How the state promotes tax evasion

That the collection of the taxes levied on citizens becomes an exceedingly difficult task in the absence of a moral sense of tax responsibility on the part of the taxpayers is well known. The readiness to tolerate taxes is reinforced or undermined by two primary factors: The sense taxpayers have of how well the taxes collected are spent and their assessment of how fair or unfair the tax system is.

In connection with the first factor, the apparent inability of the state to combat corruption and eliminate wastage undoubtedly promotes tax evasion. In the recent past, public figures have been convicted for negligently discharging their duties, for wasting public funds and for corruption. The necessary infrastructure for maintaining this momentum must be reinforced both as a form of a deterrent and, more importantly, for cultivating a higher level of tax toleration amongst taxpayers.

The second factor, namely the taxpayers’ assessment of how fair or unfair the tax system is, can be easily elevated to a much higher standard by addressing, without further delay, a series of problems that have been haunting taxpayers for many years. In an article such as this one, it is unfeasible to set out all the corrective measures that need to be taken. The setting out of certain specific measures is intended to demonstrate that is not difficult to enhance the taxpayers’ moral sense of tax responsibility, which, in turn, will generate immediate positive results.

Abandoning offensive tax assessments
For many years, the tax authorities have followed the unacceptable practice of raising what is called “offensive tax assessments”, shortly before the six-year period allowing such practices expires. These provisions allow the tax authorities to raise assessments or additional tax assessments, according to their “judgement”, without having to justify such action. They don’t even have to allege an intention to defraud or an intentional omission (in such a case the period is extended to 12 years). To prompt the tax authorities to even consider the possibility of cancelling these often arbitrary assessments, the taxpayer must file an “objection”, setting out the “precise” grounds on which the objection is based, within one month of receiving the assessment (usually sent by registered post, and occasionally reaching its destination after the passage of the deadline for filing an objection!). One can easily see how the practice of raising “offensive tax assessments” can easily be elevated into a tool of suppression.

Within 12 months of depositing the objection, the tax authorities have the right to demand audited financial statements, accounting records, documents and other vouchers, copies of bank statements and other accounts, maintained by the taxpayer and all his dependents. They also have the right to demand “any other documentation and particulars” which, in the opinion of the tax authorities, are necessary. In addition, the tax authorities can demand (and they usually do) a detailed statement of the assets and the liabilities of the taxpayer, his/her spouse and all his dependants. The tax authorities may even seek documents and information from third parties, as they consider fit.

Then the tax authorities have three years to judge the objection filed. This period of time is automatically extended, if the taxpayer fails to procure the requested evidence within the allowed time. The taxpayer may appeal before the Supreme Court (now Administrative Court) or the Tax Council against the authorities’ demands, but then the onus of proof that the “offensive assessment” was arbitrary is on the taxpayer.

I ask you: how is it possible to cultivate a tax compliance mentality amongst taxpayers when the taxpayers are at the mercy of the tax authorities and while a tax sword is hanging over their head for a period that can comfortably extend beyond 10 years?

The taxpayer is running a risk of being called upon to pay, at the end of this saga, a multiple of the taxes initially assessed because, in the meantime, huge amounts of fines, penalties and interest have accumulated – not necessarily because the taxpayer was at fault but because they simply failed to prove that they were not at fault. (This could be, for example, the taxpayer did not have the technical skills necessary for comprehending and applying the particularly complex tax legislation or because, after many years, it was unfeasible to gather the necessary documentation to support their innocence or because they had fallen ill and were unable to preoccupy their minds with such issues or for any other reason). Can you imagine an “offensive tax assessment” landing on your doorstep, year-in, year-out?

Offset taxes payable against refundable taxes
Because of the complexity of tax legislation, the phenomenon of a taxpayer being called upon to pay taxes in relation to one sub-category of taxes or in relation to a specific tax year and to be entitled to a tax refund in relation to another sub-category of taxes or in relation to another year is far from rare. What would be more natural than to offset payable taxes against refundable taxes? You are naive! The practice consistently followed by the tax authorities is to demand the payment of the taxes due, in cash, and, in terms of substance, to refuse the refunding of overpaid taxes, on the basis that no taxes can be refunded prior to examining the tax returns with which such refunds are associated. And because the examination of tax returns entails the involvement of staff that is otherwise preoccupied, the refunding of overpaid taxes is usually deferred to an unspecified future point in time. Where does the taxpayer find the required cash to settle the payable taxes while waiting for the return of the refundable taxes? This appears to be an issue of no concern to the tax authorities. I ask you: Do such practices promote a tax compliance mentality?

Interest on taxes payable and taxes refundable
The tax authorities often argue that their effective refusal to satisfy the reasonable request of taxpayers to see the taxes they are obliged to pay being offset against the tax refunds they are entitled to receive, is compensated by the taxpayer being entitled to interest for as long as the tax refunds are outstanding. They argue that the taxpayer does not suffer a loss as a result of the mismatch of these cash flows. This argument is not valid. Beyond the fact that the quantification of the interest is not based on the same time frame, the interest calculated on refundable taxes is deemed to be income and is taxed at the rate of 30 per cent. In a specific case, in which the taxpayer was under an obligation to pay taxes (defense contribution) of a broadly equal amount to the refundable income tax he was entitled to receive (relating to the same year of assessment), the amounts actually paid in the form of surcharges, penalties and interest were four times the net interest which the taxpayer was entitled to collect. As a rule, this relationship is 2:1. Is this how a tax compliance mentality is cultivated?

An end to meaningless work
A good example of the meaningless work that is being generated by the tax authorities for themselves is the process followed for requesting taxpayers to file the documentation needed for examining the tax returns filed. The Taxisnet system currently used does not have a facility for attaching any document to the tax return filed (e.g. a certificate confirming taxes withheld at source). In order to secure the submission of such documentation, the tax authorities raise tax assessments on the basis that the tax returns filed are incorrect and inaccurate. Against such assessments the taxpayer must file an objection, which is examined once the necessary documentation is submitted. This is how a climate of trust and cooperation is established between the tax authorities and the taxpayers!

The examples are numerous and cannot be squeezed into an article of this size. The gist of the message is simple. If the state is genuinely seeking to combat tax evasion, it must render the tax system transparent, readily comprehensible and fair. The taxpayer must know, in advance, the required documentation for having their tax declaration accepted by the tax authorities. The tax declaration must be automatically cleared (unless modified by the tax authorities in a properly justified and documented fashion) within a period of, say, one year from filing. The technical tools currently available, which can be placed at the disposal of the tax authorities, render such a goal perfectly feasible.