As we count down to the reading of the National Budget, we can only guess what the finance minister will mention.
As we count down to the reading of the National Budget, we can only guess what the finance minister will mention. But we can also put forward some ideas and expectations as taxpayers. When PricewaterhouseCoopers organised a Pre-Budget forum for captains of industry and senior business executives earlier this year, the issue of electricity featured prominently as expected.
In addition participants discussed the issue of improving tax compliance.
The steps taken by the Uganda Revenue Authority (URA) in the recent restructuring exercise are encouraging. The new URA has portrayed better customer relationship, an aspect that has greatly improved the relationship between the taxpayers and URA.
The challenge is to translate the promise of transformation to the daily operations of the URA. For instance the URA still takes long in undertaking audits and producing results relating to audits. Many times, audits are undertaken when a client claims for a tax refund. A good suggestion would be that especially for taxpayers who have a record of compliance, the refunds should be made before such audits are concluded, as long as there is prima facie evidence of over payment by the client. Should it be established that the taxpayer is not entitled to the payment, then such taxpayer would have to refund this money. In our experience, most of the large taxpayers who normally claim for these refunds are rightly entitled to them and holding up their money in this way creates a cash flow problem.
In addition, even with routine audits, URA approaches the audits with the presumption that every taxpayer has defaulted. This negates against good judgment as URA officials concentrate on the most frivolous issues. Such treatment affects the relationship between taxpayers and the URA and discourages investment. To this, should be added the fact that the URA tends to concentrate only on large taxpayers and pays little or no attention to small and medium taxpayers. Again, this treatment has frustrated many taxpayers and is a disincentive to investment.
Presently, the URA does not provide amnesty for taxpayers who voluntarily disclose their non-compliance with the tax obligations contained in the Income Tax Act. The purpose of encouraging voluntary disclosure is to encourage taxpayers to disclose cases of non-compliance without fear of being punished. In the end, it is hoped that voluntary disclosure would encourage compliance.
Advocates of tax amnesty argue that it may increase tax revenues as taxpayers take advantage of the grace period offered by the tax authority. They also argue that amnesty widens the tax base since it may encourage those not previously registered for tax purposes to register. Those against amnesty argue that not only is the revenue increase it generates quite small, but also that amnesty may affect compliance when those who previously complied with the law resent the amnesty given to delinquents, and thereby also reduce their compliance. The critics also argue that where many offers of amnesty are given, taxpayers may reduce on their compliance in anticipation of other offers.
That said, however, amnesty can be fruitful if it is accompanied by administrative changes such as strengthened enforcement procedures and an increase in taxpayer education. The aggregate impact of an effective amnesty is that it encourages previous non-complaint taxpayers to be brought into the tax bracket.
In 2004, Kenya announced an amnesty for tax offences which resulted in some success as taxpayers disclosed many offences and under-declarations, which should enhance revenue collections.
Given the fact that Uganda last had a total tax amnesty in 1989, the minister could consider a limited amnesty this year. Such an amnesty will need to be well drafted for it to be effective.
Penalty and Interest
Even where the Government presently is not geared up to offer tax amnesty, there is need to reform the current system which combines the two elements of penalty and interest. There is little, if any, incentive for a taxpayer who is generally compliant with the tax laws and who wants to be compliant, to disclose mistakes made that have had the effect that tax has been underpaid. This is because the penalties that the taxpayer will face, on disclosing the error to the URA, are likely to be as severe as if the taxpayer waits for the URA to discover the error.
In other words, there is no financial incentive for the taxpayer to disclose such an error, by way of reduced penalty. Indeed, if a person believes that he will not be â€˜discoveredâ€™ by URA, there is a clear financial incentive for him not to disclose the default to URA. The Minister could consider limiting tax arrears to, say, two years so as to avoid a crushing burden for being honest.
In the UK, the tax authority works out how much tax is to be paid as a result of the default. The starting point is that the taxpayer will be penalised at 100% of the tax not paid due to this default. The authority then provides for different means that can be used to mitigate this penalty. Such factors like the extent of disclosure, cooperation given to the tax authority and the size and gravity of the offence.
Given the fact that all the above factors are taken into account before a penalty can be imposed on a taxpayer, it is highly unusual that the penalty will exceed 60% of the tax, even in a large and deliberate case of evasion. These concessions made to taxpayers encourage cooperation between the tax authority and the taxpayer; and ensure that there is a balance between collection of tax and encouraging business growth. To avoid corruption in those procedures, cases have to be reviewed by an official of higher authority than the one handling the matter.
The author is a senior manager - Tax Services at PricewaterhouseCoopers Kampala.
Give taxpayers amnesty