Transcript TAX ADMINISTRATION: ISSUES OF COMPLIANCE AND …

P. A. Itawansa
Director of Enforcement & Compliance
Delta State Board of Internal Revenue
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have decided to discuss this topic under the
following headings:
• Introduction
• Factors that contribute to non-compliance
• Effects of Tax Evasion
• Enforcement in Developing Economies
• Compliance and Enforcement issues in our tax
system
• Compliance Strategies
• Recommendations
• Conclusion
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Payment of taxes either in cash or kind has
always characterized every human society and
will continue to persist for as long as human
beings have needs to be met by Government. Tax
plays an important role in generating revenue for
the government through which welfare goods
and services are provided for the citizens as
dividends of democracy. According to Margaret
and Chris (2009), taxes and tax systems are
fundamental components of any attempt to build
nations and this is particularly the case in
developing nations.
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The whole essence of good governance is to improve
the welfare of the generality of the populace which is
carried out with resources raised through taxation.
Taxes build capacity, legitimacy and consent. Thus,
the imposition of tax is statutory to enable
government meet its obligations. The Nigerian
Constitution under Section 24(f) stipulates that, “it
shall be the duty of every citizen to declare his
income honestly to appropriate and lawful agencies
and pay his tax promptly”. The key elements of any
tax system are tax policies and tax administration.
Tax administration is the assessment, collection and
accounting for taxes collected
by relevant
authorities. However, our economy is characterized
by low tax compliance. Low tax compliance is a
matter of grave concern in many countries especially
developing ones like ours because it limits the
capacity of their respective governments to raise
revenues for development purposes.
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In the same vein, enforcement has become a topical issue in tax
administration because of the perceived suitability or otherwise
in the use of force to drive the revenue generation process.
There is no gainsaying the fact that tax enforcement has become
an essential aspect of tax administration in view of the ingenious
ways taxpayers, both corporate and individuals use to undermine
the revenue generation process not only in our clime but the
world over by not remitting what is due to government, under
declaration of income as well as withholding revenue due to
government for their own use etc.
Let us take a cursory look at compliance and enforcement issues
in Tax administration because as stakeholders we all are involved
in one way or another in ensuring compliance or enforcing it.
Factors That Contribute To Non-Compliance
It is commonly acknowledged that many factors contribute to
non-compliance in Nigeria such as:
Corruption: This is an albatross over tax collection in Nigeria as
taxpayers evade tax and bribe their way out when they are found
out and so are not sanctioned to say the least. Tackling
corruption would ease the burden of tax administration as the
incidence of corruption results in heavy revenue losses to
Government at all levels.
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A large informal Sector: About 65% of taxable adults are
employed in the informal sector which the International Labour
Organisation (ILO) refers to as “the non-structured sector that
has emerged in the urban centres as a result of the incapacity of
the modern sector to absorb new entrants”. The informal sector
relates to all economic activities that fall outside the economy
regulated by the State. For example, CBN regulates the Banking
industries but the black market operator is not regulated by any
government agency.
Weak legal systems & Ambiguity in the tax laws: Before now, the
deterrent measures for non-compliance under PITA 2004
included a penalty up to N25,000.00 for Employers who fail to
register their employees and to remit such taxes to government.
And for failing to keep proper records Employers faced a penalty
of N5,000.00. Against this backdrop, Adekanola (1997) opines
these small fines tend to encourage tax evasion since the penalty
for being caught is lower than the cost for non-compliance. On
the other hand, the self-employed were not even required to file
returns much less face any penalty, and considering the fact they
form the bulk of would be taxpayers and earn as much as four
times that of the paid workers in the formal sector whose taxes
are deducted at source.
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In line with fiscal federalism, court jurisdiction
over tax matters reflects the 3 tiers of
government. The federal high courts have
jurisdiction over company income tax, petroleum
profit tax, custom and excise duties as well as
stamp duties and corporate capital gains tax, and
education tax. While Personal income tax (PIT),
capital gains tax and stamp duties payable by
individuals are legislated by the Federal
government, but collected by State authorities.
Since the Federal government is not a party to
the collection of these taxes, their adjudication
should fall on the States. This is not so as State
Governments are required to obtain permission
from the Federal Attorney-General for criminal
prosecution of tax offenders on its behalf.
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Paucity of adequate information and accounting
systems: Our economy is cash based as business
transactions are done in cash, and characterized by
low level of literacy and indifference to proper record
keeping by the informal sector operators as well as
poor reporting standards.
A culture of non-compliance: Our people have this
mind set of not used to paying taxes hence over time
failed to develop the culture of voluntary compliance.
Especially with the wrong perception that oil revenue
is sufficient for the government to operate.
Ineffective tax administration: Tax administration has
been characterized by poor working conditions and
environment, lack of working materials, poor
remuneration of staff, lack of logistics to enable staff
reach out to employers of labour to check their books
to ensure that extant tax laws are adhered to by them
and fraudulent practices by officials.
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The above factors were succinctly captured by
the CITN (2002) this way, “tax administration
is particularly hard here because literacy level
is low and record keeping is not yet a popular
culture. There are not enough tax officials to
cover the field. Most of the officials are little
trained, ill equipped, badly remunerated and
corrupt… Governments in Nigeria are
perceived as a corrupt and selfish lot, to
whom money should not ever be voluntarily
given. Taxes paid are expected to end up in
private pockets, not in public utilities”.
You would no doubt agree that the foregoing
not only made compliance difficult, but also
enforcement problematic and this tended to
encourage tax evasion.
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With the prevalent rate of non-compliance in
the system, one is forced to ask, is there any
rationale for tax evasion? According to Alm
James of Andrew Young School of Policy
Studies, George State University, “tax evasion
is of the most common economic crimes and
has been present since the introduction of
taxes. It states further that ever before now,
people do not like paying taxes and they
exploit all ways to reduce or avoid paying. For
example, even the disciples of Jesus asked
our Lord if they should pay tax to Ceasar.
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The two main issues are tax avoidance and tax
evasion which is separated by a thin line. Tax
evasion which is very prevalent is a criminal act
that leads to serious loss of revenue to
Government. It includes:
Deliberate evasion of tax payment in whatever
guise
Deliberate failure or refusal to pay taxes to
Government
Deliberate failure/refusal to remit deducted taxes
to Government by employers
Deliberate refusal to deduct and pay due taxes to
Government
Deliberate under-declaration of income and
underpayment of tax
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The following are some of the ways of
evading payment of due tax to Government;
under stating of incomes from all sources,
sales or wealth; by overstating deductions,
exemptions or credits ( claiming exemption
even for PAYE) and (not submitting
withholding tax credit notes) or by failing to
file appropriate tax returns which undermines
the assessment process.
On the other hand, tax avoidance is immoral
but not criminal as it entails the deliberate
use of loopholes in the provisions of the tax
law to reduce taxes payable. To the detriment
of revenue, some tax practitioners and
individuals work out tax avoidance schemes
to drastically reduce their tax liabilities.
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The following are effects of tax evasion:
Tax evasion reduces collections affecting
collective taxes that compliant taxpayers and the
public services that citizens receive.
According to Alm James, evasion creates
misallocation of resources when individuals and
companies alter their behavior to cheat on their
taxes.
Tax evasion alters the distribution of income
unpredictably. Unless tax evaders are caught,
they pay fewer taxes than honest taxpayers,
which is unjust.
Evasion contributes to feelings of unfair
treatment and disrespect for the law, creating a
self-generating cycle that feeds upon itself and
leads to even more evasion like a recurring
decimal.
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According to James, “evasion affects the
accuracy of macroeconomic statistics. More
broadly, it is not possible to understand the
true impact of taxation without recognizing
the existence of evasion”. This creates a tax
gap in the economy between what the actual
revenue should be and what is collected.
This brings us to how to handle this thorny
issue prevalent in our tax system in Nigeria.
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We are all aware that taxation in developed
countries is a very big issue and sacrosanct. If you
want to go jail in America, United Kingdom, Ireland
and Australia etc., then evade the payment of your
tax to the relevant authority. Non compliance with
tax laws earns one jail term without comprise.
Against this backdrop, research shows that in a
country like Republic of Ireland, the level of
voluntary compliance is said to be 98 percent even
as the tax authorities are working to make it 99.9
percent since it has been said that it may be
impossible to attain 100 percent compliance. For
as the saying goes, “in every twelve there is a
Judas.”
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The question that readily comes to mind is how
was this commendable feat achieved? The study
carried out to measure the level of enforcement
and its effect on the tax system and compliance
shows that the fear of being investigated by the
Internal Revenue Service (IRS) or brought under
its search-light are enough encouragement for
voluntary compliance. The report further hinted
that “by enforcing tax laws, the Internal Revenue
Service (IRS) not only catches tax cheats, but also
promotes
broader
compliance
by
giving
taxpayers confidence that others are paying their
fair share.” What is the scenario in Nigeria?
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Efforts have been made to put measures such as
Section 44 of PITA as amended which deals with self
assessment to encourage voluntary compliance, yet
the problem of tax evasion and non-compliance still
persist in our country. The whole essence of good
governance is to improve the welfare of the generality
of the populace which is carried out with resources
raised through taxation. However, this is not the case
as there is a tax gap, that is, the difference between
the tax amount taxpayers pay voluntarily and on time
and what they should pay under the law. This is due
to the abysmally high non-compliance prevalent in
our society. The concomitant effect is that
government cannot fulfill its commitments to the
electorate.
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Non-compliance in our system can be directly
traced to the following; poor tax culture, Lack of
tax education and enlightenment, corruption in
public office, Lack of accountability and the
erroneous belief that oil revenue is enough by
taxpayers. According to Anyaduba et al (2010),
“In reaction to this anomaly, governments (both
in developed and developing economies) adopt
deterrent measures to combat this ugly trend in
order to boost their revenue base and enable
them fulfill their electoral promises”.
It needs to be emphasized that the best way to
revive our tax system and make it a veritable
source of revenue generation beyond oil is
through enforcing compliance with the tax laws
in all its ramifications.
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Hence, the former Special Adviser to Governor
Babatunde Fashola on Revenue and taxation, now
the Attorney General and Commissioner of
Justice, Mr. Ade Ipaye said, “this is the only way
we can truly attain to equity in our tax system
and assist government to realize its objective” To
him, without enforcement, a fair, equitable and
just system can never be achieved. In line with
this, Lagos State Government has taken leave of
the Attorney General of the Federation to
prosecute tax offenders in the State.
Ifueko Omogui-Okauru, erstwhile Chairman of
Federal Inland Revenue Service once said,
“Though much still needed to be done in raising
the level of tax awareness and enlightenment,
government would always resort to the use of
enforcement as last option after going the whole
haul to achieve voluntary compliance without
result.”
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The
OECD
(Organization
for
Economic
Cooperation
and
Development)
in
their
guidelines on managing and improving tax
compliance suggests that effective application of
compliance strategies depend on a Revenue
Authority being strong in “three key capabilities;
resources, design and execution”. Areas in which
DBIR is well endowed.
The Delta State Board of Internal Revenue has put
in place the following compliance strategies to
address its revenue needs at operational level to
create a more effective tax system.
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The
Board
implored
strategies
related
to
organizational and institution reform, management
strengthening, nuts and bolts reform (strong internal
control), building capacity and integrity as well as
tackling corruption. The import of this is that
regardless of whether the revenue authority is
constituted as an autonomous or semi-autonomous
body, the way in which it is internally organized can
have a significant impact upon the effectiveness of the
tax administration fostering voluntary compliance. To
buttress this, the Organization for Economic
Cooperation and Development (2004) suggest that
compliance is most likely to be optimized when a
revenue authority pursues a citizen-inclusive approach
to compliance through policies that encourage
dialogue and persuasion, combined with an effective
mix of incentives and sanctions. So far the Board has
done relatively well in the area of sanctions but yet to
do much if anything in the area of incentives for
taxpayers.
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Gill (2003) noted that voluntary tax compliance
does not have a long history in many developing
countries, Nigeria inclusive. Flowing from this fact,
the Delta State Board of Internal Revenue
recognizes that a cooperative and positive
engagement with taxpayers and their tax advisers
in a customer-service focused and user-friendly
environment will be more productive and efficient
than more traditional adversarial and antagonistic
approaches. As part of actualizing this objective
Stakeholder meetings have been held with various
segments of taxpayers. In the same vein, the use
of Tax Professionals (TAMAs) by the Board is a
strategic design to making taxpayer obligations
clear, smoothing transactions and interactions,
making it easier and cheaper to be complied with.
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Furthermore, the OECD stated that, “if
taxpayers do not understand what their
obligations are, any intervention to enforce
compliance will be perceived as unfair.” In
this regard, as a way of making effective
support services available to meet taxpayers’
needs, the Delta State Board of Internal
Revenue has a dedicated GSM line in addition
to the ones given to all offices to aid
telephone enquiry services to remind those
potentially at risk of what their obligations
are.
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According to Mckerchar and Evans (2009), the
strategies designed to foster voluntary
compliance have taken two broad and
mutually supportive directions: building
positive taxpayer and tax community morale;
and making compliance easier and cheaper
for taxpayer. The tax authority cannot be
seen to be unjust if any taxpayer that fails to
take advantage of this window of opportunity
to voluntary comply is sanctioned through
enforcement of the provisions of the tax laws.
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Creating a seamless relationship between the Board
and the taxpaying public is part of encouraging
voluntary compliance through the use of tax
professionals to drive the process.
According to Aghaduba et al (2012), “the overall
strategy of a revenue authority should always be to
encourage voluntary compliance wherever possible,
and to facilitate such compliance whatever means it
can make available.” They also acknowledge the fact
that not all taxpayers are compliant, and that many
who are compliant some of the time are not
compliant at other times. In this regard, it is no
longer news that the Delta State Board of Internal
Revenue has moved against some companies and
individuals to enforce compliance.
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In view of the seriousness attached to this exercise,
all cases of tax defaulters due for prosecutions are
centrally treated at the headquarters. To further
facilitate the quick handling of such matters, Revenue
and Taxation department was recently created in the
Ministry of Justice by the State Attorney-General and
Commissioner of Justice. However, the judicial
officers need to be sensitized through workshop(s) to
improve their understanding of Personal Income Tax
Act 2011 as amended to enhance their performance
on the job. They should only be saddled with revenue
matters to avoid distractions and undue delays.
Perhaps, it is worthy of note to state that the Board
has achieved some mileage in its drive to enforce
compliance by tax defaulters. Aside the revenue
recovered, the awareness that it’s no longer business
as usual for tax defaulters has been highlighted
which has helped to improve compliance by potential
tax defaulters who want to avoid being sanctioned.
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Against this backdrop, I dare say in line with
global best practices the DBIR has adopted
the approach of encouraging voluntary
compliance through support services while
also sanctioning recalcitrant tax defaulters.
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The essence of all tax administration is to
ensure compliance with the existing laws and
to close the tax gap which is the difference
between tax amount supposed to be
collected and the actual collection. The main
slogan of this administration is “not to take a
kobo not due to the Board’ but ‘to collect to
the last kobo any amount owed the Delta
State Government in taxes.”
Stated below are some of the steps taken in
DSBIR to monitor tax payers and ensure
compliance
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Data Base:- The DSBIR under the new management
now has her own data base with comprehensive
information of all corporate tax payers. It is an ongoing exercise and getting robust by the day. The
Board now has tracking records and necessary tax
information on companies and some individuals.
Tax Audit Exercise: - Statutory Tax Audit processes
now centralized and most of the companies have
been audited up till date and back duty Audit
exercise carried out for most of the companies.
These have helped in clearing out standings as
much as possible.
Effective mechanism to resolve outstanding tax
matters through the Tax Audit Review Committee
(TARC) which is devoid of interference from the
management is in place.
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Usage of third-party sources of information to
confirm actual earnings or income received i.e.
Bank salary payment schedule, pay slips and
sometimes employment letters etc.
Installing the culture of accurate record keeping.
No waiver of interest and penalty culture to serve
as a strict deterrent for endemic norms of noncompliance. There has not been tax amnesty
which may encourage the bad social norms of
non- compliance. A tax amnesty gives
individuals an opportunity to pay previously
unpaid back taxes without being subjected to the
penalties that the discovery of evasion normally
brings.
Creating a central data base both in hard and soft
copies for annual returns filed by companies for
comparison and review as at when the need arise.
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Intensive Awareness Campaign:- The DBIR need to
continuously embark on compliance campaign via
electronic and print media especially through
Radio/TV jingles. This will further sensitize and
appeal to the conscience of the citizenry. Also
distribution of fliers and other educational materials
on tax matters be placed in strategic locations all
over the state.
Information Desk:- There is need to have information
desk in our major offices where tax payer can have
unrestricted access to guidance, counseling,
orientation, tax educational materials, clarification
etc. This should be in addition to the existing role of
BIR staff, ICMA and Tama’s in this area.
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Tax Computation and Assessment Materials:- Companies
can be provided with tax computation and assessment
materials to enhance their level of voluntary compliance.
This can be in-form of easy to use template and format.
Some of them do not evade tax deliberately.
Training of Tax Payers:- Need to organize exclusive
training programme for Accountants and Administrative
Officers of small and medium size companies on relevant
tax matters. The training shall center on contemporary tax
issues to ensure adequate tax management and accurate
record keepings and prevention of tax abuses.
Legal Department:- The Board need to have substantive,
effective and well equipped legal department with inhouse team of lawyers to handle all cases of distrain,
prosecution and litigation in conjunction with the State
judiciary.
Platform to ensure media hype:- Where the Board
successfully distrains, prosecutes, issue warnings and
review tax liabilities, noise should be made about it to
serve as wake-up call to other would be tax offenders e.g.
the celebrated Southern Gas Company Limited case and
others.
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Catch them young programme and activities:- Efforts should be
made to also put in a structure in place to re-oriented the youth
on tax matters i.e. organizing youth educational and competition
programme in schools that bothers on tax related issues such
variety shows/drama/debate/easy competition etc.
Re-training and re-orientation of staff even at the low level:Training should not be limited to senior and middle level
officers. Concentration should also be on junior staffs who are
first contact line officers to tax payers. This will position them to
interface with tax payers in the most appropriate way. Investing
in a highly skilled workforce and increasing the number of staff
tackling avoidance, evasion and fraud is very imperative and
necessary.
Reward and commendation Programme:- The Board should not
only concentrate on punishing defaulters but also to recognize
those who did very well in compliance (with adequate publicity)
to encourage others and set them as role model cum reference
points i.e. Annual Award Dinner Programme to recognize
complying companies, organizations, institutions, and
individuals can be organised on regular basis.
Enforce Cashless transactions: - Ensure on no account should
tax payers be allowed to pay by cash. All payments should be
through the banking platform, so that receiving payments and
accounting for tax and other monies should be through banking
system with the production of e-ticket as confirmation of
payment.
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The Board needs to keep availing and tapping
into new technology and innovation to help
analyse our data more effectively. Most tax
payers have gone quite high in using
computer to hide and evade tax. For the
Board to be steps ahead of them focus must
be on improving the ICT skill of personnel at
all levels.
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In a developing economy such as Nigeria with abysmally low
tax compliance rate, tax enforcement becomes an integral
part of the tax administration process.
Therefore, enforcement measures that will adequately suit
the tax system should be put in place such as developing a
focused strategy to improve compliance by sole proprietor
businesses e.g. presumptive tax regime.
To elicit voluntary compliance among the citizens, the
Government on its part must engender a tax culture
through good governance, promote fairness, equity and
balance in the provision of basic amenities.
Indeed, sanction alone cannot improve the compliance rate
among taxpayers to ensure a Delta beyond oil.
All hands must be on deck to make our dream of a Delta
beyond oil a reality through voluntary compliance by all
citizens.
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