The link between tax morality and tax compliance
Namibia, like most developing countries, is faced with the challenge of having a small tax base and a lack of administrative capacity in tax collection that can curb possible tax avoidance schemes. Generally the tax authorities lack the resources and skills to ensure optimal revenue collection, thus the challenge for the government is how to expand the tax base and at the same time ensure that everyone pays their fair share of tax. What can be considered as a “fair” share is however open to debate due to the different perceptions people have on the payment of tax.
The question of tax morality has been a topical issue over the recent years, especially in the wake of the Panama Papers leak debate. The Panama Papers serves as proof of the extent to which tax havens are used by people all over the world to evade tax. To exacerbate the matter, many of the persons implicated in the Panama Papers are politicians who are actually expected to set the standard for tax morality in their respective nations. The possession of offshore accounts is not prima facie illegal; however, intentionally shifting profits resulting in the underpayment or non-payment of tax in one’s respective jurisdiction sets the basis for the illegality. Tax evasion, unlike tax avoidance whereby one can arrange financial affairs to minimise tax liability within the law, is illegal. Through tax evasion, the government is deprived of the revenue that could be used to provide social services.
What is tax morality?
Tax morale can be considered as “a moral obligation to pay taxes”, or “a belief in contributing to society by paying taxes” (Torgler 2003; Torgler 2004; Torgler and Schneider 2009; Cummings et al 2009; Torgller 2005). It can be viewed from many angles, including the following:
Common good of the society
If the revenue collected from tax is used to improve the welfare of society, the whole community benefits. Government will be able to provide the services that people need and be able to distribute wealth to those who are the poorest (Calling for Tax Justice- Christian Aid).
When paying tax is considered a moral obligation, companies and individuals willingly do the right thing at the right time and pay their fair share of taxes. The resulting benefit being that companies and individuals are contributing to the benefit of all. Consequently, the nation as a whole thrives. Arguably, the revenue that government collects may not necessarily be put to good use and may be used to fund other things that do not serve the interests of the people.
Public image of organisations
The image of an organisation is negatively affected if the organisation is perceived to be involved in tax evasion. A good example is the case of Starbucks, an American coffee company and coffee chain, which was involved in a scandal in 2012, when it was accused of tax evasion through effectively shifting taxable income to its subsidiaries located in jurisdictions where it could be taxed at lower tax rates. It suffered great harm to its reputation when it was discovered that the company was not paying corporate tax in the UK.
The link between tax morality and tax compliance
The main reason why people pay tax is the legal obligation to do so. Non-compliance may result in the levying of penalties and interests. Although Tax Authorities have the power and mechanisms to enforce the payment of tax, there are many factors that influence the payment of tax.
A research paper of March 2013 by the Organisation for Economic Corporation and Development (OECD) revealed, that among other things, satisfaction with public services and expenditures influence the way people perceive the payment of tax. According to the report, people are more willing to pay tax if they are happy and can see that the revenue collected is put to good use by the government.
There must also be transparency and accountability between the government and the taxpayers resulting in a win-win situation for all stakeholders. If the results are visible of how the government is accounting for the revenue collected, people may be more willing to pay tax.
There are views that paying tax should go beyond the legal responsibility as there are also social and moral obligations to take into consideration, which brings up the question of tax morality. If the taxpayer feels that it is their moral obligation to pay the right taxes at the right time, then it can be seen as a way of giving back to the same society from which the revenue stems. It can therefore be argued that tax morale is an important factor in tax compliance decision making.
The question of tax morality cannot be ignored and it requires all involved to carefully consider the way they perceive the payment of tax. Companies and individuals need to consider the positive impact this has on our society. The focus for companies and individuals would need to shift from reducing tax liability and move towards implementation of responsible tax behaviour (Christian Aid). Equally important, the government has to be accountable on how the revenue collected is put to use. This may increase tax compliance resulting in more tax being paid, which translates into a broader resource base, which if diligently used will improve the nation’s welfare.
For more information & how we can assist:
Disclaimer: The content of this article is subject to the disclaimer which can be found at http://www.kpmg.com/na