Compliance, enforcement and education Fredrik Aksnes, International Director

What is compliance? Compliance applies to any kind of rule-regulated activity the regulator could be both yourself and an external rule-maker at the end you must decide whether the external authority should influence your behavior or not. Examples are: Trying to lose weight by establishing a rule never to eat sweets or ice-cream Avoiding the risk of getting a fine by setting as a rule never to bypass speed limits enforced by external authorities Compliance in our context : respecting/following/observing the tax rules.

Rules and facts Even the most clear-cut rule is open to interpretation both the revenue authority and the taxpayer have a tendency to interpret the rules to their advantage Clear, unambiguous rules with not too many exceptions would avoid many unnecessary conflicts What are the facts in our context? The facts must always be described in such a way that they connect to the rules applicable in the domain of the fact. (There are no rule-independent, tax neutral facts in our context).

Why are taxpayers not complying with the tax rules? Low tax morale Deal with shame feelings easily Cynicism/egoism/free riding attitude Low education Rules are made by well-educated people. Sometimes they are relevant to almost illiterate people who cannot read them Difficult to follow the rules without a considerable effort Simplify rules Making important parts of the deliveries requested from the taxpayers easier to accomplish (e- registration, e-filing, e-payment)

Having taxable activities in areas where this activities can be manipulated for tax purposes Cash economy International transactions Evaluation issues regarding intangibles Intra-group transactions Has the opinion that the risk of getting caught in non- compliance is very low Mostly this is correct and at least for the SME- segment Why are taxpayers not complying with the tax rules?

Dislike strongly the tax system and revenue authority for personal, often historical, reasons Feel badly treated by the revenue authority Dislike public solutions and authorities, generally speaking Strong corruption culture in society Generally accepted – everyone does it Weak willingness to address the issue Why are taxpayers not complying with the tax rules?

Reasons for non-compliance and possible counter-measures: Low tax morale.  Hard to change in the short run but could we learn from other areas such as drunk-driving morale, or littering morale? Low education.  Not possible in the short run to change. Difficult rules.  Simplification of rules and explaining the rules in a more pedagogical way. Economic activity in areas where it is easy to hide or falsify tax facts.  Make facts more visible or harder to manipulate. Low probability for getting caught.  Increase the subjective feeling of detection risk by use in a more active way the results from our audits. Dislike of public/tax authorities.  Trying to improve the relationship by entering into a dialogue with the taxpayer. Corruption culture.  Anti-corruption measures.

Complex interactions Personal norms & deterrence Only personal norms Only deterrence Nothing High level of voluntary compliance Low level of voluntary compliance Works well if the deterrence is perceived as supportive. Procedural fairness important. Works well because personal norms have great influence on behaviour. Deterrence can replace the personal norm. That is a weaker incentive. Doesn’t work well.

Perception is everything Other peoples behaviour Other peoples values Behaviour of tax administration Fairness Trust in tax administration

How do taxpayers perceive the Tax Agency?

Have your trust in the tax agency increased or decreased after the audit?

Reasons for the change in trust Why the trust has increased Listening and good dialogue Nice and polite treatment Professional Good relationship Easy to understand Audits are a good thing Knowledgeable Helpful Personal contact Correct treatment Correcting errors

Tax administration in four countries NorwayMozambiqueTanzaniaZambia Population4,9 millions22,9 millions45 millions12,9 millions Staff in tax administration (including customs) 3500 (including customs) 1500 (including customs) Budget700 million USD FunctionsOnly direct and indirect taxes Also customs and excises Also customs and excisesr Formal independence LowHigh Real independence High??? Wage earners and retired people (2008) Self-employed (2008) Companies (2008)

Tax structure in four countries NorwayMozambiqueTanzaniaZambia Direct taxes Contribution to the social security system Indirect taxes Tax/GDP43,6%13,4%12%16,1%

Economic strucure in four countries in relation to employment

Infrastructure in four countries NorwayMozambiqueTanzaniaZambia Power stability2 power breaks per customer in 2008 ?Frequent! ? IT coverageHouseholds with Internett: 90% 2,6%1,5%6% Number of accountants 4884 (2010AA)More than 2000 (2008WB) 2677 (2001AA)3606 (2009AA) Literacy rate99%44,4%72,3%70,6% Number of years in school (average) 11,8 1,12,75,5

Cops and robbers Interesting object to study Partners Taxpayer perspective not of any interest Taxpayers are interesting from our perspective We need to understand the taxpayer perspective Compliance history

Valerie Braithwaite Tax authorities can no longer afford to design their systems as they please and ignore public perceptions. Nor is the answer one of bringing the community on board through “spin,” which is a short-term approach to a serious problem. Tax authorities need to engage in a reflective process with the community about tax design, tax administration, tax benefits, moral obligation, coercion, justice and alternative tax authorities.

Taxpayer perspective: How to get it? Surveys Taxpayer perception Taxpayer satisfaction Interviews Co-operation with stakeholders Advisory boards

Conclusions Genuine interest in the taxpayers and their needs creates trust One size does not fit all: we must have different tools in the tool box Tax morale is strengthened by showing the public through media that the bad guys get caught Important to involve the taxpayers in the building of the tax system and showcase the public goods that the tax money pay for