The aftermath of the economic shock posed by the COVID-19 crisis forces governments to mobilize more domestic revenues in order to recover and build resilience. The reality is even more urgent for Small Island Developing States (SIDS) and developing countries, which already suffer from budget deficits as a result of tax evasion and avoidance. Improving tax compliance is now more crucial than ever. At BearingPoint Caribbean, we are driven by our belief that pursuing compliance is the most effective way to increase government revenues. Many SIDS and developing countries face great obstacles, such as understaffing, lack of expertise, and outdated tax systems. But, despite the magnitude of the investments needed for this improvement, the benefits far outweigh the costs. Even in times of crisis, governments can take various effective measures to successfully increase tax compliance.
A complete view of taxpayers
A fundamental first step for taxation is taxpayer registration and identification. With an incomplete overview of taxpayers, government revenues remain uncollected. Tax administrations must collect and maintain a complete database of businesses and individuals that are required by law to register. Furthermore, the information held in this database should be complete, accurate, and up to date. The use of third-party information is very powerful in helping to detect unregistered businesses and individuals. This is one of the great advantages of our Public Services Suite; the integrated suite of IT solutions has a taxpayer-centric approach and connects the dots between multiple systems. By doing so, governments are able to create a unique and comprehensive 360-degree view of individuals and businesses, leading to improved accuracy in taxpayer registration.
Influencing compliance behavior
Ensuring strong compliance with the tax system remains a major challenge for Small Island Developing States (SIDS) and developing countries. For instance, it is estimated that the Latin American and Caribbean region loses about 6.1% of GDP in tax revenue due to tax evasion and non-compliance. In order to successfully address non-compliance, it is important to understand its causes. Tax compliance behavior can roughly be divided into four segments, which form a pyramid based on their size. The goal for tax administrations is to move taxpayers to the bottom of the pyramid. The base of the tax compliance pyramid consists of a large number of taxpayers that are more than willing to comply with their tax obligations. Make it easy to do the right thing, and this group will follow suit. Amongst this group, the key to promoting compliance lies in optimizing simplicity and improving taxpayer services. Relatively simple measures, such as offering taxpayers electronic filing and payment, multiple communication channels, self-help guides, and pre-filled forms are tried-and-tested tools to increase voluntary compliance. As you can see, these two segments make up the majority of the compliance pyramid. A service-oriented attitude towards taxpayers is essential to promote voluntary compliance, which is the foundation of a modern tax administration system.
The top two segments of the compliance pyramid contain non-compliant taxpayers. Influencing the compliance behavior of these groups mostly comes from effective detection and enforcement. This is where technology again plays a vital role as it offers tax administration essential instruments to combat tax evasion. An example is the gathering of risk-related information from internal and external sources to support the early detection of non-compliant behavior. Also, modern tax administrations can use business intelligence to identify, assess, and rank risks within a framework of taxpayer segments. Non-compliant behavior can be influenced considerately with a strong credibility of the tax administration to ensure that taxpayers who cheat or avoid payment of their tax obligations face a substantial chance of getting caught and punished.
At the very top of the compliance pyramid tax administrations also have to deal with illicit financial flows: the illegal movement of capital across jurisdictional borders. Thanks to OECD’s Base Erosion and Profit Shifting (BEPS) initiative, tax administrations now have more ammunition in the global fight against offshore tax evasion.
Technology as a strategic tool
Compliance is a continuum that ranges from willing or voluntary compliance, to unknowing or unwilling compliance, and finally deliberate and determined non-compliance. Simply said, some people will always comply with tax laws, some will always deliberately try to evade taxes, whilst most taxpayers fit between these two extremes. Accordingly, the main tasks for tax administrations are to 1) facilitate compliance, 2) monitor compliance, and 3) improve compliance. Although there will always be a group of fraudulent taxpayers, it is estimated that 80% of compliance can be achieved by a modern and well-structured tax administration that takes proactive measures to improve compliance.
Technology plays a vital role for tax administrations in their efforts to improve tax compliance. On one hand, it makes it easier for citizens to meet their tax obligations. The modernization of tax administration systems creates better services for taxpayers which helps to increase the rates of voluntary compliance. On the other hand, technology helps to discourage non-compliance by making it clear that governments are on top of things. Tax administrations obtain better control and an increased capacity to combat tax evasion and harmful tax planning. It’s a win for both sides – governments obtain a stronger public image, and citizens and businesses are more willing to comply, driving compliance rates up. In short, the proper use of information technology creates a public environment where compliance is a way of life.