Effectiveness of Rwandan Law of Tax Administration in addressing Tax Offences

III.2. Indicators of tax offences

Some indicators of offences include:

· The maintenance of more than one set of records and preparing two sets of final accounts.

· The use of false names or false documents

· The inclusion of an overseas entity in a domestic transaction

· The use of transactions that have no apparent commercial reality or relevance

· Large unexplained gaps in documents

· The repeated commission of offences over a number of years.

· Not declaring income/under-reporting income

· Over-claiming expenses

· Non-filing of tax returns

· Claiming personal expenses as business expenses.

· Failure to report fully and accurately on income and expenditure by either omitting items of income or claiming inflated deductions or expenses

· Failure to register with Domestic tax department and thereby escaping the tax net

· Refusal to take delivery of notices of assessment sent through the post.

· Some traders keep their stock of goods away from their registered places of business (sometimes in their homes) and distribute them to selected customers

· Some taxpayers attempt to reduce their tax liabilities by splitting their incomes amongst their wives, children and other close relatives or associates.

· Problems associated with businesses being closed and re-opened in different names as if it were a new business.

III.3. Causes of tax offences

Tax offences result from different reasons and do not come out because of natural factors but there some fertile grounds to mature to have its diverse effects on the general economy at large.

There are many causes of tax offences to the extent that one can not cite them all. It would, therefore, be difficult to establish the causes which are more significant than others. I will however, cite some of the causes of tax offences as follows:

III.3.1 Limited resources and capacity tax administration

Unfortunately, the limited resources and capacity of tax administration is a reality and often means that Tax offences activities remain unchecked. Limited resources and capacity can take the form of inadequate numbers of staff or inadequate staff with the required skills and knowledge (e.g. audit skills); poor infrastructure or systems; and lack of support, funding or autonomy from the government.

With RRA unable to adequately carry out their role of enforcement and education/assistance effectively and efficiently, this often translates into taxpayer perceptions that there is a low risk of getting caught and/or there are minimal consequences of non-compliant behaviour. There is lack of experienced personnel with specialised training on audit and investigation activities to deal with Tax offences.

III.3.2 Complexity of the tax law and tax system

It is a frequently heard complaint that tax administration laws are complex, confusing, and arbitrary^19(*). To some degree this is probably unavoidable. A highly complex tax system makes the taxpayer compliance burden and costs high, so taxpayers have less (or even no) incentive to comply with the laws. For example, there is a high cost of compliance due to the different kinds of forms to fill and uncoordinated due dates. If taxpayers do not understand how their taxes are calculated and when these should be paid, they will not be comfortable in paying them! This may also prevent the expansion of overseas companies in Rwanda and restrict capital investment.

The causes of an inefficient tax system can be several: they can originate in the laws themselves. These laws can be exceedingly complex, opaque, and requiring from taxpayers the kind of information and attention that is difficult to provide. Tax laws have often become legislative labyrinths, represented by exceedingly complex tax codes, in which only few can find their way. When interpretation can vary between those who administer the taxes (or even among them), and those who pay them, administrative problems are bound to arise. At times, the laws may be clear but the incentives for the taxpayers may be wrong. For example, in some countries, the penalties for delaying the payment of taxes are so ridiculously low that the taxpayers simply do not bother to send the tax payments at the time they fall due, thus creating tax arrears and administrative problems. For them borrowing from the government becomes the cheapest source of credit^20(*)

At the same time, complexity of the tax law also encourages large companies, high wealth individuals and their advisors to look for ways to minimise their tax. In such a case, the government may react by resorting to the retrospective patching up of loopholes in the law and this can create even more inconsistencies and more advantages for them to take advantage of. This has resulted into taxpayer being with an upper hand to evade taxes, and at times, through the help of some individuals that are expelled from RRA.

* ¹⁹ Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)

Chapter 4, Law of Tax Administration and Procedure, p. 96

* ²⁰ The Reform of Tax Administration, Vito Tanzi and Anthony Pellechio, IMF, Feb 1995 P. 2