WITH just a day to go to the unveiling of our nation’s budget, there is no doubt in my mind that whatever form Budget 2023 might take on – be it an election budget or a recession circumventing budget – this is certain: the efficiency of raising of tax revenue and collection by the government would be vital.
Since the country embarked on a self-assessment tax regime in 2001, the Inland Revenue Board (IRB) has been pivotal in the administration, assessment, collection and enforcement of direct taxes for the government.
There is a significant activity by the IRB, which is less talked about, often shunned and confused by taxpayers – tax investigation.
You may have come across recent news reports where more than 31,000 possible tax evaders were identified and 186,000 taxpayers backlisted from international travel.
These are the results of hardworking and relentless IRB officers carrying out their duties in casting a net on suspected tax evaders and fraudsters.
Naturally, it is unsurprising that tax investigation has always been a taboo topic among businesses and taxpayers, as tax investigation activities carry a much serious undertone compared to that of a tax audit.
With the impending rollout of Budget 2023, we consider some possible avenues the IRB may activate as new tax investigation measures and initiatives:
Currently, the IRB’s tax investigation department is supported by 16 investigation branches across Malaysia.
While it may seem sufficient, the IRB’s resources have their limits.
With its tax investigation advancing towards criminal prosecution, as an act of warning and deterrent, the IRB could move forward by setting up two separate and distinct investigation branches in each state, where each unit handles civil and criminal cases separately.
This would be the holistic way forward, as having specialised branches would allow the IRB to carry out its tax investigation more purposefully and more efficiently.
Cases relating to criminal prosecution will have a heavier burden of proof, which would require IRB officers to be trained and well versed in the evidence, forensic and indictment processes.
On the other hand, for civil tax investigation, powers and discretion would be given to the assessing officers and teams to discuss with the taxpayers with the aim of resolving the tax disputes prior to the assessment being issued.
Taking a page from the United Kingdom’s Contractual Disclosure Facility, the IRB may launch a targeted disclosure programme (TDP) whereby individuals are invited to disclose any intended or unintended attempts to defraud or evade tax.
The programme could incorporate these conditions:
> Cooperative individuals of the TDP will have the opportunity to make full disclosure of any fraud/evasion in exchange for no criminal prosecution.
> Reduced penalties could be considered for tax evaders who voluntarily disclose and ultimately pay their share of due taxes.
> Non-cooperative individuals or incomplete disclosure would be thoroughly investigated and met with the full force of criminal prosecution.
The TDP could be an alternative way to compel tax evaders to imburse the right amount of due taxes.
Education and services
The IRB’s recent awareness, education and services initiative should incorporate bringing awareness to taxpayers on the severity of both civil and criminal prosecution for tax evasion and fraud.
A continuous focus must be placed on improving and promoting tax compliance among taxpayers, and various in-depth conversations must be held among governmental agencies, business associations, non-governmental organisations and taxpayers to further improve relationships among all the stakeholders.
The tax investigation framework could also be updated by the IRB to adopt some of the well-received changes in the updated Tax Audit Framework.
Changes such as 0% penalty on technical adjustments, penalty scale rates starting from 15% (for first offence) and clarifications on voluntary disclosure, etc.
These updates, together with further guidance on what constitutes a civil and/or criminal prosecution, should be clearly defined within the framework to provide more certainty and eliminate confusion.
Capital statement submission
Capital statement is a tool used by the IRB to detect any under-reporting of an individual’s taxable income. The mechanism of the capital statement is simple. Your income should either be spent, invested or saved.
Any increase in your net worth ought to be substantiated by either your taxable or non-taxable income, the failing of which will result in your capital statement reflecting a discrepancy position.
The IRB may compel ultra-high-net-worth individuals with yearly incomes in excess of RM10mil and high-net-worth individuals with annual incomes in excess of RM1mil to submit a capital statement triennially and quinquennially respectively.
With the IRB’s recent commendable efforts to be taxpayer-centric, compliant taxpayers have little cause for concern regardless of how the IRB will step up their tax investigation efforts.
The same can’t be said for tax evaders and fraudsters.
Whether government will introduce some of these ideas remains to be seen.
Irrespective of what will be announced, all of us play a vital role in nation-building by paying the right amount of tax.
Soh Lian Seng is head of tax, KPMG in Malaysia. The views expressed here are the writer’s own.