By Dr Veerinderjeet Singh and Andrew Burman
Comprehensive review timely as Malaysia is driving its transformation programme.
Recent developments in parts of Europe have sparked a debate in the eurozone on austerity and growth. Those who argue for austerity or “fiscal prudence” claim that debt management is key to restoring investor confidence and, therefore, long-term prosperity.
Borrowing more is not an acceptable response to a crisis caused by over-borrowing and over-spending. In contrast, those who prefer greater stimulus claim that, without further investment, growth will simply not return, and without some Government stimulus, no economy can pull itself out of recession to achieve long-term stability and growth.
Whilst there is no clear “right” answer, there is one aspect of Government policy that is absolutely central to this taxation. Governments must ensure a balanced system of taxation that provides the right incentives to business and citizens, while enabling the Government to meet its debt and spending obligations. Getting this balance right can drive increased confidence among the investor community and stimulate economic activity, international competitiveness and long-term growth.
A new approach
In the past, many countries have relied on the support of international bodies and other inter-governmental assistance to begin the process of tax reform in respect of designing the tax system itself and in improving the ability to collect taxes. In the post “credit-crunch” world, it has become apparent that the operational ability to increase tax revenues is somewhat limited. A new hands-on approach is required to assist the public sector, generating increased tax revenues and driving corporate activity without raising taxes or damaging international competitiveness.
Like any business, a Government has costs and it has revenues. A framework is required to help Governments optimise their tax revenue and balancing this need with the creation of the right incentives for citizens and businesses to stimulate the economy. To achieve this, our experience in working with Governments is typically structured around three core work streams:
* Tax reform design - Modeling the economy and designing a new system of taxation appropriate for the jurisdiction, with the emphasis on simplicity, fairness, participation and economic stimulus;
* Tax compliance - Building the taxpayer base to ensure all taxpayers have paid the correct amount of tax under the law and will continue to do so and;
* Tax operational improvements - underpinning both streams, identifying and delivering detailed operational improvements, ensuring transparency of data and processes within the tax administration, across Government departments and with taxpayers.
Malaysia has never had a comprehensive review of its tax system. The setting up of a Tax Review Panel a few years ago basically focussed on the proposed Goods & Services Tax and has done some good work in this area but the focus on income taxes was limited and too restrictive. A comprehensive review is now timely given that Malaysia is aggressively driving its transformation programme towards achieving developed nation status by 2020.
Tax reform design
A tax system is at its best when it is at its simplest, levying the minimal number of taxes, thus making compliance easy for taxpayers and the tax authorities. Headline rates should be minimised, often in exchange for the removal of reliefs or deductions. In addition, it is essential to improve the quality of the taxpayer base. Finally, international trends are to shift the burden of taxation towards indirect taxes to ensure participation in the tax system, improve the reliability of collections and increase fairness.