This article is fourth in the series focused on the costs of taxation. Last week, we briefly discussed two main approaches to tax assessment. The approach used to assess tax determines the interplay of costs and risks between taxpayers (compliance costs) and tax authority (administrative costs). We saw that under the administrative assessment system it is the tax authority’s responsibility to examine taxpayers declared information, compute the amount of tax owed and notify the taxpayers of the tax liability. On the other hand, the self-assessment system (SAS) requires taxpayers to compute tax liability, submit their tax returns (or similar declarations) and proceed to make pay the self-assessed amount to tax.
Many countries, including Tanzania, have adopted self-assessment principles in tax administration. However, SAS shifts the burden of proof of the tax liability from the tax authority to the taxpayers. According to Andrew Okello (of IMF), for SAS to be able to optimize tax collections while minimizing administration costs and taxpayer compliance costs, some seven conditions need to be met.
Are the tax laws clear and simple to taxpayers? For taxpayers to easily determine their tax liabilities, they must foremost understand the tax laws and how the laws apply to them and their businesses. Unclear and complex tax laws tend to increase compliance costs. Simple tax laws facilitate self-assessment while minimizing taxpayer effort and compliance costs.
Does the tax authority provide good service to taxpayers? SAS requires that the tax authority adopt a service-oriented attitude toward taxpayers. To ensure that taxpayers have the relevant information and support they need to meet their tax obligations. Information regarding their obligations, applicable taxes, dates and place of payment. Also, easy access to tax forms, enquiry centres, web sites, public tax seminars and similar channels. Taxpayers also need information regarding changes in tax laws.
Are there simple filing and tax payment procedures? Overly complicated tax forms or returns makes tax compliance difficult, costly and increases the chance of errors. Filing of returns and payment of taxes should be through means convenient to taxpayers. And what is the frequency of filing the tax returns or making tax payment?
Is tax enforcement effective and timely? SAS requires a mechanism for prompt detection of taxpayers failing to file tax returns or pay the tax due. This is critical to improving tax compliance. Tax collection enforcement must be prompt and expeditious. The older the debt, the more difficult it is to collect (or pay).
Are the tax audits risk-based? SAS relies heavily on a strong audit program focused on higher-risk taxpayers. Taxpayers must know that if they fail to comply with the tax laws, they face a reasonable risk of being detected. The tax authority must have enough resources to audit a reasonable percentage of taxpayers each year. Delayed audits (like those done five or more years later!) increases the chance of tax disputes as well as compliance costs.
Are interest and penalties applied fairly? Interest and penalties are important under SAS. Neither too lenient nor unrealistically harsh. Must be applied consistently across taxes and taxpayers. Interest and penalties, if applied fairly, serve to remind taxpayers of the need to take reasonable care in managing their tax obligations.
How long it takes to resolve tax disputes? SAS requires a fair and timely tax dispute resolution processes. Taxpayers must have access to an appeal process to protect their rights. The processes should be simple, neutral, and transparent. When taxpayers disagree with the results of an audit (or other tax authority’s decisions), they must have access to appeal processes for the resolution of the disputes with the tax authority.
By Shabu Maurus, Tax Partner, Auditax International.