Non-compliance with tax regulations presents a financial risk such as fines and an increase in the tax burden. This also entails commercial risk, as the tax administration sees taxpayers differently and carries out a tax audit in the future. The problem of unintentional non-compliance becomes even clearer with the planned introduction of a self-assessment system (SAS). Tax evasion is an intentional non-compliance and means the payment of less tax than is required by law on actual taxable income. Intentional non-compliance to reduce or eliminate the amount of tax payable requires a certain degree of understanding of the tax system. Surveys in developed countries such as the United Kingdom and the United States have consistently shown that respondents who are self-employed are more likely to admit to different forms of non-compliance with tax laws. No such investigation has yet been conducted in Malaysia. The literature suggests that when tax laws are made understandable by all or most taxpayers, it promotes compliance. To read or download the PDF e-book on income tax non-compliance in Malaysia, you need to create a FREE account.

This study examines the impact of compliance costs on behavior in the event of violations related to company characteristics and management`s perception of corporate taxation. The study focuses on small and medium-sized enterprises (SMEs) in Malaysia under the Income Tax Self-Assessment (SAS) system. This is the first study on corporate tax compliance in the Malaysian context and one of the first to integrate tax compliance costs, tax attitudes and the likely compliance behaviour of companies in Malaysia and abroad. Given this lack of international literature on corporate tax compliance, it therefore makes a significant contribution. The study uses a traditional large-scale postal questionnaire technique that has been widely used in studies on tax compliance and compliance costs at the international level. In particular, estimating tax compliance costs largely follows the usual technique used by Pope, the “father” of tax compliance cost studies in Australia and Asia. This estimation method was first introduced by Sandford, the “grandfather” of modern tax compliance cost studies, and used around the world with some changes in the local context. On the other hand, tax attitudes and the likely compliance or non-compliance behaviour of SMEs are measured from the perspective of management or respondents. The above-mentioned primary postal survey, as well as two additional surveys – an online survey of SMEs and a postal survey of tax professionals – were conducted to measure the consistency of the primary postal survey.

The cost of income tax compliance for Malaysian SMEs is estimated at RM 9,295 per business, for a total of .RM 1,084 million for the 2006 tax year. The results of this study show that the average tax compliance costs of SMEs under the SAS have significantly decreased by 58% in absolute terms. Nevertheless, the increasing composition of external costs and IT costs of 16% and 15% respectively shows that the role of tax specialists and day-to-day tax work has become much more important under the SAS regime. The number of compliance costs relative to tax revenues of eight percent is similar to a Malaysian study from the pre-SAS era and is also in the international zone as a whole. As regards compensatory benefits, the value of tax deductibility is estimated at almost RM 1 700 per SME, for a total of RM196 million.RM or around 18 % of compliance costs, resulting in an average net compliance cost of RM 7 595 million, or .RM 88 million ringgit. This study demonstrates the impact of tax complexity and the likelihood of tax audits on non-compliance with tax regulations by SMEs in Malaysia. In particular, compliance costs and two business characteristics, namely the size of the company and the level of taxation, as well as the perception of the Tax Fairness Directorate and the relationship of the Inland Revenue Board (IRB), have no impact on corporate tax non-compliance. On the other hand, the effect of the four remaining variables, namely the duration of the enterprise, the sector, the tax rate and the tax incentives, is inconclusive. With respect to international comparisons, the impact of firm size on past corporate tax compliance is mixed, but it has been found that the corporate sector influences corporate tax compliance. As regards compliance costs in the tax field, the need to recognise the existence and regressivity of tax compliance costs for SMEs should be recognised at this stage at national level. .