Around this time every year, businesses and Malaysians will submit their “wish list” to the government for what they hope will be a beneficial budget for the coming year and beyond. Apart from the complications due to the Covid-19 pandemic, this year is expected to be no different, but the government has introduced an added flavour in the form of the pre-budget statement (PBS).
In an unprecedented move, the Ministry of Finance issued the PBS for Budget 2022 (which is scheduled to be tabled on Oct 29), with the objective of enhancing the transparency of the annual budget process as well as to provide an avenue for the rakyat to monitor the country’s fiscal management through specific metrics.
A positive and encouraging move in line with international best practices, the PBS also covers the management of revenue leakages, Malaysia’s international commitments as well as strategies to increase tax revenue and strengthen the tax system.
Indirect tax was a notable mention, as the government recommends to study a proposed implementation of a Special Voluntary Disclosure Programme (SVDP) to increase tax revenue through increased tax compliance. Through this programme, taxpayers will be encouraged to voluntarily come forward to declare any indirect taxes that either have not been paid, underestimated or erroneously reported to the Royal Malaysian Customs Department (RMCD).
At present, there is a voluntary disclosure form made available by RMCD for specific scenarios. Also, to those who remember, the Inland Revenue Board implemented the SVDP for personal and corporate income taxes a few years back.
The voluntary disclosure programme has been one of the recommendations of the Organisation for Economic Cooperation and Development (OECD) as an international best practice, as such a programme enables taxpayers to manage and regularise their tax affairs and to declare the income that had been omitted in the past.
In a way, it provides taxpayers a proper channel to be compliant and responsible taxpayers. From the government’s perspective, it is a way to enhance revenue collection using relatively limited resources, saving costly and contentious audits, litigation and criminal proceedings.
It is interesting to note that the OECD has for years been studying what drives taxpayer behaviour and how it can be influenced to encourage greater compliance. This has resulted in The Compliance Pyramid & Voluntary Disclosure (see chart).
As illustrated in the pyramid, the widest (and ideal) base are the compliant taxpayers who pay taxes when due. These are behaviours that tax authorities around the world would like to see. The middle section of the pyramid represents taxpayers who take advantage of voluntary disclosure programmes to correct their tax affairs. These taxpayers can be considered as initially non-compliant with all or some of their tax obligations, but are encouraged by the programme to come clean.
The top portion of the pyramid represents taxpayers who are deliberately and persistently not compliant with all or part of their tax obligations. They are generally risk takers who are under the impression that their non-compliance will not be discovered, and hence fines and penalties should be the heaviest here.
From this pyramid, the focus would be to encourage the middle section or the not-so-compliant taxpayers to come forward, hence the voluntary disclosure programme. Nevertheless, it is important to note that the design of the programme needs to ensure that initial full compliance remains the most attractive option for taxpayers (and not the voluntary disclosure programme). Otherwise, it may look like an apple shape, or worse, an inverted triangle!
It is important to recognise that the voluntary disclosure programme cannot be a standalone, but needs to be part of a broader compliance strategy. It needs to complement the variety of compliance strategies and actions that tax authorities and the government take to encourage all taxpayers to meet their obligations. Hence, crafting the right and effective voluntary disclosure programme is key to its success.
Coupled with this, communication on its deployment and effectiveness is crucial. It is important to send the message that compliance is of utmost importance to avoid creating perceptions of unfairness to those who follow the law, but at the same time, the programme needs to be attractive enough to encourage the not-so-compliant taxpayers to participate.
Easing back to the Malaysian front, as mentioned earlier, there’s an existing voluntary disclosure mechanism for indirect tax, but it is for specific circumstances and there is no certainty of the consequences. It is anticipated that this proposed indirect tax SVDP will be a more comprehensive version, with experiences taken from the income tax SVDP as well. While the mechanism and feature of the indirect tax SVDP is being studied, from the taxpayers’ viewpoint, it is hoped that such a programme, if approved, will provide certainty on, among others:
• Proper and defined process to make the disclosure — clarity of the reporting process as well as the documents to be provided will encourage compliance.
• What will happen if they make a full and accurate disclosure and whether full penalty/charges will be imposed — cost benefit analysis will definitely come into play.
• Reassurance that for those who participated, there will not be any future audit for the years declared and that they will not be unduly targeted for enhanced scrutiny in the future.
• Confidentiality of the information that is provided — taxpayers may have concern for publicity/reputational damage and personal security in the event participation is disclosed.
• Assurance that the terms for the additional tax to be paid will not be prohibitive — cash flow and settlement terms need to be reasonable and flexible.
As there are many forms of indirect taxes (from import and export duties to internal taxes such as excise, sales tax, service tax and Goods and Services Tax), having a consistent programme to cover all these taxes could be administratively easier to manage and comply with.
From the government’s perspective, apart from the increased collection of revenue and improved compliance, as indirect tax is a transactional tax, it can be a much easier mechanism to collect taxes which could otherwise be missed.
Similarly, from the taxpayer’s perspective, the different indirect tax regimes, with the various differentiation among the legislations, is clearly hard to comply with or monitor. A small slip up that goes unnoticed may result in a big non-compliance issue if not discovered until many years later. Hence, the SVDP can help nip the problem in the bud without the compounding penalty effects.
Among others, and the list below is by no means exhaustive, the indirect tax SVDP could be beneficial for the following scenarios:
• Disclosure due to transfer pricing adjustments, particularly for import duties and sales tax;
• Late registration for sales tax, service tax or any other indirect taxes and the corresponding late payment of taxes;
• Under-reporting of duties and taxes which were missed out or due to inaccurate classification;
• Omission to account for imported taxable service;
• Reporting of errors found during internal health checks, and
• Underpayment of GST (it is noted that a penalty remission programme for GST was introduced from May 1, 2021, to Aug 31, 2021).
At the end of the day, a successful voluntary disclosure programme must strike a balance between providing sufficient incentives for those engaged in non-compliance to come forward but at the same time, not rewarding or encouraging such conduct. In essence, a successful programme should benefit everyone involved, from the taxpayers making the disclosure to compliant taxpayers as well as the government.
As the name suggested in the PBS, it is a “Special” Voluntary Disclosure Programme — to what extent it will cover and how long the programme will be remains to be seen. Nevertheless, this is certainly an area to look out for in the coming months leading up to Budget 2022.
Ng Sue Lynn, head of indirect tax at KPMG in Malaysia. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG Tax Services Sdn Bhd.