When you think about the Panama papers, what is the first thought that comes to mind? As I scan online and offline media to stay up to date on different topics and trends in the world of tax, it has been impossible to miss the ample selection of articles, statements, and blogs on this topic. Was tax compliance one of the thoughts that came to mind? The Panama Papers occurrence has surely been a wake-up call for governments and tax administrations as it sheds light on an even bigger denominator: Tax Compliance.
By Peter Grootens
The effects of low tax compliance
Sometimes I wonder if people are aware of the effects of non-compliance. Tax compliance is defined by the Organization for Economic Co-operation and Development (OECD) as “[the] degree to which a taxpayer complies (or fails to comply) with the tax rules of his country, for example by declaring income, filing a return, and paying the tax due in a timely manner.” Are you aware of the effects of low compliance?
“If you think (fixing) compliance is expensive, try non-compliance.”
Here are some of the effects that I find most alarming:
- Non-compliance results in missed government income. If I take the Dutch Caribbean and other Caribbean countries as an example, budget deficits are a major problem and cost a lot of effort to fix. Such a pity, when there are other things that should have the attention and focus of ministers and government officials. The yearly deficit in these countries is mostly between a bandwidth of 5 to max 10% of total government income (from tax and social contributions). This gap could be bridged easily if compliance is increased!
- Where there is a budget deficit there are also no or few resources left to invest in important areas such as education, infrastructure, social security & healthcare, security, and justice. How are countries expected to economically thrive and grow if there is no financial room to invest?
- Non-compliance increases the burden for the taxpayer who is compliant and who ends up paying more but could pay less if a larger majority of that country’s population would be compliant.
It all boils down to the fact that non-compliance is extremely expensive. One of my favorite slogans is: “If you think (fixing) tax compliance is expensive, try non-compliance”. It is said that tax evasion costs governments approximately $200 billion per year (Source: The Hidden Wealth of Nations, Gabriel Zucman, 2015). According to the Inter-American Development Bank the average tax evasion in Latin America and the Caribbean is between 25-50%. In an attempt to bridge the budget deficits, governments often raise taxes and implement (unproductive) budget cuts. I do not believe this is the answer. Lowering tax evasion and increasing compliance is! It can be done, it is low hanging fruit! Tax evasion is not only routed via tax havens, it is everywhere, on shore and off shore.
Lowering tax evasion + increasing compliance = higher revenue
According to the UK government, an astonishing 2 billion British pounds have been tracked down from offshore tax dodgers since 2010 as compliance has become a high priority on the agenda of the government. If I take an example closer to home, the Tax Administration of the Dutch Caribbean BES islands (Bonaire, Sint Eustatius, and Saba) experienced 26% more revenue than forecasted during the first year after implementation of their new IT system. This astonishing increase was the result of an increased compliance which was also attributed to the new system. Subsequently, the tax administration decided (and could afford!) to ease the tax burden by decreasing one of the tax types by 2%.
There’s work to be done
If the Panama Papers have emphasized anything it is this: while tax compliance is a hot item and it has the attention on a global level now more than ever – take for example the OECD’s Global Forum on Transparency and Exchange of Information and international tax compliance agreements such as FATCA and CRS (read more about it here) – it is evident that there is still a lot of work to be done. Government officials and tax administrators should advocate for compliance to be high on the agenda of every government, as the realization sinks in that compliance is an indisputable element of a successful and vibrant economy and community and that the price to be paid for non-compliance is high.