The problem of tax avoidance and evasion is common in all tax systems. All tax authorities have to contend and live with the problem. While the evil practice cannot be eliminated it can only be minimized because it is planned and undertaken in secrecy by the taxpayer and sometimes with the cooperation of tax consultant and auditor. Otherwise the tax authorities would have pre-emptied any tax evasion and avoidance practices. A high degree of tax avoidance and evasion may result into serious Government revenue shortfalls leading into non-realization of government and economic and social development programmes, and bring inequality in the tax system that may necessitate higher tax rates to compensate for the revenue loss than what the rates would otherwise have been. It is therefore in the interest of the country to keep the level of tax avoidance and evasion to as the minimum as possible.Tax Avoidance
Tax avoidance is not punishable in law. Where the tax authorities detect the practice, the only solution is to amend the law in order to plug the loopholes and weaknesses in the laws that allow the possibility of tax avoidance. It is for this reason that the practice of tax avoidance is sometimes considered as legally allowed. However, this does not mean that the tax authorities will allow the practice. For example, the taxpayer who claims the maximum permissible deductions in any particular year(s) of income such as through acquisition of assets that allow the highest capital deductions (e.g. clearing or clearing and planting permanent or semi-permanent crops, acquisition of class I or class 8 assets for depreciable allowances/wear and tear purposes etc.) constitute tax avoidance.
Similarly, there is no law that prevents anyone from changing his business organization from a sole proprietorship into a partnership or limited liability company. Whereas tax consideration may influence the change in the form of business organization, there may be other good reasons to justify the change such as the need to raise more capital for business expansion or attract necessary skills etc. It may also constitute legitimate tax planning where assets are leased instead of ownership because the higher lease rent is allowable over a shorter period instead of the smaller amount of depreciation allowance claims over a longer period of time. In all these cases there is no contravention of any law. The taxpayer merely looks at the existing legal framework to structure his business transactions to realize the maximum tax savings.Tax Evasion
Tax evasion on the other hand involves a taxpayer’s deliberate contravention of the tax law(s) in order to minimize or eliminate tax liability altogether (pay no or little tax respectively by breaking the law). Tax evasion is the application of fraudulent practices in order to minimize or eliminate tax liability.Typical examples of tax evasion:
- Making a false return of income by omitting or understating income or overstating expenses.
- Making a false statement in a return affecting tax liability
- Giving false information on any matter affecting tax liability
- Preparation or maintenance of false books of accounts or records
- Application of fraud e.g. manipulation of stock sheets and valuation, destruction of or defacing of accounting records, non-issue of sales receipts etc.
Where such acts are made with intent to evade tax or assist another person to evade tax it constitutes fraud or gross neglect, which is heavily punishable by law.Proof of fraud
It is essential that before such heavy penalties are imposed proof of fraud or gross (willful) neglect have to be established by the commissioner. Not all acts by a taxpayer may constitute evasion. It all depends on the amount involved and the prevailing circumstances. The omission of an item of income, false claim of expenditure or the wrong total amount by design but a genuine error of omission or arithmetic: the frequency of such errors, the amounts involved, the seniority and experience of staff or person who caused the error/false statement and other considerations should all be considered to establish the existence of fraud.
Where fraud is not established simple or minor omissions/errors are resolved by simple sanctions such as under:
· Section 98 (imposition of penalty for failure to maintain documents or failure to file statement or return of income),
- section 100 (imposition of late payment interest),
- section 99 (penalty for underestimation of estimated tax/making misleading statements),
Causes of Tax Avoidance and Evasion
Any attempt to avoid or evade tax may be caused by any one or combination of the following factors: -
- High marginal tax rates and frequent changes in tax rates such as ales tax and import duty, withholding tax etc. because taxpayers may consider distribution of their incomes unfair and may attempt to make a unilateral adjustment for equity by non-compliance through tax evasion.
- Administrative inefficiency, collusion with taxpayers and bribery of tax officials. Financial constraints, inadequate working tools and lack of staff motivation do not encourage tax compliance. Income may go untaxed and tax collection is delayed for various reasons.
- Inadequate training and experience of tax administrators coupled with lack of exposure to business practices may limit tax officials’ ability to expose complex international and intercom any tax avoidance schemes and check on stock manipulations or proper accounting in long term contracts.
- Too many taxes (multiplicity of taxes) are difficult to comply with correctly due to lack of knowledge of the detailed provisions of all the tax laws, too many due dates and too much return to complete, accounting staff shortages and different complexities in the laws etc. There are more than 30 tax laws in Tanzania. There is a need to rationalize the tax regime further.
- Low prospect of detection and punishment of tax evaders. The more tax evaders a person know who are not caught and punished, the more likely he will also join the band wagon of tax evaders (induced evasion). Where tax evaders are caught the penalty should be sufficiently deterrent. That is why a selective prosecution policy is necessary. However w.e.f.1/7/1997 the penalties for non-compliance appear too harsh and arbitrarily enforced.
- Deficiencies in the legal structure of the tax laws (poor draftsmanship) and complexity allow tax avoidance.
- Traditional and cultural tendency to hate and evade taxes (low tax morality): In Tanzania tax evasion seems to generate some sense of cheap heroism to the evaders. The practice is generally not seen by the society as a stigma.
- The wasteful manner in which the Government departments spend the revenue and lack of clear benefits to taxpayers through improved social services has some negative influence on tax compliance.
Effects (consequences) of Tax Avoidance and evasion
Although the concepts of tax avoidance and tax evasion are different, the purpose and net effect of these concepts are exactly the same i.e. the reduction or elimination of tax liability resulting into:
Government revenue loss leading to non-realization of budget plans and objectives for economic and social development;
Non-realization of other non-revenue goals of taxation e.g. inequality in taxation, as some law abiding citizens or those with no opportunity to evade tax such as employees, bear a disproportional heavier tax burden than others;
Alternative sources of government revenue such as the running of government budget deficits is inflationary and foreign loans/grants dependency causes heavy foreign debt burden (loan repayment with interest drains foreign reserves) and may be politically undesirable.How to Minimize Tax Avoidance and Evasion
It becomes relatively easier to design effective ways and means of fighting tax avoidance and evasion if we know the causes. All efforts should go towards minimizing or containing the causes.
In the light of the above causes of tax avoidance and evasion the following should be undertaken.
- Keep the marginal tax rates low, bearable and not subject to frequent changes.
- Promote administrative efficiency by providing better tools (e.g. computers, transport etc.), adequate financial resources and staff motivation (good salaries, housing, promotions etc.).
- Carry out technical staff training on accountancy, tax laws, exchange visits with other countries, practical business exposure and taxpayer education especially for small businessmen to encourage voluntary compliance.
- Carry out a major selective prosecution policy and punishment particularly on major taxpayers with a view to punish them for deterrence effect. Tax officials may be punished for corruption and inefficiency.
- Avoid multiplicity of taxes by retaining a few major productive taxes only to make easier administration and compliance.
- Design clear and simple tax laws and avoid ambiguity (better legal draftsmanship of the laws)
- Judicious and rational expenditure of revenue by the government. If taxpayers see that their taxes are well spent, voluntary compliance is likely to improve.
On the basis of the above negative implications arising from tax avoidance and evasion the government policy will fight against and discourage both practices of tax avoidance and evasion (e.g. s. 33 to s.35 – tax avoidance arrangements). Some other provisions against tax avoidance and evasion are under sections 98 to 124 of the ITA 2004. The other tax policy tool particularly against tax avoidance is to enact timely amendments of pensive of the tax acts wherever it is detected those certain provisions of the law allow tax avoidance in a major scale. The timely amendment of the law is in the nature of preventive tax maintenance to pre-empt possible avoidance and evasion.