File pic — AZMAN GHANI/The Star
TAX compliance is critical for revenue generation and fiscal stability. South-East Asian countries face similar challenges – large informal sectors, tax evasion and low levels of tax compliance.
Malaysia stands out for a relatively balanced strategy combining enforcement (the deterrent approach) and taxpayer engagement (a softer and more accommodative style).
In the regional context, Malaysia is more proactive than some peers, though perhaps less advanced than Singapore in terms of fostering a compliance culture.
Sustained reforms and digital innovations will be key to improving compliance while maintaining taxpayer goodwill.
The enforcement mechanisms deployed by the Malaysian Inland Revenue Board (IRB) include:
> Audit programmes: Field and desk audits to detect underreporting and evasion.
> Third-party data matching: Information sharing with banks, government departments.
> Penalties and prosecutions: Financial penalties and criminal charges for serious evasion.
> Mandatory e-filing: Enforced for businesses and high-income individuals.
Engagement measures and voluntary compliance:
> Self-assessment system (SAS): Places responsibility on taxpayers to declare income honestly.
> Voluntary disclosure programmes (VDPs): Temporary leniency to encourage taxpayers to come forward.
> Taxpayer education: Workshops, online tools and community outreach.
> Digital services: Taxpayer-friendly platforms like e-Hasil and MyTax.
> E-invoicing: Introduced in stages from August 2024.
Recognising the significance of combining deterrent and accommodative approaches, the IRB devised a system to make “compliance easy and non-compliance difficult” in 2016.
Based on the IRB Corporate Plan 2016-2020, the balanced approach emphasised strict enforcement action against tax offenders.
It diversified efforts to facilitate tax compliance behaviour and reduce compliance costs for taxpayers ready to fulfil their tax responsibilities.
In the IRB Corporate Plan 2021-2025, it states its mission as to:
> Maximise voluntary compliance,
> Provide excellent services,
> Optimise organisational operations, and
> Be a highly competent workforce.
The IRB recognises that there are taxpayers who fulfil their duties in good faith and therefore in their dealings with such taxpayers, there is a certain measure of leniency displayed by the IRB.
In the Tax Audit Framework that came into effect in May 2022, the penalty imposed for tax adjustments arising from a tax audit were reduced to 15% for the first offence, 30% for the second offence and 45% for the third offence as opposed to levying a flat 45% penalty across the board.
There are calls for the IRB to waive penalties for the first offence for taxpayers that act in good faith, as the tax differences could be due to technical or interpretational issues or honest mistakes.
This will foster trust between the taxpayers and the IRB.
Singapore is a good example where the Inland Revenue Authority of Singapore rarely, if ever, imposes penalties.
For taxpayers that are non-compliant, the IRB tends to be quite forceful in its execution of the tax audits or investigations.
On Aug 11, 2025, the IRB launched a 10-day Tax Compliance Operation, codenamed Op Titan, to enhance enforcement against tax evasion.
According to an IRB statement, Op Titan was initiated in response to certain parties employing aggressive tax planning to evade taxes through transactions between related companies.
This manipulative practice undermines the fairness of the taxation system and must be addressed urgently, the statement added.
A total of 313 officers were deployed to audit 103 companies across various industries to ensure the operation’s success.
The IRB is open to leveraging on the experiences of other jurisdictions to increase taxpayer compliance in Malaysia.
It is estimated that the shadow economy in Malaysia makes up about 30% of the country’s gross domestic product (GDP).
The Australian Tax Office (ATO) has been able to reduce the level of non-compliance in Australia to 3% of the GDP.
This was achieved within eight to nine years of launching the Shadow Economy Compliance programme, which could perhaps be emulated by Malaysia.
Some of the measures deployed by the ATO include mandatory e-filing, risk detection and data-matching.
Targeted audits, cross-agency collaboration, industry engagement and tax agent compliance have also been used in more recent times to improve compliance.
There is also a need to report to Austrac for transactions involving A$10,000 physical cash or more within 10 days or face civil penalties.
E-invoicing appears to have positive effect in countries where it is implemented.
In Malaysia, it is a key tool to increase the level of tax compliance significantly.
E-invoicing requires businesses to submit invoice data electronically in real time or near real time to IRB.
This gives tax authorities immediate visibility into business transactions and makes it harder to under-report income or inflate expenses.
E-invoicing creates a tamper-proof audit trail and reduces opportunities for fake invoices and under-declaration of sales.
Since e-invoices are shared with both the supplier, buyer, and the IRB, who can match purchases with corresponding sales.
This reduces mismatches and ensures both parties declare accurate transaction values.
Tax audits become more data-driven, faster and more focused on high-risk areas and reduces administrative burden as well as allowing better allocation of enforcement resources.
To further enhance tax compliance, IRB is expanding its data integration efforts by linking with more third-party databases for real-time audit triggers as well as embarking on targeted compliance programmes to focus on high-risk sectors like the gig economy and real estate.
It is also imperative for the IRB to enhance taxpayer trust with greater transparency and fair dispute resolution mechanisms.
Harvindar Singh is a council member of the Chartered Tax Institute of Malaysia and a Tax Partner at SCS Global Consulting (M) Sdn Bhd. The views expressed here are the writer’s own.
