Cash economy: tax evasion
amongst SMEs in Malaysia
Azhar Mohamad
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Mohd Hasrol Zakaria
Inland Revenue Board Malaysia, Kuala Lumpur, Malaysia, and
Zarinah Hamid
Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia, Kuala Lumpur, Malaysia
Abstract
Purpose – The purpose of this study is to investigate the relationship between tax evasion and certain
demographic factors such as location, engagement of tax agent, size and type of small- and
medium-sized enterprises (SMEs) industry in Malaysia.
Design/methodology/approach – In this study, using proprietary tax audit data from the Inland
Revenue Board of Malaysia (IRBM) on the 2011 tax returns of SMEs, the authors run a multiple
regression analysis to examine the impact of location, agent, type of industry, size of enterprise and type
of tax evasion on SMEs’ tax evasion in Malaysia.
Findings – The authors nd that tax evasion among SMEs in Malaysia is the highest when the
business is located in a suburban environment and has no tax agent. Tax evasion is also inuenced by
the size of the SME (micro or medium).
Originality/value – This study gives insight that the IRBM can use to aid its collection department in
proling SMEs that have a higher tendency to evade paying tax.
Keywords Malaysia, SMEs, Tax evasion, Cash economy, Corporate income tax
Paper type Research paper
1. Introduction
Avoiding taxes and evading taxes may sound like similar actions, but the two terms
have very different meanings. Avoiding taxes can be accomplished through various
legal means, whereas evading taxes is a nancial crime and can result in severe
penalties. This is the most important difference between the two activities. Many
methods can be used to legally avoid paying taxes, the most commonly used being
income deferral and income tax deduction. Income deferral involves postponing the
receipt of income until the succeeding tax year and frequently involves businesses that
use the accrual basis of accounting. Meanwhile, the use of tax deduction affects the total
income by reducing it, which decreases the amount of taxes that are due. Tax deductions
are granted to taxpayers and businesses to encourage certain behaviour (e.g. to attract
foreign investors, encourage R&D, etc.), spending patterns, lifestyles and so forth. Any
The authors thank the Operational and Compliance Department of the Inland Revenue Board of
Malaysia for providing the data.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
JFC
23,4
974
Journal of Financial Crime
Vol. 23 No. 4, 2016
pp. 974-986
© Emerald Group Publishing Limited
1359-0790
DOI
10.1108/JFC-05-2015-0025
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