Insight on tax administration

To many people, taxis a complex subject and complexity has been shown to contribute to non-compliance to the ever changing tax laws Taxpayer sare not given sufficien trights and tax officials exercise overwhelming powers. Disputes have become more common, investigations more frequent and penalties more severe. The resultisthat the relationship between tax authorities and taxpayers gradually become increasingly strained and intense.

Insights on tax compliance can be gained by looking at how the tax authority deals with tax payers. Taxpayers usually respond in a systematic way to how the tax authority treats them. Their willingness to pay their taxes is supported or raised when the tax officials treat them with respect. In contrast, when the tax officials consider taxpayers purely as ‘subjects’ who have to be forced to pay their dues, the taxpayers tend to respond by actively trying to avoid taxation.

The tax authority has two diametrically opposite ways of treating taxpayers. One is a respectfultreatment supporting tax morale and a second one is an authoritarian treatmen undermining tax morale. The tax officials can choose between the two extremes in many different ways. For instance, when they detect an error in the tax return, they can immediately suspect intent to cheat, and impose sanctions. Alternatively, the tax officials maygive the taxpayer the benefit of the doubt and inquire as to the reason for the error. If the taxpayer in question did not intend to cheat, but simply made a mistake, he or she will most likely be offended by disrespectful treatment on the part of the taxauthority. The feeling of being controlled in a negativeway tends to bring tax morale down. It the tax authority assumes tha tmistakes in tax returns are not necessarily an attempt to cheat in the first place, they can be perceived to act without prejudice

The objective of the tax authority is to maximise itsexpected net revenue. Although there is a voluntary component to pay taxes, the tax authority optimally chooses its policy of dealing with the taxpayers to achieve its target. Nobody likes paying taxes, not least because it involves a public good and there are incentives to free ride. Selfish individuals would be rational not to pay taxes, because the probability of being detected is so remote in certain cases that it is advantageous to evade tax or to postpone payment. Therefore, deterrence is exercised by the tax authority to enforce taxation. It can be seen that the better the tax officials pursue their policy with regard to treating the taxpayers respectfully and deterring taxevasion, the more the taxpayers are prepared to pay the taxes due.

The procedures used by the tax officials in their contact with taxpayers are to be transparent and clear. Where the move towards greater transparency iscertainly a welcome trend, higher regulatory burdens may ultimately have a negative effect. In case of arbitrary procedures, taxpayers fee lhelpless and get the impression that they are not taken seriously. Such behaviou rreduces their perception of being obligated to pay taxes. The OECD in a Practice Note on ‘Principles of Good Tax Administration’ encourages taxauthorities to :

• Apply tax laws in a fair, reliable and transparent manner;
• Outline and communicate to taxpayers their rights and obligations as well as the available compliant procedures and redress mechanisms;
• Consistently deliver quality information and treat inquiries, requests and appeals from taxpayers in an accurate and timely fashion;
• Provide an accessible and dependable information service on taxpayer’srights and obligations with respect to law;
• Ensure that compliance costs are kept at the minimum level necessary to achieve compliance with the taxlaws;
• Where applicable, givetaxpayersopportunities to comment on changes to administrative policies and procedures;
• Use taxpayer information only to the extent permitted by law; and
• Develop and maintain good working relationship swith client groups and the wider community.

The Mauritius Revenue Authority (MRA) seems to overlook transparency by not providing adequate reasons for decisions it takes, by not issuing an agenda containing matters to bediscussed when meetings are called, and by not setting an agreeable plan of work and a time frame when it starts an enquiry. A tax enquiry is a costly and time consuming obligation for the taxpayer. Most of the time taxpayers are left uninformed until they suddenly receive an assessmen tclaiming taxes, penalties and interest. Very ofthen The MRA exercises its discretionary powers contained in the tax laws without giving any indication of the motives behind its decision, of the considerations it gave and of the basis it applied.

My preceptist hat the MRA cannot expect money in the form of taxes without offering a fair procedure. A fair procedure requires that a taxpayer, improperly deprived of its property through the form of tax, must have an opportunity to be heard and such opportunity must result in a fair substantive remedy should the taxpayer’s challenge prevail. If the taxpayers do not trust the MRA to collect tax fairly, this will increase non-compliance.

My second precept is that communication by the MRA is a key treatment tool for influencing behaviour. The framing of, and language used, when communicating with taxpayers have a significant influence on behaviour.

My last precept is that the MRA must officially and regularly inform the taxpayer, on whom an enquiry is lasting over the time fame suggested above, about the progress and the revised expected date of completing the enquiry. It must also in instances, where the taxpayer is a debtor, issue regularstatements of account, electronically or otherwise, to keep the taxpayer informed.