ACC2054 Malaysian Taxation System (Mar 2013) Lecture 1

7/28/2019 ACC2054 Malaysian Taxation System (Mar 2013) Lecture 1

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BAB2205 Malaysian Taxation System

Taxation and The Modern Economy

(Part 1)

Lecture 1

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Contents

1. Roles of the state and revenue systems

2. Importance of taxes

3. Principles behind the design of an

effective tax system

4. Potential bases of taxation

5. Tax terminology6. Types of taxes

7. Determinants of tax compliance 2

Roles of the State

Including:

Executor - Economic and fiscal policies

Provision of public goods: Education

Healthcare

Welfare

Defense

Infrastructure3

Source of Funds

It has been said that 'what thegovernment gives it must first take away'.The economic resources available tosociety are limited, and so an increase ingovernment expenditure normally meansa reduction in private spending.(Jamesand Nobes, 2009, p. 7)

IMPORTANT : Fund raising to financegovernment spending

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Source of Funds - Creation of

Money Government simply creates more

money and uses it to purchase goods

and services

Debasement of currency through

production of too much money

QE1,QE2 - Quantum Easing !!!

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Source of Funds - Creation of

Money Tried many times over the centuries

Violently condemned in the 14th

century

Inflation!!!

As the value of money falls,purchasing power is transferred from

holders of money to government6

Source of Funds - Borrowings

Government can borrow either from:

own citizens; or

overseas by issuing national bonds,e.g. MGS

Alternative - concessionaire:

Roads

Natural resources, e.g. logging, mining

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Source of Funds - Borrowings

Limits to the amounts that people are

prepared to lend, even to

governments. Bankruptcy risk of a country will

increase if government finances its

deficits in the balance of account

extensively with borrowings.

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What is Tax?

Compulsory payment levied by

government on taxpayers to meet public

expenditure.

a tax is a compulsory contribution

imposed by a public authority, irrespective

of the exact amount of service rendered to

the taxpayer in return, and not imposed aspenalty for any legal offence. (Hugh

Dalton, 2003) 13

Who decides on a countrys tax

system? Government in charge

Democracy Society as a whole

(parliament)

Who will pay?

How much they will pay?

How will the taxes be collected? Non-democracy Those in power

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Design of an Efficient Tax System

The difference between taxes and

thievery is mostly a matter of legality

So, design of a tax system is very

important

How to evaluate a tax system?

Adam Smiths Wealth of Nations (1776)

provided the common principles of a

good tax system.15

Adam Smiths Canons of Taxation

Fair/ equity Based on peoples ability topay;

Certain Easily administered, not subject tosudden changes;

Convenience Tax should be collected at atime & in a manner convenient for taxpayer

Economy of collection not too expensive tocollect and does not hinder economic growth

Many others since terminology may changebut concepts are the same.

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Canons of Taxation - Application

What is a fair or equitable tax system?

Higher income earners pay a higher rate than

those with lower income (progressive tax); or

Taxpayers are taxed at the same rate

(flat/proportional tax); or

A combination of the two.

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Progressive, Fixed or Regressive?

Progressive tax the tax rate increases as the amount to which

the rate is applied increases

Effect - Upper income families pay a largershare of their income in tax that those withlower income

Flat tax

Tax rate is fixed as the amount to which therate is applied increases

Effect - the same % is taken from everyoneregardless of how much or how little they earn 18

Progressive, Fixed or Regressive?

Regressive tax

Tax rate decreases as the amount to which rateis applied increases

Effect - lower income families pay a largerproportion of income in taxes than the rich

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Canons of Taxation - Application

Fairness of tax system should reflect a

persons ability to pay (Adam Smith,

1776):

Horizontal equity taxpayers with sameability to pay (i.e. same tax base) pay same

amount of tax

Vertical equity taxpayers with greater

ability to pay owe more tax

Advocate for Progressive tax system! 20


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Lecture Illustration

A local government has came up with a newproperty tax. The tax base is the assessed value ofthe real property and it has a 2 rate structure:

2% for assessed value from 0 RM250k

1% for assessed value > RM250k

Is this a fair tax system?

The most optimum tax rate system - progressive ora flat tax system?

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Other Canons of Taxation in

Modern Economy Neutrality - does the tax system promote

or hinder economic efficiency?

Simplicity - is the tax system simple tomanage and reduce cost of compliance?

Sufficiency - does the tax system raisesufficient revenue to finding

governments spending?

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Essential Tax Terminology Taxpayer

Jurisdiction

Incidence

Tax base Ad valorem versus specific

Narrow versus broad

Tax rate

% or other unit of measurement

Flat or graduated

Statutory v effective23

Taxpayer

A taxpayer is :

Any person or organisation required by

law to pay tax to the government

Person the term refers to both natural

persons or corporations separate legal

persons

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Jurisdiction

Jurisdiction the right of a

government to levy the tax on the

person or organisation

There must be rational connection

between the tax levying government

and the taxpayers, e.g., residence basis worldwide income

source basis domestic income 25

Incidence

Incidence refers to the person who bears the

ultimate burden of the tax

Formal incidence - person who has the legal liability to

pay the tax

Economic incidence the actual person who suffers

the tax liability

Determinant of the fairness of a tax system

Formal = economic incidence Formal economic incidence

must consider the economic incidence of the taxation26

Tax Incidence

Direct tax (e.g. income tax)

Taxpayer Tax Office

Formal = economic incidence

Indirect tax (e.g. goods & services)

Restaurant

Taxpayer Tax Office

Formal economic incidence

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Adam owns 8 apartments, all rented out. He

charges each tenant RM6,000 per annum.

Government increases Adams property tax by

RM2,400 (total for 8 apartments)

Adam plans to increase rental for each tenant by

RM300

Can Adam do so? who bears the incidence of the

tax increase?28


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Inelastic demand change in price has

little effect on demand

Assuming supply of apartments is very limited

Tenants will accept the increase, thus are the

economic incidence

Adam will be the formal incidence

Other examples - cigarettes & alcohol Can shift burden to consumer

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Elastic demand - change in price has

significant effect on demand

Assuming apartments are over supplied

Tenants may not accept the increase (thus

terminate tenancy)

Adam will be the economic incidence

Other examples - ??? Cannot shift burden to consumer

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Tax Base

Computation of tax involves 2 items:

The tax base; and

The tax rate:Tax (T) = Base (B) x Rate (R)

Tax base all the items, occurrence,

transactions or activities subject to a tax

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Tax Base Ad Valorem v Specific

Usually measured as the total dollar amount or

the value,

Ad valorem higher the value, higher the tax

base, e.g., Sale & purchase agreement stamp duty based

on market value of property

Can be based on specific unit e.g., weight or size,

tobacco kilo or ton

liquor liter, alcohol content

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Tax Base - Broad v Narrow

Tax base is often described as having a broad or narrow

base:

Broad based tax, e.g.,

GST that applies to almost all goods and services

Narrow based tax, e.g.,

Tax on imported cars

Generally a broader based tax would raise more revenue.

The broader the base, the lower the rate can be.

Also, a broader base will help achieve the principle of

neutrality.

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Tax Rate Unit of Measurement

Usually the tax rate is a percentage ontaxable income in monetary value, e.g.,

company tax rate is 25% on chargeableincome

Can be other measurement unit, e.g.,

X cent per kilo of tobacco

Y cent per liter/ alcohol unit May affect consumption of the taxable

goods34

Tax rate - Flat v Graduated

Discussed earlier.

A single % that applies to the entire tax

base is described as a flat rate.

Multiple % that apply at different levels of

income is described as a graduated rate

structure.

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Tax rate - Statutory v Effective)

Effective tax rate - total tax / taxable income

Graduated rate schedule

Taxable income

Tax rate

RM0-RM25,000 2%

RM25,001-RM100,000 6%

Over RM100,000 10%

*For illustration purposes, not real tax rate

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Types of taxes imposed

Corporation tax* - income tax levied onthe financial income of corporations

Why tax corporations?

What is taxed?

Zero tax corporation tax exemption forLynas

Personal income tax* levied on thefinancial income of a person

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Capital gains tax* levied on the profit on saleof a capital asset: Inflationary environment Favorable tax rate based on holding period

Excise tax* levied on the quantity of goodsproduced, i.e. a specific tax and not an advalorem tax: Focuses on a narrow base of products

Regressive e.g. excise tax of RM190 per 1,000 sticks of

cigarettes is imposed in Malaysia (in addition, 25%of sales tax is levied).

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Consumption tax* levied on non-investment

spending,

e.g. sales tax levied on the value commodity sold

(ad valorem tax) Applies to all retail transactions, with exemptions

Inheritance tax death tax

Property tax levied on the value of a property e.g. house ownership tax in China 39


State government/ municipal tax* levied perproperty/ household, e.g., Quit rent (Cukai Tanah) land usage, location

Assessment (Cukai Pintu) market value, location

Poll tax levied per individual An example of a fixed tax

Previously used as a de facto or implicit pre-condition of the exercise of the ability to vote inUS

Introduction led to 1381 Peasants Revolt and1990 Poll Tax Riot 40


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Receipt for payment of poll tax,

Jefferson Parish, Louisiana, 1917

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Types of taxes imposed Tariffs* - levied on the movement of goods through a

political border (also called customs duty)

Transfer tax* levied on the transfer transaction (a.k.a.stamp duty)

Toll* levied to travel via a road, bridge

Wealth tax levied on net worth that exceeds a certainlevel

Super profit tax* levied on windfall profit due tofavourable market condition e.g. Windfall profit tax on oil palm planters

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Tax ComplianceMcBarnet (2001) distinguishes between differentforms of compliance:

(a) committed compliance is taxpayers willingness topay their taxes without complaints;

(b) (b) capitulative compliance refers to reluctantlygiving in and paying taxes; whereas

(c) (c) creative compliance is defined as engagementto reduce taxes by taking advantage ofpossibilities to redefine income and deductexpenditures within the brackets of the law.

(Kirchler, E. 2007, p. 22)

Critical Success Factor Tax Compliance Behaviour! 43

Tax Compliance - Perception of

Fairness

Research shows individual's perception

of the fairness or equity of a law and

regulations can influence his willingnessto comply.

Fairness in tax rates, bases, relieves,

rebates.

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Tax Compliance - Perception of

Fairness

In the notion of ability-to-pay

the higher the tax rate, the more one

pays for working hard;

find ways to avoid tax (make sense)!

Progressive v flat rate = high v low

income earner.

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Tax Compliance Efficiency of

Tax System

Canons of convenience, certainty and

simplicity

complexity of tax system

could lead to possible non-compliance

difficult for individuals to understand it

Uncertainty in what is taxable or can beclaimed as a deduction reduces

compliance to the law.46

Tax Compliance - Probability of

Detection, Sanction and Penalty

Enforcement policy by the tax agency.

The stronger the enforcement initiatives

possibility of being detected would beperceived to be high;

more likely an individual would comply.

Encourage voluntary tax compliance.

Severity of the sanction would have

coersive effect on compliance47

Tax Compliance - Contact with

Tax Agency

Individual who has been subjected to a

tax audit and thus had personal contact

with the tax agency is more likely to

comply with the tax law if the contact

has been a favourable one.

However, in some cases, contact could

lead to increased resistance.

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Tax Compliance - Contact with

Tax Agency

Tax agency should be service-oriented

agency.

System to improve contact:

Self-assessment system

scheduler tax deduction system

e-filing Tax returns filing and payment become

more convenient and favourable. 49

Tax Compliance - Education

Studies reveal that those who were leasteducated,

were more likely to be ignorant abouttaxation;

tend to view taxation only in terms of itsburden.

Campaigns should be organised to promotecompliance and appreciation of benefitsand services provided from tax revenuecollected. 50

Tax Compliance - Attitude

Towards Government Policies More pleased taxpayers (with services

provided by government), more likely tocomply with the law.

State should establish a system, for taxpayers to voice dissatisfaction; and

allowing one to have a say in shaping policy

Individuals who felt being treated fairly = morelikely to comply.

E.g., public consultation involving businesscommunities and NGOs to discuss GSTimplementation.

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ACC2054 Malaysian Taxation System (Mar 2013) Lecture 1

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