40TH CATA ANNUAL TECHNICAL CONFERENCE
YB TUAN LIM GUAN ENG
FINANCE MINISTER OF MALAYSIA
THE WEMBLEY – A ST GILES HOTEL
11 NOVEMBER 2019
Honourable Tan Sri Ahmad Badri Mohd Zahir
Secretary General of Treasury, Ministry of Finance
Mr. Sudhamo Lal
President of CATA
Represented by Ms Champawatee Gunoo
Honourable Dato’ Sri Dr. Sabin bin Samitah
Chief Executive Officer, Inland Revenue Board of Malaysia
Mr. Visvanath Das
Chairman of CATA
Mr. Duncan Onduru
Executive Director of CATA
Mr. Jonathan Mark Swerdlow
Vice Chairman of CATA
Ladies and gentlemen
1. Let me convey the appreciation of the Government of Malaysia to the Commonwealth Association of Tax Administrators (CATA) for the honour of hosting the 40th Annual Technical Conference here in Malaysia. I bid all of you a very warm welcome to Penang, the Pearl of the Orient.
2. The privilege of hosting the conference, soon after the hosting of the 36th Annual Technical Conference in Malacca in 2015 demonstrates the trust placed by CATA in the Inland Revenue Board of Malaysia (IRB) to execute and organise a conference of this level. I would like to congratulate the IRB for this
3. Penang has always been a melting pot of trade and culture, having witnessed traders from all over the world to this region many decades, even centuries, ago. It is thus a befitting location to host delegates from member countries who will discuss and deliberate on international tax issues centring on the theme of Addressing the Shadow Economy and Digitalisation in Securing Revenue for Sustainable Development.
TAXATION AND NATIONAL DEVELOPMENT
4. In 2018 when the 17 Sustainable Development Goals (SDGs) were first discussed at the First Global Conference of the Platform for Collaboration on Tax in New York, it was clear that achieving the objectives identified required significant investments.
5. Taxes finance basic public services. Experts suggest that tax collection of at the very least 15%-20% of Gross Domestic Product (GDP) is required for a country to fund its basic services. In Malaysia in 2018, tax collection was approximately 12% of GDP, although total government revenue relative to the GDP is higher at 16%. In contrast, the average OECD tax collection stands at 34.3% of GDP.
6. When we were given the democratic mandate to rule Malaysia last year, one of the earliest measures the Government took was to set up of the Tax Reform Committee (TRC). The committee’s main objectives are to address tax leakages, reduce the existing tax gap, explore new sources of revenue, study the taxation of the digital economy and review the effectiveness of various tax incentives as provided by the law.
BASE EROSION AND PROFIT SHIFTING
7. Base erosion and profit shifting or BEPS is a big challenge faced by governments all around the world. It is an unethical behaviour deploying tax planning strategies to shift profits away from one tax jurisdiction to another while disregarding where the actual economic activities take place.
8. BEPS practices are said to cost countries all around the world USD240 billion annually in lost revenue. This not only erodes a country’s tax base, but it provides an adverse incentive for governments to race to the bottom by reducing tax rates.
9. Furthermore, it is unfair when businesses operating across borders use BEPS to gain a competitive advantage over enterprises that operate at a domestic level only.
10. We must uphold the law statutes we administer and send a clear signal that taxes must be paid when they are due. To do so, tax administrators must collaborate at the international stage to create a level playing field for all.
ADDRESSING THE SHADOW ECONOMY
11. BEPS is not the only challenge faced by governments. Our tax authority is addressing the issue surrounding the shadow economy.
12. The shadow economy is difficult to measure due to its underground nature. Nevertheless, various studies suggest the size of the shadow economy ranges from 15% of GDP in rich countries to about 6% in less developed countries. In Malaysia, the figure is suspected to around 21% of GDP.
13. With the 2018 economy at RM1.45 trillion, this would put the estimated size of the Malaysian shadow economy at about RM300 billion. If we could integrate even a fifth of the shadow economy into the formal sector, this could bring anywhere between RM5 billion to RM15 billion worth of additional revenue to the Government.
14. The shadow economy includes all economic activities including corruption, hidden from official authorities for monetary, regulatory and institutional reasons. Monetary reasons include avoiding paying taxes, regulatory reasons include avoiding governmental bureaucracy or the burden of regulatory framework, while institutional reasons include corruption, the quality of political institutions and weak rule of law.
15. Addressing the shadow economy can be a chicken-or-egg problem. Complex regulatory system and high taxes contribute to the growth of the shadow economy, while actually hurting government revenue. Yet, governments do need additional revenue to finance national development and this has led to higher tax rates in some instances.
16. In this respect, better and simpler regulations, as well as a fair and transparent tax system that do not overly burden the taxpayers are necessary to integrate the informal economy into the formal sector. However, organised crime, corruption, and illegal employment should be fought through stricter controls and enforcement.
17. A unique and legal identity is helpful in addressing the shadow economy. Malaysia will be introducing the Tax Identification Number (TIN) in 2021, as announced in the recent 2020 Budget. This move will ensure taxpayers are rightfully brought into the tax net, and close the Malaysian tax gap.
UPDATING TAX LAWS IN THE DIGITAL AGE
18. Digitalisation of the public sector is crucial in addressing the shadow economy and closing the tax gap. But frankly, businesses are steps ahead of the public sector in integrating elements of digital technologies into everyday processes. Companies like Goggle, Amazon and Uber mine free raw data from developing countries and convert it into 'digital intelligence', which can provide behavioural insights into their consumers which can then be used for marketing and expansion strategies, boost productivity, penetration of new market and even dominate the respective sectors.
19. The connective power and expansion of digital technology is giving rise to new business models and a wave of innovative products and services such as ridesharing services, accommodation rental, crypto assets and initial coin offerings at unprecedented speed. For example, Airbnb went from 21,000 arrivals in 2009 to 80 million in 2016.
20. At the rate new technologies are emerging, and businesses are evolving, there are doubts whether the current tax laws designed around brick and mortar businesses are adequate in an increasingly digitalising environment. I believe tax laws have to be updated to preserve government revenue without negatively affecting entrepreneurship in the digital age.
21. The Action 1 Report of BEPS Package published in October 2015 concludes that due to the pervasive nature of the digital economy that cuts across national boundaries, there is a heightened risk for BEPS. Electronic commerce, online advertising and even cloud computing with its distinct features like multi-sides business models, mobility, reliance on data and network effects are among the business models that lead to BEPS.
22. The Report identifies several broader tax challenges raised by digitalisation, notably in relation to “nexus, data and characterisation”. These challenges go beyond BEPS and relate to the question of how taxing rights on income generated from cross-border activities in the digital age should be allocated among countries.
23. Malaysia is concerned with the mismatch between the locations of local activities of internet-based companies and where taxes are paid. The administration of tax has historically been built based on physical presence, so the assumption of physical presence in a given territory is necessary to establish a taxable nexus.
24. However, the internet has enabled businesses to operate in any jurisdiction without the need to enter it physically. Digital businesses have made it difficult to determine the point in the supply chain at which value creation actually happens so there is a need on how to capture digitalised activities effectively within the tax system of a particular jurisdiction. Specifically, how do we determine the relevant share of business profit that is subjected to taxes in a given jurisdiction?
25. With regards to digitalisation, through the 2020 Budget, Malaysia has put forward a 5-year plan. A plan with investments of around USD10 billion, not only in terms of incentives, but to establish the national fiberisation and connectivity plan (NFCP) so that we connect the entire country, and ensure broadband access that is available, affordable, and accessible to everyone. We believe that when we talk about investments, there’s a need to find revenues to make these investments possible.
MULTILATERALISM AND COMMONWEALTH SOLIDARITY
26. This is a controversial question and some countries have resorted to unilateral action in resolving it. But most member countries agree that a comprehensive long-term multilateral solution is necessary. We hope that a global consensus can be reached by the end of 2020.
27. There will come a point when countries would have to work together at the global level to ensure the digital economy works for the people, and not for the few. At the end of day, we must remind ourselves that the economy is about individuals and societies, and the digital space is only a tool to improve our lives.
28. I hope this conference will act as the voice of Commonwealth countries by the drawing up of a resolution on the issue of taxing the digital economy to be presented to OECD. It is of utmost importance that our stand together be heard at the international level especially when it comes to safeguarding tax revenue which should rightfully be channelled to us.
29. In this modern world, the new oil of the 21st century is data. Those who control data controls the world. If you are able to have raw information and the technologies, whether its big data analytics, artificial intelligence, or machine-learning algorithms, you can not only make lots of money, you will be more powerful than many governments. It is necessary to ensure that data is not only accessible and affordable, but that countries can retain their sovereign rights within the economy and monetary system. If you have the latest fintech, that can bypass the traditional monetary controls exercised by countries, then smaller economies, we may be swamped and overtaken by companies which are accountable to no one but themselves. If countries lose control over their monetary system because it Bitcoin allows payments to bypass the monetary regime, then where is our economic and political sovereignty.
30. Before I end, I would like to again express my appreciation to CATA for holding the 40th Annual Technical Conference here in Penang, Malaysia. Special thanks to the all Secretariat members, the IRBM as the host organisation and Penang as the host state.
31. To all the delegates, I hope that you will have an excellent time here at the conference and gain benefits as well as reaffirm cooperation amongst the member countries. Do take time after the conference to explore more of Malaysia as our beautiful country is well-known for its beautiful sights, great food and warm hospitality.
32. With great pleasure I declare the CATA 40th Annual Technical Conference officially open.