Serika Sterling | Getting beyond the thorny issue of tax non-compliance
No new taxes! No one will ever complain about that. But with over $200 billion in tax arrears, we can clearly see that the issue of non-compliance stands resolute.
It is a phenomenon that seems to be ingrained in our tax culture. So, what influences this culture? Let us start from the top.
Jamaica operates under a self-assessment system for taxation of its citizens. With this type of system, there is a shift in the responsibility for computing tax payable from the tax authorities to the taxpayer. Taxpayers are therefore expected to be well versed on the existing tax laws and administration and to voluntarily comply.
The self-assessment system is widely thought to be one which encourages tax compliance, yet compliance remains the single biggest challenge for our tax administrators. Tax reform as a means of improving tax compliance has been on the table in Jamaica for decades. There is an almost annual manipulation of tax rates, thresholds and regulations - all bits and pieces of the overall tax reform plan. However, the issue of non-compliance remains resolute.
The question then is: What motivates taxpayers and manufactures a culture of pervasive non-compliance? The possible reasons are numerous, but a few common determinants stand out from my interaction with taxpayers.
Complex administration system
A complex tax administration system often gives rise to tax non-compliance. No one really wants to give away their hard-earned money; as such, if the tax system is complicated and time-consuming, chances are persons will choose to stay away.
In particular, taxpayers bemoan filling out complex forms and adhering to frequently changing procedural and compliance requirements. This adds to the enormous amount of time, money and effort needed to resolve simple tax matters.
The lag in providing relevant information to the taxpayers was also cited as adding to the complexity.
A study done by the Caribbean Policy Research Institute in 2016 found that taxpayers were largely unaware of administrative measures implemented by Tax Administration Jamaica. The short lead time between the announcement and implementation of new tax laws or procedures further exacerbates the issue, leaving more questions than answers and making taxpayers more prone to making errors in calculating their tax liability.
Then there is the fairness perception, where taxpayers choose their level of tax compliance based on their perception of the balancing of the tax scale. For starters, it is perceived that the current political landscape demonises taxation.
For example, when the tax rates, thresholds and regulations are manipulated by the incumbent government - the party in power at the time - we find the opposition accusing them of some sort of stratagem through taxation. As such, many citizens view taxation as a political tool rather than a tool to drive socio-economic growth.
There is also constant disagreement regarding the formula that determines who pays what, and on what the government should spend our taxes. Some believe that more of the tax burden should be shouldered by the wealthy, while others believe that the government should not be using their taxes to support the poor. This kind of thinking is used by some taxpayers to justify tax non-compliance.
In addition, tax incentives given to certain industries - which were largely curbed following the 2013 omnibus Fiscal Incentives Act - was perceived by some taxpayers as 'picking winners'. This left some taxpayers feeling unfairly treated, and thus influenced their propensity to be tax non-complaint.
Perceived behavioural controls
Possibly the most significant factor that influences non-compliance is the weak perceived controls over this deviant behaviour - the inadequacy of our system in enforcing the tax law.
There is a common belief among taxpayers that others in the business community, and even our leaders themselves, are failing to pay their taxes. The perceived ease at which those outside the tax net operate, facilitates the deviant behaviour of tax non-compliance.
Taxpayers also believe that there is a significant disparity between enforcement action taken against persons already tax-compliant, sometimes for minor infractions, versus those who are not compliant at all. Such perceived inequity encourages tax cheats and frustrates the already-compliant into thinking they are being punished for trying to do the right thing.
Some taxpayers want to be compliant, but at times fall unwittingly into non-compliance.
The finance minister spoke of lowering penalties for those with the propensity to comply, and what better way to gauge this than with a tax amnesty for both the formal and informal business sectors - giving all an opportunity to start with a new slate. Thereafter, attention can be focused on ultimately making our tax system one that encourages compliance through simplicity of administration, fairness and equity in its enforcement.
- Serika Sterling is a certified public accountant and owner of Senior Accounting Services.