Taxpayer’s self assessment system

What is self-assessment all about? Simply put, it empowers taxpayers to declare information regarding their businesses, indicate what income they have earned within a given time period, and calculate the tax due. The system operates on the premise that no one can claim to have a better knowledge of a taxpayer’s affairs than the taxpayer. Self-assessment requires taxpayers, or those that represent them, (their tax advisers) in tax-related matters, to submit information to RRA in regard to income earned, deductible expenses, withheld tax and any other tax offset. This only requires taxpayers and their advisers to apply correctly the income tax law and the regulations that are in place. This means that a taxpayer should do what the laws provide for such as deduction of allowable expenses. Once a tax return has been lodged, the taxpayer maintains the right to rectify that return he or she has filed where the taxpayer believes that an error was made in the original return. Whereas taxpayers may rectify their declarations as many times as there are errors in them, they lose that chance once an audit (post-assessment review) is undertaken. Like most other tax administrations around the world, RRA reserves the right to rectify a return filed by a taxpayer. Following article 27 of law No. 25/2005 of 04/12/2005 on tax procedures, this period is three (3) years. It may extend up to five (5) years if the taxpayer is under automatic assessment. In the case of fraud, some countries have an unlimited period in which to review the returns filed by the taxpayer, while in the UK, it may go up to twenty years. Where there is a shortfall of tax established during the audit process, i.e. between the information provided by the taxpayer and that identified by RRA, then that difference attracts a 10% penalty, in addition to the interest charged for late payment. But, there are conditions that need to be put in place in order to facilitate self-assessment. There is a need to create confidence amongst taxpayers in order to have the correct interpretation of the tax laws and regulations. In Rwanda, this has been made possible because when the tax laws were drafted, a major objective was to write the laws clearly and concisely. Many countries in fact have hugely complex tax provisions amounting to thousands of pages and whose interpretation has to be sought through private or public rulings especially in countries like the United States, Australia and the UK. In Rwanda, the tax law is made up of a relatively small number of simple provisions that may not need frequent requests for interpretation (this does not suggest that people do not approach RRA for interpretation once in a while). But, in countries where the tax administration has to provide its position on an interpretation of a tax provision, it is necessary that such interpretations or rulings be provided on time to avoid shortfall penalties and interest accruing from late payment. Another issue that has to be addressed is to what extent the ruling binds the tax administration. Usually, such a ruling (interpretation of a tax situation by the tax administration) should bind the tax administration unless the law on which the interpretation of that case has changed, or where the ruling has been replaced by another ruling. Once a ruling is issued it binds the tax administration unless the ruling is replaced. There is an obvious need for accuracy in the advice provided and hence the reliability of such information. Again, I return to the advantage associated with the self-assessment system. As pointed out earlier, taxpayers are deemed to have ‘first-hand’ information on tax matters pertaining to their businesses and the tax administration cannot pretend to be better positioned to know this information better than the taxpayers. Self-assessment facilitates the tax administration, whereas a lot of resources were required in the older system – the revenue assessment system. In Australia, where this changeover took place in the 1980s, about 2,200 revenue employees were engaged in the assessment of taxpayers’ returns (determination of tax due from the returns filed). When self-assessment started, those employees were re-deployed to other offices within the Australian Tax Office, hence gaining better returns from that scarce human resource. It is important to talk a bit of what the process was like in Rwanda before self-assessment was introduced. As in other countries, taxpayers used to file their returns, just to show how much profit had been realized and tax officers could start to compute the amount of tax from such returns. This tax could be put on what used to be called extrait du rôle and the tax was due and payable at this point. The purpose of this article is to encourage the public, to understand how advantageous self-assessment is, not only to taxpayers but also to the tax administration, and to sensitize our esteemed readers on this important concept. Ends