Tax administrations and the voluntary compliance strategy

Today there is a general consensus that the basic strategic objective of a modern tax administration (TA) is to raise the levels of voluntary compliance by taxpayers through two main lines of action: Facilitating services to those who want to comply and performing a radical fight against fraud.

These two lines of action are fully complementary and must be both serving the acceptance of the tax system, since the major objective of the modern TA should not be of discovering much tax fraud but to be effective in reducing it.

With regard to what we can do from the viewpoint of the TA to carry out the voluntary compliance strategy, we understand that there are no magic solutions or unique solutions to achieve it, however if it is possible to talk today about the best practices that have been successful in certain countries, while being aware that the implementation must be done considering the important context of the country concerned.

We consider the work of international agencies such as the CIAT and the OECD as very important, since they are responsible for transmitting these best practices and seeking the necessary consensus.

A tacit agreement in the sense of achieving a widespread social acceptance of the tax system is fundamental, since a tax system cannot be applied it doesn’t have a widespread social acceptance.

With regard to the globalization of the economy and business today, we see that in the tax world the international taxation paradigm is governed by the BEPS Action Plan and its 15 actions to prevent the tax bases erosion and and the transfer of benefits to jurisdictions of zero or low taxation by multinational companies. All this demands greater cooperation and collaboration between the tax administrations (TAs) that have to manage increasingly globalized tax systems.

These measures seem extremely healthy but it remains to be seen how they will be implemented by each of the countries and what concrete results will be seen in practice.

We are convinced that the utopia of having an international tax authority seems closer than ever, but while this does not happen we believe fundamental that tax administrations influence the policymakers with a view to harmonize tax systems of the different countries, knowing that in many cases it could involve loss of fiscal sovereignty; but we it is the way forward if we want to overcome the global taxpayer that tax administrations must manage today.

For example, the initiatives of the EU to find a common base in corporate income tax seems very accurate; this is the Common Consolidated Corporate tax base between the different societies members of a multinational group (CCCTB) which is then split between the countries based on various parameters such as intangible assets, sales, number of employees and remuneration; in this way the big issue of transfer pricing would be solved.

The multinational corporations in our globalized world have been increasingly integrating the business by taking advantage of the synergies generated by such integration. We believe that similarly, TAs should also follow the road of integration, cooperation and international collaboration. We believe that the convergence of the tax systems should also lead the convergence of TAs.

On the issue of facilitating taxpayers who want to comply, we need to offer comprehensive information and assistance services covered by qualified personnel, and all areas of TAs should strive to attain this objective of reducing the so-called compliance costs.

This line of service by TAS has led for many years to stop talking of taxpayers, and using customers or citizens in express reference that government officials or public servants are at the service of the citizens and not the reverse, which we consider a highly positive aspect.

On the other hand, to reinforce the fight against tax fraud implies that the TA is capable of detecting tax breaches and correcting them with agility.

Then come the different action areas, such as a complete and dynamic registry of taxpayers, extensive or mass controls, intensive controls for those more sophisticated forms of fraud and the enforced collection.

We believe that the risk analysis within the tax administrations is more important than ever and it must be considered not only from the point of view of the control or audit function but from all the functions of the TA, such as collection or taxpayers’ services. Already there are some TAs, such as Argentina, that have reformulated their system of risk profile, this is called the SIPER system, in a way to categorize citizens according to their fiscal behavior, based on a monthly computer process which includes aspects related to the formal and material compliance with tax obligations, customs and social security. The interesting thing is that apart from its traditional goal of selecting possible cases to control, it seeks to identify the fiscal behavior and assign a category by granting or limiting benefits linked to revenues, return and/or transfers of tax and social security resources; and also it improve the transparency in the taxpayer-treasury relationship, establishing differential procedures according to each profile. So for example, depending on the fiscal behavior, higher quotas are granted in the plans of payment facilities or a lower debt interest rate to taxpayers better qualified according to SIPER

I.e. it seeks to reward the compliant taxpayers, in a clear signal that voluntary compliance is the way to go.

For all these reasons, we believe that a system of powerful information with qualified persons is fundamental to implement and make decisions.

Here, as in many other parts of the TA’s performance, what is known today as the fourth Industrial Revolution is taking place with new technologies (big data, block chain, artificial intelligence, etc.).

The big question at this point is who all this new technology will most favor more: the multinational companies which want to continue eroding the tax bases and transferring benefits to low or nil taxation jurisdictions, or the tax administrations seeking to fulfill their role in today’s society?

We think the most important is not so much that the new technology is used by the tax administrations, but that it serve effectively to improve the performances, for example by creating a unique, complete, and reliable information system for decision-making and the implementation strategies.

We are fully convinced that the success or failure in the use of the new technology will be a direct consequence of how TAs train their human resources, which are their main assets. They desperately need qualified, honest, motivated human resources and with a remuneration in accordance with the tasks they perform, and willing to acquire new skills, with specialized knowledge, continuing education, creativity, and geographical mobility.

We need not only to improve the quality of public services but also resolutely fight against corruption and waste. Governments need to become more efficient, transparent and innovative.

Throughout the present blog comment, it has become clear that the strategy to increase levels of voluntary compliance requires the application of two lines of action, simultaneous and complementary, facilitating the service to compliant taxpayers and fighting against the fraud.

We see them as two sides of the same coin since by facilitating compliance and increasing the number of compliant taxpayers there will be fewer defaulting taxpayers to audit in the fight against fraud, and in this fight we will achieve that more and more compliant taxpayers will facilitate voluntary compliance.

We understand that today both lines of action have the same relevance and should be directed to the same goal of increasing voluntary compliance and to gain social acceptance of the tax system and the TA, all of this by taking advantage of the opportunities of technology that the world presents currently in this fourth Industrial Revolution.

The current TA’s vision implies that as part of the public administration, it aims at providing quality services to citizens and where officials understand that they are at the service of citizens and are true public servants.

The TA is in charge of one of the most important activities of the State, which is the collection of the taxes, the most important source of funding to provide public services such as security, health, education, justice, etc.

Finally the TA should have a commitment to social cohesion and inclusion of citizens by allowing that the State offer better public services, promoting tax culture and social responsibility as supreme values of life in democracy.

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2 comments

  1. Akin samuel Reply

    Excellent write-up on voluntary compliance

  2. Anonymous Reply

    thank you very much Samuel for your comment it helps me to write more. have a nice day. Alfredo

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