Rapidly growing economies can see a lot of their efforts go to waste if a portion of the country’s revenues are lost due to tax evasion as a result of poor tax administration and enforcement failure. Countries must ensure that they are not only able to create long-term economic growth, but that it results in increased tax revenues, on a consistent basis, over a number of years.

Countries continue to experiment with and identify ways to reduce evasion, thereby increase tax revenues and reducing tax payment periods. There are several ways in which governments achieve this, these could include:

Simplification

Simplification in both the processes and communication with taxpayers is key. Despite a successful experiment in Belgium, the latter is many times, overlooked as a simple way as to how simplifying communication sent to taxpayers can have a positive effect on tax compliance. In fact, simplification had a much more positive effect when compared with ‘deterrence’ messages, highlighting penalties, and ‘tax morale’ messages, highlighting the public value of tax revenues.

It is not only the communication which needs to be simplified but also the tax system. A tax system which is complex to understand will undoubtedly result in less compliance as taxpayers and advisors struggle with the interpretation of complex rules. A simplified tax system, with limited number of rates and exemptions is critical to ensuring taxpayer compliance.

Simplification is not only about communication but also about processes, which brings us to the next point.

Digitalisation

Processes to make tax payments and submit tax returns must be completely digital and easy-to-use for taxpayers. This too has proven to be key in increasing tax compliance and in reducing the tax payment period.

Digital commerce and mobile POS payments are expected to almost double within the next 6 years, with a current total value of $5,475bn in 2020. This trend can also be seen in Africa, with e-commerce revenues from the major industries expected to shoot up to €30bn by the year 2024 (currently at around €16.3bn).

Ensuring tax compliance units are adequately resourced

Without proper resources, both human and financial, no government’s tax compliance unit will be able to manage and administer everything that it is expected to administer in order to increase compliance and reduce evasion. Governments need to ensure that such units are properly resourced, also to provide a perception of increased controls, which will result in an increase in voluntary compliance, as has been seen in a number of rapidly growing economies.  

Maintaining an updated taxpayer registry

If a government is unaware of who should be paying taxes, it will be very difficult for it to enforce payments. Governments must ensure that they have an up-to-date taxpayer registry to identify the individuals and companies which must be paying tax and being able to communicate and enforce penalties in case of non-compliance. This is particularly important in developing countries where it is somewhat more difficult to obtain such information across the country. The digitalisation process mentioned earlier is also a key element of ensuring an update registry.

Unfortunately, tax evasion will always be a reality. Governments must ensure that they reduce tax evasion to a minimal level, to ensure a negligible impact on Government revenues. This can be done both through deterrence and ensuring that the proper penalties are enforced on non-compliant taxpayers, but also through more positive actions, some of which are discussed above.

The writer is a co-founding Seed Consultancy, a research-driven advisory firm based out of Europe.

www.seedconsultancy.com | nicky@seedconsultancy.com