Why some people don’t pay taxes - (3)
Is non-compliance with tax laws necessarily deliberate? My previous two articles highlighted some of the major factors that influence tax compliance. Both economic and behavioural factors. But both the economic and behavioural models assume that non-compliance by taxpayers is a deliberate action. But this is partly true. Tax non-compliance can occur due to deliberate connivance or just ignorance.
Broadly tax obligations can be clustered into four groups: (a) registration in the system or deregistration from it (think of VAT for example); (b) timely filing or lodgement of requisite taxation information (filing tax returns for example); (c) reporting of complete and accurate information (incorporating good record keeping); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant. Regardless of whether it is intentional or unintentional. A taxpayer may intentionally evade some of his or her obligations while unintentionally being non-compliant in other respects.
When it comes to administering penalties for non-compliance it is very difficult to distinguish whether a non-compliance action or inaction is deliberate or simply unintentional. But in practice, inadvertent non-compliance with tax laws is widespread, especially within the SMEs and more so within the informal sector. So, what contributes to inadvertent non-compliance with tax laws? Of course, there are several possible reasons or factors.
Absence of tax management
Yes, just like any other aspect of your enterprise or organisation, you also need to manage your taxes. Tax management includes the understanding of the taxes that you are expected to comply, identifying the tax risks and putting in place effective controls to reduce both the possibility of non-compliance and the impact of non-compliance. It is a process to respond to the tax risks and continuously evaluate the responses for improvement. For example, how you approach non-routine transactions will make a huge difference as far as tax compliance is concerned. Are you organised in such a way that you have enough time to prepare, review and pay tax liabilities? How does the board of directors of an organisation ensures that the tax affairs of their organisations are managed properly? Does the board know all taxes that their organization is obliged to comply? It is not uncommon to find out that some organizations do not even know all the taxes that they are required to comply. Arguably, most of the reasons for inadvertent non-compliance emanates from a lack of effective tax management.
Lack of requisite tax knowledge or information
Knowledge about taxes influences a taxpayer’s ability to comply with tax rules. As indicated earlier, the economic and behavioural models on tax compliance take tax knowledge as given, which may be grossly misleading. In practice, there is enough evidence that unintentional non-compliance is directly related to ignorance about and lack of understanding of tax laws.
The complexity of tax laws and rules
Tax complexity also influences non-compliance by causing misinterpretation of rules, omissions and unintentional errors. Making the tax system less complicated will lead to a reduction of tax non-compliance. Uncertainty from the interpretation of tax law is very common and may lead to unintentional non-compliance even for experienced tax experts.
Inability to keep proper business records or lack of appropriate records about the business may lead to incorrect determination of the tax base and hence the tax liability. Due to lack of record, a taxpayer may end up paying less tax than they owe. Or even worse pay more than what is legally due. Lack of appropriate records also leads wrong, incomplete or misleading tax returns.
By Shabu Maurus, Tax Partner, Auditax International.