Since the start of the Covid-19 pandemic, Malaysia, like many other countries, has had to spend billions on stimulus measures to save lives and livelihoods. It is now necessary to increase the country’s income to finance these measures, and one obvious option is taxation.
There are many views on the best methods to increase tax revenue. In Malaysia, some of the widely mentioned, and sometimes much debated, options are the introduction of a capital gains tax – moving to a global tax scope (as opposed to our current predominantly territorial regime, where foreign source income is generally taxed). exempt) – or reinstate other taxes such as the Goods and Services Tax (GST) and inheritance tax. Each of these options has its advantages and disadvantages.
The biggest opportunity, in my opinion, is not so much to introduce new taxes, but rather to rethink and rethink tax administration systems.
Today’s tax administration systems rely heavily on voluntary compliance. Although the tax is not voluntary, the term “voluntary compliance” recognizes that in many aspects of the current tax system, taxpayers make their own choices about the reporting, calculation and payment of tax. As long as these voluntary compliance choices remain, some of the choices made will inevitably result in the non-payment of certain amounts of tax. This may be deliberate or due to a lack of due diligence or to genuine mistakes made by the taxpayer.
In Malaysia, it is estimated that the underground economy accounted for 18% of our GDP in 2019. In current terms, this translates to approximately RM250 billion. Much of Malaysia’s underground economy is made up of unregistered businesses, underreporting of business income, unreported sources of income, and trafficking. Imagine the increase in tax revenues if we could bring these activities into the tax fold.
With the digital revolution, there are now technological options that offer authorities the ability to integrate tax processes into the systems used by taxpayers in their daily life and business, i.e. say to make taxes a reality.
To use an analogy with the OECD Tax Administration 3.0 report, this would be akin to the development of automated and self-driving cars. Today, automotive safety is a combination of defined requirements, such as vision standards, driving tests, traffic rules and speed limits, coupled with enforcement processes such as the installation of cameras to detect speeding and other moving offenses, traffic police and traffic police patrols. the imposition of parking fines. Despite these defined conditions and controls, drivers are still expected to voluntarily engage in responsible behavior and comply with applicable rules.
In a world of driverless cars, however, the vehicle is an integral part of a larger system, which enhances safety through the use of algorithms and features that allow the vehicle to make complex decisions such as sensors recovering information about road conditions and other cars. . As such, driving will be largely based on compliance systems by design, with drivers free to engage in other activities.
Likewise, the future of tax administration systems is to increasingly integrate compliance outcomes by design as well as possible drastic reductions in compliance costs for taxpayers.
The main features of digital tax administration systems are as follows: (1) The tax will be integrated with the natural systems of taxpayers, so that paying taxes will become a more transparent and automated experience over time, integrated into the daily life and business activities; (2) Many digital platforms will become “agents” of tax authorities performing tax administration processes within their systems; and (3) The tax authorities will no longer be the single point of data processing and tax assessment. Instead, tax administration is conducted within a resilient network of trusted actors interacting transparently without a single point of trust. Tax administration processes will therefore increasingly be in real time or close to real time.
The use of technology has the potential to address various areas and identify actors in the underground economy, thus creating the possibility of recovering lost tax revenue, improving taxpayer morale and restoring confidence in the economy. the system. At full capacity, technological solutions can dramatically reduce the level of informal activity and revolutionize the operations and organization of tax authorities, as well as their interactions and relationships with taxpayers. Mandatory electronic invoicing and increasing the use of electronic payments are just two digitization options that can help reduce the loss of tax revenue resulting from the underground economy.
What has been described above is not an imaginary future state. It’s already underway. The digital revolution, especially with the Internet of Things, is already transforming tax administrations around the world.
In Russia, data from many cash terminals feed directly into the country’s federal tax service. Russian tax authorities have a holistic view of the entire Russian economy. With minimal human involvement, their system tracks and compares transaction data from buyers and sellers across the country. They receive receipts for every transaction in Russia within 90 seconds. The information revealed errors, evasions and frauds in collecting its consumption tax, VAT, which allowed the government to generate revenue faster than Russia’s overall economic performance.
Russia is just one example, and perhaps the most advanced. Many other jurisdictions such as Mexico, India and Brazil, to name a few, have also gone digital. These countries have introduced a form of digital tax administration, such as electronic invoicing, which results in the publication of transactional data to tax authorities in near real time.
This is the future of tax administration – digital, in real time and possibly without any tax return having to be submitted. In other words, remove the “voluntary” aspects and make the tax a reality.
Amarjeet Singh is EY Asean Tax Manager and Malaysia Tax Manager at Ernst & Young Tax Consultants Sdn Bhd