By Abel Myburgh, Associate Director for International Tax at BDO South Africa
Tax compliance refers to the degree to which a taxpayer complies (or fails to comply) with the tax rules of the country, for example by declaring income, filing a return, and paying the tax due in a timely manner.
The level of tax compliance is influenced by, among other factors, the following:
- How taxpayers perceive the likelihood of being detected and punished; and
- How taxpayers perceive the severity of the revenue administration’s sanctions against defaulters.
Tax compliance is arguably more likely to occur when the probability of detection and prosecution is perceived to be high and also when sanctions against non-compliance are perceived to be severe.
For example, Angola issued an Executive Decree on 1 March 2016 which allows the tax administration to publish the list of non-compliant taxpayers every quarter. This list will be sent to the National Bank of Angola and the Ministry of Internal Affairs. Under this Decree the following sanctions may be imposed:
- When carrying out capital transactions, payments to non-resident beneficiaries, bank transfers in general and cargo operations, a non-compliant taxpayer will be blocked from making any transactions until settlement of his tax obligations; and
- When applying for obtaining or renewal of a work permit, non-compliant taxpayers’ requests will be refused.
A non-compliant taxpayer will be removed from the list as soon as evidence is provided that the irregular tax situation was regularised, by an official clearance certificate issued by the tax administration.
A significant area of low compliance is evident in the Small Medium Enterprises (SME) sector of the taxpaying population across the continent.
It could be argued that high tax rates, complex tax laws and time-consuming tax administration processes could be reasons why this situation persists in the African environment.
The World Bank’s recent data on ‘Paying Taxes’ clearly indicates that even though Africa showed the greatest reduction in total tax rates since 2004 it is still a very difficult region in which to pay tax. For example, in Africa the average annual time spent to comply is 313 hours, compared to 197 hours in North America and 173 hours in Europe. Similarly, a taxpayer will on average make 36.6 payments in Africa per annum compared to 8.2 payments in North America and 11.5 payments in Europe.
A number of African countries, including Morocco, Mozambique, Rwanda and Zambia, have recently introduced enhanced electronic tax filing systems to reduce non-compliance by taxpayers. Gambia has improved its bookkeeping system for VAT accounts to better track the requisite input and output records for filing VAT returns.
A large number of African countries including South Africa have introduced an alternative tax regime or a minimum tax system specifically geared towards alleviating the tax complexity and administrative burden on the SME sector.
Understanding taxpayer compliance still remains a challenge and understanding how taxpayers think about and experience taxation may pinpoint the political realities for tax reform. For example, attempts to broaden the tax base require a better understanding of how the large majority of citizens perceive the tax system, whether they perceive others are paying taxes or not, their views on tax administration and enforcement and whether and how their tax behaviour is correlated with how they perceive the state. Such different factors are all likely to vary across different countries, institutions and cultures.
In conclusion, a recent speech by the Minister of Finance of Lesotho demonstrated the impact of non-compliance for any African country: ‘Non–compliance robs our country of its ability to provide for its citizens. It defeats the very purpose of taxation, which is to ensure proper redistribution of income to avoid a situation where fewer people get more, whilst the rest go without. Tax evasion denies Government the ability to build hospitals, roads, schools and other necessary infrastructure. It hinders Government’s capacity to provide better pensions for the elderly and destitute, to provide more scholarships for tertiary education, amongst other things. I therefore want to reiterate my appeal to the entire nation, to every Mosotho and to every Taxpayer to collaborate with the Government, through LRA, to help us build a better Lesotho by paying your fair share of taxes.’