TAX ADMINISTRATION:ISSUES OF COMPLIANCE AND ENFORCEMENTBy P. A. Itawansa Director of Enforcement & Compliance Delta State Board of Internal Revenue
I have decided to discuss this topic under the following headings: • Introduction • Factors that contribute to non-compliance • Effects of Tax Evasion • Enforcement in Developing Economies • Compliance and Enforcement issues in our tax system • Compliance Strategies • Recommendations • Conclusion
Introduction Payment of taxes either in cash or kind has always characterized every human society and will continue to persist for as long as human beings have needs to be met by Government. Tax plays an important role in generating revenue for the government through which welfare goods and services are provided for the citizens as dividends of democracy. According to Margaret and Chris (2009), taxes and tax systems are fundamental components of any attempt to build nations and this is particularly the case in developing nations.
The whole essence of good governance is to improve the welfare of the generality of the populace which is carried out with resources raised through taxation. Taxes build capacity, legitimacy and consent. Thus, the imposition of tax is statutory to enable government meet its obligations. The Nigerian Constitution under Section 24(f) stipulates that, “it shall be the duty of every citizen to declare his income honestly to appropriate and lawful agencies and pay his tax promptly”. The key elements of any tax system are tax policies and tax administration. Tax administration is the assessment, collection and accounting for taxes collected by relevant authorities. However, our economy is characterized by low tax compliance. Low tax compliance is a matter of grave concern in many countries especially developing ones like ours because it limits the capacity of their respective governments to raise revenues for development purposes.
In the same vein, enforcement has become a topical issue in tax administration because of the perceived suitability or otherwise in the use of force to drive the revenue generation process. There is no gainsaying the fact that tax enforcement has become an essential aspect of tax administration in view of the ingenious ways taxpayers, both corporate and individuals use to undermine the revenue generation process not only in our clime but the world over by not remitting what is due to government, under declaration of income as well as withholding revenue due to government for their own use etc. Let us take a cursory look at compliance and enforcement issues in Tax administration because as stakeholders we all are involved in one way or another in ensuring compliance or enforcing it. • Factors That Contribute To Non-Compliance It is commonly acknowledged that many factors contribute to non-compliance in Nigeria such as: • Corruption: This is an albatross over tax collection in Nigeria as taxpayers evade tax and bribe their way out when they are found out and so are not sanctioned to say the least. Tackling corruption would ease the burden of tax administration as the incidence of corruption results in heavy revenue losses to Government at all levels.
A large informal Sector: About 65% of taxable adults are employed in the informal sector which the International Labour Organisation (ILO) refers to as “the non-structured sector that has emerged in the urban centres as a result of the incapacity of the modern sector to absorb new entrants”. The informal sector relates to all economic activities that fall outside the economy regulated by the State. For example, CBN regulates the Banking industries but the black market operator is not regulated by any government agency. • Weak legal systems & Ambiguity in the tax laws: Before now, the deterrent measures for non-compliance under PITA 2004 included a penalty up to N25,000.00 for Employers who fail to register their employees and to remit such taxes to government. And for failing to keep proper records Employers faced a penalty of N5,000.00. Against this backdrop, Adekanola (1997) opines these small fines tend to encourage tax evasion since the penalty for being caught is lower than the cost for non-compliance. On the other hand, the self-employed were not even required to file returns much less face any penalty, and considering the fact they form the bulk of would be taxpayers and earn as much as four times that of the paid workers in the formal sector whose taxes are deducted at source.
In line with fiscal federalism, court jurisdiction over tax matters reflects the 3 tiers of government. The federal high courts have jurisdiction over company income tax, petroleum profit tax, custom and excise duties as well as stamp duties and corporate capital gains tax, and education tax. While Personal income tax (PIT), capital gains tax and stamp duties payable by individuals are legislated by the Federal government, but collected by State authorities. Since the Federal government is not a party to the collection of these taxes, their adjudication should fall on the States. This is not so as State Governments are required to obtain permission from the Federal Attorney-General for criminal prosecution of tax offenders on its behalf.
Paucity of adequate information and accounting systems: Our economy is cash based as business transactions are done in cash, and characterized by low level of literacy and indifference to proper record keeping by the informal sector operators as well as poor reporting standards. • A culture of non-compliance: Our people have this mind set of not used to paying taxes hence over time failed to develop the culture of voluntary compliance. Especially with the wrong perception that oil revenue is sufficient for the government to operate. • Ineffective tax administration: Tax administration has been characterized by poor working conditions and environment, lack of working materials, poor remuneration of staff, lack of logistics to enable staff reach out to employers of labour to check their books to ensure that extant tax laws are adhered to by them and fraudulent practices by officials.
The above factors were succinctly captured by the CITN (2002) this way, “tax administration is particularly hard here because literacy level is low and record keeping is not yet a popular culture. There are not enough tax officials to cover the field. Most of the officials are little trained, ill equipped, badly remunerated and corrupt… Governments in Nigeria are perceived as a corrupt and selfish lot, to whom money should not ever be voluntarily given. Taxes paid are expected to end up in private pockets, not in public utilities”. You would no doubt agree that the foregoing not only made compliance difficult, but also enforcement problematic and this tended to encourage tax evasion.
Effects of Tax Evasion With the prevalent rate of non-compliance in the system, one is forced to ask, is there any rationale for tax evasion? According to Alm James of Andrew Young School of Policy Studies, George State University, “tax evasion is of the most common economic crimes and has been present since the introduction of taxes. It states further that ever before now, people do not like paying taxes and they exploit all ways to reduce or avoid paying. For example, even the disciples of Jesus asked our Lord if they should pay tax to Ceasar.
The two main issues are tax avoidance and tax evasion which is separated by a thin line. Tax evasion which is very prevalent is a criminal act that leads to serious loss of revenue to Government. It includes: • Deliberate evasion of tax payment in whatever guise • Deliberate failure or refusal to pay taxes to Government • Deliberate failure/refusal to remit deducted taxes to Government by employers • Deliberate refusal to deduct and pay due taxes to Government • Deliberate under-declaration of income and underpayment of tax
The following are some of the ways of evading payment of due tax to Government; under stating of incomes from all sources, sales or wealth; by overstating deductions, exemptions or credits ( claiming exemption even for PAYE) and (not submitting withholding tax credit notes) or by failing to file appropriate tax returns which undermines the assessment process. On the other hand, tax avoidance is immoral but not criminal as it entails the deliberate use of loopholes in the provisions of the tax law to reduce taxes payable. To the detriment of revenue, some tax practitioners and individuals work out tax avoidance schemes to drastically reduce their tax liabilities.
The following are effects of tax evasion: • Tax evasion reduces collections affecting collective taxes that compliant taxpayers and the public services that citizens receive. • According to Alm James, evasion creates misallocation of resources when individuals and companies alter their behavior to cheat on their taxes. • Tax evasion alters the distribution of income unpredictably. Unless tax evaders are caught, they pay fewer taxes than honest taxpayers, which is unjust. • Evasion contributes to feelings of unfair treatment and disrespect for the law, creating a self-generating cycle that feeds upon itself and leads to even more evasion like a recurring decimal.
According to James, “evasion affects the accuracy of macroeconomic statistics. More broadly, it is not possible to understand the true impact of taxation without recognizing the existence of evasion”. This creates a tax gap in the economy between what the actual revenue should be and what is collected. This brings us to how to handle this thorny issue prevalent in our tax system in Nigeria.
Enforcement in Developing Economies We are all aware that taxation in developed countries is a very big issue and sacrosanct. If you want to go jail in America, United Kingdom, Ireland and Australia etc., then evade the payment of your tax to the relevant authority. Non compliance with tax laws earns one jail term without comprise. Against this backdrop, research shows that in a country like Republic of Ireland, the level of voluntary compliance is said to be 98 percent even as the tax authorities are working to make it 99.9 percent since it has been said that it may be impossible to attain 100 percent compliance. For as the saying goes, “in every twelve there is a Judas.”
The question that readily comes to mind is how was this commendable feat achieved? The study carried out to measure the level of enforcement and its effect on the tax system and compliance shows that the fear of being investigated by the Internal Revenue Service (IRS) or brought under its search-light are enough encouragement for voluntary compliance. The report further hinted that “by enforcing tax laws, the Internal Revenue Service (IRS) not only catches tax cheats, but also promotes broader compliance by giving taxpayers confidence that others are paying their fair share.” What is the scenario in Nigeria?
Compliance and Enforcement Issues in our Tax System Efforts have been made to put measures such as Section 44 of PITA as amended which deals with self assessment to encourage voluntary compliance, yet the problem of tax evasion and non-compliance still persist in our country. The whole essence of good governance is to improve the welfare of the generality of the populace which is carried out with resources raised through taxation. However, this is not the case as there is a tax gap, that is, the difference between the tax amount taxpayers pay voluntarily and on time and what they should pay under the law. This is due to the abysmally high non-compliance prevalent in our society. The concomitant effect is that government cannot fulfill its commitments to the electorate.
Non-compliance in our system can be directly traced to the following; poor tax culture, Lack of tax education and enlightenment, corruption in public office, Lack of accountability and the erroneous belief that oil revenue is enough by taxpayers. According to Anyaduba et al (2010), “In reaction to this anomaly, governments (both in developed and developing economies) adopt deterrent measures to combat this ugly trend in order to boost their revenue base and enable them fulfill their electoral promises”. It needs to be emphasized that the best way to revive our tax system and make it a veritable source of revenue generation beyond oil is through enforcing compliance with the tax laws in all its ramifications.
Hence, the former Special Adviser to Governor BabatundeFashola on Revenue and taxation, now the Attorney General and Commissioner of Justice, Mr. Ade Ipaye said, “this is the only way we can truly attain to equity in our tax system and assist government to realize its objective” To him, without enforcement, a fair, equitable and just system can never be achieved. In line with this, Lagos State Government has taken leave of the Attorney General of the Federation to prosecute tax offenders in the State. IfuekoOmogui-Okauru, erstwhile Chairman of Federal Inland Revenue Service once said, “Though much still needed to be done in raising the level of tax awareness and enlightenment, government would always resort to the use of enforcement as last option after going the whole haul to achieve voluntary compliance without result.”
Compliance and Enforcement Strategies The OECD (Organization for Economic Cooperation and Development) in their guidelines on managing and improving tax compliance suggests that effective application of compliance strategies depend on a Revenue Authority being strong in “three key capabilities; resources, design and execution”. Areas in which DBIR is well endowed. The Delta State Board of Internal Revenue has put in place the following compliance strategies to address its revenue needs at operational level to create a more effective tax system.
The Board implored strategies related to organizational and institution reform, management strengthening, nuts and bolts reform (strong internal control), building capacity and integrity as well as tackling corruption. The import of this is that regardless of whether the revenue authority is constituted as an autonomous or semi-autonomous body, the way in which it is internally organized can have a significant impact upon the effectiveness of the tax administration fostering voluntary compliance. To buttress this, the Organization for Economic Cooperation and Development (2004) suggest that compliance is most likely to be optimized when a revenue authority pursues a citizen-inclusive approach to compliance through policies that encourage dialogue and persuasion, combined with an effective mix of incentives and sanctions. So far the Board has done relatively well in the area of sanctions but yet to do much if anything in the area of incentives for taxpayers.
Gill (2003) noted that voluntary tax compliance does not have a long history in many developing countries, Nigeria inclusive. Flowing from this fact, the Delta State Board of Internal Revenue recognizes that a cooperative and positive engagement with taxpayers and their tax advisers in a customer-service focused and user-friendly environment will be more productive and efficient than more traditional adversarial and antagonistic approaches. As part of actualizing this objective Stakeholder meetings have been held with various segments of taxpayers. In the same vein, the use of Tax Professionals (TAMAs) by the Board is a strategic design to making taxpayer obligations clear, smoothing transactions and interactions, making it easier and cheaper to be complied with.
Furthermore, the OECD stated that, “if taxpayers do not understand what their obligations are, any intervention to enforce compliance will be perceived as unfair.” In this regard, as a way of making effective support services available to meet taxpayers’ needs, the Delta State Board of Internal Revenue has a dedicated GSM line in addition to the ones given to all offices to aid telephone enquiry services to remind those potentially at risk of what their obligations are.
According to Mckerchar and Evans (2009), the strategies designed to foster voluntary compliance have taken two broad and mutually supportive directions: building positive taxpayer and tax community morale; and making compliance easier and cheaper for taxpayer. The tax authority cannot be seen to be unjust if any taxpayer that fails to take advantage of this window of opportunity to voluntary comply is sanctioned through enforcement of the provisions of the tax laws.
Strengthening and Enforcing Compliance Creating a seamless relationship between the Board and the taxpaying public is part of encouraging voluntary compliance through the use of tax professionals to drive the process. According to Aghaduba et al (2012), “the overall strategy of a revenue authority should always be to encourage voluntary compliance wherever possible, and to facilitate such compliance whatever means it can make available.” They also acknowledge the fact that not all taxpayers are compliant, and that many who are compliant some of the time are not compliant at other times. In this regard, it is no longer news that the Delta State Board of Internal Revenue has moved against some companies and individuals to enforce compliance.
In view of the seriousness attached to this exercise, all cases of tax defaulters due for prosecutions are centrally treated at the headquarters. To further facilitate the quick handling of such matters, Revenue and Taxation department was recently created in the Ministry of Justice by the State Attorney-General and Commissioner of Justice. However, the judicial officers need to be sensitized through workshop(s) to improve their understanding of Personal Income Tax Act 2011 as amended to enhance their performance on the job. They should only be saddled with revenue matters to avoid distractions and undue delays. Perhaps, it is worthy of note to state that the Board has achieved some mileage in its drive to enforce compliance by tax defaulters. Aside the revenue recovered, the awareness that it’s no longer business as usual for tax defaulters has been highlighted which has helped to improve compliance by potential tax defaulters who want to avoid being sanctioned.
Against this backdrop, I dare say in line with global best practices the DBIR has adopted the approach of encouraging voluntary compliance through support services while also sanctioning recalcitrant tax defaulters.
Compliance and Enforcement – Delta BIR The essence of all tax administration is to ensure compliance with the existing laws and to close the tax gap which is the difference between tax amount supposed to be collected and the actual collection. The main slogan of this administration is “not to take a kobo not due to the Board’ but ‘to collect to the last kobo any amount owed the Delta State Government in taxes.” Stated below are some of the steps taken in DSBIR to monitor tax payers and ensure compliance
Data Base:- The DSBIR under the new management now has her own data base with comprehensive information of all corporate tax payers. It is an on-going exercise and getting robust by the day. The Board now has tracking records and necessary tax information on companies and some individuals. • Tax Audit Exercise: - Statutory Tax Audit processes now centralized and most of the companies have been audited up till date and back duty Audit exercise carried out for most of the companies. These have helped in clearing out standings as much as possible. • Effective mechanism to resolve outstanding tax matters through the Tax Audit Review Committee (TARC) which is devoid of interference from the management is in place.
Usage of third-party sources of information to confirm actual earnings or income received i.e. Bank salary payment schedule, pay slips and sometimes employment letters etc. • Installing the culture of accurate record keeping. • No waiver of interest and penalty culture to serve as a strict deterrent for endemic norms of non- compliance. There has not been tax amnesty which may encourage the bad social norms of non- compliance. A tax amnesty gives individuals an opportunity to pay previously unpaid back taxes without being subjected to the penalties that the discovery of evasion normally brings. • Creating a central data base both in hard and soft copies for annual returns filed by companies for comparison and review as at when the need arise.
RECOMMENDATIONS TO FURTHER ENHANCE TAX COMPLIANCE • Intensive Awareness Campaign:- The DBIR need to continuously embark on compliance campaign via electronic and print media especially through Radio/TV jingles. This will further sensitize and appeal to the conscience of the citizenry. Also distribution of fliers and other educational materials on tax matters be placed in strategic locations all over the state. • Information Desk:- There is need to have information desk in our major offices where tax payer can have unrestricted access to guidance, counseling, orientation, tax educational materials, clarification etc. This should be in addition to the existing role of BIR staff, ICMA and Tama’s in this area.
Tax Computation and Assessment Materials:- Companies can be provided with tax computation and assessment materials to enhance their level of voluntary compliance. This can be in-form of easy to use template and format. Some of them do not evade tax deliberately. • Training of Tax Payers:- Need to organize exclusive training programme for Accountants and Administrative Officers of small and medium size companies on relevant tax matters. The training shall center on contemporary tax issues to ensure adequate tax management and accurate record keepings and prevention of tax abuses. • Legal Department:- The Board need to have substantive, effective and well equipped legal department with in-house team of lawyers to handle all cases of distrain, prosecution and litigation in conjunction with the State judiciary. • Platform to ensure media hype:- Where the Board successfully distrains, prosecutes, issue warnings and review tax liabilities, noise should be made about it to serve as wake-up call to other would be tax offenders e.g. the celebrated Southern Gas Company Limited case and others.
Catch them young programme and activities:- Efforts should be made to also put in a structure in place to re-oriented the youth on tax matters i.e. organizing youth educational and competition programme in schools that bothers on tax related issues such variety shows/drama/debate/easy competition etc. • Re-training and re-orientation of staff even at the low level:- Training should not be limited to senior and middle level officers. Concentration should also be on junior staffs who are first contact line officers to tax payers. This will position them to interface with tax payers in the most appropriate way. Investing in a highly skilled workforce and increasing the number of staff tackling avoidance, evasion and fraud is very imperative and necessary. • Reward and commendation Programme:- The Board should not only concentrate on punishing defaulters but also to recognize those who did very well in compliance (with adequate publicity) to encourage others and set them as role model cum reference points i.e. Annual Award Dinner Programme to recognize complying companies, organizations, institutions, and individuals can be organised on regular basis. • Enforce Cashless transactions: - Ensure on no account should tax payers be allowed to pay by cash. All payments should be through the banking platform, so that receiving payments and accounting for tax and other monies should be through banking system with the production of e-ticket as confirmation of payment.
Installation of new hi-tech technology: The Board needs to keep availing and tapping into new technology and innovation to help analyse our data more effectively. Most tax payers have gone quite high in using computer to hide and evade tax. For the Board to be steps ahead of them focus must be on improving the ICT skill of personnel at all levels.
Conclusion In a developing economy such as Nigeria with abysmally low tax compliance rate, tax enforcement becomes an integral part of the tax administration process. Therefore, enforcement measures that will adequately suit the tax system should be put in place such as developing a focused strategy to improve compliance by sole proprietor businesses e.g. presumptive tax regime. To elicit voluntary compliance among the citizens, the Government on its part must engender a tax culture through good governance, promote fairness, equity and balance in the provision of basic amenities. Indeed, sanction alone cannot improve the compliance rate among taxpayers to ensure a Delta beyond oil. All hands must be on deck to make our dream of a Delta beyond oil a reality through voluntary compliance by all citizens.