Insight - When indirect tax meets special voluntary disclosure programme

KPMG_Dany Oon

THE voluntary disclosure programme has been one of the recommendations of the Organisation for Economic Co-operation and Development (OECD) as an international best practice as such programme enables taxpayers to manage and regularise their tax affairs and declare income that were omitted in the past.

From the government’s perspective, it is an approach to enhance revenue collection using relatively limited resources, avoiding costly and contentious audits, litigations, and even criminal proceedings.

Amongst the various positive initiatives announced in the Pre-Budget Statement (PBS), a notable mention was the suggested introduction of Special Voluntary Disclosure Programme (SVDP) – specifically for indirect tax.

With the objective of increasing revenue through increased compliance rates, taxpayers are encouraged to voluntarily disclose any shortfall of indirect taxes to the Royal Malaysian Customs Department (RMCD).

Indeed, SVDP is not something that is entirely new to the rakyat as there have been precedents to it, be it from Lembaga Hasil Dalam Negeri or the existing voluntary disclosure procedures practiced by RMCD.

KPMG_Dany OonKPMG_Dany Oon

However, given that it was announced by the Finance Minister in the PBS, this has certainly created a hype among taxpayers and businesses and many anticipate that a clear framework will be announced in the Budget 2022.

It is expected by many that this proposed indirect tax SVDP will be a more comprehensive version, given that there have been experiences gained from the past.

As with other similar voluntary disclosure programmes, be it at the national front or overseas, the common expectations would include, amongst others:

> Simplified disclosure process – a clear and straightforward process that will encourage compliance.

> Assurance that for those who participated, there will not be any future audit for the transactions declared or that they will not be unduly targetted for enhanced scrutiny in the future.

> Concise consequences – to what extent are the penalties/compounds imposed (if any)?

> Confidentiality of disclosure – concern for publicity/reputational damage and personal security in the event participation is disclosed.

> Flexible payment methods – easing cash flow and not to cause disruption on businesses.

As there are many forms of indirect taxes (ranging from import duties and export duties to internal taxes such as excise, sales tax, service tax and GST), having a consistent and unified programme to cover all these taxes could be administratively easier to manage and comply with as well.

From the taxpayers’ perspective, the variety of indirect tax regimes, along with the differences in the indirect tax legislations, makes it challenging to monitor and comprehend, let alone comply.

A minor mistake that goes undetected may result in a major non-compliance issue if not discovered until many years later.

Hence, the SVDP may be able to keep the exposures contained without having to face the brunt of a heavy penalty or compound.

However, before deciding to hop onto the SVDP bandwagon, it would be in the best interest of businesses to prepare some groundwork – to ascertain if there are any indirect tax exposures to begin with.

Given the wide coverage of indirect taxes, this can be a very time-consuming effort which require businesses to undertake the necessary measures, as early as now.

An early identification and possible quantification of exposure involved would give the management of the businesses a better view of the situation at hand and also, to the extent possible, whether the position undertaken earlier that resulted in the potential exposure is defendable or otherwise.

Proper and detailed consultation with subject matter experts or even legal counsel would also help the cause, especially where it involves subjective interpretation of the legislation.

All these steps, if undertaken early, would definitely assist businesses to make a better and informed decision to participate in the SVDP.

All in all, for the SVDP to be successful and fair to all, the framework must not only incentivise those who are non-compliant, but also not give the impression that such acts are in fact rewarding.

After all, leveraging on the carrot-and-stick principles, the carrot should always be given to those who take the effort in ensuring full compliance in the first place.

We are hopeful that the economic situation will also see an upward recovery trend despite the present pandemic.

As the collection of indirect tax revenues is ultimately fuelled by the frequency of financial and business transactions, it is also expected that its collection should also experience a rise in tandem with the recovering economic situation in Malaysia.

Coupled with the introduction of SVDP in a strategic and timely manner, this approach should encourage businesses to consider taking up such an opportunity, especially if there are potential exposures that businesses are concerned with.

Dany Oon is the executive director for Indirect Tax Services at KPMG in Malaysia. The views expressed here are his own.

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