PUTRAJAYA (Aug 27): Malaysia will need to implement changes to its tax system to generate more revenue for financing growth, said the Organisation for Economic Co-operation and Development (OECD).

In its 2024 OECD Economic Surveys: Malaysia report released on Tuesday, the OECD said Malaysia must mobilise additional tax revenues not only to achieve its short-term goal of a 3% deficit target but also to fund future spending requirements.

“This will require changes to the tax system so that it can provide more revenue to finance growing needs while promoting economic growth, social inclusion, and the environment.

“While the degree to which the public sector should expand to meet future needs is ultimately a political decision, estimates suggest that Malaysia can collect up to three percentage points of gross domestic product (GDP) in additional tax revenues in the short term and up to 16 percentage points of GDP in the long term,” it said.

The 2024 OECD Economic Surveys: Malaysia was launched on Tuesday by Economy Minister Rafizi Ramli.

The 161-page survey report highlighted the need to strengthen institutions to ensure more effective public spending.

“Raising additional revenues to finance future spending needs and spending these additional funds in the most effective way to achieve policy objectives will also require improvements in institutions and economic governance.

“While Malaysia has made progress in this regard, strengthening institutions is a gradual process. As incomes rise, citizens and businesses generally become more demanding concerning the quality of economic governance, and cross-country comparisons typically point to a positive correlation between incomes and the quality of institutions and governance,” it said.

The report added that Malaysia’s march towards high-income status provides an opportunity for further progress in this important domain, which would, in turn, feed into stronger economic performance.

"The quality of the tax administration will be an important determinant of Malaysia’s future success with raising additional tax revenues. Besides changes in the tax code, stronger enforcement of existing rules and better tax administration could lead to further revenue improvements now and in the future.

“Enforcement also has a role to play in reducing informal employment, particularly when coupled with better incentives for compliance through better policy design,” it said.

The OECD said that micro, small, and medium enterprises (MSMEs) could play a crucial role in helping Malaysia achieve high-income status.

To support this, it said Malaysia should enhance investment in MSMEs through new avenues like equity crowdfunding and peer-to-peer financing.

The organisation added that it is important to attract more private venture capital by improving tax incentives and the legal and regulatory framework.

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