Malaysia's Taxation System (Preview)

Malaysia’s Taxation System

IE

W

Contemporary Practices, Issues and Future Direction Editors

P

R

E

V

Mohamed Ariff Yeah Kim Leng

R

P W

IE

V

E

Malaysia’s Taxation System

IE

W

Contemporary Practices, Issues and Future Direction Editors

P

R

E

V

Mohamed Ariff Yeah Kim Leng

Copyright Š 2020 by Sunway University Sdn Bhd Published by Sunway University Press An imprint of Sunway University Sdn Bhd No. 5, Jalan Universiti Sunway City 47500 Selangor Darul Ehsan Malaysia

W

press.sunway.edu.my

IE

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, now known or hereafter invented, without permission in writing from the publisher.

ISBN 978-967-13697-9-1

Cataloguing-in-Publication Data

V

Perpustakaan Negara Malaysia

P

R

E

Malaysia’s Taxation System : Contemporary Practices, Issues and Future Direction / Editors: Mohamed Ariff, Yeah Kim Leng.

ISBN 978-967-13697-9-1 1. Taxation--Malaysia.

I. Mohamed Ariff.

II. Yeah, Kim Leng.

336.2009595

Edited by Sarah Loh, Hani Hazman Designed by Rachel Goh Typeset by Pauline Loo Printed by Nets Printwork Sdn Bhd, Selangor

Cover image: Zoya Art/Shutterstock.com Image used under licence from Shutterstock.com

Contents Foreword

iv

Preface

v vii

About the Contributors

viii

1

Introduction to Taxation in Malaysia Mohamed Ariff, Yeah Kim Leng

2

W

About the Malaysian Tax Research Foundation

Contemporary Taxation Laws and Practice

1 6

3

IE

Kanchana Chandran, Kalpana Chandran, Paul Linus Andrews

Implementation Issues and Challenges: A Taxpayer’s Perspective

40

Jeyapalan Kasipillai, Noor Sharoja Sapiei

Tax Collection: Issues and Challenges

V

4

68

Mohamed Arif, Mohamed Najib

Taxing Issues on Deferred Income

E

5

106

Chang Chee Fei, Ng Shir Li, Ng May Yee

6

Talent Management in Tax Administration

129

R

Marhaini Mahmood, Aina Hartini Hussin

Taxation, Fiscal, and Monetary Policies: A Bottom-Up Perspective

P

7

149

Mohamed Ariff, Yeah Kim Leng

8

A Cross-Country Comparison of Taxation Systems

196

Chung Tin Fah, Mohamed Ariff, Yeah Kim Leng

9

Australia’s Tax Reform Experience: Lessons for Malaysia

240

Binh Tran-Nam

10 The Way Forward: Challenges and Opportunities for Tax Reforms and Research

271

Veerinderjeet Singh

Index

295

4

Malaysia’s Tax Systems

Foreword Malaysia is on the verge of change. The new government wants to usher in a change to the management of the government’s finances, with one of the key areas being the revamp of the country’s taxation system.

IE

W

The new government’s first initiative was to abolish the goods and services tax (GST) in June 2018 and reintroduce the sales and service tax (SST) in September 2018. This was followed immediately by the formation of the Tax Reform Committee, which has been given a blank slate to suggest ideas to reform the entire taxation system. The intention of the Committee was to widen the tax base and to provide sustainable income to the government to manage the government’s finances.

V

The publication of Malaysia’s Taxation System: Contemporary Practices, Issues and Future Direction is timely and coincides with the government’s intention to reform the taxation system. This book provides all stakeholders, government bureaucracy, the private sector, academics, tax professionals, politicians, and other outside observers a starting point to understand the intricacies of our taxation system.

R

E

Although the views expressed in each chapter are entirely the independent and personal views of the respective contributors, the train of thought throughout the book is consistent. The book looks to the past and present of Malaysia’s taxation system and also provides suggestions for the future direction of the country’s tax policies. These suggestions will ultimately lead to the widening of our tax base and serve to provide guiding principles on transparency, consistency, certainty, and ideas for further thought.

P

In essence, this book captures the thoughts of tax intellectuals and practitioners, and will act as a launching pad for anyone desiring to commence research on any area of taxation in Malaysia. I recommend this book, without hesitation, to anyone who wants to understand Malaysia’s taxation system, be it foreign investors, international organisations, or the general public.

SM THANNEERMALAI Chairman of the Board of Trustees Malaysian Tax Research Foundation

iv

Preface

IE

W

Malaysia’s Taxation System: Contemporary Practices, Issues and Future Direction is an in-depth analysis of Malaysia’s taxation system with chapters contributed by leading legal, accounting, and tax administration professionals and academics. Besides fulfilling the government’s call for greater industry–academia collaboration, the contributors’ collective expertise provides new insights into the evolution of Malaysia’s taxation system and how it is functioning in 2019 at the time of writing this book. It shows how policy-relevant reforms evolved over eight decades especially since 1957 by the leaders of an independent country. New changes are already signaled by the new government that took power in 2018 promising to chart a suitable way forward. One of the reform areas is to devise a more holistic taxation system for this upper middle-income country that is projected to reach high-income status in a few years.

R

E

V

In a country that saw itself welcoming the new government following the 14th General Election in 2018, after six decades of rule by the previous coalition party, the country is heading towards significant times of change on promised fiscal prudence and good governance. This book, envisaged to provide readers with a comprehensive overview of the existing taxation system, comes at a time of this momentous political change. There are calls already for a reformation of the taxation system.

This book, commissioned by the Malaysian Tax Research Foundation (MTRF), offered us the editors a timely opportunity to make a record of the present status of the taxation system.

P

It was great pleasure working closely with Datuk Aziyah Bahauddin and Mr SM Thanneermalai, the respective past and current chairpersons of MTRF, which provided a research grant to the editors in early 2018 for the specific purpose of a research to understand the current taxation system as it had evolved since the 1940s, consolidated by several ensuing administrations adapting the then taxation system to the changing social and economic situations. Our task to carry out the intent of the MTRF was to identify persons with extensive industry experience and scholars qualified to contribute to this book because of their track record in taxation research.

v 5

vi

Preface

The team producing this book is grateful to the Chairman and the trustees of MTRF for the grant to make this book a reality. We record our gratitude to the President of Chartered Tax Institute of Malaysia (CTIM) Ms Farah Rosely, Executive Director Mr P. Thomas Simon, and CTIM council members for their support, and also to the Sunway University Press bookproduction team, Carol Wong and editors Sarah Loh and Hani Hazman, for putting this book together.

V

IE

W

It is hoped that this book will not only broaden a reader’s understanding of the taxation system and practices but help serve as a reference point for practitioners and policymakers. With a comprehensive understanding of the current tax status, stakeholders would be able to make better informed decisions concerning future directions. This should lead to new initiatives to pass new laws and policies, as appropriate, for the modernisation of tax collection, including potentially a merger of the two separate tax administrations, the Inland Revenue Board of Malaysia and the Royal Malaysian Customs Department, into one to gain economies of scale to secure greater efficiency in tax collection.

MOHAMED ARIFF & YEAH KIM LENG

P

R

E

Sunway University, Malaysia

About the Malaysian Tax Research Foundation

W

The Chartered Tax Institute of Malaysia (CTIM) promoted the formation of a body corporate on 11 June 2011 under the provisions of the Trustees (Incorporation) Act 1952, called the Malaysian Tax Research Foundation (MTRF). MTRF is a separate and independent body from CTIM. MTRF has been granted a tax exemption status under Section 44 (6) of Income Tax Act 1967 for any donation received.

MTRF is a trust body created for the promotion, encouragement, and advancement of tax research in Malaysia. It is currently the only such body in Malaysia. The objectives of MTRF are as follows:

P

R

E

V

IE

• To put Malaysia at the forefront of taxation-related studies through promoting interest in tax research among Malaysians by providing assistance in tax research work.

• To bridge the gap of understanding of taxation laws and the complying environment towards enhancing the economic development of Malaysia.

• To bridge the divergence between taxation laws and accounting standards.

• To undertake research on the impact of any proposals for changes in tax legislation and tax administration.

• To provide scholarship for those undertaking tax research in universities.

• To encourage and promote the advancement of knowledge in taxation.

• To carry out such other legally charitable purposes for the advancement of education and training in the profession.

• To cooperate with other bodies and institutions with similar aims and objectives.

• To publish and disseminate literature in advancement of taxation.

For further information, kindly contact the current MTRF secretariat at the offices of CTIM at Unit B-13-1, Block B, 13th Floor, Megan Avenue II, No. 12 Jalan Yap Kwan Seng, 50450 Kuala Lumpur, Malaysia; +603 2162 8989 (telephone); +603 2162 8990(fax); secretariat@ctim.org.my (email).

vii 7

About the Contributors Aina Hartini Hussin, presently retired, was with the Inland Revenue Board of Malaysia for 20 years. Throughout her career, she held various positions and led divisions in the Logistics, Corporate & People Management Department and the Malaysian Tax Academy. She holds a Biotechnology degree from Universiti Putra Malaysia and a master’s degree in Occupational Safety and Health Management from Universiti Utara Malaysia.

W

Binh Tran-Nam, PhD, is Professor at UNSW Sydney, Australia and the

IE

founding Editor-in-Chief of eJournal of Tax Research. His research on taxation, international trade, and development economics has culminated in 10 books, 45 book chapters, and 85 scholarly articles. In 2015, he was awarded the prestigious Australasian Tax Teachers Association Hill medal for his contribution to Australasian tax teaching and policy.

E

V

Chang Chee Fei, PhD, is Associate Professor at Sunway University, Malaysia lecturing on revenue law and accounting. He previously held key positions in management reporting, tax planning, internal control, and corporate finance at several private and public firms including a foreign direct investment entity. He is a member of the Malaysian Institute of Accountants and a Fellow of the Association of Chartered Certified Accountants, United Kingdom.

P

R

Chung Tin Fah, PhD, is Associate Professor at HELP University, Malaysia.

He has more than 30 years of industry experience, having worked at Bank Negara, Securities Commission Malaysia, Social Security Organisation (SOCSO), and various investment banks. He is also an independent member of Bursa Malaysia’s Market Participants Committee, providing consultancy for Bursa Malaysia, the Malaysian government, and the World Bank.

Jeyapalan Kasipillai, PhD, is Professor at Monash University Malaysia and since 2012, a Fellow at the Taxation Law and Policy Research Institute in Melbourne. He is a fellow member of the Institute of Certified Practising Accountants (FCPA), Australia; the Institute of Chartered Secretaries & Administrators (FCIS), United Kingdom; and the Chartered Tax Institute of Malaysia (FCTIM). He is a prolific author whose book A Guide to Malaysian Taxation (2019) is now in its fifth edition.

Kalpana Chandran is a Solicitor with Hogan Lovells Int. LLP, a top-tier

global law firm in London, United Kingdom where she works with some of the world’s largest corporations in some of the most significant, challenging and high-value commercial disputes in the world. She brings a unique perspective to the practice of law, combining the best qualities of the bar and traditional law firms.

viii

About the Contributors

ix

Kanchana Chandran is Senior Lecturer at the Centre for Commercial Law and Justice, Sunway University, Malaysia. She is a dual-qualified Solicitor and Barrister of England and Wales and an Advocate and Solicitor of the High Court of Malaya. She has published articles in peer-reviewed journals, book chapters, and conference papers, and regularly receives invitations to speak at international conferences.

Marhaini Mahmood, PhD, has 28 years of experience in taxation and

W

is Director of the Enterprise Risk Management Division at the Inland Revenue Board of Malaysia. She is a trained Certified Risk Governance professional by the Enterprise Risk Management Academy of Singapore.

She has been invited to give talks on enterprise risk management at the Organisation for Economic Co-operation and Development in Paris, France and public agencies in Malaysia.

IE

Mohamed Arif, PhD, has been with the Inland Revenue Board of Malaysia for over 15 years. He is currently Senior Research Officer in the Tax Research Department. He also holds a master’s degree from National Graduate Institute for Policy Studies, Japan.

Mohamed Ariff, PhD, is Head of the Economics and Finance Department

E

V

at Sunway University, Malaysia. He has 27 years of academic experience across Singapore, Australia, Japan, United States, Ireland, and Malaysia.

His scholarly works on taxation and on accounting/economics/finance have become standard reference materials in higher learning institutions around the world. He is the co-editor of this book.

R

Mohamed Najib, PhD, started his career in 2001 at the Inland Revenue Board of Malaysia, where he was attached to the Tax Collection Department, the Kuala Lumpur Investigation Centre, and the Special Task Department. He is currently Senior Research Officer in the Tax Research Department.

P

Ng May Yee, PhD, holds an LLM from the University of Northumbria and a degree from the Institute of Chartered Secretaries and Administrator in the United Kingdom. She previously served as a company secretary to an investment bank in Malaysia. She is now Assistant Professor of Law at Heriot-Watt University Malaysia, teaching various law subjects at both undergraduate and postgraduate levels.

Ng Shir Li, PhD, has over 10 years of experience working at various

accounting firms and academic institutions across Malaysia and Australia.

She currently lectures on various accounting modules at Sunway University, Malaysia. Her research interests lie in the areas of corporate governance, international financial reporting standards, integrated reporting, and accounting theories.

9

x

About the Contributors

Noor Sharoja Sapiei, PhD, is Senior Lecturer at University of Malaya, Malaysia, specialising in taxation. A member of the Association of Chartered Certified Accountants, United Kingdom, she also holds an MBA from University of Malaya. She has published extensively on taxation compliance costs, compliance behaviour, corporate governance, and other tax-related matters.

W

Paul Linus Andrews, PhD, is Head of the Centre for Commercial Law and Justice, Sunway University, Malaysia. He is EXCO member of the Malaysia Crime Prevention Foundation (Selangor), Committee Member of the Constitutional Law Committee of the Bar Council Malaysia, and Fellow of the Higher Education Academy, United Kingdom. His coauthored publications have appeared in Halsbury’s Laws of Malaysia (LexisNexis, 2002), Equity and Trusts in Malaysia (Sweet and Maxwell, 2005), and Law for Business (Sweet and Maxwell, 2018).

IE

Veerinderjeet Singh, PhD, is Chairman of Axcelasia Group and Axcelasia

V

Taxand Sdn Bhd. He is also Trustee of the International Bureau of Fiscal Documentation, Vice President of the Malaysian Institute of Certified Public Accountants, Council Member of the Malaysian Institute of Accountants, and Member of the Commission on Taxation of the International Chamber of Commerce. He was previously President of the Chartered Tax Institute of Malaysia and Chairman of the International Fiscal Association-Malaysia Branch.

P

R

E

Yeah Kim Leng, PhD, is Professor of Economics at Sunway University, Malaysia. He is also Deputy President of the Malaysian Economic Association, Trustee of the Malaysian Tax Research Foundation, Member of the National Consumer Advisory Council at the Malaysian Ministry of Domestic Trade and Consumer Affairs, and Member of Bank Negara’s Monetary Policy Committee. He was Group Chief Economist of Malaysia’s first credit rating agency for 20 years. He is the co-editor of this book.

Yong Mun Ching holds a master’s degree from Monash University Malaysia

and professional memberships in the Malaysian Institute of Certified Public Accountants and the Malaysian Institute of Accountants. She has over 15 years of experience in both industry and academia, having worked at PricewaterhouseCoopers (PwC) and more recently Taylor’s University, Malaysia. She is currently pursuing her PhD at Monash University Malaysia.

CHAPTER 1

Introduction to Taxation in Malaysia

IE

W

Mohamed Ariff, Yeah Kim Leng

P

R

E

V

Malaysia is an upper middle-income country with a per capita income of USD9,500 in 2018. This was a higher figure in 2014 before the Malaysian Ringgit started to decline in 2015.1 The resultant stream of total tax collection increased in the 1980s after the successful industrialisation of the country. Meanwhile, the ratio of tax-to-gross domestic product (GDP) has been declining since 1987 to 17 percent, but subsequently rose to 20 percent with the implementation of the goods and services tax (GST) in 2015 (which has been zero-rated as of June 2018). A typical high-income Organisation for Economic Co-operation and Development (OECD) country has a tax-to-GDP ratio of 32 percent. Malaysia’s November 2018 budget estimate of government revenue is approximately RM275 billion, which is about 21 percent of the country’s aggregate income. With the zero-rating of the GST, the government revenue would shrink by some RM44 billion in 2019. Several countries at a similar stage of economic development, M. Ariff, Sunway University; K.L. Yeah, Sunway University 1

The Malaysian Ringgit fared well when the economy was growing, right up to the end of 2014 when the currency value was high enough that the per capita income was USD11,200. The currency has since depreciated by 8.5 percent and as such, per capita income has declined over three years to USD9,500 per capita. The high-income economic status to which this country aspires is defined as one that has a per capita income of USD12,600 or more (as of 2018). To reach that high-income threshold, the per capita income of the country has to improve from the current level by 32 percent. It is a long road ahead to that endpoint.

1

2

Mohamed Ariff, Yeah Kim Leng

such as Thailand, are collecting lower amounts of revenue (17.4 percent) than Malaysia.

W

Malaysia’s taxation system began in the fifteenth century when the Malacca Sultanate, a maritime power, developed a system based entirely on trade and wealth. In 1920, the then British rulers of Malaya imposed the modern taxation system in the country, which was further improved when Malaya gained independence in 1957.

The current modern taxation system leans more on income and less on wealth.

P

R

E

V

IE

Malaysia’s Income Tax Act 1967 incorporated the need for changes when Sarawak and Sabah joined to form Malaysia in 1963. Since then, the law aims to garner revenue based on taxing incomes in the form of personal income tax, corporate income tax, capital gains tax, and dividend tax (fully repealed since 2017).

There are also indirect taxes such as import and export taxes, sales and service tax (SST), and petroleum income tax. The country’s taxation authorities are the Inland Revenue Board of Malaysia (IRBM), which oversees direct taxes, and the Royal Malaysian Customs Department (RMCD), which oversees indirect taxes.

At the time of writing, the direct tax revenue of the Malaysian government is 53 percent while indirect taxes account for 47 percent of total tax revenue, evidencing the country’s reliance on direct taxes.

This book on Malaysia’s taxation was conceived as a primer for scholars, students, practitioners, and policymakers alike. Divided into two parts, the chapters in this book are contributed by legal, accounting, and tax administration professionals, and academics who specialise in taxation studies. Part I provides a perspective on government revenue with the theme “taxation in practice”, zooming into the intricacies of the taxation system and how it is being administered. Part II examines taxation on a broader level, analysing the country’s policies and taxation system in comparison to other countries.

Introduction to Taxation in Malaysia

3

W

Part I starts off with an overview of Malaysia’s contemporary taxation laws and practice in Chapter 2. Providing references to significant case laws, this chapter details the country’s five prominent taxes — income tax, real property gains tax (RPGT), SST, petroleum income tax, and stamp duty — along with other tax legislations such as Customs Act 1967, Local Government Act 1976, and Tourism Tax Act 2017. The authors of this chapter point to the fact that the existing laws provide room for other forms of taxation to be introduced.

R

E

V

IE

The ensuing Chapter 3 examines the challenges faced by taxpayers arising from the complexity of a taxation system and the implementation of new taxation laws. The chapter focuses on tax compliance and how compliance cost is incurred by taxpayers, now that tax computing and reporting are done through the SelfAssessment System (SAS). The chapter also highlights the measures taken by tax authorities to reduce taxpayers’ compliance burden and simultaneously improve voluntary compliance, such as tax education and awareness programmes, and tax simplification methods. In addition, the chapter provides a brief discussion on the new SST implemented in September 2018 to replace the GST.

P

In Chapter 4, key challenges faced by tax authorities in terms of tax collection are discussed. The primary obstacle to tax collection is non-compliance, either intentional or unintentional, which not only reduces the amount of collected tax (and hence, revenue) but also incurs extra cost for tax authorities to counter and penalise such behaviour. The chapter also describes significant historical milestones in the country’s taxation system development and sheds light on the tax collection processes of the IRBM and RMCD. Chapter 5 focuses on taxation issues involving deferred income (payment received in advance for goods or services not yet rendered) following the controversial amendments made to Section 24 of Income Tax Act 1967. The chapter questions the practicality of the amendments, which make deferred income

4

Mohamed Ariff, Yeah Kim Leng

taxable upon receipt instead of on an accrual basis, and argues that these amendments are in line with neither conventional tax principles nor accounting standards. The authors of this chapter recommend for the amendments to be suspended until further refinements are made.

V

IE

W

While the previous chapters discuss the taxation system and its administration at length, Chapter 6 examines talent management in the IRBM and how the tax authority transforms its employees into efficient tax professionals. From recruitment and training to development and retention, this chapter analyses the IRBM’s approaches in managing its workforce. Proper talent management and workplace leadership are important areas for any tax authority to develop, as an efficient taxation system is only made effective with the people that govern it.

P

R

E

Part II, which covers national policies and cross-country perspectives, begins with a bottom-up perspective on taxation through its intertwining relationship with fiscal and monetary policies in Chapter 7. Taxation, fiscal policy, and monetary policy work in tandem towards influencing economic growth, and changes in one without considering the other two could harm the economy instead. The chapter also details the major fiscal policy changes Malaysia had made throughout the decades since the 1970s, and the crises that shaped them.

Chapter 8 is a multi-country study of taxation. The chapter compares the taxation system in Malaysia to that of Japan, Korea, the Philippines, Singapore, Indonesia, and the OECD countries.

The chapter provides insights into the different tax structures each country has adopted and how these structures have influenced the country’s tax ratio and economic growth.

In a similar fashion, Chapter 9 provides a critical analysis of the Australian taxation system as a reference point for Malaysia. The chapter discusses the significant reforms Australia has undergone

Introduction to Taxation in Malaysia

5

in the past 30 years in the areas of tax law, tax policy, and tax administration. These reforms have transformed the Australian Taxation Office from an average tax administrator into a leading one. This chapter offers valuable lessons for Malaysia and its taxation system, especially since the country aspires to be a highincome nation such as Australia.

P

R

E

V

IE

W

Finally, Chapter 10 concludes the book with possible tax reforms and strategies to transform the country’s current taxation system into a better one. Written by a tax professional who has been at the helm of taxation for decades, the personal views expressed in this chapter could be considered radical to some readers. However, in a country straddling between the upper-middle income and high-income divide, perhaps extensive changes are needed for the country’s taxation system to move onwards and upwards.