Once again the issue of black money and tax evasion has come under scrutiny. While addressing members of the private sector in Nadi last month the Attorney-General Aiyaz Sayed-Khaiyum said, "I have to say the Western Division with probably Vanua Levu is where there is a lot of black money around. There is a lot of wheeling and dealing done under the table. There are a lot more cash transactions." (The Fiji Times 28/11). It was reported earlier that a company was under investigation for alleged tax fraud involving under-declaration of its sales by more than $16.5 million (FT 16/11).
High level of noncompliance
It is quite evident that there is still a high level of noncompliance despite all the inducements such as the Gold Card Scheme and tax amnesties being offered by Fiji Revenue and Customs Authority (FRCA).
So what could be the reason for the low tax morale? Is the high cost of compliance one of the contributing factors for the low unwillingness to pay taxes?
Or is the non-compliant behaviour a revolt towards the tax regime? FRCA goes to great length to educate the public on their tax obligations. But how many taxpayers have the ability to fully understand and more importantly to comply with the various requirements which is seen as an administrative burden.
Its efficacy can be easily tested by the number of self-assessed tax returns filed. Even Albert Einstein admitted that "the hardest thing in the world to understand is the income tax."
In my view FRCA will do well in investing more effort towards developing less complicated and user friendly systems aimed at enticing self-compliance.
What is compliance cost?
Taxation experts have claimed that the gross costs of complying with taxation obligations typically consist of monetary and psychological costs.
Monetary costs refer to the value of resources expended by businesses and individuals to satisfy the requirements of government taxation and regulation.
Psychological costs refer to the stress and anxieties experienced by business owners and individuals in having to satisfactorily deal with taxation and other regulations.
These costs are particularly relevant to small businesses, especially sole traders, since these businesses have rather limited capacities to outsource the compliance obligations to third parties such as tax advisers or experts.
A compliance cost is defined as the sum of time or money spent in conforming with government requirements such as legislation or regulation.
For example, people or organisations registered for value added tax have the extra burden of having to keep detailed records of all input tax and output tax for filing VAT returns. Therefore, a simpler and transparent tax system can greatly reduce the cost of compliance for taxpayers especially for SMEs.
Compliance costs are strongly regressive
Several studies have been conducted to ascertain the costs businesses incur in the process of complying with various taxes. Some of these studies have also analysed the costs incurred by small and medium-sized companies in complying with business income taxes.
It came as no surprise that their findings were similar. The findings reveal that although larger firms generally incurred higher compliance costs than small and medium-sized firms, compliance costs were regressive in the sense that smaller firms faced greater compliance costs as a proportion of sales than medium-sized and large firms.
A study by Sandford and Hasseldine established that compliance costs incurred by businesses in New Zealand were "strongly regressive" and that compliance costs associated with the income tax were estimated to be 19 per cent of the revenues collected by the income tax.
Time taken to comply
According to World Bank's "Time to prepare and pay taxes" survey the number of hours for Fiji has increased from 206 in 2005 to 247 in 2016.
Time is recorded in hours per year. The indicator measures the time to prepare, file and pay (or withhold) three major types of taxes and contributions:
* corporate income tax;
* value added or sales tax; and
* labour taxes including payroll taxes and social contributions.
Preparation time includes the time to collect all information necessary to compute the tax payable.
Filing time includes the time taken to complete all necessary tax forms and to make all necessary calculations and submissions.
Payment time is the hours needed to make the payment online, or at the tax office. Where taxes and contributions are paid in person, the time includes delays while waiting.
This payment time can also include analysis of forecast data and associated calculations if advance payments are required. It is important to note that the hours to comply measure does not include any time spent on tax audits or inspections or dealing with tax authority queries.
What are the reasons for tax evasion or avoidance?
Based on my observation and experience I believe there are several factors that strongly influenced the non-compliant behaviour.
Perception of unfair tax system normally emanate from the belief that high tax rates increase the tax burden thus lowering the disposable income of the taxpayer.
The huge disparity in import duty between new and used hybrid motor vehicles which also leads to unfair competition typifies one such case.
Lack of transparency and mismanagement of public funds also contributes to public distrust in the tax system thus increasing the willingness to evade taxes.
The infamous $220 million bail out of National Bank of Fiji and the agriculture assistance scam are still afresh in the minds of the taxpayers.
Some may detest filing tax returns because the task could be labourious and time consuming for them.
Of course high cost of compliance, amnesties granted to defaulters and ineffective voluntary compliance regime has also contributed to the problem.
Let me leave the readers with this interesting taxpayer's prayer coined by Russell Baker: "Oh Mighty Internal Revenue Service, who turneth the labour of man to ashes, we thank thee for the multitude of thy forms which thou hast set before us and for the infinite confusion of thy commandments, which mulitplyth the fortunes of lawyers and accountants alike."