Encouraging Tax Compliance for Improved Revenue

Mobilization
Riël CD Franzsen
Professor and Director: African Tax Institute
University of Pretoria
South Africa

“No one likes taxes. People do not like to pay them. Governments do not like to impose them.
But taxes are necessary both to finance desired public spending in a non-inflationary way and
also to ensure that the burden of paying for such spending is fairly distributed. While
necessary, taxes impose real costs on society. Good tax policy seeks to minimize those costs.”
Richard Bird, 2003.

1 Introduction

Operating an efficient, professional tax administration is not a simple task in any

country, whether developed or developing. However, as Bird (2003) indicates, it is –
“particularly difficult in developing countries with large informal sectors, low
levels of literacy and public morality, poor salary structure for public servants,
poor communications, malfunctioning judicial systems, and entrenched
interests against radical reform. Despite such handicaps, the experience of
several countries in recent years shows that substantial improvement can be
achieved with determined effort and an appropriately designed strategy. What
a tax administration can do, however, and how it can best be reformed
depends largely upon the environment in which it operates” (emphasis added).

Along similar lines Mikesell and Birskyte (2007:1074) state that –

“What lawmakers and researchers do not understand about taxpayer

compliance gnaws at the fiscal foundation of government by threatening
equity, efficiency, effectiveness, and yield of the tax system and there is no
unified approach to making the necessary repairs.”

2 An Appropriate Environment for Tax Compliance and

Revenue Enhancement
Irrespective of how good tax policy is (in theory), or how good tax administration is
(in practice), good results are only possible in an appropriate environment (Bird,
2003). Therefore, as a first step it is important to understand the environment within
the relevant jurisdiction to be considered. In this context there are various relevant
“environments” or factors, namely the political environment, prevailing economic
environment, existing fiscal policies, the constitutional and legal (i.e. rule of law)
environment, the tax administration, taxpayers, as well as – or possibly collectively –
in-country realities, that may impact on tax compliance.
These factors are generally interrelated and interdependent. For example, political
changes or changes to the economic welfare of citizens will impact on how taxpayers
respond.

2.1 Political Environment

Bird (2003) correctly states the following:

“Abundant experience around the world has made it clear that the single most
important ingredient for effective tax administration is clear recognition at the
highest levels of politics of the importance of the task and the willingness to
support good administrative practices even if political friends are hurt (Bird
and Casanegra de Jantscher, 1992). Unfortunately, very few developing
countries have so far proved able to leap this initial hurdle.”

Just how sensitive tax compliance is to the political environment, can be highlighted
with a few examples at the local government level. South Africa’s recent property tax
reforms were championed by a senior parliamentarian who was the driving force
behind the policy reforms and the eventual enactment of the new law (Franzsen,
2005). In a recent study of property taxes in metropolitan cities in the developing
world, the common factor in four of the most successful cities (as regards their
property tax) was strong political leadership (McCluskey and Franzsen,
forthcoming). 1 However, the non-payment of property taxes was propagated in the
presidential election campaign in Uganda in 2006.

As Bird (2003) remarks,

“the widespread reluctance to collect taxes efficiently and effectively without fear
or favor may be understandable in countries, many of which are somewhat fragile
politically, but without major changes in this respect, no viable long-term tax
system can possibly be put into place.”

The Corruption Perception Index, published annually by Transparency International,

provides some context within which tax compliance (or the lack thereof) can be
reviewed, and whether there are any real chance of significantly enhancing tax
revenues at all levels of government. There is obviously not necessarily any direct
link between a country’s tax policies and tax administration and its ranking in the
corruption perception index. However, perceptions about high levels of corruption in
government will likely impact on the perceptions of local taxpayers, government
service delivery and possible foreign investment. Hence it impacts on tax compliance.

Table 1 provides an overview of the ten least corrupt countries internationally as well
as the ten least corrupt African countries – according to the Corruption Perception
Index.

1
These cities are Belo Horizonte (Brazil), Bengaluru (India), Bogotá (Colombia) and Cape Town
(South Africa).

2
Table 1: 2011 Corruption Perception Index
10 least corrupt CPI Tax % 10 least corrupt CPI Tax %
countries Ranking of GDP African countries Ranking of GDP
New Zealand (2007) 1 34.62 Botswana 32 -
Denmark (2009) 2 47.09 Rwanda 49 -
Finland (2008) 3 30.81 Namibia 57 -
Sweden (2009 4 38.31 South Africa (2009) 64 26.04
Singapore (2009) 5 13.68 Ghana 69 -
Norway (2009) 6 31.54 Tunisia (2009) 73 22.37
Netherlands (2009) 7 24.01 The Gambia 77 -
Australia (2009) 8 26.97 Lesotho (2007) 77 57.69
Switzerland (2008) 9 22.48 Morocco (2009) 80 25.06
Canada (2009) 10 26.15 Liberia 91 -
Source: Transparency International & 2010 IMF Government Finance Statistics Yearbook.
Notes:
1. Only countries on the African mainland were considered.
2. 15 African countries are in the bottom 30 countries (i.e. most corrupt countries) in the ranking of
182 countries, but only two (Sudan and Somalia) in the bottom 10 countries.

The poor performance by tax authorities are often blamed on the lack of political
support. Although the examples mentioned above indeed suggest that political will is
an important factor in the tax compliance environment, it also seems that in some
instances “lack of political will” is simply used as a blanket excuse by poorly
performing tax authorities and local governments.

2.2 Tax Policy Environment

2.2.1 Tax Policies

Good tax policy is worth very little if it cannot be implemented effectively. Therefore,
the administrative dimension of taxation simply cannot be ignored in good tax policy
design. A review of the present situation must take into account what can realistically
be done in future (Bird and Zolt, 2003). For example, how likely is it politically that
changes to institutions, or amendments to current laws (including the Constitution)
and practices will be effected, even if these would constitute good policy.

As Bird and Zolt (2003) correctly state that tax design (i.e., tax policy) in developing
countries is strongly influenced by economic structure. For example, developing
countries often have large traditional agricultural sectors that are difficult to tax.
Many developing countries have a significant informal economy that also is largely
outside the formal tax structure. This presents its own unique challenges in the design
of tax policy and to the tax administration; given that the potential tax base is a
relatively small portion of total economic activity. This may pressure governments to
increase tax rates, which creates further incentives for tax evasion. 2

How easy is it to do business generally, and more specifically, how easy is it to pay
taxes in a specific country? The relevant World Bank indices in this regard (Doing

2
For a brief discussion about the difference between “tax evasion” and “tax avoidance”, see Ali-
Nakyea ( 2008).

3
Business, 2012), which ranks a total of 183 economies (rather than countries), are
insightful. The following two tables provide some indication of how African countries
are performing in this regard.

Table 2: Doing Business

Top 10 countries Ranking Top 10 African countries Ranking

Singapore 1 South Africa 35
Hong Kong SAR 2 Rwanda 45
New Zealand 3 Tunisia 46
United states 4 Botswana 54
Denmark 5 Ghana 63
Norway 6 Namibia 78
United Kingdom 7 Zambia 84
Korea (South) 8 Kenya 109
Iceland 9 Egypt 110
Ireland 10 Ethiopia 111
Source: Doing Business 2012 (World Bank).
Notes:
1. Only countries on the African mainland were considered.
2. 14 African countries are in the bottom 20 jurisdictions in the ranking of 183, with 8 in the bottom
10.
3. Other developing countries, such as Malaysia (18) and Thailand (17) are much higher ranked.

Table 3: Ease of Paying Tax

Top 10 countries Ranking Top 10 African countries Ranking

Maldives 1 Rwanda 19
Qatar 2 Botswana 22
Hong Kong SAR 3 Malawi 23
Singapore 4 South Africa 44
Ireland 5 Zambia 47
Kiribati 6 Swaziland 60
United Arab Emirates 7 Lesotho 61
Canada 8 Tunisia 64
Oman 9 Djibouti 70
Saudi Arabia 10 Ghana 90
Source: Doing Business 2012 (World Bank).
Notes:
1. Only countries on the African mainland were considered. Mauritius3 is in the 11th position on the
overall list.
2. Ghana is in the overall 90th position, Nigeria is 138th and Sierra Leone is 76th.
3. 14 African countries are in the bottom 20 countries in the ranking of 183 jurisdictions, with 7 in
the bottom 10.

2.2.2 Importance of Non-Tax Revenues

Reliance on non-tax revenues, such as revenues from the sale of government assets,
oil and petroleum, and/or donor assistance, is also a factor that impact on tax
compliance. In the context of local government in Ghana,4 for example, it is stated

3
Mauritius is viewed to be a tax haven.
4
This is also an issue in, for example, Nigeria and Uganda.

4
that the large transfers from central government and donors act as disincentives and
result in weak performance in collecting own-source revenues (Pichard, 2009).

2.3 Legal Environment – Complexity of the Tax Laws

As Mikesell and Birskyte (2007:1067-1068) correctly point out, complexity of tax

legislation reduces compliance. 5 In their study, which focuses on the United States,
they conclude that there “is a general consent that American income tax preparation is
burdensome and even overwhelming. ‘A law that can be understood (if at all) only by
a tiny priesthood of lawyers and accountants is subject to popular suspicion. By
undermining popular support, complexity undermines the self-assessment on which
economical compliance depends.’”
Mikesell and Birskyte (2007) state:

“Presumably, the less burdensome and costly compliance is, the more likely a
taxpayer is to comply with the tax laws. Complexity can also frustrate
taxpayers in their efforts to comply with tax laws and create a sense of
unfairness. Technical complexity and the demands for legal completeness
produce significant alienation of taxpayers leading to lower tax morale and,
consequently, evasion. Even if taxpayers do not necessarily view a complex
tax system as unfair, the requirement to file a long tax form creates
opportunities to evade and negatively effects compliance rates of the taxpayers
facing such an obligation.”

Tax laws are by their very nature technical and in many cases complex. However,
these laws can create additional complexity in various ways. For example,
recordkeeping requirements, tax concessions, multiple tax rates, rebates, etc., all add
to the complexity.

2.4 Institutional and Administrative Environment

Ideally tax administrations should have the freedom to collect the tax due in terms of
the laws. However, as indicated above, political and policy pressures often impact on
the collection function.

2.4.1 Facilitating Compliance

As Bird and Zolt (2003) state, “the first task of any tax administration is to facilitate
compliance. This requires making sure that those who should be in the system are in
the system and that they comply with the rules.” In this regard they list four important
steps:

 Ensure that taxpayer coverage is as comprehensive as possible. If taxpayers are

required to register, the registration process should be as simple as possible under

5
“In my own case the words of such an act as the Income Tax, for example, merely dance before my
eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception—
couched in abstract terms that offer no handle to seize hold of —leave in my mind only a confused
sense of some vitally important, but successfully concealed, purport, which it is my duty to extract, but
which is within my power, if at all, only after the most inordinate expenditure of time.” Justice Learned
Hand, The Spirit of Liberty, as quoted in Thuronyi (1996:71).

5
 the circumstances. Systems must be in place to identify and follow up on those
who do not register voluntarily. Tax authorities should adopt an appropriate
unique taxpayer identification system 6 to facilitate compliance and enforcement.

 Tax authorities need a proper process for determining tax liabilities. This may be
done administratively (as with most property taxes) or by some self-assessment
procedure (as with most income taxes and VATs).

 Taxes that are due must be collected in an efficient and proper manner. In many
countries, this is best done through the banking system. It is seldom appropriate
for tax administration officials to handle money directly.

 Tax authorities should provide adequate taxpayer service to make taxpayer

compliance with the relevant laws and regulations as easy as possible. This can
be done in a number of ways, including the provision of sufficient information,
pamphlets, forms, advice kiosks, extending payment facilities 7 and options, 8 as
well as electronic filing of tax returns. Even tax bills can be used effectively to
communicate information. 9 As Bird and Zolt (2003) state, this approach “rests on
treating the taxpayer as a client (albeit not a willing one) to be served and not a
thief to be caught”.

2.4.2 Reducing Evasion

The second important task of a tax administration is to reduce tax evasion, in other
words dealing with those taxpayers who act dishonestly. To be able to understand the
scope of the problem of evasion, tax authorities require estimates of the extent and
nature of the potential tax base, for example, by estimating what is sometimes called
the “tax gap” (Bird and Zolt, 2003). The penalty structure should be such “that those
who should register do so, that those who should file do so, and that those who under-
report their tax bases are sufficiently penalized to increase the costs of evading tax”
(Bird and Zolt, 2003).

2.4.3 A Clean Administration

As Bird and Zolt state, a “third major task is keeping the tax administration honest…
[and] even a sound tax structure and sound expenditure policy can be vitiated by a
capricious and corrupt tax administration”. If taxpayers perceive the tax
administration to be corrupt, tax evasion is the next step.

6
Many countries in Africa now have Taxpayer Identification Number (TIN) systems in place.
7
E.g., the City Council of Bangalore, Karnataka State, India has provided more than 260 ward offices
where taxpayers can receive information and pay their local taxes (McCluskey and Franzsen,
forthcoming).
8
For example, internet banking, mobile phone text messages, direct debit (e.g. for recurrent property
tax instalments), banks, post offices and retail stores.
9
This could include the more obvious information on payment options (where and how?), and the less
obvious information to indirectly enhance compliance (e.g., how the revenue collected in the previous
fiscal year was used, and what could not be done as a result of evasion). In the City of Tshwane, South
Africa, advertisements are printed on the back of municipal tax bills. These advertisements cover part
(if not all) of the costs pertaining to the billing process.

6
2.4.4 Appropriate Enforcement

Tax administrations must be able to identify those who must pay, but will not pay (i.e.
tax evaders), and distinguish them from those who may want to pay, but cannot pay
(i.e. hardship cases). Various enforcement mechanisms, coupled with tax relief
mechanisms, are available to tax administrations to succeed in this task. For example,
is jailing a taxpayer who did not pay the six dollar poll tax the best enforcement
mechanism to use in practice? What are the actual costs (for government and the
taxpayer) of this enforcement action, and what are the political costs? How will other
taxpayers respond to such action? Will they perceive it as just or unjust government
action and will it therefore make them more or less likely to comply?

Enforcing a tax system is neither an easy nor a static task. It is especially difficult in
the dynamic environments prevailing in developing countries. Unless this task is
approached professionally and with consistency, even a well-designed tax system will
fail to produce good results (Bird and Zolt, 2003). This is especially evident at local
government level where tax collectors seldom use the available enforcement
mechanisms provided by law, or where they do enforce, inappropriate mechanisms
are sometimes used.

Bird (2003) states that “due attention [must be] given to the extent to which revenue is
attributable to ‘enforcement’ (the active intervention of the administration) rather than
‘compliance’ (the relatively passive role of the administration as the recipient of
revenues generated by other features of the system)”. Distinguishing between
enforcement and harassment seems to be an issue in some jurisdictions.

2.5 Taxpayers

2.5.1 Morality

Tolerance for tax evasion breeds more evasion and also provides a (further) breeding
ground for corruption. A high level of evasion puts pressure on otherwise “law-
abiding citizens” who have to compensate for the additional burden resulting from
large-scale tax evasion. This is likely to create a tendency to tax evasion among at
least some of these honest taxpayers (Mikesell and Birskyte, 2007). As Mikesell and
Birskyte (2007) indicate,

“persons living in jurisdictions where large number of taxpayers willfully and

sometimes successfully ignore efforts of the collecting agency, e.g., delinquent
account notices, tend to be less compliant than those living in areas where the
response to tax administration efforts is quick and positive. Higher compliance
is associated with low social standing of evaders, viewing tax evasion as
‘immoral’ by an individual, and a stronger sense of social cohesion.”

In her qualitative research on tax compliance in South Africa, Wang (2010:27) state
the following:

“In their research, Alm and Torgler (2004) argues that “difference in tax
compliance behaviour and tax morale can be explained by difference in
fairness of tax administration, in the perceived equity of the fiscal exchange,

7
 and in the overall attitude towards the respective governments across the
countries”. They found that trustworthiness in different countries has different
connotation. For example, in the United States, trustworthiness is driven by
reciprocity, while in South Africa trustworthiness is related to kindness. The
culture difference leads to different level of perception of fairness and attitude
which in turn relates to different level of tax morale, hence different
compliance level.”

In some countries the publication of names of delinquent taxpayers (often referred to

as “naming and shaming”) seems to have positive results. However, in other
jurisdictions the impact of this measure seems to have little or no effect at all.

2.5.2 Taxpayer Perceptions

Mikesell and Birskyte (2007:1069) state that –

“compliance improves when taxpayers believe the tax system is fair, they
believe that they receive something valuable for their payments and when
society shows no tolerance for tax evasion. This finding is explained by a
broad concept of ‘the tax culture’.”

In a number of African countries national government is a taxpayer in respect of the

local government property tax. 10 Recent cases of government defaulting on their tax
payments have made the headlines. How will individual and business taxpayers
respond when government is delinquent?

Wang (2010:82) states:

“Although South African taxpayers, including business taxpayers, generally

hold the view that it is reasonable to pay one’s fair share of tax, they also feel
especially in the case of SMMEs, that the tax system in the country is too
complex, tax rates are too high and there are too many taxes, which all
contribute to high compliance costs.”

2.5.2 Voluntary Compliance

Silvani and Baer (1997:11) define “voluntary compliance” as “the timely filing and
reporting of required tax information, the correct self-assessment of taxes owed, and
the timely payment of those taxes without enforcement action”.

Wang (2010) concludes that taxpayers’ confidence is largely dependent on –

 the efficiency and efficacy of government services, i.e., whether the services
provided are cost-efficient (i.e. perceived to represent “value for money”) and
whether the revenue is appropriately spent in a transparent and accountable
manner; and
 the perceived level of fraud and corruption in the government, and whether
government is serious in combating fraud and corruption.

10
For example, Malawi, South Africa and Swaziland.

8
In an environment where taxpayers generally trust government, voluntary tax
compliance is more apparent. With reference to the local government level in
Tanzania, Fjeldstad (2006:24) states that –

“taxpayers’ unwillingness to pay is not perceived to be the main problem in

revenue collection. The survey data point at misuse of tax revenues by council
staff (particularly by tax collectors) and councillors as the major problem.
Hence, stronger punishment of council staff and councillors whose
mismanagement is detected is perceived to be a key measure for improving the
present system.”

3 Compliance Costs

3.1 Introduction

Bird and Zolt (2003) state –

“The resources used in administering and complying with taxes (or, for that
matter, evading them) are real economic costs, in terms of the ability of the
economy to provide goods and services. Good tax policy requires keeping
such costs as low as possible while also achieving revenue, growth, and
distributional goals as effectively as possible. This is no small task.”

Apart from the efficiency costs 11 of taxation, taxes cost something to collect. As
stated by Bird and Zolt (2003), depending on the types of tax, “the actual cost of
collecting taxes in developed countries is roughly 1 percent of tax revenues. In
developing countries, the costs of tax collection may be substantially higher. ”

There is a dynamic interaction between tax administration and tax compliance (Bird
and Zolt, 2003). This often implies a trade-off between administration costs and
compliance costs. For example, in the property tax environment, where the
administration costs are typically very high 12 and compliance costs rather low, some
jurisdictions have opted for self-assessment of property values. 13 In other words,
administration costs were reduced and compliance costs increased. However, there
may be instances where both compliance costs and administration costs may increase,
for example, where a tax administration may require more detailed information from
taxpayers, which, in turn, may necessitate more complex audits (Bird and Zolt, 2003).

11
“Efficiency costs” constitute one component of the “excess burden” of taxation, and refer to the cost
of behaviour that is not optimal and result from the tax system. For example, where a tax change, such
as increasing the rate of VAT on specific items, leads businesses to stop stocking those items in order
to keep their tax dealings simple, or where taxpayers alter their investment decisions as a result of tax
concessions that give preferential treatment to certain activities (Smulders et al., 2012).
12
Government (or government agencies) must firstly identify all taxable properties as well as a
taxpayer (owner or occupier) and must then either value or measure these properties to determine a
taxable amount. Especially property valuation, and regular revaluations to maintain the credibility and
accuracy of the tax base, are costly (McCluskey and Franzsen, forthcoming).
13
E.g., some cities in India (Bengaluru (see Rao, 2008), Delhi), Rwanda, Colombia and Thailand.

9
According to Smulders et al (2012), the “taxpayer compliance burden” includes the
time and money spent (i.e., the costs incurred) by taxpayers in order to comply with
all aspects of the tax system. This burden includes activities such as record keeping,
gathering relevant tax documentation, the completion and submission of tax returns,
tax planning, using the revenue authorities’ services (offices, help desks, on-line
assistance), and/or using the services of tax practitioners. As stated, the compliance
burden increases with the complexity of the tax system. Regular amendments effected
to tax laws – which are often unavoidable – further increases complexity.

Apart from the administration costs of taxes, which could be quite high, it is also
important to consider the “compliance costs” that taxpayers incur in meeting their tax
obligations, over and above the actual payment of tax. Abdul-Jabbar and Pope (2008)
(as quoted by Wang (2010)) define “tax compliance cost” as the cost incurred by
taxpayers to fulfil their statutory tax obligations, over and above their actual tax
liability. “Tax compliance costs”, according to Smulders et al (2012),14 include
monetary costs, time costs, psychological costs, and opportunity costs to taxpayers. In
the literature the following types of costs have been identified:

 Efficiency costs (also called social costs) which refer to the cost of behaviour that
is not optimal and result from the tax system (Evans, 2008:452). An example is
taxpayers’ altering their investment decisions as a result of tax concessions that
give preferential treatment to certain activities.
 Opportunity costs which refer to the opportunities that a taxpayer might have lost
for other benefits, with the money and time spent on complying with tax matters.
 Monetary costs refer to expenses incurred by taxpayers in respect of professional
advisers and in order to equip them, or their employees, with sufficient knowledge
to understand and comply with the tax laws.
 Time costs refers to the time taxpayers and their employees spend on tax
compliance matters, such as filing returns, keeping records, etc.
 Psychological costs include the stress, anxiety, frustration and dissatisfaction
suffered by taxpayers as a result of trying to comply with their tax obligations
(Evans, 2008:451). The impact of psychological costs on tax compliance should
not be underestimated.

According to Smulders, et al. (2012) and with reference to businesses (rather than
individuals as taxpayers)

“tax compliance costs include internal costs,… that is, the cost of collecting,
paying and accounting for tax on products or profits of the business, and on
the wages and salaries of employees together with the costs of acquiring the
knowledge to enable this work to be done; and external costs, mainly in the
form of advisors costs – using professional tax service providers is one of the
main costs contributing to the cost of complying with taxation legislation.”

14
See also Evans (2008).

10
3.2 Factors impacting on Compliance

When reviewing overall tax compliance, the ease with which taxpayers can comply
with their legal obligation to pay tax is a critical factor. Much research has been don e
globally regarding compliance costs, both qualitative (researching the factors that
result in a compliance cost) as well as quantitative (attempting to measure the
compliance cost) for different types of taxpayers.

Direct factors
In a recent study on tax compliance in the business sector in South Africa, Wang
(2010) concluded that, generally, taxpayers’ decisions to comply (or not comply) are
determined by the following direct factors:

 the complexity of the tax system 15 (see also Mikesell and Birskyte, 2007);
 taxpayers’ confidence in government generally, but more specifically
government service provision and the cost-effectiveness of the provision of
public goods and services, as well as the level of fraud and corruption within
government;
 taxpayers’ perception regarding the fairness of the entire tax system;
 the social setting and societal norms; and
 the effectiveness of tax authorities in detection and punishment of non-
compliance.

Focusing more specifically on businesses, Wang (2010) states that the following are
also factors critical to businesses’ decisions on tax compliance:

 the effective tax rate to enhance shareholders’ value;

 risks to financial position, including risks from non-compliance with tax
legislation, which could lead to costs of dealing with intensive auditing, civil
litigation and having to pay interest and penalties resulting from the non-
compliance;
 the (professional) advice provided by third-party tax practitioners;
 tax behaviour of the key managers in a business;
 corporate governance and management generally;
 reputation of the business, especially those large businesses trading on the
major markets; and
 accounting for uncertain tax liabilities. With the evolution of financial
accounting standards, the listed companies are required to disclose their tax
uncertainty.

Although the impact of the marginal rate on the reported income is ambiguous in the
basic economic model of compliance (Mikesell and Birskyte, 2007), high tax rates
generally reduce compliance. The higher the tax rate, the higher the potential gain
from evading tax. This is especially pertinent in the context of small businesses, as

15
For example, in Nigeria the multiplicity of taxes is a problem (PwC, 2010). In South Africa the
introduction of a simplified turnover tax has significantly reduced the compliance costs of small
businesses.

11
pointed out in a study in Zambia (FIAS, 2004) with reference to customs and excise
taxes and the local government council levies.

3.3 Tax Practitioners

The use of tax practitioners to assist the taxpayer may, or may not, improve tax
compliance. Mikesell and Birskyte (2007) argue that they help alleviate the
compliance burden which results from complex tax laws and regulations by providing
specialized information and computational skills. The use of paid help to file the tax
return may also reduce time costs and psychological costs (e.g. relating to anxiety and
uncertainty related to compliance). However, they may also be (and are often) used
“to exploit grey arrears in the tax laws and regulations to the detriment of compliance
with negative consequences for tax equity and efficiency” (Mikesell and Birskyte,
2007:1068). The more ambiguous and complex the laws are, the greater the non-
compliance is likely to be.

Wang (2010), quoting South African Revenue Service (SARS) statistics, reports that
more than 40% of South Africa’s taxpayers use the services of tax practitioners.
Therefore they exert a significant influence on taxpayers’ perceptions on taxation and
attitude towards tax compliance. According to Wang (2010:56)

“South Africa has around 17,200 registered tax practitioners, of whom 5,000
do not belong to any professional body. A significant challenge that SARS is
facing is that there is no minimum requirement, either in terms of qualification
or in terms of experience, for a person to engage in the profession and to be
registered as a tax practitioner by SARS, and not all tax practitioners are
subject to a code of professional conduct.”

The long-awaited enactment of the Tax Practitioner’s Bill 16 will address this issue.

3.4 Small Businesses

From various international studies regarding tax compliance costs a number of

patterns have emerged, including that tax compliance costs are high and comprise a
much larger proportion of total compliance costs for smaller businesses (Smulders et
al., 2012). This is an issue in, for example Malawi (where it results in cash-flow
problems), South Africa (complexity), and Zambia (high penalties for contravention
of the value-added tax law and regulations.

If the tax laws are complex (as they tend to be), even small business feel the need to
outsource their tax compliance responsibilities to professional tax practitioners. The
cost of using an intermediary can be significant, as is evidenced in a South African
context by Figure 1 below.

16
This long-awaited bill will likely be enacted in the last quarter of 2012.

12
Figure 1: Cost of Outsourcing Tax, Non-tax and Payroll Activities) as a
Percentage of Turnover of SMMEs in South Africa

Source: Smulders, et al. (2012).

Almost half (48.9%) of the respondents perceived that there is a value in the
information provided by their external service providers beyond the provision of tax
services and tax advice, as they indicated that they would be prepared to pay for
external accounting and payroll services even if South Africa were tax free. It was
generally the smaller businesses (turnover of less than R1 million) that would
probably not incur these expenses and therefore it appears as if they do not perceive
as much value in the information provided by their external accounting and payroll
service provider.

However, when quantifying tax compliance costs, the difference between the gross
compliance costs and compliance benefits needs to be calculated, as this difference
represents the net impact of the tax compliance burden on small businesses (Smulders
et al., 2012).

3.5 Compliance Benefits

However, tax compliance does not entail only costs for the taxpayer. There are also
tax compliance benefits which need to be considered. Literature on “tax compliance
benefits” categorised these benefits into three broad categories, namely cash-flow
benefits, managerial benefits, as well as tax deductibility benefits (Smulders et al.,
2012).

 Cash-flow benefits are the benefits derived from the use of tax revenues for a
period before they must be paid over to the revenue authority, such as property tax
collected by banks or supermarkets, the deduction of “pay-as-you-earn tax”
(PAYE) by employers and VAT by vendors, before these are paid over to the
relevant revenue authority (Smulders et al., 2012). A further example is the
benefit from the lawful delay that arises when the income received by a taxpayer
is not immediately or fully taxed on accrual or receipt.

13
 Managerial benefits are the benefits that may arise due to a requirement in terms
of tax legislation to maintain records, such as better recordkeeping, the use of
technology, improved knowledge of the financial affairs of the business in
particular in the form of increased knowledge of their complex accounting
information systems and improved business or managerial decisions (Smulders et
al., 2012).

 Tax deductibility benefits are the benefits that arise when the income tax system
permits some tax compliance costs to be treated as a legitimate deduction for tax
calculation purposes, for example where the tax system permits a business a
deduction for the services of their tax practitioners and tax-related incidental
expenses from their taxable income (Smulders, et al., 2012).

4 Improving Compliance

4.1 Introduction

As Bird (2003) correctly points out, “assessing the relation between administrative effort
and revenue outcome is by no means a simple task”. Maximizing revenue is only one
dimension of the task of tax administration. How that revenue is raised, in other words
the effect and impact of the revenue-raising task in equity, the level of economic welfare
as well as the political fortunes of governments, may be as important. Rather than simply
looking at the amount of revenue raised, that is the level of collection, to measure the
effectiveness or success of a tax administration, a more accurate measure would be to
measure the so-called “compliance gap” which constitutes the gap between actual and
potential revenues (Casanegra de Jantscher and Bird, 1992).

The Malaysian government has recently embarked on an initiative to encourage the

collection levels of local revenue. Stars are awarded to individual local authorities on
the basis of their success with the collection of their property taxes (Pawi, 2012). The
idea is that their will be sufficient peer-pressure amongst local authorities to stimulate
poorer-performing authorities to improve their star rating by collecting more property
tax.17

4.2 Accountable and Transparent Administration

A transparent and accountable tax administration that is service-oriented is likely to

have a positive impact on public trust. If the revenue is furthermore properly spent in
terms of a budget which the taxpayers find agreeable, compliance should increase.

A fascinating example is the so-called “110% campaign” in Bogotá, Colombia

(Pinilla, 2012). In the early 2000s, the then mayor of the city launched a campaign in
terms of which taxpayers were requested to volunteer an additional voluntary
contribution to their property tax (as well as other local taxes). In the most successful
years of this campaign more than 56,000 taxpayers made additional, voluntary

17
For purposes of comparison it should be clear that stars should be awarded on the basis of collection
as a percentage of the amount billable, rather than the amount billed. If it is the latter, it may actually be
a disincentive.

14
payments. The money was spent on programmes agreed to by taxpayers and the
success was largely founded in taxpayer confidence in the mayor – i.e., trust in the
government of the day. Surprisingly, the majority of taxpayers who made additional
payments were from the lower-income groups (Pinilla, 2012). The success of this
campaign is not the additional revenue (which was rather insignificant), but in the
building of a civic and tax culture in a city that was devastated by poor service
delivery and deteriorating infrastructure in the 1990s.

4.3 Tax Amnesties

Governments periodically offer those who have not fully complied with their tax
obligations a period in which they can voluntarily correct past violations and not
suffer the full penalties that such violations would normally entail. Although revenue
is a key attraction of amnesties, they are also sometimes used to address political
goals, for example, as a measure to “put the past behind us in order to move forward”
(Bird, 2003). On the whole, the evidence is clear that tax amnesties are seldom
successful and should rather be avoided (Casanegra de Jantscher and Bird, 1992; Bird,
2003).18

Tax amnesties are popular 19 and therefore commonly encountered. They are
especially attractive to politicians who regularly (and somewhat short-sightedly) view
an “amnesty as a way to obtain revenue that was owed the government but would
never have been collected without the amnesty” (Mikesell and Birskyte, 2007:1058).

Apart from the importance of careful design, a tax amnesty will only be effective if
the taxpayer can be certain that the amount declared during the amnesty will not result
in a future investigation of possible tax evasion in years not covered by the amnesty
(Bird, 2003).

Mikesell and Birskyte (2007) state that one-time amnesties may enhance voluntary
taxpayer compliance during the amnesty period, but that typical tax amnesties are
unlikely to generate significant amounts of new revenue in the long run. To be
successful, an amnesty programme must do more than simply offer relief for past
violations. These authors conclude:

“It must also change future behavior, both of the taxpayer and the government.
If the likelihood of getting caught, and thus penalized, rises after the program,
then taxpayers are more likely to take advantage of the temporary amnesty as
a last chance opportunity. The design of a successful amnesty might combine
mild treatment of the evaders upon the disclosure with a tougher expected
enforcement regime.”

In 2006 South Africa embarked on a tax amnesty for small businesses. The reason for
this amnesty was to provide the large number of small businesses that were not
registered for tax purposes, or was in the net but had not made full disclosure of their
taxable income to the revenue authority (SARS), with an opportunity to regularize

18
Bird (2003) furthermore refers to Das Gupta and Mookerjhee (1998), chapter 5, where a detailed
analysis of tax amnesties is provided.
19
According to Mikesell and Birskyte (2007), 79 distinct tax amnesties have been conducted in 40 US
states plus the District of Columbia between 1982 and 2007.

15
their tax affairs without fear of tax liabilities arising out of past non-compliance
(Smulders et al., 2012).

4.4 Incentives and Tax Concessions

Tax incentives and concessions are often used as measures to enhance revenues and
overall tax compliance. As Bird and Zolt (2003) point out –

“many countries have sought to improve their economy by introducing a

variety of tax incentives for investment, for savings, for exports, for
employment, for regional development, and so on… Often, such incentives are
redundant and ineffective, giving up revenue and complicating the fiscal
system without achieving their stated objectives. Even to the extent that
incentives may be effective in inducing investors to behave differently than
they would have done in response to market signals, the result is often
distorting and inefficient, diverting scarce resources into less than optimal
uses.”

Tax incentives result in inequity as they purposely cause very uneven tax burdens,
with domestic companies often subject to full taxation, while foreign investors benefit
from tax incentives that reduce their effective tax rates (Bird and Zolt, 2003). These
authors further indicate that non-tax factors, such as a sound macroeconomic policy,
good infrastructure and a stable governance system are more important factors in
locational decision than tax concessions. Although there may indeed be cases for
some tax concessions, for example, to assist the small business sector, “these tax
incentives should be well-designed, properly implemented, and periodically evaluated
if they are to do more good than harm” (Bird and Zolt, 2003).

In an attempt to assist micro, small and medium-sized businesses to lower or

minimise their tax compliance costs and reduce their tax burden, governments often
provide these enterprises with a simplified tax regime and/or a variety of tax
concessions (Smulders, et al., 2012). These concessions can generally be classified
into two main categories, namely –

 positive concessions that provide a lower rate of taxation, an exemption from

paying tax or an accelerated tax deduction; and

 relieving concessions that excuse the taxpayer from requirements otherwise

imposed, for example special registration thresholds for certain taxes (relieving
taxpayers from complying with a tax), simplified accounting rules and longer
accounting periods (e.g., for VAT purposes).

Positive concessions have a direct impact on the tax burden, resulting in a reduction
in, or exemption from, tax liability. These concessions do not have a direct impact on
tax compliance costs. These concessions are generally elective and subject to complex
qualifying criteria and strict rules, which means they can be rather costly to
understand and adopt (Smulders et al., 2012). As complexity generally increases tax
compliance costs (Bird and Zolt, 2003; Mikesell and Birskyte, 2007), complex tax
concessions may ultimately and rather perversely, increase tax compliance costs.

16
Relieving concessions can indeed have a direct impact on the tax burden, particularly
in the form of tax compliance costs. For instance, a specific tax registration threshold
can preclude a business from registering for a particular tax. In some cases,
registration thresholds can also arguably be regarded as positive concessions. This
would occur when an exemption threshold results in an exemption both from having
to pay the tax (a positive concession) and from having to comply with the obligations
imposed by that tax (a relieving concession). If an exemption threshold merely
relieves the taxpayer from having to comply with administrative compliance
requirements, but does not provide tax exemption, it would be regarded as a relieving
provision only. A reduction in the number of tax payments that need to be made,
constitute a real concession. It could result in less time – whether internal and/or
external – being spent on a particular tax compliance obligation, which ultimately
leads to a reduction of tax compliance cost (Smulders et al., 2012).

Some jurisdictions have hoped to enhance revenues and voluntary compliance by

granting taxpayers a discount for early payment 20 (McCluskey and Franzsen,
forthcoming). If it is not backed up with proper enforcement, it is not likely to be
successful. The honest taxpayers who have been paying in the past will benefit from
the discount, and the tax evaders will still evade the tax. The simple lesson is that
incentives and concessions, as is the case with amnesties, must be properly designed
to ensure that only those who are meant to benefit, actually benefit from the
preferential treatment.

Too much political and/or administrative discretion to grant exemptions or other

forms of tax relief should also be avoided. These quickly erode the tax base and if tax
rates are not increased to recoup the revenue loss from the remaining taxpayers, which
is seldom an acceptable (political) option, the inevitable result is a decrease in tax
revenues.

4.5 Treating Taxpayers as Clients

Discouraging non-compliance is only one aspect of improving compliance (Bird,

2003). Treating taxpayers in a professional manner, in other words, more like
customers rather than like suspects or thieves, may do much more to promote and
improve compliance (Bird, 2003; Mikesell and Birskyte, 2007; Wang, 2010).
Providing taxpayers with various payment options (e.g. banks, supermarkets, internet,
ward offices), easy filing, and assistance (e.g. on-line or at shopping malls and sports
stadiums) not only reduces actual compliance costs, but can reduce unintentional non-
compliance. A professional and effective service-oriented tax administration is crucial
for improving tax compliance. The revenue authorities in a number of African
countries have already been successful in this regard and improved service levels
through training and knowledge exchanges should result in further gains in future. 21

20
Receiving early payments may, however, have benefits for the relevant authority as it may improve
cash flows.
21
In this regard the role of entities such as the African Tax Administration Forum (ATAF), the
Organisation for Economic Co-operation and Development (OECD), the International Bureau of Fiscal
Documentation (IBFD), as well as dedicated training facilities (e.g., in-house training academies and
universities) can play an important role.

17
The recent property tax reform in Northern Ireland (McCluskey and Franzsen,
forthcoming) provides useful examples of how to treat taxpayers in a professional
manner, as well as on how to educate politicians and taxpayers on taxation (and
valuation issues). The public relations campaign in Bangalore, India, in respect of
their property tax reforms is also quite instructive (Rao, 2008). The South African
Revenue Service (SARS) is also doing much to assist taxpayers during the income tax
filing season, setting up kiosks and help desks in shopping malls and increased
accessibility through extended working hours.

5 Conclusions

There is no single, “one size fits” magical solution to enhance revenues at national or
sub-national level. Bird (2003) states the following:

“There is no single set of prescriptions - no secret recipe - that, once introduced,

will ensure improved tax administration in any country. Developing countries
exhibit a wide variety of tax compliance levels, reflecting not only the
effectiveness of their tax administrations but also taxpayer attitudes toward
taxation and toward government in general as well as many other environmental
factors.”

High tax burdens and high compliance costs are stumbling blocks for business growth
and have a negative influence on taxpayer compliance levels. In the case of the South
African Revenue Service (SARS), compliance with tax legislation is improved and
achieved through three pillars in the value chain, namely education, service and
enforcement (Wang, 2010). In short: increased efficiency and quality in respect of
taxpayer service, improved taxpayer education by SARS and increased efficiency and
effectiveness in respect of enforcement actions will independently and collectively
have a positive influence on increasing the levels of tax compliance.

An efficient tax system, particularly in developing economies, is critical not only to

increase government revenue but also to promote investment and long-term growth
and to increase employment. What matters in the end is the overall impact of the
budgetary system on the distribution of wealth and income. In this regard both the
expenditure side and the revenue side of the budget should therefore be taken into
account in considering how government policy affects the distribution of income, as
well as the overall equity implications of any (policy and administration-related)
changes to the tax system (Bird and Zolt, 2003). Smulders et al. (2012) point out that
tax compliance costs diminish business resources without raising income for the
government. This results in a waste of economic resources. Furthermore, these costs
also affect the economic behaviour of both individuals and businesses and seem to be
connected to the level of compliance in that they could result in an increase in tax
evasion.

As is the case in South Africa, tax compliance cost surveys may indeed be very useful
and assist tax authorities in pinpointing problems and assist in establishing a baseline
against which progress can be monitored and measured (Smulders et al. (2012).

18
Finally, if taxpayers generally perceive that the services they receive as representing
value for money, it should go a long way in enhancing voluntary tax compliance and,
as a concomitant result, also increase tax revenues. This applies to all levels of
government, but especially to local government – where government is closest to
taxpayers.

I would like to acknowledge the assistance of my research assistant, Ben-Lauren

Johannes, and the extensive research on tax compliance costs by Sharon Smulders,
one of my PhD students.

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