A Workshop Jointly Organized by the World Bank Institute PRMPS: Issues in Revenue Administration, Tax Compliance, and Combating Corruption March 2-4, 2006, Cape Town, South Africa Compliance Strategy: Where is Sub-Saharan Africa headed?
Outline Levels and nature of compliance relationship between taxpayer and government Discussion of issues within three levels of compliance relationship Background data SADC VAT Study of tax administration in 13 countries Personal experiences in Kenya, Botswana, Ethiopia, Ghana, Lesotho, Malawi, Tanzania, Uganda and Zambia
Levels of compliance relationship Relationship of the taxpayer to 1. government as a public service provider 2. government as a provider of tax policy (or the structure of taxes) 3. the tax administration as implementer of tax policy Who is in charge? Who is the principal and who is the agent in the taxpayer government relationship?
Compliance Relationship: Level 1 Government as a provider of public services Taxpayers (or generally citizens) are the principal in the relationship with government as their agent to provide public services Ultimately the taxpayer has to be willing to pay for the package of public services Where taxpayer perceives the tax burden to be unfairly high relative to the perceived services received, the reluctant taxpayer emerges and in the extreme tax revolts occur In SADC region, nearly 50% of governments have expenditures in excess of 20% of GDP In SSA, controlling for per capita income levels and economic structures, central government tax revenues are some 4% to 6% of GDP higher than over countries in the world. Gap widens for total expenditures because of aid and debt often higher. More cost-effective service delivery from government would encourage tax compliance
Compliance Relationship: Level 2 Government as a provider of tax policy (or the structure of taxes) Once citizens are willing to legislate tax law (or require the specification of the compulsory transfer of resources to the government), they are willing to make government becomes the principal and the taxpayer the agent within the bounds of this agreement. Tax structures can either facilitate or frustrate tax compliance SSA has diversity of capacity to comply with taxes across and within countries literacy/numeracy levels education levels abilities to maintain books and records of business activities breadth and depth of accounting profession, etc, etc
Compliance Relationship: Level 2 (contd) Example: Dealing with the informal sector In SSA, the significant size of the informal sectors provides a major challenge to the application of the modern VAT/sales tax and income tax both self assessed taxes relying heavily on sound books and records of business activity In many SSA countries more of the labor force is employed in the informal than formal/modern sector This poses a major challenge to the scope of the VAT and the income tax Where should the compulsory registration limits be set? At what income level should the income tax apply? How to gain revenue from the informal sector and remove the distortions at the boundary of the heavily taxed modern sector? What taxes should be charged on the business activity below these limits? What are the roles of VAT and import duties as indirect taxes on the informal sector?
Compliance Relationship: Level 2 (contd) Example: Dealing with the informal sector (contd) Tax structures and administrative strategies for taxing with the modern sector are the strategies of the revenue authority administering the modern self-assessed taxes Tax structures for dealing with the informal sector in an efficient and cost-effective manner involve new thinking and possibly a return to the past back to the future? Turnover and unit taxes Taxing agricultural production (benefits accrue locally) Labor-intensive taxpayer identification, service/training and assessment Local government implementation Central co-ordination and oversight
Kenyan Labor Force, 2003 Millions Growth since 1993 Modern/formal sector 1.8 17% Non-agricultural informal sector 5.5 85% Agricultural informal sector 9.3 18% Total labor force 16.6 Population 32.2 Formal sector is about 11% of work force but 71% of labor income
Compliance Relationship: Level 3 Tax administration as implementer of tax policy: The principal promoting agent compliance by-- Sanctions 1. Penalties and interest 2. Audits 3. Prosecution and tax courts Service 1. Communications, computerization and e- governance 2. Accounting capacity 3. Client-oriented organization
Sanctions 1: Penalties and interest Financial non-discretionary administrative penalties are standard tool for inducing compliance Appeal for reasonable penalties Unreasonably high penalties are typically unenforceable not applied, not collected, induce negotiation basically lead to corruption same problems as caused by excessively high tax rates Under appreciation of importance of interest rates on late payments if government collects interest rates equal to costs of added debts from late payment of taxes then real value of taxes are sustained; similarly, government should pay interest on late payments of refunds and credits to maintain tax agreement/relationship with taxpayers Interest on late payment of taxes should never be forgiven
Sanctions 2: Audits Cost-effective field audits are a critical tool in achieving compliance under a self-assessed VAT/sales tax or income tax. Major scope for improvement in this area in SSA. Amongst SADC member states, VAT administration survey reports: only one country reports using random risk-weighted audit selection techniques. Most countries report some structured audit selection system where all registered taxpayers are audited with different frequencies from once a year to once every five years based on some size criterion such as turnover. No country can actually achieve legislated frequency of audits Some countries include random selection in picking audit cases, but many still report subjective judgment as a basis for selection. Many countries view refund audits outside the general audit function and devote a disproportionate resource to these audits.
Sanctions 2: Audits (contd) Audit selection Amongst SADC member states, VAT administration survey reports: The lack of full development of computerized administration and a policy commitment to move away from manual selection limits the ability to use experience-based risk-weighted random audit selection procedures. Most, but not all countries, report some management oversight mechanisms to control for quality and reduce corruption in the audit process. Most send out auditors in pairs and use some form of management review of audit reports. Only a few countries report using follow up or overtake audits to check audit quality. Clearly major scope for more cost effective audits which ultimately should target less than 10% of tax payers per year. More superficial inspections can be done with greater frequency.
Sanctions 3: Prosecutions and tax courts Amongst SADC member states, VAT administration survey reports: Very few countries make use of the court system to prosecute tax frauds. Countries generally use administrative means to enforce tax compliance. The courts are used more frequently for tax appeals. Seven countries report having established some form of special tax court, tribunal or board to be the primary form of appeals against tax assessment and other administrative decisions. A further two member countries intend to establish such bodies Special tax courts, tribunals or boards represent best prospect of initiating greater use of prosecutions, but still issue of training sufficient tax prosecutors and judges in many SSA countries.
Service 1: Communications, computerization and e-governance The internet offers enormous scope for e-government including timely, accurate and cost-effective e-publishing of tax documents, e-filing of tax returns and e-payment of tax liabilities. Amongst SADC member states, VAT administration survey reports: Only two countries have websites that support all three major functions. A further five have websites that make detailed tax documents available to the public, while the remainder have websites with limited summary information on tax authorities and tax compliance. Development of the use of internet-based communications with the tax-paying populations represents a major opportunity for implementing more cost effective tax administration and raising tax efficiency levels, BUT in many countries limitations in the internal computer systems will limit the ability to effectively use e-filing and e-payments information
Service 1: Communications, computerization and e-governance (contd) Amongst SADC member states, VAT administration survey reports: While most countries have computer systems supporting customs administration, only a few have fully computerized customs clearance systems. Similarly, most countries have computer systems supporting their domestic VAT, sales or turnover tax administration, all countries still have paper returns and files, and most use the computer system for tax collection information rather than tax collection management. There is still significant scope for fully computerizing tax administration systems. This is important to support deeper use of e-governance and develop objective risk-based audit selection techniques which require the development of longterm data bases from actual audits
Service 2: Accounting capacity Accountants are the backbone and cutting edge of tax assessment, audit and compliance, particularly for the income tax. All SADC countries reported small numbers of qualified accountants within the tax administrations and difficulties in retaining them. Development of the accounting professions generally in SSA would benefit the tax system both through improving the assessment and audit capacity of tax administrations and in improving business compliance. Revenue authorities should take a leadership role in promoting the development of the accounting profession.
Service 3: Client-oriented segmented organization Effective taxpayer service (and control) requires recognition of the diversity of taxpayers in term of their size, complexity, sectors (framing, mining, finance, etc) and other needs, whether for domestic or border taxes and then structuring tax administrations to better service these needs. This requires Gaining knowledge of taxpayers Re-organization A pre-condition to client-oriented organization is the development of a functional organization as any particular client group requires service from all tax functions, development of knowledge of taxpayer population, and development of communication mechanisms with client populations Multi-functional large taxpayer units (LTUs) covering all domestic taxes are an example of client-oriented organization What is status of knowledge of taxpayers, functional organization and LTUs amongst SADC member countries? 11 out of 13 could provide a count of the number of registered VAT, sales or turnover taxpayers. Out of the remaining 11countries, 9 could give estimates of the active taxpayer population, but only 6 could provide a distribution of the registered taxpayers by turnover.
Organization of tax administration among SADC member states Oganizational Type Revenue Authority a Department of MoF Organization of functions Functional organization Tax-type organization South Africa (MF-LTU) Angola (MF-LTU) Zimbabwe DRC (MF-LTU) Mozambique (MF-LTU) Nambia (MF-LTU) Botswana Mauritius (MF-LTU) Lesotho (TT-LTU) Swaziland Malawi (MF-LTU) Zambia (TT-LTU) b Tanzania (MF-LTU) TT-LTU MF-LTU a b Tax-type LTU Multi-functional LTU Revenue authorities tend to have centralized general management (policy, planning, internal audit and investigation) Debt collection is functionally organized for all tax types
Growing importance of understanding and measuring administrative and compliance costs of taxes Three components of economic costs of raising taxes Economic allocation efficiency cost Administrative cost fixed and variable costs Compliance cost commencement/entry cost plus recurrent/variable cost Lower and more rationalized rate structures have reduced relative importance of allocative efficiency costs such that the transactions costs of taxes are not looming larger