In order to realize our progressive aspirations, Malaysia must put in place a robust tax compliance framework that can strengthen tax collection and unlock new revenue streams so that public investments in infrastructure, education and healthcare can continue to be supported for the rakyat.

However, developing a tax compliance framework is not just about streamlining policies, nor can it be driven by the simple enforcement of stricter regulations and laws.

Improving tax compliance requires trust and transparency between government and taxpayers.

With Budget 2025 due to be tabled in Parliament this Friday, the government must balance increased revenue collection with compliance costs borne by taxpayers, particularly micro, small and medium enterprises, which contribute to 39.1% to the Malaysian economy.

As part of the government’s objectives to strengthen the country’s tax base, various tax initiatives have been introduced to reform and digitalize the tax system.

One of the notable initiatives is the gradual implementation of electronic invoicing, starting August 1, 2024.

While these measures are crucial for economic growth, they also entail compliance costs for businesses. Meeting tax obligations requires time, money and resources. As new initiatives proliferate, some businesses may struggle to keep pace, leaving some vulnerable and in a position of non-compliance.

So the question is: how can the government further improve fiscal discipline while easing the burden on the rakyats?

Transparency and communication

Transparency and clear communication are essential to building public trust.

The Inland Revenue Board (IRB) may consider implementing a multi-year program whenever major tax initiatives or reforms are introduced.

This would give taxpayers sufficient time to plan for changes in a structured manner, manage expectations and ensure a smoother transition.

It would also allow businesses to allocate time and resources to upskill their staff, fill potential gaps, and budget for necessary technology investments.

A phased approach, accompanied by a clear roadmap and regular updates from the IRB would ensure that taxpayers are adequately prepared for the upcoming changes.

This strategy would also allow for feedback and adjustments during implementation, minimizing disruptions and fostering an atmosphere of cooperation between the tax administration and taxpayers.

Additionally, the IRB could encourage compliance with social norms through messaging. For example, HM Revenue and Customs in the United Kingdom has successfully implemented campaigns highlighting high rates of compliance among its peers and leniency on voluntary disclosures, thereby incentivizing taxpayers to file their returns in deadlines.

Similarly, the Internal Revenue Service (IRS) in the United States has also used this approach to encourage compliance, particularly among hesitant filers.

Each IRS campaign is addressed through one or more processing streams, which are a combination of compliance actions, such as issue-based reviews, soft letters to encourage voluntary self-correction, and stakeholder outreach initiatives .

These approaches, in turn, have not only encouraged taxpayers to come forward but also yielded positive results in increasing tax compliance rates.

Reward Compliance

To further build trust, the IRB could place greater trust in taxpayers who consistently demonstrate high compliance.

By leveraging big data analytics to track taxpayer behavior, the IRB can identify individuals and businesses that are consistently meeting their tax obligations.

Combining this with the new electronic invoicing system could encourage more honest reporting and voluntary disclosures.

Instead of increasing compliance burdens, it might be more effective to focus on rewarding taxpayers who follow the rules.

In Singapore, for example, the Inland Revenue Authority of Singapore offers tax reductions for filing returns on time.

As for the United States, the IRS offers incentives such as the Earned Income Tax Credit to encourage compliance, particularly among low-income individuals, allowing them to maximize their tax savings.

Issuing warnings for first offenses, rather than sanctions, could also build confidence.

This would give taxpayers a learning opportunity, emphasizing the importance of compliance without being overly punitive – especially for those making real efforts to comply.

Collaborative programs, education

Collaborative programs between the IRB and taxpayers are another effective way to improve tax compliance. Such initiatives can demystify the tax process, making it more transparent and less intimidating.

Although the IRB has already introduced the Tax Corporate Governance Framework (TCGF) to promote governance, trust and transparency, the program mainly targets large or publicly traded companies.

The IRB may consider developing a simpler version of the TCGF for small businesses to help them better understand and comply with their tax obligations.

Additionally, improving taxpayer education through regular workshops or training sessions could further improve compliance.

For example, the Canada Revenue Agency offers self-guided online courses to help taxpayers improve their understanding of the tax system and their responsibilities. Similar efforts could be adopted in Malaysia to manage tax compliance more effectively.

Improving tax compliance in Malaysia requires a multi-dimensional approach that prioritizes trust, transparency and collaboration.

Building trust and transparency cannot be achieved overnight.

Although it takes time, combined with sustained efforts and a commitment to open collaboration, Malaysia can achieve higher tax compliance rates.

Ultimately, this will benefit the country’s economic growth, development and rakyat.

Chang Mei Seen is Partner, Transfer Pricing and Ooi Wei See is Associate Director, Transfer Pricing at KPMG Malaysia. The opinions expressed here are those of the authors.