Tax arrears amongst individual income taxpayers in Malaysia
| Pages | 17-34 |
| Date | 03 January 2017 |
| DOI | https://doi.org/10.1108/JFC-10-2015-0055 |
| Published date | 03 January 2017 |
| Author | Azhar Mohamad,Neazlin Radzuan,Zarinah Hamid |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Tax arrears amongst individual
income taxpayers in Malaysia
Azhar Mohamad
Department of Finance, International Islamic University Malaysia,
Kuala Lumpur, Malaysia
Neazlin Radzuan
Collection Department Inland Revenue Board of Malaysia, Petaling Jaya,
Malaysia, and
Zarinah Hamid
Department of Economics International Islamic University Malaysia,
Kuala Lumpur, Malaysia
Abstract
Purpose –The purpose of this paper is to investigate the relationship between tax arrears and
socio-psychological demographic factors on individual taxpayers as well as macroeconomic factors in
Malaysia.
Design/methodology/approach –In this study, using proprietary data from Inland Revenue Board of
Malaysia on individual income tax returns for the year of 2004 through 2012, the authors run a panel data xed
effect model analysis to examine the impact of socio-psychological demographic factors such as age, gender,
marital status, income level, occupational sector, place of residence of individual tax payers as well
macroeconomic factors such as real GDP, ination and economic growth on tax arrears in Malaysia.
Findings –We nd that, by and large, older male taxpayers in big towns, with high incomes, tend to
accumulate tax arrears. Tax arrears are also signicantly affected by real GDP, but not by marital status or
occupational sector.
Originality/value –To the best of our knowledge, this is one the few studies that uses individual tax
returns data to study determinants of tax arrears.
Keywords Malaysia, Demographic factors, Fixed effect model, Individual income tax, Tax arrears
Paper type Research paper
1. Introduction
The management of tax arrears has always been imperative for national tax administration.
The Inland Revenue Board Malaysia (IRBM) has demonstrated its mettle by reducing tax
arrears cases, thus slashing balance of accounts receivables by 52.45, 50.98, 63.44 and 70.68
per cent in the year ending 31 December 2009, 2010, 2011 and 2012, respectively[1]. The
downward trend in accounts receivables from 2009 to 2012 has indisputably demonstrated
the agency’s unswerving commitment to managing tax arrears. In the present ever-changing
environment, society makes constant changes in the way it thinks, behaves and makes
decisions, to progress and survive. Malaysian taxpayers are no exception. They have
evolved in response to how they are affected by tax policy, particularly in the area of
compliance. This provokes a need for continuous research on tax compliance, which is
becoming more signicant throughout the world.
The authors thank Revenue Collection Department of Inland Revenue Board of Malaysia for the data.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
Individual
income
taxpayers in
Malaysia
17
Journalof Financial Crime
Vol.24 No. 1, 2017
pp.17-34
©Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-10-2015-0055
The main aim of this paper is to investigate the relationship between tax arrears and
certain socio-psychological demographic variables of individual taxpayers in Malaysia.
Those variables are age, gender, marital status, income level, occupational sector and town of
residence. We nd that older male taxpayers in big towns and the surrounding areas, with
high incomes, tend to accumulate the most tax arrears, when real GDP is decreasing. The tax
arrears, however, are not affected by marital or occupational status.
We contribute to the growing literature on tax arrears in several ways. First, the use of
individual taxpayers’ proles, based on the IRBM’s proprietary data on socio-psychological
aspects of demographic variables, including age, gender, marital status, income level,
occupation and location, has not been considered before. These data are very rich and enable
us to reveal the general typology of individual taxpayers who are susceptible to incurring tax
arrears: older male taxpayers with high incomes and who are involved in business. We nd
that different locations produce different results on this typology. Thus, it is hoped that the
IRBM will be able to use these ndings to streamline its collection mechanisms to the right
target groups based on the proling it carries out.
Second, this study nds evidence of a negative correlation between tax-compliant
behaviours and tax arrears. In referring back to the earlier local literatures by Mohani (2001),
Loo (2006,2010a,2010b) and Palil (2010), which consistently indicate that age, income level
and gender (with male ⫽1, female ⫽0) are negatively related to compliance behaviour, this
study veries the positive relationship between age, income level and tax arrears.
Third, the study provides focus areas for the Revenue Collection Department and the
Corporate Services Department to help them address tax arrears issues with individual
taxpayers more effectively. The Revenue Collection Department can apply the ndings to
strengthen its collection strategies, for example, by taking immediate action and making
regular follow-ups throughout the year regarding these non-compliant groups of individual
taxpayers, to prevent current tax balances from becoming tax arrears. Likewise, special
benets such as exible instalment plans for settling tax balances and penalty reduction
incentives can be offered to the compliant group as a reward and to encourage them to
continue to comply. Meanwhile, the IRBM can use the study to continuously address, educate
and encourage these groups of taxpayers specically to cooperate as much as possible by
promptly paying their taxes so as to reduce individual tax arrears.
The remainder of this paper is organised as follows. In the next section, we provide a brief
description of the tax arrears computation in Malaysia. We review the related literature on
tax arrears in Section 3. Section 4 describes our data and research methodology. Section 5
reports our results, and nally Section 6 offers some concluding remarks.
2. Tax arrears computation in Malaysia
Every individual who is subject to tax is obligated to declare his income. There are two types
of individual taxpayers. The rst is the individual taxpayer with employment income, which
includes remuneration, wages, salary, leave pay, fees, commission, bonuses, gratuities,
perquisites and allowances that arise from the employment. By virtue of the Income Tax Act
(1967), taxpayers under the employment income category are required to declare their
earnings on or before the deadline, which is 30 April, every year. The tax amount is computed
based on a calculation the taxpayer makes during the submission of their Income Tax Return
forms. To ease the taxpayers’ burden, as an alternative to paying in one lump sum, there are
instalment schemes provided under certain rules and regulations, which enable taxpayers to
put aside the relevant amount of money before the submission deadline. Monthly Tax
Deductions (MTD) prepared by their respective employers allow a certain portion of the
amount to be deducted as advance payments from their monthly remunerations about one
JFC
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