1. Introduction

The Malaysian Government officially announced the introduction of Self-Assessment System (SAS) to replace the Official Assessment System (OAS) on 22^nd November 1998. SAS was implemented in stages for different categories of taxpayers (Table 1), beginning with corporate taxpayers in the year of assessment 2001. It was later introduced to businesses, partnerships and cooperatives in 2003, and salaried individuals in 2004.

Table 1. Implementation of Self-Assessment System Categories of Taxpayers Year Companies 2001 Business, partnership and cooperatives 2003 Salaried individuals 2004

The principle objectives of introducing the SAS are to increase the collection rate, minimise the costs of collecting taxes and to encourage voluntary compliance[1]. The move into the SAS regime however involves a substantial shift of responsibility upon taxpayers in terms of computing accurate amounts of tax liability and to make payment based on the computation.

In addition, taxpayers also have to be responsible in maintaining proper records and retaining the records in safe custody. As a result, compliance requirements of taxpayers are expected to increase under the SAS environment. According to[2], there is a great deal of evidence to indicate that countries with SAS incur higher compliance costs. Tax compliance costs are costs incurred by taxpayers as a result of their obligations to the relevant tax laws in force in a country[3]. Moreover,[4] stated that the eagerness of governments in the emerging economies to create modern tax systems has resulted in greater compliance burden on taxpayers due to weak tax administrations.

The following provides a general overview of the Malaysian tax system, which includes some background of tax revenue in Malaysia, focusing on corporate taxation. It is followed by a discussion on corporate taxation, as well as deliberation on the adoption of SAS in Malaysia and the impacts on tax compliance burden issues pertaining to its implementation.

2. Overview of Malaysian Tax System

The Malaysian federal government revenue can be broadly categorised into tax revenues and non-tax revenues. Based on past records, the Malaysian government relies mainly on taxes for its revenue (Figure 1).

Figure 1. Malaysian Federal Government Revenue[6]

For example, in 2009, tax revenue constituted 67 percent of the total federal government revenue and this portion rose to 70 percent in 2011. The remaining portion of 33 and 30 percent, for 2009 and 2011 respectively, were revenue derived from non-tax sources. The sources of non-tax revenues for the Malaysian government include fees for issue of licenses and permits, fines and penalties, interest and returns from investment, petroleum royalties/gas cash payments, as well as contributions from foreign governments and international agencies[5].

The federal government tax revenue in Malaysia is classified into two main categories, namely direct and indirect taxes. Table 2 provides the details of direct and indirect taxes under the current Malaysian federal tax system.

Table 2. Types of Malaysian Federal Taxes (2012)

The Malaysian Inland Revenue Board (IRB) is responsible for administering the direct taxes. Main examples of direct taxes include income tax on individuals and corporations, petroleum income tax, real property gains tax and stamp duties. Indirect taxes are under the jurisdiction of the Royal Malaysian Customs Department (RMCD) and include taxes such as customs duties on export and import, excise duties, sales tax and service tax.

With regards to revenue contributions from these two types of taxes, in the 1960s, indirect taxes played an important role as a major contributor to the government’s revenue, as compared to the direct taxes. For instance, in 1960, indirect taxes accounted for 76.7 percent of total tax revenue (Figure 2). This is supported by[7], who argued that most emerging economies relied heavily on indirect taxes during the early stages of development.

Figure 2. Malaysian Federal Tax Revenues 1960-2011[6]

Nevertheless, the relative importance of indirect taxes has steadily declined over the years, which by 1999, generated less than one third of the tax revenue, to the lowest point of 26.4 percent in 2009. Reference[1] suggested that as the economy developed and with the introduction and expanded range of other taxes, less reliance was placed on indirect taxes. Correspondingly, the importance of direct taxes has increased. In 1960, direct taxes contributed only 23.3 percent of revenue. The proportion of direct taxes reached 51.6 percent in 1985 and remained around this level for several years with a steady increase from 1990 onwards. In 2009, the estimated share of direct taxes to federal tax revenue stood at 73.6 percent.

It can be seen from the 1960 to 2011 data that the percentages of indirect and direct taxes contributions indicated a reversal trend from the 1980s. This overall shift in emphasis towards direct taxes in place of indirect taxes is a reflection of changing economic structure and the rising importance of personal tax as a source of tax revenue[1]. He suggested that income tax was one of the surest ways by which the IRB could obtain a steady source of revenue, and from which the government could budget its annual expenditure, due to fluctuating export prices of Malaysia’s primary commodities.

3. Corporate Taxation in Malaysia

With effect from year of assessment 2008, the IRB introduced a single-tier income tax system replacing the imputation system previously adopted. Under the new system, corporate income is taxed at the company level and the corporate tax paid on a company’s profits is a final tax[8]. Therefore, corporations are no longer required to deduct tax on dividends distributed as dividends received by shareholders are exempted from tax[9]. Table 3 presents the essential features and comparisons between the two systems.

Table 3. Comparisons between Imputation and Single Tier Tax System

The IRB provided three reasons for introducing the single tier system: (i) the imputation system was not able to accommodate increasingly sophisticated business transactions; (ii) the obligation of resident companies to maintain the franking account which entailed high compliance costs; and (iii) to remove the constraint that a company might have distributable profit and yet could not frank dividend because of insufficient credits. With any tax reform, there would be some discussions over the implications of the new system. Table 4 presents the benefits and drawbacks for the adoption of the single tier system.

Table 4. Benefits and Drawbacks of Single Tier Tax System

In Malaysia, corporations are taxed at a flat rate on their chargeable income. The corporate income tax (CIT) rate has been gradually reduced over the last decades (Table 5). The CIT rate was 50 percent up to year of assessment 1985 and was reduced gradually to reach the current rate of 25 percent.

Table 5. Malaysian Corporate Income Tax Rates: In Percentages

The main reason for the CIT rate reduction is to bring it more in line with the taxes of neighbouring countries[11] and to spur growth of private investments[12]. The Malaysian corporate tax rate of 25 percent compares relatively fairly with other ASEAN countries. The corresponding current tax rates in the ASEAN countries are 30 percent for Thailand and Philippines, 25 percent for Indonesia, 22 percent for Brunei and 17 percent for Singapore. Certain companies in most of the ASEAN countries are given preferential tax rates (Table 6).

Table 6. Corporate Income Tax Rates of ASEAN Countries (2012)

Figure 3. Federal Tax Revenues of Income Taxes by Types[6]

Apart from a competitive CIT rate, tax incentives are commonly utilised in order to make a country an attractive investment destination. Malaysian incentives provided through the tax system are contained in the Income Tax Act (ITA), 1967. Some of the most important forms of tax incentives available include the approved services projects, investment allowance, reinvestment allowance, operational headquarters companies and double deduction (Table 7).

Table 7. Tax Incentives under the ITA, 1967

A government may also use tax incentives as an avenue to channel investment capital into favoured activities[19]. According to[11], Malaysia expended its income tax incentives as part of the overall strategy to generate increased industrial activities and attract foreign direct investment (FDI). Tax incentives reduce the effective tax rates, which in turn, lower the taxes paid by corporate taxpayers. Examples of these incentives include tax holidays, regional investment and special enterprise zones.

In terms of revenue contributions, CIT has always represented the highest portion of federal income tax revenue (Figure 3). In 2003, CIT accounted for 59.3 percent, while petroleum income tax (PITA) and individual taxation contributed 20.9 and 19.8 percent respectively of the total income tax revenue. This proportion of CIT to federal income tax revenue ranged from around 40 to 60 percent between the years 2003 to 2011. Despite lowering of tax rates, corporate taxation has remained the main contributor to the government revenue. Reference[11] suggested that the revenue loss from tax rate adjustments was compensated by the tax revenue accrued from corporate profits due to the rapid rise in business activities.

4. SAS in Malaysia

4.1. Adoption of SAS

Over the last few decades, SAS has been adopted by several tax administrations in both the advanced and emerging economies (Table 8). Emerging economies are countries that are progressing toward becoming advanced economies, specifically with a rapid phase of economic development, government policies favouring economic liberation and the adoption of a free market system[20].

Table 8. Adoptions of Self-Assessment System

Countries pioneering the adoption of SAS are the United States (US) and Canada in 1913 and 1917 respectively, followed by Japan in 1947[21]. Subsequently, Sri Lanka (1972), Pakistan (1979), Bangladesh (1981), Indonesia (1984), Australia (1986-87), Ireland (1988), New Zealand (1988) and the United Kingdom (UK) in 1996-97 implemented the new tax filing system. There have been variations in the extent of implementation, with some countries starting with partial adoption, while others went for full adoption of SAS for all groups of taxpayers[22]. Nevertheless, some developed countries like Singapore, Belgium, Luxembourg and France, have not embraced SAS[23].

4.2. SAS for Corporations

Self-assessment for Malaysian companies has redefined the roles and responsibilities of corporate taxpayers. Under SAS, corporate taxpayers are required to furnish estimates of taxes, make instalment payments, determine taxes payable, lodge tax returns and remit tax liability to the IRB. An estimate of tax payable must be filed with the IRB in a prescribed form (CP204) not later than 30 days before the beginning of the company’s basis period. Based on the estimation, tax payable must be remitted to the IRB on or before the 10th day of each month in equal monthlyinstalments, commencing from the second month in the basis period.

Corporate taxpayers are then required to compute their income tax liability and furnish a tax return in the prescribed form (Form C) within seven months from the date following the close of the accounting period. The tax return furnished by the company is deemed to be the date on which the notice of assessment is issued to the company. If the estimated tax is less than the actual tax but is still within the 30 percent margin, the company is required to settle the difference within seven months after the closing of the accounts.

5. The impacts of SAS

The following are some of the impacts on corporate taxpayer’s compliance burden resulting from the introduction of SAS.

5.1. Obtaining Appropriate Knowledge

As the burden of ascertaining tax liability has shifted from the IRB to corporations, it is presumed that taxpayers possess the necessary knowledge and skills to comply with the tax laws. Therefore, taxpayers are indirectly forced to learn or obtain appropriate knowledge in order to understand tax rules and regulations. With the implementation of SAS, the IRB has conducted seminars and training for the purpose of providing exposure concerning taxpayers’ responsibilities under the SAS[25]. This kind of training will certainly benefit taxpayers in terms of obtaining the necessary knowledge, but at the same time, taxpayers need to spend time and incur incidental costs such as travelling expenses, in order to gain that knowledge.

5.2. Engaging External Tax Professionals

Reference[26] anticipated that a large number of taxpayers, especially the business community, would employ external tax professionals with the introduction of SAS. In Australia, the percentage of taxpayers who sought professional assistance to prepare returns under the SAS rose from approximately 20 percent in 1980 to 72 percent in 1992[27]. Many authors, including[21] and[28] argued that SAS will further burden the taxpayers in terms of hiring tax professionals to prepare and submit tax returns on their behalf. Furthermore, external tax professionals with their superior knowledge and expertise may have the ability to influence their clients’ compliance behaviour.

5.3. Tax audit and Investigation

As the IRB officials are relinquished from the tasks of assessment and review of tax returns filed under SAS, their emphasis has shifted to enforcement activities, mainly to tax audits and investigations. The conduct of tax audits is expected to be a common and regular feature under SAS, as emphasis would be placed on post-assessment audit and examination[29]. Public Ruling 7/2000 stipulates that reasonable facilities and assistance should be provided by taxpayers to enable IRB officials to gain access to buildings, books and documents. A tax audit division has also been set up by the IRB to monitor the expansion of audit activities and to coordinate the audit programme, education and training activities[30].

Tax audit procedures conducted, however, may increase the compliance burden on taxpayers, in terms of time taken to prepare tax records and meet with tax authorities, as well as the level of anxiety in being audited and investigated by IRB. Reference[31] further argued that tax audit and investigation can result in considerable compliance costs burden, not only to the non-compliant taxpayers, but also to the honest taxpayers.

5.4. Record Keeping Practices

Section 82 of the ITA (1967) requires a taxpayer to keep sufficient records for at least seven years from the end of the year to which the income relates or the year in which the returns are furnished. In addition, the IRB has issued Public Rulings 4/2000, 5/2000 and 6/2000 pertaining to the keeping of sufficient records by companies and co-operatives; individuals and partnerships; and persons other than companies or individuals, respectively. Self-assessment procedures do not involve detailed checking of tax returns by IRB, but require an increased level of record keeping on the part of taxpayers for audit purposes[29].

6. Conclusions

The SAS is an approach by which taxpayers are obligated by law to ascertain their chargeable income, compute their tax liability and submit their tax returns, based on existing tax legislations. Thus, there is a substantial shift ofresponsibility onto corporations in terms of their tax compliance obligations especially with regards to obtaining appropriate knowledge, engaging external tax professionals, tax audit and investigation as well as record keeping practices.