WHEN tax audits started in the 2000s, the original objective was to improve and enhance voluntary tax compliance, and to educate taxpayers to avoid mistakes and know their rights and responsibilities under income tax laws.
Initially, tax auditors were focusing more on educating taxpayers in understanding the laws and regulations. However, recently the direction appears to have changed towards collecting taxes and imposing penalties.
Malaysia has a low tax-to-gross domestic product ratio of 11.8%. The World Bank recommends the ratio to be 15% and above.
There is pressure on Malaysian tax authorities to collect more taxes. To meet the gap, the focus should not be on existing taxpayers who are diligently filing their tax returns, but the direction should be to unearth errant taxpayers and bring them into the tax system.
There is a need to accelerate the widening of the tax net, which in a way is happening through the introduction of e-invoicing, which will provide greater transparency and reduce leakages.
What is happening now?
Currently, taxpayers who are within the system are facing increased frequency of audits. The issues arising in the audits are often technical issues or disputes on the reliability of the evidence provided. No doubt there are cases where the taxpayers have not kept proper documentation or taxpayers have intentionally attempted to defraud the Inland Revenue Board (IRB). In such cases, IRB is correct in assessing such errant taxpayers.
However, the relationship between taxpayers and IRB is not improving but perhaps deteriorating because IRB is frequently disputing with taxpayers as opposed to giving the benefit of the doubt to taxpayers. The educational element in tax audits is now missing, and the mission seems to be leaning towards collecting taxes and imposing penalties.
If this climate continues, the reaction from taxpayers would be defensive, and more matters could end up in litigation, which will be unproductive to both taxpayers and IRB. Taxpayers will also be planning their tax affairs to minimise their taxes and be prepared for tax audits.
Where should we be moving?
No one will disagree if IRB imposes additional taxes on taxpayers who fail to follow the law. However, there is no necessity for first-time defaulters to be subjected to penalties. We must go back to the old practice where penalties are only imposed when the same mistakes were being repeated, and the rate will increase as a taxpayer repeatedly makes the same mistakes. However, where the tax issues identified can go both ways, the benefit of the doubt should be given to the taxpayer and no additional taxes should be imposed.
Harmony versus confrontation
Tax audits are excellent to engage taxpayers and to educate them on the application of the law to improve voluntary compliance. It is not a tool to just collect taxes and penalties. We need to change the climate such that taxpayers are encouraged to connect with IRB well before an audit is triggered, and during the audit, IRB officials should be establishing relationships so that taxpayers can reconnect with them whenever they have a doubt.
There should be no fear that there will be adverse consequences if you talk to IRB officials and seek their views and advice and apply them. It is difficult, but this is a process of engagement that needs to be started sometime.
At the moment, if an audit is initiated, there is always a fear with taxpayers with what is the extra tax bill. This should not be the case.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
