Tax compliance needs holistic approach

Tax compliance is a challenge to almost every country. There are many studies that explain tax evasion. Some theories are economic, political, social, and psychological.

Despite the existing theories and models that explain tax compliance, nations are still grappling with high levels of noncompliance.

Tax noncompliance remains a major hindrance to economic development of many nations.

Uganda’s performance in terms of tax revenue as a percentage of Gross Domestic Product (GDP) is performing below it peers in the region.

The country’s tax revenue to GDP is below 16 per cent, according of Organisation for Economic Co-operation and Development (OECD) and World Bank. With the performance, attaining middle income status can only remain a dream.

Last week the Ministry of Finance reported that Uganda had signed a contract with a US company to help Uganda Revenue Authority (URA) collect rental taxes.

Whereas any effort to increase revenue and reduce noncompliance is welcome, there is need for a holistic approach to deal with the problem. There is need for research to find out why there is high noncompliance of rental taxes before any solution is implemented.

URA and development partners had already dedicated a project for tax payer register expansion and established rental unit.

The December 2018 revenue report indicates that URA surpassed target of rental revenue. It is important to use the experience of the project to study the finding and come up with comprehensive project to address noncompliance.

For example if Kampala Capital City Authority has been able to value properties successfully why not apply the strategies to the rest of the country.

Further still, the Lands ministry has successfully computerised systems with 22 zonal offices now operational. That information is too vital for property identification.
According to the Finance ministry statement, the company will help URA identify property link it to tax payers TINS with URA and determine rental tax revenue before deductions.

That implies the hired company will be vital in property identification. However the challenge on rental tax non-compliance is beyond property identification.

The existing theories of tax compliance attribute tax evasion to a number of factors which include probability of being detected by the revenue authority, enforcement effort of revenue authority, compliance costs, tax payer understanding of tax system and tax laws, motivation such as rewards and penalties, ethics or morality of the tax payer and tax collector, equity of the tax system, demographic and cultural factors, tax payer perception and attitudes of the tax system and revenue authority, informality, political accountability etc.

These factors will vary from country to country and culture to culture. It is therefore important as a country to do research and find why there is noncompliance.
How are tax payers for example perceiving URA? Is it coercive or persuasive? What is the level of knowledge of the tax payers? Is the tax system equitable? A tax payer that pays ground rent, property rates, rental tax, business licence all from one business for example may perceive the tax system unequal. How do tax collectors behave? Are they ethical? Is government accountable? Many of these factors will have a negative bearing on the tax payer’s morale to comply.

Property identification is a good step but let’s first harness the existing information, assess results from existing projects and study the factors leading to noncompliance.

Mr Edson Serve Ashabahebwa CFE, CPA Africa Tax Institute University of Pretoria.