For Ethiopia, as a developing country, weak capacity for tax resource mobilization is considered to be one of the most important challenges. The country has one of the lowest Tax-to-GDP ratios, even by sub-Saharan standard. And to address this issue, the country is embarking on a new tax compliance strategy where the tax administrators are expecting it to improve the country’s compliance level. As to Kebede Lidetu, Director of Risk and Compliance Strategy at Ministry of Revenue, a strategy that ensures optimal targeting of those taxpayers who deliberately evade whilst providing support for those who attempt to comply can improve tax compliance.
“A recent study that I was also part of showed that both coercion and persuasion are effective in nurturing tax compliance within taxpayers. As an institution, we have come to understand to implement both of them in tandem as such approach brings success in improving tax compliance.” While tax compliance strategy differs from country to country, the aim has been to focus group of taxpayer and the broader compliance environment, rather than individual taxpayers.
The international experience shows that taxpayers have four categories of tax compliance, which can be shown in the shape of the compliance pyramid, the Director noted. Further explaining the basics of the compliance strategy pyramid, Kebede said: “On the base of thepyramid, where the majority lies, the taxpayers in that group are simply compliant. The taxpayers in the next group, found one step ahead of the base, generally attempt to comply, but usually fail in doing that.” The third groups of taxpayers that come immediately ahead of the second category are generally evaders and try their hardest not to comply.
These batches of people come around to paying their taxes once they have been found out through detect and deter approach and fear of punishment from the authorities. Finally, the fourth category includes those that have decided to evade and avoid paying their taxes. This segmentation of taxpayers is crucial for the compliance strategy, according to Kebede, because it will be inexpedient to use “One size fits all” approach for all categories as they are different problems in need of different solutions. It will be giving diabetic medication for a cancer patient.
And the segmentation process helps in understanding and selecting the appropriate approach towards the taxpayer, which can fluctuate between service and control (education and punishment) – or between coercion or persuasion. For instance, the way to go about those at the bottom of the base (the complaints), is to give recognition and awards to them for complying, and making the tax payment process easier and conducive for them to maintain their motivation and persuade them some more. And the best strategy to use on the secondgroup is to provide information or education as they are by nature complaints in need of it.
Given that those in the third try to evade tax as much as they can until they are detected, the appropriate strategy would be identifying them and using various enforcement mechanisms like audit, intelligence and investigation on them, while the strategy towards to the fourth group is to use the full weight of the law as they have no interest of complying to the law. While the basis of the pyramid holds much of the taxpayer community, which is complaint, and differs from country to country, but whatever the case, the strategy is about pulling those up in the pyramid into the bottom or base of the pyramid.
In another words, it isabout making most of the potential taxpaying individual complaint by using various tools put in the strategy. Furthermore, Kebede also pointed out the Ministry is using a risk-based compliance management now, making various tax management works risk based. “For instance the audit system has been made riskbased from its previous approach; meaning that the people to be audited are not picked randomly, but based on the risk they pose.”
International experience show risk-based approach is the best tax management approach, he added. However, according to him, risk based compliance management is not enough alone as there are other variables that influence tax payers to comply or not to comply.
International experience shows that there are at least five factors that influences taxpayers’ voluntary compliance, ranging from the business profile and type of business to psychological, sociological politico-economic factors. All in all, as part of the tax reform process, the government is embarking on implementing a new compliance strategy at the Ministry level with a nationwide scope. And it is expected that by taking into account the various nuances of the taxpayers, and have a more systemic understanding of the broader compliance environment, compliance risks, the new strategy is more effective and help the country vastly improve its tax compliance in the days ahead.
The Ethiopian Herald May 15/2019
BY ROBEL YOHANNNES
