WAYS TO PROMOTE/ENFORCE THE REGISTRATION OF HIDDEN TAXPAYERS PAPER PRESENTED TO ITD AFRICA CONFERENCE ON

1. WAYS TO PROMOTE/ENFORCE THE REGISTRATION OF HIDDEN TAXPAYERS • PAPER PRESENTED TO ITD AFRICA CONFERENCE ON • TAXING MICRO AND SMALL BUSINESSES-From Confrontation to Cooperation Presented by: CHRISTINE S. SHEKIDELE DEPUTY COMMISSIONER, TRA • APRIL 22 – APRIL 24, 2009  KIGALI, RWANDA

2. COVERAGE • Introduction • Registration and Identification of Taxpayers • Tax Policy Changes and its Impact on SMEs Compliance Behavior • Designing a Successful SME Tax Registration Campaign • Benefits of Small Business Formalization • Tax Amnesty: Is it Really a Suitable Way to Encourage Voluntary Tax Registration?

3. COVERAGE Cont’d • Experience with strategies to Enforce Tax Registration • Whistle-blower Mechanisms – Do they Produce any Tangible Results? Tanzania Experience • The use of Tax Audits and Systematic Information Cross-checking for Identifying Non-registered Taxpayers • Concluding Remarks

4. Introduction • Economic structures in many developing economies are predominantly overwhelmed by the informal sector, which is expanding rapidly. • Business entities and individuals manage to avoid the full impact of the tax system hence; they remain outside the tax net.

5. Introduction Cont’d • Taxpayers who escape the tax system mostly include small and medium-sized enterprises. • In tax administration these are our “hidden taxpayers”. • Generally hidden taxpayers include taxpayers in both the informal and the formal sectors of the economy.

6. Introduction Cont’d • Hidden taxpayers may include unregistered merchants (family owned businesses) and professionals involved in cash transactions or even barter. • Have difficulty in keeping business books and records • May not be familiar with banking and other financial transactions and therefore keep under cover.

7. Introduction Cont’d • There are increasing concerns that even medium and larger businesses might hide in the informal economy. • These may include start-up firms, professionals, medium manufacturing and commercial firms capable of keeping accounts.

8. Introduction Cont’d Factors associated with hidden taxpayers include among others: • High tax rates • Inability to understand the complex tax system and procedures • low risk of detection of non-compliant culprits • lack of confidence in government use of revenues

9. Registration and Identification of Taxpayers • Broadening the tax base is a strategic objective of tax administrations • Registration of eligible taxpayers is the fundamental requirement in order to have them in the tax net. • It is therefore, the duty of tax administrations to promote or enforce registration of all potential taxpayers to encourage voluntary compliance.

10. Registration and Identification of Taxpayers Cont’d • It is absolutely imperative that tax administrations devise a system and probably an automated one for registration and identification of taxpayers. • Under this system all SMEs must be given a taxpayer identification number (TIN), which a trader will be required to use for all tax transactions with tax authority.

11. Registration and Identification of Taxpayers Cont’d • TRA, under the TRA Act Cap 399 has the responsibility for the establishment, application and maintenance of a system for registration and identification of taxpayers. • The objective is to improve the overall effectiveness of taxpayers’ identification and registration by putting in place a system that encourages taxpayers to register.

12. 2.1. Taxpayer Identification Number (TIN) • In an effort to promote compliance and ensure that each taxpayer is unique, TRA embarked on an initiative to strengthen the use of the TIN system and database. • Thus, TIN is an automated taxpayer registration system, which issues a unique number to each taxpayer on first registration.

13. 2.1. Taxpayer Identification Number (TIN)Cont’d • TIN, which became operational in July 2002 is a unique identifier used in all tax system; and by December 2008 the system has been rolled out to all Tanzania Mainland regions and Zanzibar. • TIN system is linked to the central server thus enabling all the regions, including Zanzibar to print and issue TIN certificates and update taxpayer information.

14. 2.1. Taxpayer Identification Number (TIN)Cont’d • The provisions of the Income Tax Act 2004 (Cap 332 RE 2006) requires every resident person carrying on a business anywhere and non-resident person carrying on a business in the URT to be issued with TIN. • As at 31st December 2008, a total of 433,959 taxpayers (excluding employees) were registered into the TIN system.

15. Tax Policy Changes and its Impact on SME Compliance Behavior • Taxing small and medium businesses has always been challenging. • Complexity of the tax system lead to non-compliance with the tax laws, which require both individuals and business entities to register.

16. Tax Policy Changes and its Impact on SME Compliance Behavior Cont’d • Simplifying the taxation system for SMEs in developing economies was given an urgent priority to facilitate registration of hidden taxpayers and enhance voluntary compliance. • Apparently, there is no unique simplified tax system for all countries.

17. Tax Policy Changes and its Impact on SME Compliance BehaviorCont’d • Experience shows that there is a wide practice of opting for presumptive taxation, as a simplified tax scheme. • The most commonly used presumptive taxation is in the context of the income tax. • The purpose of adoption of such simplified tax regimes for small businesses is to broaden the tax base.

18. Tax Policy Changes and its Impact on SME Compliance BehaviorCont’d • Simplification of tax structure might play a role in reaching the hidden taxpayers. • A flat rate income tax with very limited deductions and scheduler rates for non-wage income, or VAT with limited exemptions and zero rate categories can be used to bring into tax net hidden taxpayers.

19. Tax Policy Changes and its Impact on SME Compliance BehaviorCont’d • It is worth noting that simplified tax regimes may also impose a risk by opening a new door of avoidance for medium-sized entities that are presently in the standard tax system; these may want to shift to the presumptive regime, hence narrowing the tax base.

20. Tax Policy Changes and its Impact on SME Compliance Behavior Cont’d • Presumptive taxation in transition countries has improved voluntary compliance on registration of SMEs. • In 2002, in Russia registration of legal entities under the simplified system rose 2.8 times.

21. Tax Policy Changes and its Impact on SME Compliance Behavior Cont’d • The number of individual SME operators registered under the same system rose 3.2 times in the same period. • Similarly, in Albania the number of taxpayers registered for the small business tax increased from 18,000 in 1997 to 35,000 at the end of 2002. (M. Engelschalk, 2004).

22. 3.1. Tax Policy Changes: Tanzania Experience • The administration of small and medium taxpayers administered by DRD is scattered throughout the country at all 23 regions and 71 districts of Tanzania Mainland and Zanzibar. • Prior to July 2004, both the VAT and Income Tax Departments dealt with small taxpayers respectively through the stamp duty on receipts and the presumptive income tax regime.

23. 3.1. Tax Policy Changes: Tanzania Experience Cont’d • The government in July 2004 rationalized the presumptive scheme by introducing a new simplified taxation schedule for small business taxpayers as part of a drive to make it easier for informal sector operators (including start-up businesses) to register, formalize and start paying taxes.

24. 3.1. Tax Policy Changes: Tanzania Experience Cont’d • The presumptive assessment is described under paragraph 2 of the First Schedule to the Income Tax Act, 2004 (Cap 332 RE 2006). Specific objectives of the presumptive scheme included: • To rationalize turnover tax regime.

25. 3.1. Tax Policy Changes: Tanzania Experience Cont’d • To increase an administrative efficiency by minimizing real resources needed by TRA to administer income tax and stamp duty payable by small businesses separately. •  To enhance compliance by minimizing time and trouble expended to fill in the relevant forms and up and down movements to TRA offices every month.

26. 3.1. Tax Policy Changes: Tanzania Experience Cont’d • To eliminate avenue for evading taxes through submission of false sales declarations by taking advantage of sections 9 and 10 of the Stamp Duty Act, 1972. • To solve the problem of evading paying Stamp Duty by taxpayers once they pay income tax.

27. 3.1. Tax Policy Changes: Tanzania Experience Cont’d • The simplified tax regime is applicable to small business taxpayers (SBTs). • In Tanzanian context SBTs refer to all resident sole proprietors with business gross turnover not exceeding TAS.20,000,000 (USD 14,981.27) per annum. • The system has had a very good impact on the number of registration albeit with the small income tax contribution.

28. 3.1. Tax Policy Changes: Tanzania Experience Cont’d • As at December, 2008 a total of 300,530 small taxpayers were registered. • This number accounts for 69.3% of all taxpayers administered by DRD. • During the period from July to December, 2008 tax contribution of SBTs to total tax collected by DRD accounted for only 0.68%, whereas their contribution to total tax revenue collected by TRA was only 0.28%.

29. Designing a Successful SME Tax Registration Campaign • Simplified taxation schemes have proven to be popular, with increased number of registered small taxpayers. • However, such schemes alone cannot be sufficient to achieve major improvements in taxpayer compliance. • Experience shows that, in many countries small businesses do not register voluntarily. Once registered, after some time they change identity with little or no formality.

30. Designing a Successful SME Tax Registration Campaign Cont’d • Tax administrations must design a strengthened administrative capacity in close collaboration with the local authorities that have jurisdiction over the operations of the SMEs; to detect hidden taxpayers, non-filers and stop-filers. • Close monitoring and rigorous enforcement involving door to door visits at the business premises is the only way to deal with hidden taxpayers and non-payers.

31. 4.1. Block Management System (BMS): Tanzania Experience • In order to have the taxpayers in the tax net, expand the tax base and optimize tax revenue collection, Tanzania Revenue Authority (TRA) adopted the BMS. • The basic objective of BMS is to promote compliance and register all eligible traders within a particular business, sectoral or

32. 4.1. Block Management System (BMS): Tanzania Experience Cont’d • geographical area, capturing their correct level of economic activities and gathering valuable tax information. • The system assists tax administration in improving and assurance of quality of assessments, as well as monitoring closely their business activities and be able to fight tax evasion.

33. 4.1. Block Management System (BMS): Tanzania Experience Cont’d • BMS has simplified registration of traders, brought non-filers and non-payers into the tax net through closer monitoring and collaboration with local government authorities. • By reaching out to the unreached the BMS has widened the tax base.

34. 4.1. Block Management System (BMS): Tanzania Experience Cont’d The set up of the BMS is as follows: • Areas of trading concentrations are mapped up in small Segments, defined on the basis of geographical or administrative set up, or a combination of a few streets to form a block.

35. 4.1. Block Management System (BMS): Tanzania Experience Cont’d • Each Block is mandated to operate all the tax functions of registering, assessing, collecting and accounting for revenue collected. • Each Block is allocated staff to carry out those functions, subject to rotation after a certain length of stay in one Block.

36. 4.1. Block Management System (BMS): Tanzania Experience Cont’d • To measure performance, each Block is allocated targets (including revenue collection targets) measured against set time frames and benchmarks. • To enable smooth functioning, each Block has a leader who is answerable to an Assistant Manager and assisted by a number of subordinates.

37. Benefits of Small Business Formalization • The problem of identification and registration of taxpayers is largely caused by: • Traders not having permanent business premises; • Mostly hawking along the town streets; or • Displaying their goods on the street pavements, which they pack and shift at the end of each working day.

38. Benefits of Small Business Formalization Cont’d • Tanzania LGAs have started to mobilize small traders by providing them with permanent trading sites and infrastructure. • Small traders can easily be identified and guided on business management basics, such as marketing and obtaining loan facilities. • These efforts will assist TRA in identifying and registering traders and have them into the tax net.

39. Benefits of Small Business Formalization Cont’d • TRA will be able to reach most of the informal sector traders and provide them with basic tax education and assistance, to enable them to comply with the tax laws and make their rightful tax contribution. • Small traders associations have been formed and TRA is able to partner with them so that all the intended taxpayers are reached and captured.

40. Tax Amnesty: Is it Really a Suitable Way to Encourage Voluntary Tax Registration? • Governments of all kinds have frequently turned to tax amnesties as part of their fiscal programs. • An amnesty typically allows individuals or firms to pay previously unpaid taxes without being subject to some or all of the financial and criminal penalties.

41. Tax Amnesty: Is it Really a Suitable Way to Encourage Voluntary Tax Registration? Cont’d • The obvious purpose of a tax amnesty is to raise short-run revenue. • Many taxpayers who are not in compliance with tax laws may be unaware of their tax obligations, and changing tax laws magnify the problem. • Tax Amnesty gives these taxpayers a chance to come into voluntary compliance.

42. 6.1. Benefits of a Tax Amnesty • Benefits of tax amnesty include, bringing the evaders back to the route of honesty, new taxpayers entering the system, leading to improved voluntary compliance. • Provides information about the taxpayers and their activities. • TRA has no experience associated with tax amnesties as we never granted any since its inception in 1996.

43. Experience with Strategies to Enforce Tax Registration • The key to reaching the small business and self employed sector is close monitoring and rigorous enforcement. • In Tanzania implementation of the BMS, involve TRA tax officials in the Blocks to make door-to-door visits so as to ensure that all eligible taxpayers are registered and finally pay their taxes.

44. Experience with Strategies to Enforce Tax Registration Cont’d • July 2006 – June 2007 new taxpayers registered by TRA were 46,274. Out of these 16,476 (36%) were registered as a result of BMS. • July 2007 – June 2008 new registrations were 57,011. Out of which 24,972 (43%) resulted directly from the BMS. • July to December, 2008 new registered taxpayers were 32,231, out of these 13,138 (41%) were registered as a result of BMS.

45. Experience with Strategies to Enforce Tax Registration Cont’d • The advantages of BMS are evident. • As such the Domestic Revenue Department (DRD) is currently working on modernization (automation) of BMS by improving on the registration, coverage, information capturing and enforcement strategies.

46. Whistle-blower Mechanisms – Do theyProduce any Tangible Results?: Tanzania Experience • For the purposes of curbing tax evasion and enhance voluntary compliance TRA has taken deliberate initiatives to receive information from different parts of the country. • Different modes of communication are used by informers, which include:

47. Whistle-blower Mechanisms Cont’d • Walk in to the office of the CG, DCG, Revenue Commissioners, and DTSE. • Text messages (SMS) to CG, DCG, Revenue Commissioners and DTSE. • Telephone calls to DTSE, and Revenue Commissioners, and any TRA staff who the informer thinks to be of help.

48. Whistle-blower Mechanisms Cont’d • Certain information needs to be investigated hence, forwarded to CTI. • Other cases are dealt with by respective Revenue Commissioners. • Through this mechanism TRA has been able to register traders for VAT and graduated them to the normal taxation system.

49. Whistle-blower Mechanisms Cont’d • For example, in January 2009 seven traders were reported to CDR to have huge daily sales while treated as presumptive taxpayers. • Out of these, four traders (57%) were registered for VAT, as the annual turnover was far above the VAT threshold(40,000,000 (USD.29,962.54)). • These taxpayers were also, graduated to the normal taxation system and required to maintain books of accounts.

50. Whistle-blower Mechanisms Cont’d • “Reward to Informers” arrangement adopted by TRA has been successful. • Under this arrangement, the informer is rewarded 3% of the identified and collected tax; subject to a ceiling of TAS.20,000,000 (USD. 14,981.27).