Tax obligations can, broadly, be clustered into four groups: (a) registration in the system (think of TIN and VAT registrations); (b) timely filing of tax returns; (c) reporting of complete and accurate information (typically, also incorporates good record keeping and the use of electronic fiscal devices (EFDs); and (d) payment of tax on time.
You pay taxes. But what makes you pay taxes voluntarily? Your assessment of the benefits of evading tax against the potential penalties or fines for noncompliance - and the likelihood of being audited - may partly explain compliance decisions. Also, your ability to pay the tax, as well as the costs of compliance. I discussed these three economic factors in my previous article.
Tax obligations can, broadly, be clustered into four groups: (a) registration in the system (think of TIN and VAT registrations); (b) timely filing of tax returns; (c) reporting of complete and accurate information (typically, also incorporates good record keeping and the use of electronic fiscal devices (EFDs); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any - and you are noncompliant! Understanding taxpayer behaviour and factors that influence compliance is crucial for successful tax administration. But, there are no hard and fast rules. So,what sort of factors influences tax compliance or noncompliance? In this article, I discuss three factors.
Some taxpayers may fail to comply with their tax obligations on the grounds of lack of necessary tax knowledge (legal and/or procedural obligations). Knowing the tax system can change a taxpayer’s attitude and morale. This is particularly relevant under the self-assessment system where taxpayers are expected to “accurately” determine and pay their taxes. Unfortunately, not many taxpayers can afford to engage a tax advisor or know how to access free services from tax authorities.
How does the group (of individuals or organisations) view tax compliance and noncompliance? Individuals and organisations do not always behave rationally. Their tax compliance behaviour tends to be affected by the surrounding environment, or by self-identification of belonging in a group, or for organisations or isomorphic forces (such as normative, coercive and mimetic forces). Belonging in a particular group may create interactions called ‘social norms,’ ‘peer influences,’ ‘neighbourhood effects,’ ‘conformity,’ ‘imitation’ or ‘herd instinct.’ These dynamics may either encourage or discourage tax compliance.
Imagine a situation where paying taxes is seen as a betrayal to the group! Or when your competitors do not pay taxes - and are, thus, able to underprice you. Handling tax uncertainties is also heavily affected by group dynamics. In my experience from tax consulting, most taxpayers tend to handle uncertainties with tax legislation by copying what others (peers) are doing. This can be perilous when the whole industry, for example, gets it wrong - by, say, underpaying or overpaying tax.
At the individual level, there is no quid pro quo when you pay taxes (i.e. if you pay Sh100,000 in tax, you do not expect the government to give back to you specifically an equivalent value of public services or goods. Nevertheless, the trust that taxpayers have in their government to provide public goods and services fairly to society does affect their intrinsic motivations to pay taxes (tax morale). This is the fiscal exchange - sometimes also called a ‘fiscal contract.’ So: how the government spends taxpayer money is a key variable in the tax compliance equation.
How the tax authorities administer tax laws is also among the key factors influencing tax compliance. I will expound on this in my next article...
Mr Maurus is a Partner with Auditax International