Effectiveness of Rwandan Law of Tax Administration in addressing Tax Offences

III.3.3 Government regulations and prohibitions

This factor is related to the complexity of the tax laws/system discussed above, but also encompasses the rules and regulations imposed by other government agencies. In this case, the costs associated with formalising a business such as registration costs, permits, yearly costs for accounting and secretarial services may discourage formalisation and provides disincentives for taxpayer to be compliant. Excessive amounts of regulation can also encourage corruption, as taxpayers try to bribe their way through the red-tape.

The lack of coordination between government agencies also exacerbates this problem. Therefore, a considerable degree of the ease which the informal sector can bloom and grow is attributable to the extent to which business activity regulatory rules are enforced by the relevant authorities and the extent to which these authorities cooperate with the tax administration in dealing with the problem.

III.3.4 High tax and duty rates

High marginal tax rates are a commonly cited factor contributing to the evasion or avoidance of tax. The bigger the difference between the total cost of labour in the official economy and the after-tax earnings (from work), the greater is the incentive to avoid this difference and to participate in the underground economy.

III.3.5 Lack of publicity of tax offenders

Lack of publicity (naming and shaming) of tax evaders is another reason for widespread of tax evasion. Even when the tax evader is caught and punished for tax evasion is not publicised. Therefore, this has encouraged tax evaders to evade tax just because they are not exposed to the public. Perceptions towards the tax system

III.3.6 Attitudes and perceptions towards taxation

In some of tax payers, tax morality is low and there is a strong culture to avoid paying tax. In other words, there is no social disapproval or reprimand for avoidance or evasion of taxes. Often, this is exacerbated by the evasive actions of friends, relatives, co-workers and business colleagues. The perception of Tax offences as a crime is also low. This is not the view of only general taxpayers but also includes members of the judiciary who are inclined to pass lenient fines and sentences.

Some taxpayers do not also realise what the government is doing for them as a result of tax revenues and it is from here that the tax payers escape from paying taxes in conformity to what they are due to pay.

III.3.7 Corruption among some tax officials

There is considerable potential for corrupt practices in revenue administration involving tax officers, taxpayers, importers and customs clearing agents. Corruption in revenue administration can take many forms ranging from systematic - where individuals act together, to systematically support evasion (usually driven by senior staff) - to individual corruption, where staff either have `clients' whom they facilitate illegally or where they simply exploit their positions for financial gain. In addition, those involved in corrupt activities continually seem to be very inventive in finding new loopholes as some doors are being closed. Examples of corrupt activities include:

· Charging for services that should be free

· Speeding up of services (especially charging for faster clearance of goods)

· Charging for help to overcome complicated procedures and to qualify for exemptions or duty free treatment

· Turning a blind eye to non-registration for taxation, smuggling, and fraud (in customs, for instance, the declaration of false values supported by fraudulent invoices)

· Overstating values, over-assessing tax to instigate corrupt deals with importers and taxpayers

· Aiding taxpayers and importers in understating income and value of goods

· Selling insider information about competitors, profits, purchase costs, etc.

· Receiving payments to impede a competitor's business activities

· Diverting of cash, including issuing cheques for false repayment claims, for instance, value added tax (VAT) refunds

· `Losing' files

· Facilitating or organising the smuggling of goods

· Receiving payment to complete tax returns for taxpayers or customs entries for importers

In addition, like in other parts of the public sector, corrupt behaviour within the revenue administration includes abuses of positions, such as:

· `Stealing' time to pursue outside interests and/or employment

· Recruitment, dismissals, promotions, transfers of staff for payment or favours (for instance, recruitment of friends and relatives)

· Private use of equipment

· Fraudulent subsistence and travel allowance claims

· Abuse of tender and procurement procedures

· Theft of goods (e.g. office equipment)

· Receiving gifts from taxpayers^21(*)

Corruption is present when public officials abuse their positions of public authority for private gain.^22(*) Such corruption undermines confidence in the tax system, negatively affects willingness to pay taxes, and reduces a country's capacity to finance government expenditures.^23(*)

No government can expect taxpayers to comply willingly with a tax structure that they consider unfair or when they are unconvinced that any of the money collected is put to good use. Tax officials must therefore be adequately compensated, so that they do not need to steal to live. They should be professionally trained, promoted by merit, and judged by their adherence to the strictest standards of legality and morality. To remove temptation, the money should be kept out of the tax administration and channelled through banks. Officials should have relatively little direct contact with taxpayers and even less discretion in deciding how to treat them. How they behave in such contacts must be monitored in some way^24(*).

Taxes that require frequent interaction between the tax authority and individuals, such as taxes on international trade, seem to be more affected by corruption than most other types of taxation. This suggests that if the government needs to raise more tax revenues in a way that minimizes distortions and maximizes social welfare, it should implement reforms that either reduce corruption or raise revenues from tax categories that are less susceptible to corruption^25(*).

Our understanding of the nature of fiscal corruption has improved significantly over the last decade but it is still limited in several ways. Similarly, our understanding of the relative effectiveness of policy responses and anti-corruption strategies has also improved but is far from complete^26(*).

* ²¹ Key Steps to address corruption in Taxes and Customs, by David Child, May 2008, No. 15

* ²² Corruption, Fiscal policy and Fiscal Management: Fiscal Reform in Support of Liberalisation, June, 2006, P. 9

* ²³ An introduction to the Design and Development of Tax Policy in Developing and Transitional Countries, Richard M. Bird and Eric Zolt.

* ²⁴ Administrative dimensions of Tax Reform, Richard M. Bird, April 2003

* ²⁵ www.imf.org/external/pubs/cat/longres.cfm?sk=20005.0

* ²⁶ Corruption, Fiscal policy and Fiscal Management: Fiscal Reform in Support of Liberalisation, June, 2006, P. 12