Should Malaysia be inspired by Indonesia’s successful tax amnesty?
GIVE them a break and they’ll pay. That can be the slogan for the tactic of offering incentives over a limited time for people to settle what they owe the government.
The police have occasionally dangled discounts to get traffic offenders to clear summonses. Local authorities have done the same when they need to improve the collection of outstanding fines, fees and taxes.
The National Higher Education Fund Corp (PTPTN) has long been struggling to recover billions of ringgit due from defaulters. To make headway on this front and to encourage early settlement of loans, it has slashed repayment amounts a few times in recent years.
Governments have also used temporary periods of leniency to widen compliance with the law or to achieve policy objectives. One example is an amnesty programme to boost the legalisation of undocumented foreign workers or to allow them to return home without prosecution.
We have seen both types of measures in income tax here.
Between May and Dec 1998, Malaysian residents weren’t taxed for the money they brought in from overseas. The aim was to persuade Malaysians to bring back funds, thus increasing liquidity in the country’s financial system, which was then reeling from the Asian financial crisis.
Last year, there was another round of tax amnesty, although the authorities didn’t use that phrase. This was in response to the increased uncertainties in the global economy, which the Government said had impacted the domestic economy and had led to a rise in the cost of living.
In January that year, Prime Minister Datuk Seri Najib Tun Razak announced 11 measures under the recalibrated 2016 Budget. Measure No.6 was to enhance the efficiency and amount of tax collection, and this included the Government giving “special consideration on relaxation for penalty on taxpayers to encourage them to come forward and declare their past years’ income”.
But carrot season is over and the Inland Revenue Board seems eager to wield the stick.
Last month, IRB CEO Datuk Sabin Samitah warned that from next year, tax dodgers will have to pay penalties equal to the taxes they evade.
That means if a person under-declares his income next year or doesn’t report it at all, and if the tax assessed on that hidden income is RM10,000, he’ll have to cough up RM20,000, which includes the penalty.
Currently, the penalty rate is 45% of the arrears if the amount outstanding is settled within six months.
Datuk NK Jasani, the country managing partner of accounting firm Grant Thornton Malaysia, thinks it’s a bad idea to impose higher tax penalties “in the current tough Malaysian economic situation”.
In a news release issued last week, he argued that amid the crackdown, there might be no distinction made between hardcore tax defaulters and taxpayers with technical disputes on grey areas of law.
He added that a taxpayer was likely to concede on technical issues and opt for a settlement with the IRB if the impact of a 45% penalty would not be significant. However, most people would probably find a 100% penalty harder to stomach, and Jasani reckons that more taxpayers would go to court to challenge the IRB’s interpretation of the law.
He suggested that instead of depending on higher penalties to help boost tax revenue, the Government should again consider tax amnesty.
He cited the success of Indonesia, whose amnesty between last July and March this year reportedly resulted in more than 800,000 evaders declaring US$350bil in hidden assets. But the bigger benefit was the increase in the number of taxpayers, thus broadening the country’s tax base.
“The IRB should also ponder a similar policy and have tax amnesty for a period of six months, with a 15% tax rate for previously undeclared income. This rate compares favourably with the current corporate tax rate of 25%. The IRB will then not only increase tax revenue for this year but also pave the way for a long-term increase in the tax base and revenue,” he said in the statement.
But not everybody is convinced that tax amnesty is the way to go. A 2008 study by the International Monetary Fund found that tax amnesty programmes are unlikely to deliver benefits that exceed their true costs.
The IMF even suggested that when a country relies on repeated stand-alone amnesties, the gross revenue shrinks with each successive amnesty. In the end, overall tax compliance may decline.
This isn’t a complicated argument to follow. There’s a moral hazard when people’s failure to follow the rules are forgiven too often.
They become accustomed to the idea that the authorities will be giving out free passes every now and then. As a result, there’s less incentive to fear the consequences of breaking the law.
And for those who faithfully observe the rules, amnesty is a slap in the face. It tells them that good behaviour means little and that sometimes bad behaviour is ‘rewarded’ with discounts and lighter penalties.
This why some people advocate the introduction of voluntary disclosure programmes, which the Organisation for Economic Co-operation and Development (OECD) define as “opportunities offered by tax administrations to allow previously non-compliant taxpayers to correct their tax affairs under specified terms”.
“When drafted carefully, voluntary disclosure programmes benefit everyone involved – taxpayers making the disclosure, compliant taxpayers, and governments,” says the organisation.
But what about the recent Indonesian experience with tax amnesty? Is it right to ignore the strong numbers?
Perhaps the answers are in Paying Taxes 2017, a report produced by the World Bank and PricewaterhouseCoopers.
Here’s how it explains the outcome: “The success of the tax amnesty programme reflects the growing trust of taxpayers in the current Indonesian government. Credit must also be given to comprehensive communication campaigns nationwide.”
Apparently, tax amnesty can indeed work under certain conditions. The question is, can there be such conditions in Malaysia?
Executive editor Errol Oh is seldom in a forgiving mood.