and good corporate governance. They sent a clear message to corporate boards that more attention should be given to tax risks.
Most taxpayers want to get it right and are equally concerned that tax administrators recognise the need to collaborate with businesses to improve their tax system. Thus the International Chamber of Commerce (ICC) based in Paris, through its Commission on Taxation, which speaks for international business, has made the following recommendations.
The administration of the substantive tax regime should be done in a manner that is no more complicated than is necessary to assess and collect tax. All else being equal, simplification should result in lower costs for tax administrators and taxpayers.
A tax audit should, as far as possible, begin as soon as possible after a return is filed. A taxpayer can more quickly respond when the needed information is readily available. Information retrieval is less problematic shortly after filing than many years after.
Delays in the tax audit also compound the potential impact of an adjustment as a taxpayer may have adopted a similar position to that challenged by the tax administration on subsequent returns. A proposed adjustment is less likely to be resisted if future tax filings are not as heavily impacted, which will be the case if tax returns are reviewed promptly and tax audits concluded relatively swiftly.
Transparency of tax rules should be an on-going goal. Taxpayers should know the rules of the game under which their transactions are taxed. The International Monetary Fund defines transparency as follows:
“Tax laws, regulations, and other documents relating to administrative interpretation of tax law should be accessible to the general public. Explanatory material should also be kept up to date. New budget measures should be given sufficient publicity so that taxpayers understand how they might be affected?”
Both tax administration officials and tax professionals need to be properly trained to perform their duties. The training should permit both parties to operate at approximately the same level of tax knowledge. Costs to the tax system will be minimised if both sides are equally versed in the tax rules.
Tax rule changes should be prospective
Inappropriate positions revealed under audit could be quickly addressed if audits are carried out promptly. Any changes in tax rules that are necessitated should be prospective only.
Use of business records
Costs of compliance and administration could be reduced if:
l Taxpayers ensure that books and records are appropriately maintained. The cost of administration increases when taxpayer records are inadequate or unavailable.
l No specific form of records apart from those normally maintained should need to be created to comply with the requirements of tax compliance.
l In the presence of adequate records, the onus will be on the tax administrator to demonstrate that non –compliance has occurred based on the transparent tax regime.
Tax administrations must continue to maintain the confidentiality of the return information they receive. Strict adherence to this standard will facilitate the willingness of taxpayers to provide the information needed to audit tax filings.
Impartial appeal process
Reasonable disagreements may inevitably arise even under most transparent systems. In such situations, an impartial adjudication process should exist that has as part of its function the publication of its decisions, taking into account privacy concerns of the affected taxpayer.
Such a procedure will promote confidence in the system, and ultimately increase voluntary compliance.
It is to be noted that the ICC’s recommendations represent best practices that international businesses consider important both to them as well as tax administrators in achieving tax efficiency.
Many of these practices are in fact mirrored in the practices adopted under the Malaysian tax system but as with everything, there will always be room for improvement.
In this respect, the work of the joint public/private sector task force, Pemudah in the area of improving aspects of tax administration is very much in keeping with the expectation of both Malaysian businesses as well as the Inland Revenue Board in enhancing the efficiency of the tax system.
The writer is executive director of TAXAND Malaysia Sdn Bhd, a member firm of the TAXAND Network of independent tax firms worldwide. He can be contacted at firstname.lastname@example.org