The previous two articles in this series shed some light on some aspects of the taxpayer’s business that tend to affect tax compliance costs (TCCs). Aspects such as the legal vehicle for business, types of goods and services and the way these are supplied (the distribution model), the business location(s) chosen, the business size, how business leverages on ICT, and the tax management approach. But there are external factors that either alone or in conjunction with the business aspects, may also influence the level of TCCs of taxpayers.
Tax administration practices
The way a tax authority administers tax laws tend to affect the level of compliance burden on taxpayers. Efficient tax administration is important in reducing tax compliance costs. The taxpayer audit function of the tax authority plays a critical role in the administration of tax laws. Its primary role is detecting and deterring non-compliance. The tax audit work demands that auditors can interpret the complex laws and carry out intensive examinations of, sometimes also complicated, books and records pertaining to the businesses of taxpayers. And, by necessity, through their several interactions with taxpayers, the tax auditors are the "public face" of a tax authority.
How long does it take for the tax authority to undertake and close a tax audit? The longer it takes to finish a tax audit, the more a taxpayer will incur as cost. That is more time is spent by the taxpayer to support the tax audit work instead of spending that time for his core business or production of income. How well tax auditors plan their audit work? What kind of information do they require or request from a taxpayer for the audit? What is the scope of the audit? Unprepared tax auditors are likely to be unfocused during the audit and may request information that is irrelevant for the tax audit or information that the taxpayer had already submitted to the tax authority with the tax returns, for example. Poor coordination of the tax audit work tends to disrupt the taxpayer's business operations. Also, taxpayers who are frequently audited tend to have higher compliance costs.
The complexity of tax laws
Tax complexity can come from design features of the tax (“design complexity”) - for example, the number of different tax rates, exemption rules and expense deduction rules. Or from the operation of the tax law. How easy/costly it is for an honest taxpayer to comply with the informational, filing and payment requirements or obligations of the tax system. A taxpayer is likely to take more time to understand and comply with complex tax rules. For example, where tax return forms are very complex, taxpayers may incur additional cost to engage a tax consultant (payment of consultancy fee). Or risk making errors in the tax return with potential penalties or even worse, overpayment of tax. Cumbersome tax procedures may also induce taxpayers to pay bribes to tax officials.
Just like other laws, tax laws are also subject to changes. There are several reasons a tax law may be changed. It could be to reflect a new tax policy on the tax rate or tax base. However, when the changes are frequent, it becomes expensive for taxpayers. Changes may necessitate taxpayers to learn new rules, change or update their systems or even change their business plans or strategies. These and other similar reactions to tax changes may mean additional cost to the taxpayers involved.
By Shabu Maurus, Tax Partner, Auditax International.