Tax Amnesties

Are they a sin or a tool?

blog-¿Amnistías TributariasTax amnesties are unfair: They favor tax evaders against those who comply. They are perverse incentives, “invitations” to non-compliance. They create the expectation that there will be a next time where penalties and interests will be condoned, and even, with some luck, “opportunity” rates to enjoy (certainly not an unfounded expectation). Therefore, a basic rule of tax technique was: (1)No to amnesties!

Politicians, on the other hand, have a strong incentive to give them. In a relatively short time, they allow achieving revenue expectations that would otherwise be collected in the future, perhaps in the next administration, or perhaps never. Politicians granting them also gains popularity with the beneficiaries – an advantage that could be politically important (Maybe also to finance the next campaign). On the other hand, taxpayers who do not benefit from them tend to remain silent, because next time the turn could be theirs.

Consequently, amnesties are an unquestionable worldwide reality.

A few days ago, Guatemala, a country with many needs and very low tax burden, passed a “Tax Regularization Act” to give offenders an opportunity to get in order. Now it seems that they have improved the tax system and have an administration prepared to fulfill its mission.

Its neighbors to the north and south have followed the same path. In Mexico, President Peña Nieto launched a “tax amnesty program, , as did the former Presidents Fox and Calderon at the beginning of their administration , which includes canceling between 80 and 100 percent of the tax liabilities of individuals and companies that request it.” In the case of Honduras, the country with the highest poverty rate in Central America, an amnesty that includes contributions to Social Security, pensions and public services was approved last May.

Further north, in the United States, the Federal Revenue Act of 2013 also includes an amnesty and the IRS has implemented amnesties so that taxpayers who reside abroad and have not submitted the required returns may regularize their situation, as well as taxpayers who have “offshore” investments and others who are not yet in the administration network. Large corporations that keep their profits overseas to avoid paying taxes have also benefited from preferential rates if they repatriate their profits. The states, meanwhile, have done the same: from 1982 to November 2012, 46 states plus the District of Columbia, and major cities such as New York and Los Angeles implemented 112 amnesties.

In Latin America, Argentina, Brazil (and several states in Brazil), Colombia, Ecuador and the Dominican Republic have offered tax amnesties in the last decade, as had many other countries around the world, including Australia, Singapore, India, South Africa, Kenya, Spain, Belgium, Italy, Sweden and Russia.

The reality is obvious. Amnesties are a “fact of life”. They are also, a “disease” from countries with weak institutions.

Therefore, the question to ask is how and when we can take advantage of amnesties to improve the tax administration system. There are several lessons we can learn:

  1. Amnesties should be extraordinary; they should not be part of the daily routine or cyclical program of the administration. The most successful are not those that aim to temporarily raise revenues (they abound in times of fiscal crisis), but rather those that mark a rupture with the practices of the past. In this context, many countries have used them for inviting companies to repatriate their profits and investments hidden in tax havens: Sweden, Australia, USA, Spain, to mention a few. The purpose in these cases is to change the tax behavior, to “wipe the slate clean” (keep in mind that if we use the eraser too much, it destroys the paper). This could also be the case of Guatemala, which claims that it is making a significant break with the bad practices of the past.
  2. When an amnesty is offered, there are two paths open to the administration and the courts, for which they must be prepared. First, resources are liberated that would otherwise be involved in the administrative and judicial collection. Second, and much more important: It is an opportunity to learn about the taxpayers, since they reveal much about themselves by the way they as act through the amnesty. Those who use it provide information, and also those who do not.
  3. It is necessary to correct the negative incentives that amnesty itself generates. For example, penalties for those who do not use this opportunity it should be very severe, in order to stimulate more regularization. Those who are in judicial process or under audit should not have the option to benefit from the amnesty, to avoid the temptation to evade tax in the future (and causes pressures for another large amnesty).
  4. The amnesty should be part of a collection campaign and reorganization of the tax system, not an isolated action, or a desperate attempt to increase short-term revenue. Taxpayers who regularly comply with their obligations must know that amnesty is part of a process that will better distribute the tax burden, which will also favor them in the future.

In conclusion it is important to put the instrument in proper perspective. Will it be really possible to achieve an income tax increase, even temporary? Will data about taxpayers be improved? Will the tax behavior improve in the future? Available studies suggest that the main effect is to increase income in the short term, that the increase tends to be significantly lower than expected by the authorities, and that the long-term effects are small, one way or another. Yet it should be emphasized that when the goal is only to increase revenue in the short term, other measures that undermine the administration in the long term are often associated.

(1)See for instance the Spanish amnesty criticized by the Finance expert and  inspector Francisco de la Torre in his blog “Inspectors and Tax amnesty” (in Spanish).

652 total views, 1 views today

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

Leave a Reply

Your email address will not be published.

CIAT Subscriptions

Browse through the site without restrictions. Consult and download the contents.

Subscribe to our electronic newsletters:

  • Blog
  • Academic offer (Only in spanish)
  • Newsletter
  • Publications
  • News alert

Activate subscription

CIAT Members

Representatives, Correspondent and Authorized staff (TA)