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 non-compliance 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 EDFs); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant. Understanding taxpayers behaviours and factors that influence compliance behaviour are crucial for a successful tax administration. But there are no hard and fast rules. So, what sort of factors influences tax compliance or non-compliance? In this article, I discuss further 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 taxpayers’ attitudes and tax 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 the tax authority.
How does the group (of individuals or organisations) view tax compliance and non-compliance? 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”, “neighborhood 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, get it wrong- by, say, underpaying or overpaying tax.
At an individual level there is no “quid pro quo” when you pay taxes (i.e. if you pay 100,000 shillings 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 on 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 or sometimes also called a ‘fiscal contract’. So how the government expend 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.
By Shabu Maurus, Tax Partner, Auditax International.