THE Inland Revenue Board of Malaysia (IRB) and the Royal Malaysian Customs Department (Customs) are expected to collect about RM270 billion in taxes. IRB collects income tax, real property gain taxes, stamp duties, petroleum income tax; Customs collects import duties, export duties, excise duties, sales tax, service tax, and tourism tax.
Culturally, both these agencies are different. Customs originated from border control, and the mindset is one of preventing smuggling and policing illicit imports, whereas IRB is more accounting orientated and veers towards white-collar crimes. However, with the introduction of sales and service taxes and good and services tax, there is an overlap in using accounting as a base for bringing transactions to tax. The key difference is that Customs is focused on transactions, while IRB is focused on profits.
What is the case for the merger?
There is a strong case for merging the two agencies. The only area that needs to be kept aside is border controls which involve the physical movement of goods to prevent illegal activities and smuggling.
In many countries, both these agencies have been merged, particularly in the area of value added tax and internal taxes. Examples would be Singapore, New Zealand, the UK, Australia and Thailand, among others.
Since both agencies are dealing with numbers and accounting information for the internal taxes such as sales tax and service tax and for income tax matters, it makes a lot of sense to merge these agencies because the same information can be shared to get the full picture of the taxpayer’s business.
Currently, the lack of sharing such information has resulted in gaps and consequently leakages in tax collection. For example, is the information that is available to IRB on the income and expenditure and the balance sheets being reconciled with what is declared for sales tax and service tax purposes and vice versa? If the connection is made, then the revenue will be increased automatically since the opportunity to arbitrage on those gaps will be minimised.
Another example is using the information provided for income tax purposes will also help trigger the timely registration for sales and service tax purposes.
IRB cannot share information with Customs as the law is clear that all information provided to the Board is confidential. However, if this was a single agency, this issue will disappear.
Merging both agencies will also provide economies of scale as far as the staff force and capital expenditure is concerned. There could be duplication of the same activities and investments in both agencies.
With the developments in the digital world such as e-invoicing, merging of these agencies will be much easier since common data is being used to reduce leakages, improve economies of scale, increase operational efficiency, minimise transfer pricing leakages, etc. A good example of IRB and Customs coming into conflict in bringing taxpayers to taxation will be the area of transfer pricing, where broadly one agency is looking at increasing the transfer prices, while the other is looking to reduce the transfer prices.
What cannot be merged?
Border control that will deal with the collection of customs duties, excise duties, and sales tax on imports, and the policing against smuggling or illicit products should be left separately under an agency that deals solely with border control issues.
It is about time for the government to start exploring the benefits of merging the two agencies because the advances in technology and the increased use of digital data in the financial world would outflank the tax authorities in capturing the information for tax purposes. To avoid this, the government has to invest significantly to capture the information and avoid the duplication by the two agencies.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
Source: The Sun Daily
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