Improve taxpayer education and services
In most Mrican countries, noncompliance with tax laws has created fiscal deficits that threaten
economic stability and growth. Governments need to convince taxpayers of the social benefits of
taxation and the social costs incurred when governments fail to collect taxpayers' liabilities. The goal of
taxpayer education should be to persuade citizens that tax evasion is not a "victimless" crime; instead, it
causes inflation and impedes job creation.
Recognize the extent of evasion and impose corrective measures
Prosecution and sanctions for tax fraud are rare in SSA. Government inaction perpetuates
noncompliance. Two factors influencing an individual's decision to evade taxes are low perception of risk
of detection and a reduced sense of civic duty to contribute to an unfair tax system.
Publicize tax exemptions and holidays
Most Mrican countries are legally bound to announce tax exemptions and holidays in the official gazette.
However, they often grant exemptions and holidays on an ad hoc basis and fail to publish
announcements as prescribed by law. Furthermore, many finance ministers have the authority to waive
customs duties and excise taxes on particular goods or to exempt specific individuals from payment of
those taxes. Effective transparency demands not merely publishing exemptions but also maintaining a
cumulative account of exemptions enjoyed by specific taxpayers, relating such exemptions to other
information about the taxpayers, and disseminating the findings to the public. In cases lacking
justification, exposure of all exemptions will raise the cost to grantors and recipients.
Establish institutions to enhance transparency
Transparency of tax administration can be improved by creating a regulatory unit within the revenue
service, establishing the position of an autonomous "tax ombudsman" to evaluate individual taxpayer
complaints, and setting up a quasi-judicial body before which taxpayers can formally protest their
assessments. True transparency of tax systems requires the establishment of an independent agency
with a mandate to evaluate the performance of the revenue service. Such an agency should compute
and publish detailed performance indicators that would permit the tax administration to compare itself
with its counterparts in other countries and set targets for increasing compliance. Furthermore, the
creation of an independent agency would convince citizens that the tax system is fair, thus making them
more willing to comply with tax laws either out of civic responsibility or in response to a higher
perceived risk of detection.
A government can enhance the transparency of its tax administration by sharing with the public
reasoned estimates of the extent of evasion and credible plans to control it. By publicizing its intentions,
a government can help create a civic lobby that will press for implementation of such plans.
Review of tax compliance risks
The review of tax compliance risks consists of a strategy to improve the knowledge of the taxpayer on
the basis of institutional cooperation, seeking voluntary compliance, self-regulation of noncompliance,
and defining the appropriate approach for each taxpayer.The purpose of a review of tax compliance
risks is to enable the identification and assessment of taxpayers’ risks, in conjunction with the Tax and
Customs Authority, encouraging taxpayers’ selfevaluation, to allow reducing these risks to appropriately
low levels. This will furthermore allow minimizing the costs associated with procedures involving a
significant allocation of resources from both parties, contributing to a reduction in disputes and the use
of legal advantages derived from the timely resolution of non-compliance.The review of compliance
risks, once a year for most taxpayers, will determine whether additional procedures should be
implemented for each taxpayer in terms of analysis of tax returns or specific or general inspection / tax
audit.The review level of tax compliance risks determines the classification of taxpayers who are low risk
and higher-risk taxpayers,
Strategies against tax evasion and tax avoidance
As the preceding sections indicate, there is a large variety of reasons and factors contributing to a
situation where tax evasion and avoidance occur on a large scale. Tax evasion and avoidance may derive
from low tax morale, high compliance costs or may result in the course of firms’ endeavours to maximize
profits by reducing their tax liabilities. Hence, in the same way as there is not only one type of tax
evasion and avoidance, there is “no one size fits all” (GTZ, 2006a, p. 12) solution to counter tax evasion
and avoidance. The practicability and the size of the window of opportunity depend on the specific
situation and the predominant type of tax evasion and avoidance in a country. An effective strategy
needs to address the underlying causes and most importantly - in the context of developing countries -
needs to be tailored to the specific country environment. Any imbalance between a country’s absorptive
capacity and the complexity reforms can either induce a failure of reform or a wasted opportunity. If, for
example, the absorptive capacity is low, reform strategies should either not be too ambitious or be
accompanied by extensive capacity development initiatives. If, on the other hand, the absorptive
capacity is very high, simple reform strategies will likely be successful. Still, such a strategy would be
unbalanced in the sense that more complex and more ambitious reforms could already be initiated.
Based on the preceding chapters on the reasons and modes of tax evasion and avoidance, the present
chapter describes potential ingredients of such an effective, country-specific strategy to fight specific
causes and factors contributing to tax evasion and avoidance. The improvement of citizens’ tax morale
requires measures ensuring and visualizing that the state is acting in a transparent, accountable and
efficient manner with the ultimate aim of providing services for its citizens. These measures go far
beyond reforms of the tax system or administration by developing a sound state-society relationship
and enhancing the legitimacy of the state requires taking into account the entire public system. Such
broader strategies cover e.g. the quality of public services, the transparency and control of the public
budget or the fight against corruption. The following description will, however, focus on reforms in the
area of taxation.
Taxpayer education and taxpayer service
The importance of taxes for the functioning of the state is not always apparent to the taxpayer.
Similarly, individual tax liabilities as well as requirements to comply with the tax system such as filling
out different tax forms might be unknown or difficult to understand. By means of taxpayer education
and taxpayer service, citizens can be informed and educated about the tax system and be assisted in
their attempts to comply with the tax system. Efforts in this direction have been conducted e.g. by the
Rwandan Revenue Authority
Taxpayer education and taxpayer service in Rwanda and Peru
A key factor to strengthen voluntary tax compliance is sound education of (future) taxpayers in focal
areas of taxation. Taxpayers need to understand the importance of contributing to the tax system.
Further, they need to develop a deeper understanding of the tax system and the taxpaying procedures.
With the objective to change the public’s opinion of the revenue authority to a benevolent attitude and
promote a “tax-paying citizen” culture, the Rwanda Revenue Authority has integrated its external
environment into the capacity development process. This includes the organization of an annual
“taxpayer’s week” with parades and the awarding of certificates and prizes. Additionally, opinion leaders
and political figures are sensitized how to encourage compliance among constituents. Moreover, the
Rwanda Revenue Authority is cooperating with partner organizations to reinforce their efforts to
disseminate information about paying tax (Land, 2004). This emphasizes the importance of integrating a
wide range of stakeholders into the education process. In addition to the typical efforts of politicians and
tax officers, important tax payers, donors and NGOs can help to improve the tax moral or function as a
role model for a responsible and sensitive citizen.
The Peruvian Revenue Authority (SUNAT) educates citizens in the scope of taxation. SUNAT offers,
among other services, E-learning, education programs at schools and universities, education courses,
video lessons, a virtual library and a range of publications. The aim is to educate both current and future
taxpayers. The use of comics and videos can help to reach illiterates, children and in the end the
majority of the citizens. The aim is to develop tax morale, tax culture and a deeper understanding of the
tax system in the long run.
Addressing tax compliance costs and administrative costs
Apart from promoting voluntary tax compliance, governments in developing countries as well as
development partners should concentrate on measures that reduce taxpayers’ costs of fulfilling their tax
liabilities. In this regard, revenue authorities must be aware of the importance of acting service oriented
and should therefore monitor customer satisfaction. Many revenue authorities shift towards a customer
service orientation which reflects the growing awareness of the need to offer a quality service to the
taxpaying public and to be responsive to public concerns. For instance, measures to simplify the
taxpaying process and promoting service oriented tax administration include a reduction of the number
of tax forms and officers assisting clients in filling out documents or the introduction of online services.
Semi-autonomous revenue administrations
A common measure in tax administration reforms in recent years has been the establishment of semi-
autonomous revenue authorities. By setting up semi-autonomous revenue administrations many
developing countries expected to enhance revenue mobilization, improve service orientation and staff
quality, and fight tax related corruption and evasion. The semiautonomous status enables revenue
authorities to pay higher salaries than the public sector which enables them to recruit highly educated
staff. It is also believed that higher salaries reduce corruption by lowering incentives to accept bribes.
This leads to better work ethics as well as a proactive and professional administrative culture which
ultimately contributes to improved law enforcement. Finally, semi-autonomous tax revenue authorities
become depoliticized, promoting their acceptance in public by lowering the risk of being abused for
interests of political elites (Mann, 2004).
Large Tax Payer Unit
Along the same lines, the creation of a large taxpayer unit (LTU) allows for specialization of tax auditors
and thus increases efficiency. Additionally, LTUs help tax administration concentrate all available
capacities to those firms that contribute considerable amounts to domestic revenues.
Particularly in developing countries, a small number of enterprises bear the lion’s share of the tax
burden. Focusing on a small group of crucial taxpayers simplifies the enforcement of corporate tax laws
and, hence, allows tax compliance at minimum costs, as the Kenyan experience reveals: In 1998, the
Kenyan revenue authority formed a large tax payer office (LTO) as a one-stopservice, substantially
reducing costs of complying with the tax law. The LTO’s mandate covers the administration of income
taxes, VAT, domestic excises and agency taxes. In 2006, the LTO covered 700 institutions which
contributed about 75% of the domestic tax revenue. Ghana established a LTU in 2004 and was able to
increase revenues by about 86% between 2003 and 2005 although the corporate tax rate was reduced
(GTZ, 2006b).
The cases of Kenya and Ghana illustrate that the establishment of LTUs is particularly suitable to target
limited administrative capacities in developing countries. However, despite of these advantages, one has
to bear in mind that the creation of LTUs might slow down the process of integrating all citizens into the
tax system in the long run. Including small and middle sized enterprises as well as natural persons into
the tax system is essential to get society involved in public finance and to strengthen a state’s legitimacy
and accountability. If citizens pay taxes they are more concerned about how the government spends
their money. Taxing also small taxpayers leads to a critical monitoring of both the government and
other, larger taxpayers by the public, thereby strengthening mutual accountability.
Complex and often changing tax laws cause confusion and uncertainty among tax officials and taxpayers.
Addressing deficiencies in the tax system is therefore probably as important as process orientated
reform actions that enhance the user-friendliness and transparency of the taxation procedure.
Particularly small and medium size enterprises (SME) with only limited administrative capacities and
private households do not only suffer from the bureaucratic burden of complicated tax procedures but
also from the complexity of the tax system itself. Simplifying the (corporate) income tax structure by
reducing the number of tax brackets and high statutory tax rates lowers the tax burden and may support
voluntary compliance.23 A comprehensive reform of the tax law might be more advisable than
reforming the system step by step, thereby risking a complex financial law as is common in many
(developing) countries today.
Furthermore, the possibility to detect and prosecute tax violators depends crucially on data availability
and data quality. Hence, actions taken against tax evasion and avoidance relate to an improvement of
the data quality available to tax officers. The (inter-)institutional exchange of high quality information
requires different steps. On the one hand, it is important to ensure the collection of adequate data.
Therefore, one needs to ensure a sufficient endowment with technical equipment and the
establishment of good performing statistic divisions with competent staff members to collect data and
keep records. On the other hand, good technical equipment and technically educated staff are also a
prerequisite for a well functioning information exchange. Along these lines, automation of tax collection
procedures e.g. through online tax assessment, payment and monitoring opportunities may serve as an
efficient way to reduce the scope for tax evasion and avoidance.
In fact, the Tanzanian Revenue Authority successfully implemented a computerized tax administration
system (iTAX) which simplifies tax compliance and contributes to enhanced efficiency of tax collection as
well as auditing processes (GTZ, 2010).
Tax fraud and avoidance are also a result of a weak judiciary. Addressing revenue shortfalls needs to go
hand in hand with legislative reforms strengthening the rule of law. This includes insufficient
punishment and prosecution of violators which can only be tackled when detected tax criminals
face stricter penalties that are effectively executed by courts. As shown by Fishlow and Friedman (1994),
higher penalties act as a deterrent and help to improve tax compliance. To achieve this goal
governments have to strengthen the rule of law and develop capacities of investigation authorities.
Moreover, investigators as well as courts and judges should receive greater support by politicians in
order to emphasize the importance of this issue.
END TAX HAVENS
Establish a clear list of the worst tax havens, based on objective criteria, backed with powerful counter-
actions, such as sanctions, to end their use.
The Paradise Papers reveal that – despite successive leaks exposing tax dodgers – not enough change
has happened and corporate and individual tax dodgers are continuing unimpeded to minimize their tax
bills. Most countries are losing considerable tax revenues because ocompanies shifting their profits to
tax havens to dodge paying their fair share in tax. The United Nations Conference on Trade and
Development (UNCTAD) found that developing countries lose around $100bn in tax revenues each year
as a result of corporate tax avoidance schemes that route investments through tax havens.4 Corporate
tax havens provide taxadvantages – such as low to zero corporate tax rates, tax exemptions and
loopholes, and financial secrecy – to non-resident companies. Companies minimize their tax bills by
making taxable profits ‘disappear’ by shifting profits to these low-tax jurisdictions where there may be
little or no genuine economic or profit-making activity. They can artificially attribute the ownership of
assets or the locations of transactions to paper subsidiaries in tax havens. As a consequence, tax havens
are driving a harmful race to a bottom on corporate taxation. Oxfam ranked Bermuda, the Cayman
Islands and the Netherlands as the world’s worst corporate tax havens.
A clear list of the worst tax havens, based on objective criteria, and free from political interference, is
critical. The criteria must include transparency measures, existence of very low tax rates and harmful tax
practices that grant substantial reductions. Strong measures (including sanctions and incentives for
compliance) should then be used to stop companies shifting their profits to tax havens, and in turn limit
countries losing investment and tax revenues to those tax havens. All countries must implement strong
controlled foreign company (CFC) rules, which prevent multinationals based in those countries from
artificially shifting profits into tax havens. They can also introduce withholding taxes on risky payments
(such as royalties and interests). These can be done without waiting for global agreement.
Governments can take other national level action. For example, following the Panama Papers, Ecuador
was the first country to hold a national referendum on instituting legislation that obligated politicians
and public servants to repatriate companies’ and individuals’ offshore accounts.
LEAD THE WAY ON TAX REFORM
Support a new generation of tax reforms that lead to tax systems that deliver in the public interests of
all countries. Create a global tax body to lead and coordinate international tax cooperation that includes
all countries on an equal footing.
International initiatives to address the financial recklessness and murky tax rules that plunged the world
into financial crisis, and end banking secrecy and industrial scale tax abuse, are not working. The
Paradise Papers again reveal that corporate and individual tax dodgers are still carrying on their business
as usual, and by escaping their tax liabilities, are constraining the ability of governments to tackle
inequality –particularly that of developing countries. Despite recent reforms in transparency and tax
rules, the financial and tax system is rigged in favour of corporations and wealthy interests.
Disproportionate influence of corporate lobbyists and vested interests, and the fact that developing
countries are either excluded or are not on an equal footing in tax and transparency rule-making, have
meant reforms continue to replicate the same defects that have afflicted the current international tax
system.
At a global level, a new generation of global tax reforms is needed that create an international tax
system that works in the interest of the majority. This second-generation reform process should include
all countries on an equal footing and tackle a number of key issues that have not been sufficiently
addressed by the recent global tax reform led by the OECD under the mandate of G20 (BEPS process),
such as:
• the competitive granting of tax incentives and lowering of tax rates;
• tackling corporate tax havens and harmful tax practices;
• the reallocation of taxing rights between countries, for example by revising tax treaty terms and
transfer pricing and permanent establishment rules;
• addressing avoidance of capital gains tax;
• preventing manipulation of internal transaction prices and developing alternative approaches to the
arm's length principle; and
• the taxation of commodities.
A global tax body is required to oversee the global governance of international tax matters, while
respecting democratic national sovereignty on taxing multinational companies. Until such a global forum
is created, all countries and global institutions, including the UN, the International Monetary Fund, the
World Bank and the OECD should worktowards an agreement on how to curb the corporate tax race to
the bottom and to ensure companies pay their fair share of tax.
END CORPORATE TAX SECRECY
Commit to introduce PUBLIC country-by-country reporting(CBCR) for all multinational companies in
EACH country they operate. Ensure development finance institutions only invest in companies that have
adopted responsible tax policies, for example, by publishing financial reports for every country where
they do business.
For decades, corporations have artificially diverted their profits made in the countries they do their
substantial business into countries with very low, or zero, corporate tax rates – or ‘corporate tax
havens’. Through this shifting of profits, countries around the globe are denied large amounts of
potential tax revenue. This is now done by corporations on an industrial scale. Despite widespread
agreement that this behaviour by corporations is destructive, accurate data on the extent to which this
is happening hasbeen elusive. This is because corporations have not been required to publish their
profits or the tax they pay on a country-by-country basis. Instead they produce aggregate accounts that
obscure their use of tax havens. Transparency of key data to show what companies are paying and
where would be a powerful tool in demonstrating the scale of the problem.
There is also a lack of transparency in the use of public funds by international development finance
institutions. Governments and international institutions advocating for global tax reform need to lead by
example by, at minimum, ensuring transparency in public procurement by development finance
institutions. In just five years, the World Bank’s lending arm – the International Finance Corporation –
more than doubled its investments in Sub-Saharan Africa in companies that use tax havens – from
$1.20bn in 2010 to $2.87bn in 2015.8 As a consequence, taxable profits may be shifted out of the
developing countries in which they operate resulting in revenue losses.
All governments should ensure companies publish financial information for every country in which they
operate. This will allow the public to see if they are paying their fair share of tax in those countries.
Companies that dodge taxes should not receive a single dollar of overseas aid money. Development
finance institutions should ensure every company they invest in publishes financial reports (CBCR) for
every country where they do business so it is clear if they are paying their fair share of tax.
10. Administrative penalties
Administrative penalties are civil (usually monetary) penalties imposed on taxpayers for violating laws or
regulations. Such penalties are imposed, for example, when taxpayers are late with the submission of
their returns or with paying the taxes due, among others, following an audit of the tax administration
which resulted in a higher tax payment than that assessed by the taxpayer. While penalties are not the
only means to secure compliance, they can deter the taxpayers from not paying their taxes due: The
amount payable will be higher in the end for a taxpayer who chooses not to comply in the first place.
However, such threat would not be effective if taxpayers know that penalties are only very rarely
imposed and/or that the tax administration undertakes no great efforts in collecting them. Imposing a
low number or a low value of administrative penalties could mean that the tax administration is lacking
capacity to detect irregularities on tax pay-ments or is too lenient. If only a low share of the penalties
imposed are effectively collected this could indicate that the administration lacks capacity or will to
properly enforce tax policy.
The OECD also notes that perceived fairness is a potential driver of voluntary tax compliance. One of the
relevant dimensions of fairness is “retributive fairness”, which means that tax authority is “fair in the
application of punishment when the rules are broken” 38. With other words, if individuals or entities
breaking the rules only face low penalties or if these penalties are actually not collected, this could have
a negative impact on taxpayers’ willingness to comply voluntarily.
It is also important to assess the differences in the imposition of penalties differentiated by types of
taxes, in order to know whether some types of taxes only receive relatively few or no penalties.
11. Prosecutions
A tax administration might refer cases for criminal prosecution if it concludes after an audit that the
taxpayer has illegally reduced the payable tax, i.e. evaded tax on purpose, e.g. by not reporting parts of
income s/he received. Other cases might include criminal attacks on the tax system, such as for example
the “Missing Trader Fraud” or the “VAT carousel”, where traders claim refunds of VAT payments that
have actually never taken place 42
Pursuing such cases is necessary to adequately punish behaviour that is detrimental to society and to
deter taxpayers from committing such offences. With regards to inequality, criminal prosecutions are
likely to have a higher deterrent effect than administrative penalties, as tax dodgers cannot simply
weigh civil penalties against ‘tax savings’, but may confront prison terms. As with administrative
penalties, it is important to differentiate for which types of taxes prosecutions are initiated, so that it is
possible to know whether any type is left out from prosecution activity.Further, it is important to
consider that a low percentage of finalized cases might point to a lack of means to collect the evidence
necessary to successfully pursue cases or alternatively to a lack of willingness to enforce compliance.
12. Whistleblower protection and reward
A culture of integrity within the tax administration is necessary so that it correctly fulfils its mission. To
maintain such a culture, organisational safeguards can help shielding the tax administration from non-
compliance or corrupt practices, especially in higher management. One such safeguard is the protection
of whistleblowers, who publicly denounce unlawful practices that take place in an organization, often on
the public’s account. Without the assistance of whistleblowers, illegal practices in organizations may
remain unknown/silent and cause damage to the society. An example of a disclosure of concerning
practices in a tax administration is the case of Antoine Deltour who used to work for
PriceWaterhouseCoopers (PWC) and revealed tax rulings concluded between multinational companies
(MNCs) and the Luxembourgish tax authority. These tax rulingsenabled MNCs to avoid huge sums of
taxes due in other countries across the world. The disclosure of the information by Deltour (also known
as LuxLeaks45) has led to widespread criticism on these rulings and had political consequences:
The European Commission used the data to investigate whether the ruling constituted illegal state aid
granted by Luxembourg, forcing Luxembourg in some cases to recover taxes due from multinationals
such as Engie, Amazon, Fiat and McDonald’s 46. Pressured by the European Parliament, the European
Commission subsequently proposed the automatic exchange of tax rulings between tax authorities
adopted in 2015 47
Laws that impose criminal sanctions on whistleblowers intimidate and silence those who identify
dubious or illegal activities by employees or other taxpayers.While it is important that regulations
preventing the disclosure of confidential information exist, it is equally necessary to ensure effective
legal protection for whistleblowers who reveal information of public concern ensuring the integrity of
administrations or companies on behalf of the jurisdictions’ citizens and for the organizations’ own sake.
A report by Transparency International from 2013 focused on whistleblower protection laws in 27 EU
member states and found that only four countries had legal provisions that could be called advanced 48.
Another report on G20 countries published in 2014, analysed the state of whistleblower protection rules
in each of the G20 countries in both the public and private sectors. The report found important
shortcomings which referred to several issues including the existence of anonymous channels for
employees to discreetly report sensitive information, independent agencies to investigate
whistleblowers’ disclosures and complaints,and transparent and accountable enforcement of
whistleblower laws 49
In its tax policy report 2017, the European Commission joined these voices and recommended the
establishment of regulations protecting whistleblowers in order to improve compliance within tax
administrations 50
Wolfe, Simon, Mark Worth, Suelette Dreyfus, and AJ Brown, Whistleblower Protection Laws in G20
Countries, 2014 <http://www.transparency.org.au/wp-content/uploads/2014/09/FINAL__-
Whistleblower-Protection-Laws-in-G20-Countries-Prioritiesfor__-Action.pdf> [accessed 9 July 2018]
Robinson, Leslie, and Joel Slemrod, ‘Understanding Multidimensional Tax Systems’, International Tax
and Public Finance, 19/2 (2012), 237–67
Savić, Gordana, Aleksandar Dragojlović, Mirko Vujošević, Milojko Arsić, and Milan Martić, ‘Impact of the
Efficiency of the Tax Administration on Tax Evasion’, Economic Research-Ekonomska Istraživanja, 28/1
(2015), 1138–48
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