It is believed that taxation started about 5,000 years ago in ancient Egypt where the Pharaoh collected 20% of grain harvests as a tax equivalent at the time. Much like how the world has changed, tax systems too have gone through countless revisions throughout history, giving us the modern tax system that we have today.
Changes to tax policies are necessary to ensure that tax systems remain fit-for-purpose and do not become outdated.
Why are modern tax systems needed?
It is vital that tax policies are in tandem with economic conditions, technological developments and new ways of doing business, so that these policies remain relevant and continue to achieve the desired objectives. Being aware of advancements and variations in the socioeconomics of a country as well as the way in which taxpayers structure their affairs is crucial so that timely updates and modifications to tax policies can be implemented.
How does globalization shape tax policies?
Globalization is defined as the development of closer relationships between different countries globally socially, economically, and politically due to advancements in technology, making communication and travel significantly more convenient. Due to this increasing interdependence, developments in Malaysia and in other countries must be considered when drafting or amending tax policies so that the tax system is ahead of the curve.
One example of how globalization has influenced tax policy is the introduction of global minimum tax (GMT), which is an internationally agreed-upon minimum jurisdictional effective tax rate of 15% driven by the G20 and Organization for Economic Co-operation and Development (OECD) to reduce tax competition between countries.
Keeping local tax policies updated with the latest global reformative requirements is vital for corporations in Malaysia to adhere to international laws while maintaining the integrity of the country’s tax system.
How does digitalization shape tax policies?
The world is progressing into a digital era where the restrictions introduced during the COVID-19 pandemic have become the catalyst for expedited technology use. For example, businesses have taken to technology to streamline operations, explore new revenue opportunities, and maintain relevance in the increasingly online market.
So, it is only natural for this transition of business activities into the online market to be followed by the digitalization of the tax system. This will maintain consistency between business operations and tax systems, alongside improving the country’s tax administration and adopting tax policies that are fit for the current environment.
One example of an initiative to digitalize tax administration is e-Invoicing, which is being implemented in phases and expected to be completed by 1 July 2025. The implementation of e-Invoicing allows for a more efficient and transparent tax reporting, which in turn strengthens the national tax system. Malaysia is not the first country to initiate e-Invoicing, but rather following in the footsteps of Italy, Brazil, Mexico and Saudi Arabia. It is expected that more countries will follow suit.
The e-Invoicing system will make significant additional data available to the tax authorities in real-time. Data analysis can be extremely useful and effective in combatting tax evasion and the shadow economy. example, the UK’s HM Revenue & Customs (HRMC) utilizes Connect, which is a big data IT system, to help identify errant taxpayers.
The increased use of technology by the tax authorities means that it is important for tax and financial professionals to also be technologically proficient. That said, proficiency in technology does not mean that tax professionals do not need to keep up to date with legislative and policy developments. Further analysis by professionals is still essential before making any definitive decisions as technology lacks certain key elements that professionals possess. Hence, it is crucial for tax professionals to continue upskilling and staying updated on technology developments and to efficiently use such tools in drafting tax policies.
