By Stephanie Jacob
One of the biggest implications of the black economy, is the massive loss of taxes and revenue for the government. With that in mind the Inland Revenue Board is one, if not the key agency in the effort to reduce the size of the illicit informal economy. But are they sufficiently empowered to not only recoup the lost taxes, but to put those participating in these sectors permanently out of business.
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The illegal segment encompasses all types of activities ranging from pirated software and fake goods, to prostitution, illegal betting rings and money laundering.
Estimating how much the illegal segment of the informal economy actually amounts to, either in terms of size or value is a tough prospect as much of it remains hidden and underground. The problem is compounded as many of these illicit transactions are increasingly going virtual, and many of the businesses in this segment are extremely mobile and can be relocated quite speedily, should the need arise.
Then of course there is the fact that these businesses are run shrewdly and by individuals or groups which are usually well connected; often they also pose as legitimate businesses by having front businesses, which mask the true nature of their dealings.
Hishammuddin Hussein
For example in 2010, then home minister Hishammuddin Hussein said that the government believed that the illegal or illicit segment of the informal economy alone had grown to almost RM10 billion and included a slew of activities. More recently the country’s deputy finance minister, Ahmad Maslan was quoted in The Star newspaper as saying that the country’s so called ‘black economy’ stood at 30% of GDP.
Earlier this month, an article in The Borneo Post highlighted a raid by the Sarawak state branch of the Ministry of Domestic Trade, Cooperatives and Consumerism that sized RM30,000 worth of counterfeit sports goods and clothes, purportedly bearing the branding of international brands such as Converse, Adidas, Nike and Levi’s.
In October, Perak’s state police announced that they had busted a duo responsible for running a fake DVD ring; the cops said that they believed the two were in fact part of a larger syndicate which had been actively producing and distributing pirated DVDs over the past few years.
There are many issues, both economic and social that make the black economy a dangerous problem. From the economic point, illegal enterprises which do not play by the rules and therefore are not subject to the regulatory, quality and tax laws, have a significant edge over those which are working to run legal, above-the-board businesses.
Take the examples above as a guide, and it is clear that the fashion, retail and entertainment industry both locally and internationally suffer substantial losses as a result of counterfeit and pirated versions of their products; and they are not the only ones, as in general all those innovating new products and services also face the risk of their ideas being stolen or duplicated, without any reward or compensation.
The country also loses significant income; as the Inland Revenue Board suffers much unrealised taxes as these businesses under declare or do not file tax returns at all, while the Royal Malaysian Customs Department loses import and export duties and the trade ministries and local authorities lose revenue that comes from licensing and regulatory fees.
Socially too, there are implications especially stemming from illegal betting rings, drug sales, and human trafficking and prostitution.
A journal article published by Marliza Mohamed in the Malaysian Journal of Economic Studies, titled ‘Estimating the Underground Economy from the Tax Gap:The Case of Malaysia’ published in 2012 highlighted that some of the other negative impacts include inefficient goods and workers being deprived of their rights and guarantees.
Consumers who have purchased shoddy goods produced by counterfeit businesses, will have little or no recourse in recouping their money as the sellers are often mobile and difficult to track. Likewise, workers employed in these businesses are not protected by labour laws and therefore are open to exploitation and abuse.
Therefore it is clear that the impact of the illicit informal economy is far reaching and it is an issue the government recognises that it has to deal with.
In fact, just this September, during a visit to the Johor Bahru state Customs headquarters, deputy finance minister Ahmad Maslan noted that the black economy contributed to 30% of uncollected revenue. He added that it was the government’s aim to reduce that to around 15%, which is the level seen in most developed countries.
Soh Lian Seng
With the most obvious impact being the enormous amount of tax revenue being lost, a key player in the effort to reduce the size of the black economy is the Inland Revenue Board, said executive director of KPMG Tax Services Sdn Bhd, Soh Lian Seng.
The IRB’s main tools in dealing with the issue of unreported and under-declared tax, includes street and business, desk audits and field audits, and investigations and prosecution. In general surveys and audits are used on taxpayers who have shown a desire to fully disclose and comply with the tax laws of the land.
Investigations both civil and criminal, and prosecution are used on those who do not want to comply, or have decided that they will not comply with the tax laws. In these cases says the IRB, the offenders will be pursued with detection and the full force of the law will be brought to bear on them (Please refer to graph below).
Soh highlights that in 2013, the IRB decided to move to focusing on criminal investigation, rather than civil suits in pursuing tax avoiders and evaders. The main difference is that in civil cases, the IRB suspects a person and pursues the case with the aim of collecting lost taxes; while for criminal investigations, the IRB already has admissible evidence in hand when they go in, and do so with the view to prosecute, said Soh.
Basically, this means that in civil cases, while there may be action in the form imposing punishments in line with the the tax laws their main objective will be to recover the loss of the taxes. For criminal investigations, the aim is to prosecute.
Pre-2013, investigations were largely carried out under the various tax acts such as the Income Tax Act 1967, Customs Act 1967, Real Property Gains Tax among others, said Soh. However this year on, investigations will also be governed by the Criminal Procedure Code, Evidence Act and in some instances, the Penal Code.
Soh suggests that the IRB are choosing criminal investigations, as it is a more comprehensive investigation method and will be a stronger deterrent to preventing tax avoidance and evasion. Furthermore he adds that the IRB has more options this way, as should they discover after investigating that they do not believe that they have a sufficient case to call for prosecution, they still have the recourse of filing a civil suit.
In addition to dealing specifically with illegal or unlawful activities, sections 112, 113 and 114 of the Income Tax Act 1967 have been gazetted as serious offences under schedule 2 of the Anti-Money Laundering and Terrorism Financing Act 2001 (AMLATFA 2001).
Packing this extra punch, the IRB can now conduct investigations under the AMLATFA 2001 when it believes that a tax avoider or evader is not declaring income coming from illegal or unlawful activities; with the main benefit of this legislation being that they can issue a freeze order on the bank accounts or property holdings of the taxpayer in question.
By using AMLATFA in pursuit of non-compliant taxpayers conducting illicit activities, IRB can now work with other agencies like the Attorney General’s Chambers of Malaysia, Bank Negara Malaysia, the police and customs departments and the Malaysian Anti-Corruption Agency (MACC) – in addition to their usual partners like the Ministry of Finance, Road Transport Department, National Registration Department and the Companies Commission of Malaysia, explained Soh.
That being said, while inter-agency work has somewhat helped the IRB nab more errant taxpayers, there can only be cooperation if another agency chooses to include them. The IRB itself is still not allowed to share taxpayer information with other agencies (not even the police or the MACC) even if it involves illegal activities, as a result of confidentiality provisions in the Income Tax Act 1967.
This results in the level of punishment meted out by IRB being limited to what is provided for by the tax laws and in some cases AMLATFA 2001, said Soh.
Furthermore, with the Income Tax Act 1967 not containing a provision that distinguishes between the non-declaration of legal or illegal income, the IRB has very limited options to putting individuals and enterprises conducting illegal or illicit activities out of business after it has collected the appropriate amount of lost taxes.
Therefore while taking into account the importance of confidentiality provisions, going forward it will be important that inter-agency cooperation be strengthened to allow the various agencies and authorities to work together to counter the issue of the illegal economy.
It is not just lost taxes which are recouped, but also that these illicit businesses will also be permanently put out of businesses.
Yesterday: The tales of two economies
Tomorrow: Bringing the legal informal economy into the light
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