Revenue Authorities: law Enforcers Or Bounty Hunters?
02 January 2009
Posted by: Author: Hendrik J van Deventer
Revenue Authorities: Law Enforcers or Bounty Hunters?
The Wild West was a tough place, especially if you were a law enforcement officer.Back then you were pretty high up in society if you were an officer of the law.In a town called Tombstone lived some of the most famous law enforcers of all times, the brothers Earp with Wyatt, of course, the most well-known. They, together with their gambling friend Doc Holiday, maintained law and order.
However, the Wild West also had bounty hunters, an industry that is still very much alive today.These cowboys had no policing powers.Bounty hunters could make arrests without warrants and they could even break and enter into homes.Their motivation was certainly not catching criminals because it was the right thing to do.It was all about the money.So what do the brothers Earp, bounty hunters and revenue authorities have in common?
A recent newspaper article on traffic authorities titled, ‘Put enforcement before revenue’ triggered the issue of tax avoidance versus tax evasion.Some tax commentators have been accusing revenue authorities of having blurred vision when it comes to tax avoidance and tax evasion.The line between careful tax planning and not paying what is rightfully due is precariously thin.It appears that revenue authorities find it difficult to apply the General Anti-Avoidance Rules (GAAR) contained in most tax legislation.
South Africa’s revenue authority has made some sweeping changes to its anti-avoidance rules mainly because of several court decisions in favour of taxpayers that challenged some of the rules.The role of government in tax compliance.It is well known that the police service lacks the resources to effectively combat organised crime. Some of the reasons for this sad state of affairs are:
•The necessary skills are lacking;
•Management focuses on quick and short-term results;
•The focus is on statistics (number of arrests instead of investigating syndicates).
It is for these reasons that the Scorpions were established.
In 2001, the New York Times reported that the IRS has effectively written off $2.5 billion owed by 668 018 taxpayers.It deemed these cases too small to pursue with its limited resources.This clearly shows the impact that the lack of resources can have on a law enforcement authority.A recent working paper submitted to the International Monetary Fund stated that "tax evaders protect each other, because they tie down limited enforcement capacity”.Honest taxpayers therefore often end up feeling that tax cheats are simply allowed to get away with it and that governments and revenue authorities are doing absolutely nothing about it.
Tax Avoidance vs. Tax Evasion
Prosecuting tax evaders is a time-consuming exercise.It is also not a cheap exercise.Some believe that the reason for SARS’ remarkable success is the fact that it is run like a business.Whether this is true or not, I cannot say.Let’s assume that it is and then we can assume one of the areas it will be conscious of is its cost to income ratio.The bulk of the administration cost has already been passed onto tax practitioners that created a substantial saving in overhead costs.
A revenue authority with limited capacity and resources makes it an ineffective law enforcer.With no effective law enforcement, taxpayers are less likely to be compliant. SARS’ auditors have financial targets to meet.The law enforcer is now the bounty hunter.This cannot be right.Can we really afford to have SARS auditors knocking on a taxpayer’s door for not adhering to the law but not on the neighbour’s door, simply because the add back is much higher than what it is for the neighbour?
Measures to increase tax compliance
Russia introduced a flat tax rate with phenomenal results. Revenue collection increased substantially and almost immediately.The rate cuts in Russia changed the behaviour of the Russian taxpayer, who is now more inclined to make an honest declaration of income on his tax return.The incentive for evading tax became so insignificant that even tax evaders are now becoming honest taxpayers.
In Ireland, taxi drivers are forced by law to issue an electronic receipt when passengers pay their fare.The issuing of receipts effectively records the income of the taxi driver, making it very difficult for him to evade tax.Revenue authorities should continue to audit honest taxpayers, but there should be a balance between the auditing of compliant taxpayers and investigating tax evaders.Authorities should avoid a situation where complying taxpayers feel as though they are treated like common criminals.Non-complying taxpayers must be brought to book.
Simple tax system
This means more than making it easier for the man in the street to file his tax return!It means having a hard look at the Income Tax Act and writing in clear, unambiguous language.
Source: By Hendrik J van Deventer (TaxTALK)