This article first appeared in Forum, The Edge Malaysia Weekly on October 30, 2023 – November 5, 2023

The taxation landscape and attitude to dealing with taxation have evolved tremendously in recent years. A decade ago, unless a major tax bill arrived, generally the perception of senior management was that tax was a compliance exercise. Tax was an afterthought then and may not have featured much, if at all, in decision-making. Tax implications may not have been addressed up front, but instead managed as and when an issue arose. Today’s world is very different. Tax news features prominently in the business sections of newspapers, tax changes in the national budget announcement are eagerly awaited and carefully analysed and a seemingly unending series of changes to the global and domestic tax landscapes has made it extremely challenging to predict future taxation trends.

When it comes to taxation, some of the key challenges faced in today’s world are:

Speed of change of tax rules and regulations

Respondents to the 2021 EY Tax Risk and Controversy Survey said that the pace and volume of tax changes are relentless with digitalisation disrupting the decades-old tax compliance life cycle. This has created a far more diverse tax risk environment. In any given month (or sometimes even every week), new rules and regulations are being introduced on taxation matters or existing rules are revised and it is important for businesses to keep up to date. Implications for the business need to be identified and analysed quickly, even before the rules and regulations come into force, to ensure that the company is nimble enough to address the change and manage tax issues up front, to avoid impacting business operations. This does not only mean addressing potential tax costs. Tax-driven changes to documentation, systems and reporting requirements can significantly impact operations if not properly managed.

International organisations such as the Organisation for Economic Co-operation and Development (OECD) are developing complex rules to curb aggressive tax planning and influence changes to domestic tax laws. One example is the global minimum tax rules designed by the OECD, which will be implemented in many countries in 2024, and in countries such as Malaysia, Singapore, Hong Kong and Thailand in 2025. Another example is the recent changes and proposed changes in Malaysia, Singapore and Hong Kong in relation to the taxation of foreign-sourced income and gains, which were driven by requirements of the European Union.

The move towards tax transparency has led to an increased and seamless exchange of taxpayer information between countries. Multi­national businesses need to comply with global requirements and standards such as country-by-country reporting. They must also anticipate and prepare for the questions that the tax authorities may ask as a result of the vast amounts of information that is now available to them.

Digital transformation is pushing back the boundaries on taxation, impacting not just taxpayers but also tax authorities. Tax authorities are equipping themselves with the latest digital skills to facilitate their collection, audit and enforcement efforts, and are now hiring as many data analysts and scientists as they are accountants and lawyers. This is crucial because initiatives such as exchange of information and e-invoicing will result in significantly more data being received by the tax authorities at a faster pace than ever, and the value of this data will not be maximised without proper analysis.

With tax authorities becoming increasingly sophisticated and technologically advanced, taxpayer behaviour must also adapt. Businesses need to be ready to embrace technology and digitalise their business processes. The future of taxation is digital, with real-time scrutiny of the tax treatment of transactions. This means businesses need to be agile and move quickly, otherwise unwanted tax risks will materialise and become threats to business operations. Furthermore, the increased complexity of tax compliance and the requirement to comply with initiatives such as electronic filing and e-invoicing means that doing things manually is no longer an option.

Tax technology is not just about hardware and software — the importance of the people factor cannot be underestimated and there is a need to diversify the skill sets of the tax team. With the digitalisation of the tax function, there is a need to ensure employees are trained to be competent in this new environment and are able to perform their duties using new tools and technology. This requires a significant change in mindset as well as approaches to recruitment, as businesses compete for employees who are not just tax savvy but also trained in tax technology.

Fiscal policy and pressure to collect revenue and change behaviour

Governments are increasingly using tax policies as a means to increase national revenue and create a more sustainable and inclusive economy and society.

This includes the use of incentives and relief or new types of taxes or levies to encourage behavioural changes. Examples of this include green incentives to encourage certain types of behaviour and carbon taxes to curtail negative behaviour.

Tax incentives are a powerful fiscal tool but they must be designed such that they are relevant to the industry sectors being promoted, benefit the nation, support domestic industries and increase the nation’s competitiveness on the regional and global stage. Incentives should be regularly reviewed to ensure that they continue to meet the desired objectives.

All this will improve the economy and the spillover effects will result in better revenue collection.

In view of the speed of change in taxation, senior management must assess the organisation’s readiness. Is the business ready to adapt to the new tax requirements? Are the organisation’s resources and technology fit-for-purpose?

The tax landscape is changing faster than ever and this will continue to be the case in the coming years. It is up to businesses to embrace the change and make bold moves to make the necessary transformation to avoid having to play catch-up. Organisations should view these tax changes as an opportunity to pursue digi­tal advancements, upskill their tax teams and educate the entire organisation about how tax policies can impact all aspects of the business and build a collaborative relationship with the tax authorities.

Farah Rosley is Malaysia tax leader at Ernst & Young Tax Consultants Sdn Bhd

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