KIGALI INDEPENDENT UNIVERSITY
FACULTY OF LAW
P.O. BOX 2280
KIGALI
A Critical Analysis of Effectiveness of Tax
Offences Control Mechanisms under
Rwandan Law
This dissertation is submitted in partial
fulfilment of requirement for the award
of the bachelors degree in Law
BY: KABERA Charles
Supervisor: CCA ABIJURU Emmanuel
Kigali, September 2009
i
Dedication
To my children Charlotte and Junior;
To my Late wife Ruth;
To my Dear mother Therese;
To my Late father Ladislas;
To my sister and brothers;
To all Creative Thinkers and Researchers;
I dedicate this work
ii
Acknowledgements
Above all, I owe much tribute to the Almighty God who gave me a life worthy living and I thank Him for
giving me the strength to accomplish this project.
The success and accomplishment of this research work stems from efforts and dedication offered by
many individuals and institutions whose support was either direct or indirect. I thank all of you for your
devotion, generosity and mercy to complement my labours in making my education successful.
I acknowledge the Kigali Independent University (ULK) particularly the Faculty of Law for the quality
training accorded to me for the past four years. The efforts of both academic and non-academic staff
in organisation and implementation of the faculty agenda are much appreciated. I acknowledge the
support and guidance that was offered by the Dean of Faculty of Law whenever I approached him.
The skills attained will facilitate perfection in my professional career.
Special thanks go to CCA ABIJURU Emmanuel, the Supervisor of this research work for his wise and
kind guidance. His genuine cooperation, encouragement and simplicity enabled me to accomplish my
work in a calm and convenient environment. I wish to thank him sincerely for his precious availability.
His assistance and his advices have been particularly helpful. His devotion and commitment towards
the success of this work will always be valued.
With much regard, I thank Late Dad and loving Mother for their endless love. I equally thank my Loving
sister and brothers who were always by my side when things turned the other way round. Thank you
indeed for being there when I needed you. You have been special friends to me.
Particular thanks also go to my colleagues and friends at ULK for being so friendly and supportive
during this period.
KABERA Charles
iii
Acronyms
AO
:
Art
: Article
Asycuda
: Automated System for Customs Data
ATO
:
Abgabenordnung (German Tax Code)
Australian Taxation Office
CCA
Chargé de Cours Associé
CRA
: Canadian Revenue Agency
DTD
:
Domestic Tax Department
Ed.
:
Edition
GST
:
Goods and Services Tax
HMRC
: Her Majesty Revenue and Customs (UK Revenue Agency)
http
:
Hyper Text Transfer Protocol
IBFD
:
International Bureau for Fiscal Documentation
ICHA
: Impôts sur chiffre d’Affaires (Sales Tax)
INR
Indian Rupees(Indian currency)
IRC
:
Internal Revenue Code (United States),
LGT
:
Ley General Tributaría (Spain Tax Code)
L.P.F.
: Livre de procédures Fiscales (French Tax Code)
LRA
:
Lesotho Revenue Agency
LTP
Ksh
Law on Tax procedure
:
Kenya shillings
MAGERWA: Magasins Généraux du Rwanda (General Stores of Rwanda)
MRA
: Malawi Revenue Authority
OECD
:
OGRR
: Official Gazette of the Republic of Rwanda
RPD
Organisation of Economic Cooperation and Development
Revenue Protection Department
RWF
:
RRA
: Rwanda Revenue Authority
PAYE
: Pay as You Earn
SARS
: South Africa Revenue Services
SIGTAS
Rwanda Francs
Standard Integrated Government Tax administration System
TLDD
:
TIN
: Taxpayer Identification Number
TPL
: Law on Tax procedure
Tax Law Design and Drafting
iv
U.S.
:
United States of America
Vol.
:
Volume
www
: World Wide Website
ZAR
:
South African Rand (Currency for South Africa)
ZRA
:
Zimbabwe Revenue Authority
v
Table of Contents
Dedication ................................................................................................................................................................ i
Acknowledgements .................................................................................................................................................. ii
Acronyms ............................................................................................................................................................... iii
Table of Contents .................................................................................................................................................... v
GENERAL INTRODUCTION ..................................................................................................................... 1
i.
Background of the Study ................................................................................................................................. 1
ii.
Objectives of the Study ................................................................................................................................... 1
1.
General objective ....................................................................................................................................... 1
2.
Specific objectives ..................................................................................................................................... 2
iii.
Scope of the Study ......................................................................................................................................... 2
iv.
Statement of the Problem ................................................................................................................................ 2
v.
Hypothesis..................................................................................................................................................... 3
vi.
Research Methodology ................................................................................................................................... 3
vii.
1.
Techniques ............................................................................................................................................... 3
2.
Methods ................................................................................................................................................... 4
Subdivision of Work ........................................................................................................................................ 4
CHAPTER I.
I.1.
I.2.
I.3.
I.4.
AN OVERVIEW OF TAX OFFENCES.................................................................... 5
Definition of Tax and Related Terms................................................................................................................. 5
I.1.1
Definition of Tax .................................................................................................................................... 5
I.1.2
Characteristics of tax ............................................................................................................................. 7
I.1.3
Direct vs. Indirect Taxes ........................................................................................................................ 8
Objectives of Taxation .................................................................................................................................... 9
I.2.1
Increase of government revenue .......................................................................................................... 11
I.2.2
Fair distribution of income .................................................................................................................... 11
I.2.3
Economic Stability and control of inflation .............................................................................................. 11
I.2.4
Protection policy and creation of employment opportunities ..................................................................... 11
I.2.5
Optimum allocation of Resources ......................................................................................................... 12
I.2.6
Restriction of consumption of certain commodities ................................................................................. 12
Definition of Tax Offence and Related Terms .................................................................................................. 12
I.3.1
Tax Offence ....................................................................................................................................... 12
I.3.2
Tax Fraud .......................................................................................................................................... 13
I.3.3
Tax Evasion vs. Tax avoidance ............................................................................................................ 13
Main Tax Offences ....................................................................................................................................... 14
I.4.1
Value Added Tax violations .................................................................................................................. 14
vi
I.4.2
Consumption Tax Offences .................................................................................................................. 15
I.4.3
Income Tax offences ........................................................................................................................... 15
I.5.
Causes of Tax Offences ................................................................................................................................ 15
I.5.1
Complexity of tax laws systems and procedures .................................................................................... 16
I.5.2
High rates of taxes .............................................................................................................................. 17
I.5.3
Limited resources and capacity of tax administration .............................................................................. 18
I.5.4
Tax offenders are not published: ‘Naming and Shaming’ ......................................................................... 18
I.5.5
Perceptions towards taxation and historical factors ................................................................................. 18
I.5.6
Corruption among some tax officials ..................................................................................................... 19
I.5.7
Low literacy and lack of tax education ................................................................................................... 19
I.5.8
Technological developments ................................................................................................................ 19
I.5.9
Poverty and nature of production .......................................................................................................... 20
I.6.
Negative Impacts of Tax Offences .................................................................................................................. 20
I.6.1
Consequences on the government ....................................................................................................... 20
I.6.2
Consequences on the tax offender ....................................................................................................... 21
CHAPTER II.
II.1.
CRITICAL ANALYSIS OF CONTROL OF TAX OFFENCES....................... 22
Legislative rules and procedures used in tax offences control....................................................................... 22
II.1.1
Powers of access to information for tax audit and investigation ................................................................ 22
II.1.2
Tax offences and subsequent sanctions ................................................................................................ 25
II.1.3
Tax offence management, disputes resolution and appeals mechanism ................................................... 30
II.2.
Administrative tax offences control rules and procedures ............................................................................. 33
II.2.1
Registration and de-registration of taxpayers ......................................................................................... 33
II.2.2
Taxpayers education and assistance .................................................................................................... 35
II.2.3
Control of corruption among tax officials ................................................................................................ 36
CHAPTER III.
III.1.
MECHANISMS PROPOSALS FOR CONTROL OF TAX OFFENCES .... 39
Legislative Mechanisms Proposals ............................................................................................................ 39
III.1.1
Provide more powers of access to information ....................................................................................... 39
III.1.2
Prosecution, imprisonment and publication of tax offenders .................................................................... 45
III.1.3
Enhance the external appeals mechanism............................................................................................. 47
III.2.
Administrative Mechanisms proposals ....................................................................................................... 48
III.2.1
Enhance Taxpayer Registration and De-registration ............................................................................... 48
III.2.2
Enhance taxpayer assistance and education programs ........................................................................... 50
III.2.3
Stamping out corruption ....................................................................................................................... 52
GENERAL CONCLUSION .................................................................................................................................. 56
1
GENERAL INTRODUCTION
i.
Background of the Study
Rwanda has had a tax system since the earliest days of colonial settlement. Today, the government
collects over RWF 351.81 billion in taxes and duties. A good tax system needs to be robust and
efficient in terms of revenue collection, compliance improvement and control of tax offences.
With the growth and increasing globalisation of businesses (including the increased mobility of capital
and rise of e-commerce), the opportunities for taxpayers to violate tax laws are expanding, prompting
the need for the tax administration to continually update and broaden the strategies it uses to deal with
this problem.
This research paper carries out a critical analysis of both legal and administrative mechanisms used to
control tax offences. One difficulty encountered during research analysis lies in determining the
necessity for rigorous penalties and other control measures that ensure effective control of committed
tax related offences and their adequacy to the types of tax infringements. A comprehensive study has
been carried out to identify best practices that are employed by other tax administrations in detection
and prevention of violation of tax laws.
Finally, the paper discusses the effectiveness and acceptability of measures applied to control tax
offences and I attempt to offer some recommendations towards the tax offences control mechanisms
under Rwanda Tax system.
ii.
Objectives of the Study
1. General objective
The general objective of this study is to analyse the current mechanisms used to control tax offences
under Rwanda tax law. The research will recommend and draw conclusion on legal regime
surrounding violation of tax law and propose strategies to address these violations.
1
RRA Annual Report, 2008, p 7.
2
2. Specific objectives
The research study will highly focus on specific objectives particularly which will be to:
1. Identify the concept of Taxation and tax offences under Rwandan tax Law;
2. Identify legal and administrative measures used to address tax offences;
3. Identify the existing legal and administrative weaknesses in addressing tax offences;
4. Recommend mechanisms that should be used to control tax offences.
iii.
Scope of the Study
This research is in the domain of Taxation Law. The actual focus of study is a critical analysis of tax
offences control mechanisms under tax system as provided by the law nº 25/2005 of 04/12/2005 on
Tax Procedures and other legal texts in force. The research study was conducted in Rwanda.
iv.
Statement of the Problem
People talk about tax matters, complain about them and try to dodge them when they can2. Some
always pay; some always cheat; and some cheat when they think they can get away with it 3.
Businesses also react to taxes, both in how they organize their activities and, perhaps, in where they
carry them out.
This research is intended to find the possible solutions for the following questions:
1. How effective is Rwanda Taxation Law in the Control of Tax Offences?
2. What mechanisms can be put in place by Rwandan tax administration in order to effectively
address the problem of tax offences?
A critical analysis on the control and prosecution of tax offences under Rwanda taxation system is
carried out in the second chapter of this work and control mechanisms to address the persistent
problem of violation of tax law are provided in the third chapter.
2
Richard M. and Eric Z., An introduction to the Design and Development of Tax Policy in Developing and Transitional
Countries, World Bank, April, 2003, p.57.
3
Richard M. , Administrative dimensions of Tax Reform, 2003, p.24.
3
v.
Hypothesis
Despite the fact that there are various legal provisions and administrative mechanism put in place to
control the violation of tax law, the effectiveness of these mechanisms remains questionable. Based
on this problem, we have been prompted to carry out a critical analysis of effectiveness of tax offences
control mechanisms under Rwandan Law. This research work will be based on the following
hypotheses:
1. Some weaknesses may occur into both legislative and administrative mechanisms and lead to
failure of tax offences control;
2. Enhancement of legislative and administrative mechanisms such as publication of tax
offenders and tax payer education and assistance may lead to an effective tax offences
control
vi.
Research Methodology
Research methodology is the part of a research work in which the techniques and methods to be used
in conducting a research are described4. Research methodology includes both Research Techniques
and Research methods. The techniques and methods used during this research are discussed
below.
1. Techniques
The research techniques used included documentation and interviews as explained in the following
paragraphs.
a) Documentation
This involved analysis secondary data by consulting textbooks on taxation, Taxation Law, tax
administration, Rwandan legal texts, legal texts of other countries, documentation from RRA, website
of RRA, websites of other tax administrations, papers presented in national and international seminars,
conferences and workshops.
4
The Free Dictionary by FARLEX, available on: medical-dictionary.the-freedictionary.com, accessed on 08/07/2009 .
4
b) Interviews
In order to obtain data related to the objectives of this research, selected taxpayers and RRA Staff
working in Legal and Board Secretariat, Domestic tax Department and RPD were interviewed to grasp
the practical approach to tax offence control process and procedures.
2. Methods
The methods used during the research work included comparative method, analytical method,
synthetic method, and scientific method.
a) Comparative method
Comparative method was used to carry out a comparative study of doctrine and jurisprudence from tax
systems of other countries. The identified best practices applied by those countries were
recommended to be adopted by Rwanda tax administration.
b) Analytical method
Through analytical method, I studied and analyzed different legal texts and data which I collected
using different techniques.
c) Scientific method
The scientific method was an indispensable tool in the interpretation of different text books and legal
texts that were consulted during this work.
vii.
Subdivision of Work
Apart from general introduction and conclusion, this work is subdivided into three chapters.
The first chapter concentrates on theoretical aspects of taxation and tax offences. The second chapter
carries out a critical analysis on tax offences control under Rwandan law. The third chapter proposes
both legal and administrative mechanisms that can be implemented to address the problem of tax
offences.
5
CHAPTER I.
AN OVERVIEW OF TAX OFFENCES
‘For the impositions that are laid down on the people by sovereign power are nothing else but the
wages due to them that hold to public sword, to defend private men in the exercise of their several
trades…5.’
This chapter will be devoted to the theoretical aspect and general overview of taxation and tax
offences in order to facilitate comprehension of the problem related to control of tax offences in the
context of Rwandan tax system. The chapter will mainly focus on definition of tax and related terms,
justification of taxation, definition of tax offence and related terms, main tax offences, causes of tax
offences and the negative impacts or consequences of tax offences.
I.1.
Definition of Tax and Related Terms
This section provides different definitions of tax are given according to different researchers and
writers on taxation; characteristics of tax are derived from different definitions of tax. A conclusion is
drawn from these definition elucidate what tax actually means. This section also tries to draw a
distinction between a “tax” and other non tax collections. The distinction between direct tax and
indirect tax is also clarified.
I.1.1
Definition of Tax
Since this work is on tax, it seems appropriate to mention what ‘tax’ means. Under Rwanda tax law,
there is no formal definition of a tax. The Concise Oxford Dictionary defines a ‘tax’ as a “contribution
levied on persons, property or business for support of government”, while OECD defines a tax as “a
compulsory, unrequited, transfer by the general government sector6.” It is in effect a contribution
designed to reduce private expenditure in favor of public expenditure to enable the government to
obtain funds in order to provide social and merit goods and services, redistribute income, clear market
imperfections and stabilize the economy7.
5 Thomas
Hobbes, Leviathan, 1651.
6
Waburton R. Hendy P, International Comparison of Australia’s Taxes , 2006), pp.17-22.
7
Nicholas, T, Taxation in Kenya (Principles and Practices), 5th Revised Edition, 2003, p.71.
6
Allan prefers a wider view of tax as “any leakage from the circular flow of income into the public sector,
excepting loan transactions and direct payments for publicly produced goods and services up to the
cost of producing these goods and services.8 While this definition distinguishes taxes from other
government action with an equivalent economic effect, it is at the same time both over- and underexclusion. Some legally required payments may be made not to the government itself, but to a
government controlled entity. Such payments differ only in form from earmarked taxes that are paid to
the government and then passed to the spending agency in question. On the other hand, not all
required payments to the government are taxes. Tax should not include civil or criminal fines. The
distinction between a fine and a tax can be a matter of form. For example, is consumption tax provided
in law n° 26/2006 of 27/05/20069 determining and establishing consumption tax on some imported and
locally manufactured products really taxes or are they fines? The answer may differ depending on the
context in which the question arises. Fines should not be considered as taxes. A fine may be
distinguished from a tax on the basis that the former is designed to punish the illegal conduct, while
the latter is designed to contribute to public revenues on the basis of the taxpayer’s economic
capacity.
Further, taxes should not include payment to the government for which the taxpayer receives a
service in return. There is a continuum, ranging from pure taxes where the taxpayer receives nothing,
to a fee for a service whose value corresponds to what was paid.
Several continental European countries and Latin American countries have fairly well elaborated
statutory definitions of taxes and other compulsory contributions10. Under such schemes, taxes are
viewed as a subset of a more general category- compulsory contribution11- which has been defined as
‘ a monetary contribution unilaterally imposed under the public law which serves ( at least in part) to
raise revenues and is payable to a public authority’. The following definition in Spain is about the
same: ‘a public receipt under public law, obtained by a public entity, on the basis of a relationship as a
8
Allan C, The Theory of Taxation, Penguin, (1971) p.24.
9
For example, article 4 of the cited law levies Consumption tax of 120 percent on cigarettes. One wonders whether it is tax
or fine on cigarette smokers.
10
The definition is typically contained in the tax code or in a general law on tax procedure. For example, AO ss
3(Germany), LTG art. 26(Spain), Tax Code, art 8 (Russia)
11
In German: Abgabe. German law contains a definition of tax (Steuer) in ss 3 AO. Abgabe is a compulsory contribution.
Taxes are subsets of abgaben. The corresponding to Abgabe in Spanish and Portuguese is tributo, the term for tax being
impuesto (in Portuguese imposto).
7
creditor in respect of the person obligated to contribute, as a result of the application of the law to a
fact which is indicative of economic capacity, and which does not constitute a penalty for an illegal
activity12.’
In France, obligatory contributions are divided into fees (taxes fiscales et redevances), parafiscal fees
(taxes parafiscales), social contributions (Cotisations sociales), and taxes (impôts). The difference
between a ‘taxe’ and a ‘redevance’ is that the latter should be equivalent in value to the service
rendered while the former needs not be. ‘Taxe’ has fiscal nature while ‘redevance’ is a non-fiscal fee
for services.13 Parafiscal fees are same as ‘taxes’ except that they are extra-budgetary and not paid to
the state itself. A fundamental criterion is that the contribution is compelled by the law. In turn,
compulsory contributions are subdivided into fees, special contributions, and taxes paid by the
beneficiary.
Professor Seligman suggests that a tax is a compulsory contribution from a person to the government
to defray the expense incurred in the common interest of all, without reference to special benefits
conferred. It is a compulsory levy imposed on the nationals and residents to meet expenses which are
incurred by a government for the common cause.
Tax is generally referred to as a compulsory levy by the government upon assessment of various
categories. It is a compulsory levy payable by an economic unit to the government without any
corresponding entitlement to receive a definite and direct quid pro quo from the government14.
I.1.2
Characteristics of tax
The above definitions points out or encompasses three main characteristics of the tax and the
following deserves mention:
a) Tax is not levied for a return for a specific service rendered by government to taxpayers. An
individual can not ask for any special benefit from the government in return for the tax paid. It
is referred to as a non-quid-proquo payment.
13 TROTABAS
14 BHATIA
L. & COTTERET J., Droit Budgétaire et Comptabilité Publique, Edition Dalloz, Sirey 1997, p.319-320,
H., International Economics , 1999 p. 37
8
b) It is a compulsory contribution imposed by the government on people or companies. Because
of its compulsory nature, those who do not pay it are reliable to being punished but it is to be
paid by those who come under its jurisdiction.15
c) It is a payment by taxpayers which is used to benefit all the citizens whereby the government
uses the collected revenues to establish infrastructures such as hospitals, schools as well as
other public utility services.
I.1.3
Direct vs. Indirect Taxes
Taxes are often classified as direct or indirect16. There seems to be a fair amount of consensus that
income tax is a quintessential and typical direct tax and that taxes on consumption (sales, VAT,
excises) are indirect taxes. However, when one probes deeper on what basis taxes should be
classified as direct or indirect the distinction between the two becomes unclear, and one is left with
impression that the distinction does not make a great deal of sense. ``The grouping of taxes into two
classes, direct and direct goes back a long way in the literature. The main guide as to the appropriate
category has tended to be whether the person who actually pays the money over to the collecting
authority suffers a corresponding reduction in his income. If he does then- in the traditional languageimpact and incidence are upon the same person and the tax is direct; if not and the burden is shifted
and the real income of someone else is affected (i.e. impact and incidence are upon different people)
then the tax is indirect17. In 18th and 19th centuries, the distinction seems to have been on the basis
that the indirect taxes are those whose incidence is shifted18. For example, the explanations given by
the French constituent assembly in 1790, to the effect that direct taxes are levied on persons or
property, while indirect taxes are levied on manufacture, sale, consumption, and the like, and are
indirectly paid by the consumer. However, modern economic theory holds that even income taxes
might be shifted to different degrees and in different circumstances (and in some cases, such as those
of corporate income tax, the incidence is unknown) so basing classification of taxes on their incidence
does not seem to make a lot of sense. The distinction ‘direct’ and ‘indirect’ has been drawn in a
15
Cooper, K., Income taxation; 5th editions 2005.
16
For example, the general tax code of france is divided into direct and indirect taxes. In France, direct taxes include
income tax and property tax, while indirect taxes include VAT and inheritance tax among others.
17
David W., The Direct-Indirect Tax problem: Fifteen Years of Controversy (1955).
18
Beltrame, P. & Mehl L., Techniques, Politiques et Institutions Fiscales Comparées, PUF, Paris. 1997, p 62-63,
9
number of ways but has remained without analytical usefulness.19 The distinction between direct and
indirect tax is ‘ambiguous’ but intended to distinguish between those taxes that are intended to be
shifted and those that are not20.
Despite the lack of sound economic basis for distinction between direct and indirect taxes, such a
distinction is made in various contexts often has legal significance. For example, in France, the
administrative courts have jurisdiction over appeals over direct taxes and VAT, while the ordinary
courts have jurisdiction over indirect taxes (other than VAT). In determining whether for this purpose
taxes are direct or indirect, the courts have relied on the ‘legal nature’ of the tax. 21 The distinction is
not always drawn on the same basis, which should not be surprising in light of the lack of theoretical
justification for distinction
I.2.
Objectives of Taxation
According to Warburton and Hendy: “In liberal democratic societies, the community makes choices
how they want their society and economy to operate. One of the most fundamental choices is the
balance between private and public provision of services”- including the extent and structure of the
taxation system. It is not therefore surprising that attitudes to tax vary. At one extreme, Justice Oliver
Wendell Holmes(Jr.) observed in Compania deTabacos vs Collector that “taxes are what we pay for
civilized society,” and that “the power to tax is one great power upon which the whole national fabric is
based… It is not only the power to destroy, but the power to keep alive” 22. At the other extreme, more
cynically, it has been said that “the art of taxation consists in so plucking the goose as to obtain the
largest amount of feathers with the least amount of hissing23”and that “there is only one difference
between a tax collector and a taxidermist- the taxidermist leaves the hide24.
19
Richard M & Peggy R., Allocation Aspects, Domestic and International in The Role of Direct and Indirect Taxes in the
Federal Revenue system, Blackwell Publishing, London, 1964,
20
Richard Musgrave & Peggy Musgrave, Public Finance in Theory and practice, McGraw-Hill Education, P. 215-16(5th Ed.
1989)
21
Gilles B., & Eve O., Le Contentieux Fiscal, EFE, Paris, P. 126 2nd Eds. 1996)
22
Attributed to USA Supreme Court Judge by JP Smith, Taxing Popularity: The story of Taxation in Australia(Canberra:
Federalism Research Centre (ANU,1990)
23
Jean Baptist Colbert in JP Smith above p.7.
24
Mortimer Maxwell Capwell, Time magazines, 1 Februarys 1963.
10
It has long been therefore recognized that, in order to govern effectively, a democratic government
needs to raise revenue, and one of the most effective means of doing this is by imposition and
collection of taxes.
Taxes are levied in almost every country of the world. It has been suggested that the tax system has
become the ‘maid’ of all work25. “…it is necessary to the existence and prosperity of a nation as the air
he breathes to a natural man26”. The justifications of tax often include a combination of a
management, a redistributive function and general need to raise revenue.
The development of different sections of the economy is not possible without the state help. The
government should develop irrigation, transport and communication, industrial and agricultural
systems of the country for the rapid increase in the rate of economic growth. 27 Therefore, Taxation is
necessary because it is not possible or desirable to obtain all resources needed for the government
programs from prices, licenses, and fees.
Certain services, such as national defense and general public administration, cannot easily be sold to
individuals. This is because if these services are provided, the benefits are generally available to all
individuals, irrespective of whether or not they pay, and one person’s enjoyment of them does not
diminish the benefits available to others. Similarly, it would not be socially acceptable to provide
certain services, such as education and police protection only to those who are able to pay full costs
because, then, only the ‘rich’ would be able to enjoy these services.
The points stipulated in the following subsections give an outline of justification of tax which include,
increase in government revenue, fair distribution of income, economic stability, protection policy,
optimum allocation of resources, restriction of consumption of certain commodities, control of inflation
and creation of employment opportunities.
25
Kirkbride J. and Olowokkufu, A., The Law And Theory Of Income Tax, Liverpool Academic Press P.28, 2001
26
Mills S., Taxation in Australia, Macmillan, London 1925 p.1
27
Tayebwa. M, Simplified Economics 2nd edition, (1991)
11
I.2.1
Increase of government revenue
The main reason of imposing taxes is to raise revenue for financing public activities such as building
schools, roads, and hospitals, maintain security of nationals, and safeguard territorial integrity thus
playing a pivotal role in maintaining a political, social and economic stability.
I.2.2
Fair distribution of income
Another point to justify taxation is fair distribution of income (Reduction of income inequality). Here the
government imposes taxes to achieve equality in the distribution of national income whereby the rich
are taxed highly that will improve the welfare of the poor and taxing the poor less or giving subsides.
This has already been done in the Rwanda context such as PAYE system.
I.2.3
Economic Stability and control of inflation
Taxes are imposed to maintain economic stability in the country. For example, when it is a period of
inflation, the state imposes more taxes so as to discourage the useless expenditures of the individuals
and the same applies to deflation where taxes are reduced to enable the citizens spend more money.
It is from here that indirect taxes may automatically stabilize the economy as much as goods having
high income elasticity of demand are taxed more heavily. Taxes are used to check on inflation by
reducing the purchasing power of the people. This can be done by increasing taxes on their incomes
so that there is a reduction on disposable income28.
I.2.4
Protection policy and creation of employment opportunities
The policy of the government must be protected by enhancing local industries through imposing high
taxes on imported commodities from other countries but of the same type (damping). The government
can also subsidize home industries so that the cost of production is low. This will enable these
industries to compete with other regional ones especially now that regional integration may not allow
imposition of taxes on goods from neighboring countries. Protecting home industries also solves a
social problem of unemployment as local gain capacity they absorb unemployed skilled manpower.
When the revenue collected is used into developmental affairs, individuals get employed due to more
employment opportunities created.
28
Tayebwa M, Basic Economics, 3rd ed (1992)
12
I.2.5
Optimum allocation of Resources
Taxes may bring about a balanced national development. This means that out of revenues collected,
government may decide to allocate resources to areas or sectors where development is highly needed
so as to have balanced productive results.
I.2.6
Restriction of consumption of certain commodities
The government imposes taxes for the element of social welfare by imposing high taxes on harmful
goods to human health and these include alcoholic drinks, cigarettes and other harmful chemicals.
I.3.
Definition of Tax Offence and Related Terms
It is evident that one cannot carry out a critical analysis of tax offences and their control mechanisms
without providing a definition of tax offences and related terms. This section provides a definition of tax
offence and related terms like “tax fraud,” “tax evasion” and “tax avoidance” which is sometimes
confusingly and wrongly used interchangeably with tax evasion.
I.3.1
Tax Offence
An offence in general is an illegal act punishable by law. For an offence to occur the act must be illegal
and in contravention of a law. An offender is someone who commits an offence29.
Rwandan law does not define a tax offence. However under article 106 of the Russian Tax code, a tax
offence is defined as ‘an unlawful (in violation of tax legislation) act (action or inaction) of a taxpayer,
tax agent or other persons entailing liability under the present Code 30.’ In other words, this article
ensures that the act cannot be regarded as tax offence unless four elements exist: (i) The act should
be unlawful; (ii) there must be guilt in the composition of the act; (iii) the act should have been
committed by one of the subjects mentioned in the article (taxpayer) and (iv) Tax Code foresees a
responsibility for such an act.
The doctrines depict ‘tax offence’ “as an unlawful, culpable action or inaction, that results in nonfulfilment or inappropriate fulfilment of tax obligations foreseen in the tax legislation and such action or
29
RPD Processes And Procedures, October 2007
30
http://www.russian-tax-code.com/PartI/Section6/Chapter15.html, cited on 24/12/2008
13
inaction breaches the rights and legal interests of participants of tax relations and legislation foresees
legal responsibility for that31.”
I.3.2
Tax Fraud
The doctrine describes tax fraud as a form of deliberate evasion of tax which is generally punishable
by law. The term ‘tax fraud’ includes situations in which deliberately false statements are submitted,
fake documents are produced, etc. Sanctions may include civil or criminal penalties32.
I.3.3
Tax Evasion vs. Tax avoidance
The terms tax evasion and tax avoidance are often used imprecisely with varying meanings 33. Part of
the problem is a linguistic one. In English, tax evasion is synonymous with tax fraud and means
criminal activity. In French, évasion means avoidance. Tax evasion should be translated into French
as fraude fiscale34. Confusingly however, the French expression Fraude à la loi, used in a tax context
means tax avoidance35. Fraude à loi means taking advantage of letter of the law while seeking to
violate its spirit. In my view the expression tax evasion should be deleted from the vocabulary as is a
euphemism which covers its true name which is tax fraud36. However, there is substantial consensus
that the term tax evasion should be used to refer to only criminal activity, although it has not always
been used with this meaning37.
Tax avoidance is a more ambiguous concept than tax evasion. It can be properly used with more than
one meaning, so the meaning must be derived from the context. Tax avoidance in a general sense
refers to any activity aimed at reduction of tax that is not criminal in nature. Tax avoidance is doing
what you can with the law.
The following distinction between tax evasion and tax avoidance is drawn in a manual of Revenue
agents in the U.S.: ‘Avoidance of tax is not a criminal offence. All taxpayers have the right to reduce,
31
Shaulov D.I and Cann U., “Foundations of tax legislation”, “World of economics and law” Publishing House, 2000, P. 71
32Barry
L., International Tax Glossary, IBFD Publications, 3rd Ed, 1996, P. 159
33
Victor T, Comparative Tax Law, Kluwer Law International. p.154,
34
Charles R, Fraude et Evasion Fiscales, in Dictionnaire Encyclopédique de Finances Publiques p. 854, Loïc Ed., 1991).
35
Florance D., La simulation en Droit Fiscal, L.G.D.J.Paris, 1997 p.55-66.
36
John D., Tax Avoidance from Practitioner's Perspective, in Tax Avoidance and the Law, Adrian Shipwright Ed., 1997).
37
For example, section 482 of the U.S. Internal Revenue code refers to ‘evasion ' of taxes in at context that clearly would
call for the use of the Word ‘avoidance ' instead.
14
avoid or minimize their taxes by legitimate means. One who avoids tax does not conceal or
misrepresent, but shapes and preplans events to reduce or eliminate tax liability, then reports the
transactions. Evasion on the other hand, involves deceit, subterfuge, camouflage, and concealment,
some attempt to color or obscure events, or making things seem other than what they are38.’
Although the precise contours of ‘tax avoidance’ can be disputed, the following definitions of the terms
tax evasion and tax avoidance can provide a demarcation between the two:
Tax evasion39 or tax fraud is an offence against the laws that is punishable by criminal sanctions.
Tax Avoidance40 is behavior by the taxpayer that is aimed at reducing tax liability, but that is found to
be legally ineffective (perhaps because of an anti-abuse doctrine or by construction of tax law)
although it does no constitute a criminal offence.
I.4.
Main Tax Offences
Although Rwandan Tax Law clearly asserts which acts are regarded as tax offences, there are other
frequently made violations of tax legislation similar to ones mentioned in the Rwandan Tax Law.
Professor Shaulov and professor Cann (2000) provide some examples of such offences, which include
tax evasion41, creation of illegal organizations and violation of cash payment disciplines 42. Hence, in
practice there are more cases, which can be determined as tax offences.
The doctrine provides late filing, late payment, and failure to declare taxable income or transactions,
and negligent or fraudulent misstatements in tax declarations43 as major tax offences. Under this
section, VAT violations, Consumption tax offences and income tax offences are highlighted on this
section and will be discussed in details with the corresponding sanctions in the next chapter.
I.4.1
Value Added Tax violations
Article 63 of Law N°25/2005 of 04/12/2005 on tax procedures relates to the administrative fines
imposed to persons who do not comply with provisions of Value Added Tax and the following are VAT
38
U.S. Internal Revenue services, Internal Revenue manual, Audit Guidelines, sec. 913.
39
In French, fraude fiscale in German, Steuehinterziehung.
40
In French, évasion fiscale, in German, Steuerumgehung.
41
Rwandan Tax Law does not have definition of tax evasion neither does it mention the term.
42
Supra note p. 76
43
BARRY L., International Tax Glossary, IBFD Publications, 1996,
15
violations:
a) Operation without VAT registration where VAT registration is required;
b) Incorrect issuance of a VAT invoice resulting in a decrease in the amount of VAT payable or in
an increase of the VAT input credit or the failure to issue a VAT invoice;
c) Issuing of a VAT invoice by a person who is not registered for VAT;
d) Aiding, abetting, obstructing or attempts to obstruct the activities or duties of the Tax
Administration in the exercise of its powers.
I.4.2
Consumption Tax Offences
a) Failure to keep a register of daily inventory of the products manufactured and a sales register
b) Late declaration of zero (0) tariff and fraudulent declaration;
c) Furnishing fraudulent document or misinformation;
d) Making fraudulent written report or any other act commits
I.4.3
Income Tax offences
According to Law on Tax Procedures, the following are provided as Income tax offences:
a) Failure to pay tax within the period set forth by the law;
b) Failure to file a tax declaration on time;
c) Failure to file a withholding declaration on time;
d) Failure to withhold tax;
e) Failure to provide proofs required by the Tax Administration;
f) Failure to cooperate with a tax audit;
g) Failure to communicate on time the capacity or appointment the taxpayer has been given;
h) Failure to register as described by article 10 of Law on income Tax;
i) Failure to comply with articles 12, 13 and 15 of Low on Income Tax;
j)
Failure to pay on time the profit tax advance.
I.5.
Causes of Tax Offences
There are many causes of tax offences to the extent that one can not cite them all. It would, therefore,
be difficult to establish the causes which are more significant than others. I will however, cite some of
the causes of tax offences which include: high rates of taxes; limited resources and capacity of tax
administration; failure to publish tax offenders; perceptions towards taxation and historical factors;
16
corruption among some tax officials; low literacy and lack of tax education; technological
developments; and unemployment, poverty and nature of production.
I.5.1
Complexity of tax laws systems and procedures
It is well known that tax laws are often complex, confusing, and arbitrary44. To some degree this
complexity is probably unavoidable since tax laws deal with commercial transactions and has to cover
a very wide variety of transactions. This complexity provides ample justification for the ordinary people
to evade it.
Unfortunately, true and effective attempts at simplification are often taken over by the piecemeal
amendment of the tax laws to close loopholes that taxpayers have taken advantage of to evade tax.
This has actually led to increased complexity rather than simplification and in some cases further
increases the opportunities for violation of tax law. For example, the UK Finance Act 2004, with 328
sections and 42 schedules, holds the record as the longest Finance Act ever 45. In Rwanda, the
compilation of fiscal laws and regulations in use (2008) has 711 pages! Similarly in Australia, today
there are now 9600 pages of legislation, compared to 3600 in 199646. This probably helps to explain
why approximately 75 percent of individual taxpayers and 97 percent of business taxpayers in
Australia use tax agents to prepare their returns47.
A highly complex tax system also makes the taxpayer compliance burden and costs high, so taxpayers
have less (or even no) incentive to comply with the laws. For example, there is a high cost of
compliance due to the different kinds of forms to fill and uncoordinated due dates. If taxpayers do not
understand how their taxes are calculated and when these should be paid, they will not be comfortable
in paying them! This may also prevent the expansion of overseas companies in Rwanda and restrict
capital investment.
44
Victor T., Tax Law design and Drafting, volume 1; international Monetary Fund: 1996; (Ed.) p., 96.
45
MARTIN, D., (2005). ‘Tax Simplification: How, And Why, It Must Be Done ', The Centre For Policy Studies, Surrey,
Available At: Http://www.cps.org.uk/pdf/pub/407.pdf, Accessed on 15th March 2009.
46
The Allen Consulting Group (2005), available at:
http://www.allenconsult.com.au/resources/IncomeTaxReform_June05.pdf, accessed on 15th March, 2009.
47
Australian Taxation Office ‘Compliance Program’ 2005-06, Available at: http://www.Ato.gov, Accessed on 15th March
2009.
17
If the law is difficult, the procedure for assessment is even more complex. People would like to stay
away from the tax net as long as they possibly can through commitment of different tax offences.
I.5.2
High rates of taxes
Allegedly high tax rates may persuade some individuals to violate their tax obligations. Therefore, it
would be counter productive and the people complain that VAT rate of 18 percent is very high and it
has induced commitment of tax offences and has diverted trade from official routes to non official
routes.
Further more the impact high tax rates on willingness of the taxpayers to meet their tax obligations is
explained the Laffer curve.
The Laffer curve suggests that, as tax rates increase from low levels, tax revenue collected by the
government also increases. It also shows that tax rates increasing after a certain point (A) would
cause people not to pay taxes either through legal means (avoidance) or through illegal means
(evasion)48. Eventually, if tax rates reached 100 percent (the far right of the curve), then all people
would choose to evade all taxes because everything they earned would go to the government.
On the endpoints, if for example, the tax rate is 0 percent, we get zero revenue. If the tax rate is 100
percent, we also get zero revenue, or near to it, because no one will be willing to pay taxes. In the
middle somewhere is a maximum (labeled equilibrium point) where people will be willing to meet their
tax obligations.
48
NDUHUNGIREHE, O., Course Notes, Droit Fiscal, ULK, Kigali 2007, P.23,(Unpublished).
18
I.5.3
Limited resources and capacity of tax administration
Unfortunately, the limited resources and capacity of tax administration is a reality and often means that
violation of tax law remains unchecked. Limited resources and capacity can take the form of
inadequate numbers of staff or inadequate staff with the required skills and knowledge (e.g. audit and
investigation skills); poor infrastructure or systems; and lack of funding or autonomy from the
government. With the tax administration unable to adequately carry out its role of enforcement and
education/assistance effectively and efficiently, this often translates into taxpayer perceptions that
there is a low risk of getting caught and/or there are minimal consequences of non-compliant
behaviour.
I.5.4
Tax offenders are not published: ‘Naming and Shaming’
Lack of publicity (naming and shaming) of tax offenders is one of the reasons for widespread of tax
evasion and other tax offences. Even when the tax offender is caught and punished for committing a
tax offence is not publicised. This has led to continued violation of tax law tax because tax offenders
exposed to the public when they are caught49.
I.5.5
Perceptions towards taxation and historical factors
Among some taxpayers, tax morality is low and there is a strong culture to evade and avoid tax. In
other words, there is no social disapproval or reprimand for commitment of tax offences. Often, this is
exacerbated by the evasive actions of friends, relatives, co-workers and business colleagues50. In
Rwanda, the perception of Tax offences as a crime is also low. Persons committing breaches of tax
laws have not been described as criminals. In international tax literature, they have been described as
"white collar criminals" and tax fraud is referred to as "white collar crime". This is not the view of only
general taxpayers but also includes members of the judiciary who are inclined to pass lenient fines and
sentences. Some taxpayers do not also realise what the government is doing for them as a result of
tax revenues and it is from here that the taxpayers escape from paying taxes in conformity to what
they are due to pay.
Further more, Rwanda, like Most of other developing countries was a colony of European powers.
Their independence was preceded by a struggle for liberation from the foreign rulers. In this struggle,
RRA Antismuggling Strategy, july 2009, p.5
DICKSON, J(1978)., Perception of risk as related to choice in two-dimensional risk as related to risk situation,
Psychological Reports, No 43, pp 10059-62.
49
50
19
people were politically taught to disobey the laws to fail the foreign government. Not paying taxes was
one of such measures. Habits are easy to form but difficult to give up especially when these are
beneficial for one’s own interest.
I.5.6
Corruption among some tax officials
A corruption tendency among tax officials has a very ancient history. For example, the Bible refers to a
tax collector called Zacchaeus51 who was corrupt (but happily reformed). Corruption is present when
public officials abuse their positions of public authority for private gain52. Corruption undermines
confidence in the tax system, negatively affects willingness to pay taxes, and reduces a country’s
capacity to finance government expenditures. There is considerable potential for corrupt practices in
revenue administration involving tax officers, taxpayers, importers and customs clearing agents.
I.5.7
Low literacy and lack of tax education
In Rwanda, the rate of literacy is rather low and there is limited tax education. For an uneducated
person, it is difficult to understand the need for payment of taxes. Taxes are treated as punishment.
Low literacy level makes it even more difficult for tax administration to educate taxpayers about their
obligations and for taxpayers to complete the necessary forms. Many of the options available to the
tax administration to educate taxpayers, such as brochures, booklets and information on the RRA
website become irrelevant when a large proportion of the population is illiterate.
Some unscrupulous taxpayers exploit the general low literacy perceptions by not maintaining any
business records or accounts when in reality many of them are fully capable or literate enough to do
so. The tax administration needs to think of other methods to disseminate information such as running
face-to-face seminars and workshops.
I.5.8
Technological developments
The rise of e-commerce and internet communication is changing the nature of business (for example,
it can involve intangible goods (such as downloadable music) and makes it even harder for tax
51
Luke 19:1-10
52
Corruption, Fiscal Policy and Fiscal management: Fiscal Reform in support of Liberalisation, June, 2006, available at :
http://www.fiscalreform.net/best_practices/pdfs/fiscal_policy_and_corruption.pdf, accessed on 30th June 2009
20
administrations to track and account for transactions. The deletion, hiding or encryption of electronic
records by businesses also makes it difficult for tax administrators to uncover and follow the audit trail.
I.5.9
Poverty and nature of production
The bottom-line is that if taxpayers are struggling to stay alive, paying their taxes would be the last
thing on their mind! They do not see taxes as an investment that might improve their future living
standards.
There may also be traders who involve in tax offences due to likely failures of their business and other
individuals with marginal income who are not able to meet their expenses from their earnings.
Otherwise the motive to commit tax offences is excessive enrichment.
The more atomised is production (i.e. where much of the economic activity takes place in small shops
or small farms); the more likely it is that tax offences will flourish. For example in Rwanda, most
companies are private, family businesses that tend to operate as if they are unincorporated.
I.6.
Negative Impacts of Tax Offences
The negative impacts of tax offences can be analyzed under two perspectives: on one side, there is an
impact on the level of economic development or on the Government. On the other side, there is a
negative impact on the individual who commits a tax offence.
I.6.1
Consequences on the government
Violation of tax law deprives government of revenue for public expenditure. Also efforts to prevent
detection and conviction of tax offenders are high and a burden to the government. Government
revenue is spent on the enforcement side including investigation, prosecution and punishment of tax
offenders which would otherwise be spent on developmental projects such as infrastructure
development, health care, education.
Tax fraud may drive some firms out of business as they are unable to compete with owners that
successfully evade taxes. Goods sold by tax offenders are often sold a lot cheaper than goods brought
onto market through the right procedures. Tax evasion therefore deprives traders of free competition.
When there is unfair competition in the market due to tax evasion and other related offences,
compounded by the collapsing of industries, the labour market (employment base) is eroded. Many
professionals, skilled and unskilled personnel remain jobless.
21
I.6.2
Consequences on the tax offender
On the tax offender point of view, a tax is considered as an obligation and can have an impact on the
taxpayer who fails to execute his obligation if the taxpayer is proved guilty of violation of tax law, heavy
administrative penalties and interests are imposed on him and he can be criminally prosecuted and
imprisoned. Additional expenses are also incurred in form of bribing tax officials, hiring people to
prepare fictitious accounts and falsification of documents53.
In conclusion, this chapter was devoted to the theoretical aspect, concepts and general overview of
taxation and tax offences in order to facilitate comprehension of the problem related to control and
prosecution of the tax offences in the context of Rwandan tax system. The chapter mainly focused on
definitions of tax and other related terms, justification of taxation, definition of tax offence and related
terms, main tax offences, causes of tax offences and the negative impacts or consequences of tax
offences.
SMITH K.,(1987) “Understanding Taxpaying behaviour: a conceptual framework with implications for research’’,
Accounting and Business Review, Vol. 20 no 4, pp 639-63
53
22
CHAPTER II.
CRITICAL ANALYSIS OF CONTROL OF TAX OFFENCES
It is true that Rwandan tax system provides both legislative and administrative mechanisms to control
and prosecute tax offences. However still, taxpayer compliance is still low despite the control
mechanisms put in place. In this chapter, both legislative and administrative tax rules and procedures
applied in the control tax offences under Rwandan tax system are examined; existing weaknesses in
tax control mechanisms are identified. The areas studied included: Powers of access of information for
tax audit and investigation; Tax offences and subsequent sanctions; Tax offence management,
disputes resolution and appeals mechanism; Registration and de-registration of taxpayers; Taxpayers
education and assistance; and Control of corruption among tax officials
II.1.
Legislative rules and procedures used in tax offences control
Under this section, Legislative rules and procedures used to control tax offences have been examined
and they included; Powers of access of information for tax audit and investigation, Tax offences and
subsequent sanctions, Tax offence management and disputes resolution and appeals mechanism.
II.1.1
Powers of access to information for tax audit and investigation
This subsection examines the provisions of the law giving the tax administration powers of access to
information for tax audit and investigation to establish whether a tax offence has been committed.
Areas of weaknesses to access of information are also discussed.
II.1.1.1
Provisions of the law
The declaration of tax is made when the declaration form with the supporting documents is submitted
to the tax administration. However this does not constitute the only sources of information for the tax
administration because the tax administration has powers to carry out investigations to get additional
information. This investigation is conducted in case the tax administration is in doubt of the information
furnished by the taxpayer and suspects that a tax offence has been committed.
RRA has the right to obtain information from other persons in case there is need to know the structure
and use of the property of the taxpayer. It can send written questions which have to be answered
within a period of fifteen (15) days. A person bound by professional secrecy can not give any
23
information to the tax officer unless written permission is given by the competent Prosecutor. In
applying for such permission, the Tax Administration provides the Prosecutor with the following:
a) the name, address and activity of the taxpayer;
b) the name, address and activity of the person bound by professional secrecy;
c) the serious indications of fraud the Tax Administration holds against the taxpayer;
d) the reasons why the Tax Administration wants the permission to search;
The powers of access are stipulated by the tax legislation of many countries. For example, in Australia,
the Commissioner has power under Section 264 of the Income Tax Assessment Act 1936 to direct any
person, whether a taxpayer or not, including any officer who is employed in or has connection with any
department of a Government or by any public authority to furnish him with such information as he may
require.
In the UK, rules were introduced in 2001 requiring financial institutions to collect information about UK
and foreign-source interest of non-UK persons and to provide that information to the Inland Revenue
with a view to the information being exchanged with the appropriate overseas tax authorities. These
rules were introduced in response to the EU debate on the proposed savings directive and concerns
about tax evasion with the EU54.
Also the requirements of the US tax code are even more prescriptive. An extremely wide variety of
transactions must be reported (generally in electronic format) to the IRS, including agricultural
payments, allocated tips, barter exchange income, brokers’ transactions, capital gains distributions,
prescribed gambling winnings to name a few55. This data is then matched with taxpayer records and
used to identify discrepancies.
54
BURNIE, E., MICHELMAN, M., & JORDEN, T., (2005). ‘Compliance and Avoidance ', International Tax Review, available
at: http://www.internationaltaxreview.com , accessed on 20th June 2009
55
Forum of Tax administration Compliance Sub-group (2004). ‘Tax administration in OECD countries, available at:
http://www.oecd.org, accessed on 14th April 2009
24
II.1.1.2
Weaknesses of the legal provisions in Taxation
The weak point under Rwandan tax system is that during audits and investigations, emphasis is put on
the use of the information got from the taxpayer himself. Information from third parties is rarely used.
Further more, there is a contradiction between the customs law and the tax procedure on the period
for which the records as a source of information have to be kept. The Customs law provides that “All
documents relating to the declarations of importation or exportation of goods must be kept by the
persons concerned for five (5) years from the date on which the document was signed by Customs 56”
while the law on tax procedure provides that “Books and records mentioned under paragraph one and
two of this article, are preserved for any time they may be required by the tax administration at least in
a period of ten (10) years starting from January 1st, following the tax year in which it was carried
out57”.
Considering the above the taxpayers obligations to keep the books and accounts should be
harmonised and put at a period of ten years in order to facilitate audit activities at a later period when
tax fraud is discovered.
According to articles 12 and 13 of law on tax procedures58, all persons engaged in business activities
must keep books of accounts and records. These records are important sources of information when a
tax audit or investigation is being conducted.
All the books of accounts, documents and record are required to be kept in the premises of the
taxpayer or any another place located within in Rwanda59 at least for a period of ten years. The
obligation to keep these sets of accounts is made in order to facilitate the authorised tax officer have
access to them and conduct verification and establish whether any tax offence has been committed or
not. Once the books of accounts and records are produced and provided to the tax authorised officer,
they are verified to establish whether they comply with the requirement of the law and are in conformity
to the reality of the business activities under investigation.
56
Article 11 of Customs Law.
57
Art. 13 of LTP
58
Law no 25/2005 of 04/12/2005 on tax procedures, OGRR no 01 of 1st January 2006.
25
The information from third party can be crucial in detecting serious violations of tax law. By definition, it
consists of a piece of financial information on a taxpayer that is held by someone else. That
information becomes valuable if it can be legally obtained by the tax authorities and linked to the
taxpayer’s record. Third party information leads to increased tax recoveries and possible discovery of
new cases for prosecution. It also deters tax evasion if used properly in the long term. When this is
done, it is often possible to check the credibility of a tax return. So, third party information can often be
a useful audit trigger.
II.1.1.3
Lack of opportunities for Voluntary Disclosure
Another area of concern is that there is no room for voluntary disclosure under Rwanda tax system.
This means that the offenders who wish to come forward and clear out their disputes with the tax
administration are not given that opportunity.
II.1.2
Tax offences and subsequent sanctions
The tax system can be expected to function smoothly and yield anticipated revenues only if adequate
penalties are imposed for violations that strike at the heart of the tax system and penalties for noncompliance with tax obligation are an essential element of a robust tax system60. Probably the most
traditional mechanism used by tax administrations to deal with non-compliant taxpayer behaviour is
the application of fines or penalties, both administrative and criminal.
The Rwandan law on tax procedures sets out various offences and penalties which include:
imprisonment of tax offenders, application of monetary fines, closure of business activities by the
Commissioner General and barring the tax offender from biding for public tenders.
II.1.2.1
Imprisonment of tax offenders
Rwanda tax law provides imprisonment sentences under the following circumstances:
a) “…A supplier who fails to keep any records…or who fails to keep them for the time so required
shall be guilty of an offence and shall be liable, on conviction …to an imprisonment for a term
not exceeding twelve months61…”;
60
Tax Compliance: report to the Treasurer and of the Minister of Revenue by Committee of Experts on Tax Compliance,
December, 1998, available at: http://taxpolicy.ird.govt.nz/publications, accessed on 15th May 2009
61
Art. 66 of Law no 06/2001 of 20/01/2001 on the Code of Value Added Tax,OGRR no Special of 20th January 2001
26
b) Where the taxable supplier fails to make any payments ….shall be guilty of an offence and
shall be liable, on conviction …to imprisonment for a term not exceeding twelve months62.
c) Where the taxable supplier continues to make taxable supplies beyond the time allowed by
the Commissioner General…shall be guilty of an offence and shall be liable, on conviction, to
…an imprisonment for a term not exceeding twelve months63.
d) Other persons who fraudulently remove and take away any such goods and chattels to
prevent the authorised officers from distraining upon them or completing the distress so levied,
assists in the same, shall be guilty of an offence and shall be liable, on conviction, to…an
imprisonment for a term not exceeding twelve months64.
e) In case of fraud, the Tax Administration refers the case to the Prosecution service if the
taxpayer voluntarily evaded such tax, like use of false accounts, falsified documents or any
other act punishable by law and in case of conviction, the taxpayer can be imprisoned for a
period between six (6) months and two (2) years.65
f) Any person who…assaults, obstructs, hinders or resists an authorized officer in the exercise
or performance of any duties he or she assigned…commits an offence and shall be liable
to…an imprisonment of between six (6) months and two (2) years.66
g) In case a person intentionally fails to deliver the tax withheld to the Tax Administration…the
taxpayer can be imprisoned for a period between three (3) months and two (2) years 67.
h) Shall be deemed offender and liable to…an imprisonment of between six (6) months and one
(1) year any domestic manufacturer and importer of taxable products who: fails to keep tax
stamp registers, records or any other documents; fails to submit tax stamp reconciliation
statements within the prescribed period; fails to affix tax stamps to a taxable product in a
secure manner; makes an overprint or defaces tax stamps affixed on taxable products; or
submits an incorrect or incomplete tax stamp reconciliation statement; or commits any other
62
Art. 35 of Ministerial Order nº001 of 13/01/2003 providing for value added tax rules and taxation procedure.
63
Supra note, Art. 43.
64
Supra note, Art 48,
65
Art 64 of law n° 25/2005 of 04/12/2005 on Tax Procedures
66
Art. 36 of law n° 26/2006 of 27/05/2006 determining and establishing consumption tax on some imported and locally
manufactured products, OGRR, no 13 of 1st July 2006.
67
Art. 65 of law n° 25/2005 of 04/12/2005 on LTP
27
fraudulent act regarding the nature and usage of tax stamps. The same penalty shall apply to
any dealer of taxable products on which tax stamps are not affixed68.
Even though there are many legal provisions that provide for imprisonment of tax offenders,
practically, there are very few cases where the tax offenders were taken to court to be prosecuted and
be sentenced to imprisonment.
Table showing the cases that were investigated by RPD in 2007 and 2008
Description of cases investigated
Year 2007
Year 2008
11
14
1.046.295.217
4.085.621.404
Principal Taxes
603.663.392
1.999.209.308
Fines and Penalties
442.631.825
2.086.412.096
Prosecutions
2
2
Pending cases
2
2
---
---
Number of Cases investigated
Assessments made (RWF)
Successful prosecutions
Source: RPD Annual Report, 2008, p.2
The table above shows the numbers of domestic tax offences were investigated by RPD, assessments
made including principal taxes penalties and the number of Prosecutions including pending cases and
successful prosecutions. As it can be witnessed below, no successful prosecutions were made in both
2007 and 2008.
II.1.2.2
Monetary fines imposed on tax offenders
Under Rwandan Law, in most case, monetary sanctions are more frequently applied compared to
other sanctions like imprisonment and publication of tax offenders.
According to article 9 of Law no 74/2008 of 31/12/2008 modifying LTP provides monetary fines to a
taxpayer or any person who fails to:
a) file a tax declaration on time;
b) file a withholding declaration on time;
68
Art 47 of law n° 26/2006 of 27/05/2006 determining and establishing consumption tax on some imported and locally
manufactured products
28
c) withhold tax;
d) provide proofs required by tax administration;
e) cooperate with a tax audit;
f) communicate on time the capacity or appointment he or she has been given as described by
the paragraph 2 of Article 7 of Law nº 25/2005 of 04/12/2005 on tax procedures;
g) register as described by Article 10 of Law nº 25/2005 of 04/12/2005 on tax procedures;
h) comply with Articles 12, 13, 14 and 15 Law of Law nº 25/2005 of 04/12/2005 on tax
procedures;
i) Pay on time the profit tax advance; comply with any requirements provided for in tax Laws
governing taxes mentioned in Article one of Law nº 25/2005 of 04/12/2005 on tax procedures.
The monetary fines provided for the above offences are as follows:
a) one hundred thousand (100,000) Rwanda francs if the taxpayer’s annual turnover is equal to
or less than twenty million (20,000,000) RWF;
b) three hundred thousand (300,000) Rwanda francs if the taxpayer’s annual turnover exceeds
twenty million (20,000,000) Rwanda francs;
c) five hundred thousand (500,000) Rwanda francs if the taxpayer was informed by the Tax
Administration that he or she is in a large taxpayer category.
In case of understatement of a fine, Article 62 of Law n° 25/2005 of 04/12/2005 on Tax Procedures is
modified and complemented as follows: If the amount of tax shown on a tax declaration understates
the amount of tax required to be shown as a consequence of an audit or investigation by the Tax
Administration, the taxpayer is subject to the following fines:
a) five per cent of the amount of the understatement if the understatement is equal to or more
than five per cent but less than ten percent of the tax liability;
b) ten per cent of the amount of the
understatement if the understatement is equal to or more
than ten percent but less than twenty percent of the tax liability he or she ought to have paid;
c) twenty per cent of the amount of the understatement if the understatement is twenty percent
or more but less than fifty percent of the tax liability he or she ought to have paid;
d) fifty per cent of the amount of the understatement if the understatement is fifty percent or more
of the tax liability he or she ought to have paid.
29
In case the same violation is committed twice within five (5) years, the fine is twice the original fine. In
case the same violation is committed again within such five (5) years, the fine is four times the original
fine.
Also Article 63 of the Law n° 25/2005 of 04/12/2005 on Tax Procedures is modified and completed as
follows: In case of VAT violations, the following administrative fines are imposed to persons who do
not comply with provisions of Value Added Tax:
a) in the event of operation without VAT registration where VAT registration is required, fifty per
cent of the amount of VAT payable for the entire period of operation without VAT registration;
b) in the event of the incorrect issuance of a VAT invoice resulting in a decrease in the amount of
VAT payable or in an increase of the VAT input credit or in the event of the failure to issue a
VAT invoice, one hundred per cent of the amount of VAT for the invoice or on the transaction;
c) for issuing of a VAT invoice by a person who is not registered for VAT is assessed a penalty of
one hundred per cent of the VAT which is indicated in that VAT invoice and is due to pay the
VAT as indicated on that VAT invoice.
Further more, Taxpayer who commits fraud is subject to an administrative fine of one hundred percent
of the evaded tax. With exception to that penalty, the Tax Administration refers the case to the
Prosecution service if the taxpayer voluntarily evaded such tax, like use of false accounts, falsified
documents or any other act punishable by Law. In case of conviction, the taxpayer can be imprisoned
for a period between six (6) months and two (2) years.
In case of failure to withhold tax, article 13 modifying Article 65 of the Law n° 25/2005 of 04/12/2005
on Tax Procedures is modified and completed as follows: In case a person intentionally fails to deliver
the tax withheld to the Tax Administration, he or she is subject to a fine of one hundred per cent of the
unpaid tax.
II.1.2.3
Closure of business activities by the Commissioner General
Apart from the above sanctions, there are also sanctions taken by the Commissioner General of RRA
including closure of business activities for a period of thirty (30) days and publishing the tax offender in
nationwide newspapers. It should be noted that this sanction has never been applied by the
Commissioner General even though it is provided in the law.
II.1.2.4
Denial of public tenders and withdrawal of business register and publication
30
Apart from the above sanctions a person who is convicted of a tax offence can be barred from bidding
for public tenders and his business register can be withdrawn. The tax offender can also be published
in nationwide newspapers69. The sanctions taken by tribunals/courts are based on the gravity of the
offence committed.
As it can be observed from the above points, the Rwandan taxation law provides for different sanction
ranging from monetary sanctions, imprisonment and publication of tax offenders.
However, according to available statistics, the sanction of imprisonment and publication of tax
offenders is rarely applied.
II.1.3
Tax offence management, disputes resolution and appeals mechanism
This subsection discusses tax offences management procedures under Rwanda tax system. Tax
offence management involves fact finding, submission of case for prosecution, dissolution of tax
disputes through transitional approach and tax appeals processes. Where weaknesses are identified,
proposals for improvement are given in the third chapter.
II.1.3.1
Fact finding
In the course of duty, a tax auditor or any other proper officer in the field may raise queries based on
reasonable suspicion about a particular set of facts. The officer should be able to explain the nature of
the offence suspected to have been committed and the relevant section of the law contravened
This commences the offence management procedure.
When a tax offence is suspected, a statement of offence or an affidavit is established and issued to
the person who has committed a tax offence. An affidavit constitutes sufficient proof of the facts and
evidence the authorized officer has established. It may be used by the Tax Administration for issuing
an assessment without notice and it may be used as testimony. The contents of the affidavit can only
be disregarded if it is proved that the authorized officer committed fraud or made a serious mistake70.
If that person agrees with the facts in the statement of offence, he signs the statement and the tax
administration proceeds with the enforcement of evaded taxes and duties and fines imposed. If the
taxpayer does not agree with the facts, he refuses to sign the statement of offence issued to him and
proceeds with the appeals process.
69
Art. 67 of LTP.
70
Art 41 of LTP.
31
II.1.3.2
Submission of case for prosecution
In case a taxpayer is proved guilty of a tax offence, the case is referred to RPD staff with powers of the
Judicial Police Officer. The officer examines the case and submits to the competent court for
prosecution depending on the gravity of the offence. However in most cases the disputes between
taxpayers and RRA are resolved through compromise or transaction.
II.1.3.3
Tax dispute resolutions through transactional agreement
Transaction is a civil law practice where an agreement is concluded between two or more persons,
who for the purpose of preventing or putting an end to a law-suit; adjust their differences by mutual
consent, in the manner which they agree on. For example, In Louisiana, Transaction agreement must
be reduced in writing71. In the common law, transaction is called a compromise, defined as an
agreement between two or more persons, who, to avoid a lawsuit, amicably settle their differences, on
such terms as they can agree upon. It has the effect of res judicata (Latin for, a thing adjudicated, a
matter already settled in court; cannot be raised again)72 which is a fundamental legal doctrine that,
once a lawsuit is decided, the litigant parties are barred from raising the same issue again in the
courts. It is based on the principle that court cases cannot be allowed to go on for ever and must come
to an end. Transactions regulate only the differences which appear to be clearly comprehended in
them by the intentions of the parties, whether they are explained in a general or particular manner,
unless it is the necessary consequence of what is expressed; and they do not extend to differences
which the parties, never intended to include in them.
Year
Corporate income tax
Property Tax
Principal
Penalties
Principal
Penalties
2004 64.257.836
6.425.784
45.805.695
19.678.026 270.700.461 6.000.000
412.867.802
2005 55.524.014
5.552.401
135.238.086 48.215.171 108.960.678 6.000.000
359.490.350
2006 57.173.251
5.717.325
26.087.188
28.030.556 93.129.581
9.312.958
219.450.859
Total
17.695.510
207.130.969
95.923.753
21.312.958
991.809.011
176.955.101
VAT
Principal
472.790.720
Total
Penalties
Source: RRA Legal and Board Secretariat Departmen.
71
The Free Dictionary By Farlex, www.Legal.Dictionary.thefreedictionary.Com/Transaction, Accessed On 14/07/2009
72
Transactional Agreement of 16/04/2009 Between Bralirwa and RRA related to Case no. R.Com/0375/08/HCC and the
RRA-BRALIRWA memorandum of understanding of 16/12/2009 on 2004,2005,2006 Tax audit
32
The advantage of transactional resolution of tax disputes is that it saves time. For example as it can be
observed from the above table BRALIRWA was assessed to pay 991.809.011 RWF and the case was
later withdrawn from the Commercial High Court to be resolved through transaction as shown in the
table above73.
However, the disadvantage of this approach is that taxpayers are not prosecuted by competent courts
and they will continue to commit tax offences because they will have not felt the pain of violation of tax
laws.
II.1.3.4
Tax Appeals mechanisms
The law provides that the taxpayer who is not satisfied with the decision of the Commissioner General
may appeal to the Appeals Commission (formerly appeals council) within thirty (30) days after receipt
of the decision of the Commissioner General.
Article 33 of law No 25/2005 of 04/12/2005 on Tax Procedures states that “The Prime Minister’s order
shall establish the appeals commission and determine its functioning as well as the procedure of
appointing its members”. Article 3 of the Prime minister’s order nº 08/03 of 09/05/2007 on
establishment, Composition and functioning of the tax appeals Commission, provides the following to
constitute the appeals this commission:
a) The Minister(having Finance in his attributions) or his delegate who shall be the Chairman;
b) A representative from Rwanda Revenue Authority, who shall be the Secretary; and
c) Three other members appointed from amongst persons with reputable integrity that have
proven to be highly knowledgeable in commercial, financial and legal matters as well as in any
other field relevant thereof, who shall be nominated by the Minister(having Finance in his
attributions).
Clearly, this body consisted of persons with a high degree of expertise and integrity. It has proven
effective in the past. The weakness in this system is that, if perceived with a critical eye by a person
making an appeal, it could be argued that the body is not sufficiently independent. One of the precepts
of justice is that “No man shall be a judge in his own case”. The Minister for Finance as keeper of the
National treasury could be seen by an outsider as having a vested interest in the outcome of appeals –
73
Art 34 of LTP.
33
especially one involving significant amounts of revenues. The RRA, although present in a secretarial
capacity, could add to the impression of lack of independence.
The provision for the above commission was repealed article 7 modifying article 38 of LTP., the current
law provides that the taxpayer who is aggrieved by the decision of the Commissioner General may
make a judicial appeal and that the appeal should be brought before the competent authority within
thirty (30) days after the receipt of the Commissioner General’s decision.
II.2.
Administrative tax offences control rules and procedures
There are many administrative mechanisms that can be used to encourage taxpayer to become
compliant with their tax obligations. Among those mechanisms there is enhancing taxpayer registration
and de-registration procedures, taxpayers’ assistance and education, providing incentives and rewards
to compliant taxpayers, and control of corruption among tax officials.
II.2.1
Registration and de-registration of taxpayers
A tax administration cannot be effective in control of tax offences if there is no quality taxpayer register
in place. If there is no quality register, the actual number of the taxpayers and their category is not
known to the tax administration and it becomes difficult to identify those who have violated tax laws
and take appropriate actions against them. Currently, taxpayer registration turn up in Rwanda is
reducing yet the economy at large is growing. Registration procedures and rules have been in place
but there is a need to activate, strengthen and enforce them for efficiency and effectiveness. In order
to enhance taxpayer’s compliance with tax law and also determine the level of non compliance.
II.2.1.1
Provisions of the law
Article No 10 of law No 25/2005 of 4 /12/2005 on Tax procedures requires any person who is engaged
in business or other activities that may be taxable to register with the tax Administration within a period
of 7 days from the beginning of the business or activity or the establishment of the company.
Individuals and Organizations that fall in this category are required to register and receive a Taxpayer
Identification Number (TIN) by completing the relevant application form. TIN is a number given to each
taxpayer, whether it is a commercial business entity that pays taxes or a special body exempt from
payment of taxes and duties, for the purposes of identification and it is unique for each taxpayer.
Failure to register, the taxpayer is subject to fines as stipulated in article 9 of law No 74/2008 of
31/12/2008 modifying and completing Law No 25/2005 of 04/12/2005 on tax procedures.
34
II.2.1.2
Current taxpayer registration practice
The following is a summary of the existing practice:
a) The registration is centralized at the Domestic Tax Department with the taxpayer filling out a
standard form, which is captured in the RRA information system (SIGTAS) by the registration
officer;
b) The taxpayer receives his/her TIN immediately after filling out the registration form. The TIN is
unique identifier that is generated with check digit and is adequately controlled.
c) Different forms are used for companies and individuals as the requirements of registration are
different
d) Field recruitment of taxpayers is conducted and record of offence is issued to those who do
not register voluntarily.
II.2.1.3
The weaknesses in the current situation
The weaknesses in the current registration processes are outlined below:
a) Some taxpayers do not voluntarily register as required by the law. This means that they will
have violated article 10 of Law on tax procedure which provided that any person who sets up
a business or other activities that may be taxable is obliged to register with the Tax
Administration within a period of seven (7) days from the beginning of the business or activity
or the establishment of the company.
b) Some taxpayers are reluctant to provide true information about their business and address
and it becomes difficult for RRA to trace them. This means that they will continue to commit
different types of tax offences as the tax administration cannot trace them and enforce the on
them.
c) There are taxpayers who import goods without being registered with the RRA and sell the
goods they import directly from customs warehouses. Since these taxpayers are not
registered, it means that they will continue evade domestic taxes because the tax
administration can not trace such a taxpayer since he is not registered.
d) The RRA delays in responding to taxpayers’ requests for de-registration. In such a situation
where taxpayers request are not responded to promptly by the tax administration. The
taxpayers will have long perception towards tax administration and they will be prompted to
become non compliant with their tax obligations.
e) Criteria for entry and exit to large taxpayers from and to small and medium taxpayers’ are
neither clearly established nor consistently followed.
35
f) There is no adequate link with the public agency that provides trade licenses to enforce
taxpayer registration. If there is a link between these agencies and the tax administration, all
business operators can be brought in the tax net and the tax administration can enforce the
law against those who have not voluntarily registered.
g) Some taxpayers do not notify the RRA of the change in their registration details ranging from
the change of phone number, to ceasing of businesses. In such a situation, it will be difficult
for tax auditors to trace tax offenders in that category and conduct investigations on their
operations.
II.2.2
Taxpayers education and assistance
Taxpayer education and assistance is an important administrative tool that is used to enhance
taxpayers’ compliance with their tax obligations. Although a lot is done by Rwanda tax administration
to educate and assist taxpayers, there are still some weaknesses; for example, tax intermediaries are
not effectively assisted and educated yet they play a vital role in improving taxpayer compliance. Also
limited information and tools are provided to tax payers to assist them to become compliant with their
tax obligations.
II.2.2.1
Providing information, tools to help taxpayers
The provision of information, tools and guidance to help taxpayers comply is very important. If
taxpayers do not understand what their obligations are, any intervention to enforce tax laws will be
perceived as unfair. Thus, a first step in considering how to address a specific non-compliant
behaviour should be to review whether or not the appropriate steps have been taken to make
obligations clear — meaning transparent, easy to understand, simple and non-confusing guidance.
The RRA established a toll free line for taxpayers to make use of in case of any quick and faster
inquires and or complains. This toll free line 3004 was assigned to an officer who is well versed with
RRA services and operational procedures to enable him/her be in position to answer any or at least
quite number of callers’ concerns. The hotline works from 07:00 am to 10:00 am daily 74.
The information provided to taxpayers is limited. For example, most of the information is provided on
the website; yet the majority of the taxpayers especially those from rural areas do have limited access
74
RRA Taxpayer Services Annual Report, 2008, p. 7.
36
to internet services. Also information provided on the internet is not sufficient. For example, tax
calculator tool is not provided on RRA website. This tool is provided by many other Revenue Services
on their websites.
There has also been complaints among some taxpayers that most of the tools and information
provided is either in French or English yet the majority of the tax paying community is semi-literate to
the extent that they do not understand these languages. This is a burden especially to small taxpayers
who are not able to hire expensive tax consultants.
II.2.3
Control of corruption among tax officials
One of the weaknesses in the tax administration is continued tendencies of corruption 75. Corruption in
revenue administration can take many forms ranging from systematic – where individuals act together,
to systematically support evasion (usually driven by senior staff) – to individual corruption, where staff
either have ‘clients’ whom they facilitate illegally or where they simply exploit their positions for
financial gain. In addition, those involved in corrupt activities continually seem to be very inventive in
finding new loopholes as some doors are being closed. Examples of corrupt activities in the tax
administration may include76:
a) Charging for services that should be free;
b) Speeding up of services (especially charging for faster clearance of goods)
c) Charging for help to overcome complicated procedures and to qualify for exemptions or duty
free treatment;
d) Turning ‘a blind eye’ to non-registration for taxation;
e) Aiding taxpayers a in understating income;
f) Selling insider information about competitors, profits, purchase costs, etc.;
g) Receiving payments to impede a competitor’s business activities;
h) ‘Losing’ files that contain evidence of tax offences;
i) Receiving payment to complete tax returns for taxpayers.
According to Law No 23/ 2003 of 7th August 2003 related to the Punishment of corruption and related
offences, “The officials in organs of the public service and public institutions, those in private
75
RRA Customs & Excise action plan, 2007, p.2.
76
HELGE F., Revenue Administration and Corruption, Michelon Institute, London, 2005, p.24
37
institutions, companies and non governmental organizations are under obligation to set up
mechanisms for the prevention of corruption and related offences.”
According to RRA Code of Conduct77, an RRA employee must be aware that it is a gross misconduct
and a criminal offence:
a) To receive any gift, loan, fee, reward or advantage for doing an act of his official duty even
valid but not subject to the remuneration;
b) To demand or receive any gift, reward, promise or any illicit profit in order to accomplish an
illegal act or refrain from carrying out his/her duties;
The same code of conduct goes further to state that any member of staff who has reasonable
grounds for believing that another member of staff is involved in bribery and corruption or theft must
report the matter to the Competent Authority, either via their own Head of Department or otherwise
directly.
According to RRA Quality Assurance 2008 annual report, 49 investigations in connection with
corruption, tax evasion, unjustified increase in wealth, theft and other staff malpractices were
conducted. The concluded cases involved 60 employees suspected in which 16 were dismissed for
corruption, tax evasion and other staff malpractices, 12 were acquitted after being found not guilty
while 32 were given different administrative sanctions78.
This table summarizes Disciplinary measures that were taken by RRA.
Dismissal
Last written
warning
16 ( 9 for corruption & 4
tax evasion; 7 for other
malpractices)
First written
warning
26
Oral warning
Acquittal
Total
2
12
60
Source: Quality Assurance Annual Report for 2008, page 5.
As it can be observed above the ‘the prevention is better than cure’ approach is not put in place rather
than applying the sanctions when the case of corruption has already taken place. Dismissals and other
disciplinary actions can minimize corruption but they cannot eradicate them.
77
RRA code of Conduct, December 2008, p.7.
78
RRA Quality Assurance Annual Report for 2008, p.1.
38
After carrying out a critical analysis of mechanisms applied in the control of the tax offences, the
existing weaknesses in tax control mechanisms are identified and need to be addressed those
weaknesses include limited powers of access to information for tax audit and investigation, lack of
effective prosecution and punishment of tax offenders, lack of independence in appeals process,
inefficient registration and de-registration procedures, limited taxpayers education and assistance; and
limited control of corruption among tax officials. The mechanisms to address these problems are
proposed in the third chapter.
39
CHAPTER III.
OFFENCES
MECHANISMS PROPOSALS FOR CONTROL OF TAX
This chapter is devoted to providing mechanisms proposals that can be implemented in order to
eliminate the weaknesses that were identified in the second chapter. The tax offences control
mechanisms proposed include: providing more powers of access to information; prosecution,
imprisonment and publication of tax offenders; enhancing the external appeals mechanism; enhancing
taxpayer registration and de-registration process; enhancing taxpayer assistance and education
programs; and stamping out corruption
III.1. Legislative Mechanisms Proposals
The proposed legislative mechanisms to be applied in the control of tax offences include: The
legislative mechanisms proposed were provision of more powers of access to information;
Prosecution, imprisonment and publication of tax offenders; and Enhancing the external appeals
mechanism.
III.1.1 Provide more powers of access to information
As it was observed in the previous chapter, most of the information used by the tax auditor under
Rwandan tax system is from the taxpayer himself. Yet, information from third party is very crucial. The
tax administration should have the powers to get information from third parties during the investigation.
The tax auditors should have access to the records of anyone who has financial dealings with
taxpayers and who can provide relevant information on taxpayers' income and the accuracy of their
tax declarations and books and records79.
These third parties include administrative authorities, physical persons as well as moral persons; that
is, the administrative services include Prosecution service, the registries of tribunals and courts, the
subordinate as well as all the public institutions that the State holds shares or has governance over 80.
These services must provide the authorised tax officer with all information and documents that they
possess. Obtaining information from other domestic government departments and relevant private
79
Victor T., Tax Law Design and Drafting, Vol.1, International Monetary Fund: 1996; (Ed.), p.301.
80
Art 24 of LTP.
40
sector organisations for risk identification and assessment, and data-matching is recognised as an
effective way of discovering tax offence practices. For example, external sources of information can
improve detection of unreported income and assets.
III.1.1.1 Information from other government agencies
In many countries, information is shared or obtained from other domestic government departments,
agencies and regulatory bodies (typically under MoUs) such as the:
a) Immigration department
b) Land registry
c) Motor vehicle registry
d) Audits & accounts department
e) Securities commission/stock exchange
f) Social security department
g) Police
h) Bureau of statistics
i) Bureau of Standards
III.1.1.2 Information from the private sector
Information obtained from private sector organisations can sometimes yield more useful insights than
information that is obtained from government departments and agencies, as taxpayers may set out to
defraud more than one government department or agency. A few examples of useful sources of
information include:
a) Banks/financial institutions
b) Utilities companies
c) Telecommunications companies
d) Trade/industry associations
e) Professional groups
f) Wholesalers and retailers.
g) Connected companies
However, information sharing with the private sector can be difficult and is usually one-way because
organisations have no incentive to provide this information. Their desire to protect the confidentially of
their clients is also a key barrier. Therefore, effective provision of information usually requires changes
to the legal framework.
41
RRA should follow example of the US tax code which requires that transactions must be reported
(generally in electronic format) to the IRS, including agricultural payments, allocated tips, barter
exchange income, brokers’ transactions, capital gains distributions, prescribed gambling winnings to
name a few81. This data must then be matched with taxpayer records and used to identify
discrepancies.
Also the legal obligations to keep records by the taxpayer should be harmonized in both Customs law
and the code on tax procedure should be harmonized. As mentioned earlier, the Customs law provides
for a period of five (5) years while the code on the tax procedure for vides for a period of ten (10)
years.
III.1.1.3 Taxpayer’s books of accounts
It should also be pointed out that taxpayers’ books of accounts are not systematically audited by
independent professional accountants. This is very common in the provinces where there are very few
certified accountants.
III.1.1.4 Opportunities fro voluntary disclosure
Voluntary disclosure is another important source of information. However, the Rwanda tax law clearly
shows that there is no room for voluntary disclosure. This does not give a reflection of transparency in
the system and discourages the taxpayers who are wing to comply to come forward and settle their tax
disputes with the tax administration.
Voluntary disclosure is a system where a taxpayer discovers that he/she did not declare the right
amount of tax or finds himself engaged in fraudulent activities and he is given the occasion to come
forward and report information related to these activities to the tax administration. For example, in
some cases, taxpayers may not pay their tax on time because of severe personal circumstance or
have unintentionally provided incorrect information or made an honest mistake on their tax return. The
taxpayer then decides to approach the tax administration and makes a disclosure of such errors.
Some errors may be intentional but others may be innocence or negligence errors. In these situations,
if the tax administration came down heavily on the taxpayers with punishments and penalties, the
taxpayers are likely to ‘rebel’ and lose respect for the tax authority – this is likely to have an impact on
81
Forum of Tax administration Compliance Sub-group (2004), available at: http://www.oecd.org, accessed on 24th June
2009.
42
future compliance behaviour as well. It is therefore not surprising that some tax administrations provide
taxpayers with the opportunity to voluntarily disclose. For example, Canada Revenue Agency’s
Voluntary Disclosures Program (VDP) allows clients to come forward and correct inaccurate or
incomplete information or disclose material they did not report during previous dealings with the CRA,
without penalty or prosecution. The VDP even accepts information that is less than one year overdue,
except when disclosures are being made to avoid late filing charges82.
From the above point of view, Taxpayers should be allowed some chance to exercise their
responsibility as far as tax liability is concerned and this would be through voluntary disclosure. RRA
should allow taxpayers to come forward and correct inaccurate or incomplete information or disclose
material they did not report during previous dealings with the RRA, without penalty or prosecution. By
making a full and complete voluntary disclosure, a taxpayer will get the advantage of reduced levels in
any shortfall penalty imposed.
The following are the expected benefits in case of implementation of voluntary disclosure:
a) It is a customer-focused approach that improves the level of compliance.
b) It is a system that is geared at reducing costs of collections.
c) It makes it as easy as possible for taxpayers to understand and comply to their obligations.
d) It reduces costs in trying to identify fraud cases
e) Less time and resources will be invested in audits
Finally, RRA having a self –assessment system where taxpayers are given the opportunity to
determine their tax liability, should adopt voluntary disclosure as one of the tools to encourage
voluntary compliance. This recommendation has been made in consultation through research with
other progressive countries.
82
For more information on Voluntary Disclosures Program, please see the Canada Revenue Agency website at:
http://www.cra, accessed on 15th June 2009 .
43
III.1.1.5 Tax amnesties
Another important source of information is the use of amnesties. The basic idea of an amnesty is to
encourage taxpayers to come forward and pay their long-past-due obligations and can be used to
bring new taxpayers into the tax net. Tax amnesties have been used by a number of countries with
varying levels of success83.
In order to succeed, they should contain consequence components and be supported by strict
enforcement and compliance activities. Heavy publicity (of both the amnesty itself and the
consequences of not complying) also helps to maximise the effectiveness of the tax amnesty.
An important point to remember is that amnesties can also be used when a change in tax law
highlights previous, possible unintentional, non compliance - for example, non-compliance that results
from uncertain tax laws that are later clarified84.
In addition, limited amnesties can also be offered. For example, in the United Kingdom an incentive
scheme was introduced to improve compliance amongst those businesses which failed to register for
VAT. The incentive scheme was aimed at those businesses which, for whatever reason, have failed to
register despite trading above the compulsory turnover limit (currently £56,000) for over 18 months.
The scheme gave these businesses relief from the usual penalties and interest connected with
substantially belated notifications, although importantly it gave no relief from arrears of tax due since
the correct registration date. The integrated strategy for addressing this risk included traditional
enforcement methods of bringing businesses onto the VAT register, including covert and overt
investigations, and use of intelligence. The rationale for including this scheme in the integrated
strategy was that it made sense to give businesses which should have registered some time ago an
incentive to come forward voluntarily rather than take the chance of waiting for these more traditional
methods.
Aspects of the UK strategy of interest include:
a) Use of professionally produced publicity to advertise the scheme;
83
TORGLER, B., AND SCHALTEGGER, C., ‘Tax amnesties in Switzerland and around the world ', 2005. pp. 1193-1203;
and Hasseldine, J., (1998). ‘Tax amnesties: in International Review ', bulletin for international Fiscal Documentation, 52,
pp.303-310.
84
CUNLIFFE, D., (2004). ‘Options for dealing with industry-wide tax evasion: Policy Advice division of the New Zealand
inland Revenue Department, wellington, available at: http://www.taxpolicy.ird.govt.nz/publications, accessed on 24th March
2009.
44
b) A definite end date to the scheme (it ran for about 6 months) after which the authority
promised to crack down on those found to be continuing not to comply;
c) Operation within the existing legislation which allowed waiver of penalties and interest but not
arrears; and
d) No discrimination between those businesses which deliberately failed to notify and those
which failed because of ignorance of the regulations.
In UK, The scheme finished in September 2003. Over 3000 businesses took advantage of it, with
arrears of tax of over £19,000,000. Included in this total were over 30 businesses with individual
arrears each of over £100,000. In addition, the publicity connected with the scheme increased
awareness of the registration rules and indications are that many businesses ignorant of the rules
have come forward earlier than they otherwise might have done85.
Other experiences with tax amnesties are described below:
a) India – in 1997, during the 214 days of the amnesty, the Indian government collected INR 100
billion additionally (US Dollars 2.5 billion) from over 350000 individuals, covering half of the
sum collected through income tax. The amnesty was accompanied by intensive media
activities and a private marketing company was engaged to help with the marketing campaign.
Even celebrities and sport stars were engaged to promote the amnesty!
b) South Africa - has had success with its most recent amnesty program lasting from June 1
2003 to Feb 29 2004. Individuals, trust and private companies bringing their money home had
to pay 5 percent charge as well as settle tax liabilities for the year 2002-2003. Ten per cent
was charged on funds that were declared but kept abroad. South Africa received about 43000
applications. Indications are that the value of foreign assets declared by applicants will be
about ZAR 65 billion, raising ZAR 2.2 billion.
c) Kenya - had success with its tax amnesty conducted between 10th June - 31st December
2004. It raked in KShs. 4.41 billion from 4, 483 applications.
It is very important to understand that the proposal is not about simply letting tax law offenders off the
hook. Rather, it is about improving the incentive to come forward for those who are willing to begin
85
OECD ‘Compliance risk management: Managing and improving tax compliance', prepared by forum on Tax
administration Compliance Sub-group, available at: http://www.oecd.org, accessed on 20th May 2009.
45
complying with the law, allowing RRA to focus more resources on those who continue to not comply
with their tax obligations.
III.1.1.6 Unannounced audits
Rwanda tax law should be amended to give allowance for visits to taxpayer premises to be conducted
unannounced. For example, Botswana has recently introduced unannounced field visits – This has
made a noticeable impact not only in the recovery of underpaid taxes, but also in the attitudes of
evaders towards the tax administration86.
III.1.1.7 Mystery shopping
Another approach to surprise visit is what is referred to as “Mystery shopping.” This approach is
commonly used for market research purposes. For example, a private sector organisation may act as
a customer at their competitor’s shop(s) to gather information on prices and practices. Some
organisations also use ‘fake customers’ to test the service quality provided by their staff. “Mystery
shopping,’’ is relatively a new measure adopted by only a few tax administrations to control violation of
tax law. Argentina for example, has introduced a legislation to enable tax inspectors to make false
purchases in shops and apply a sanction if the mandatory invoice is not issued upon the sale.
III.1.2 Prosecution, imprisonment and publication of tax offenders
There is a misconception that tax offences are not treated with the same seriousness as other
offences of fraud or dishonesty, and that tax offences are somehow “victimless” crimes. That is
incorrect. A conviction for violation of tax law can carry the very distinct risk of imprisonment as well as
heavy fines87 and publication of tax offenders. The threat of long imprisonment and publication of tax
offenders may create some amount of fear and induce offenders to pay their taxes 88. For example in
Singapore, an Income Tax Act was introduced in 2003 to impose heavier penalties on tax evasion.
The penalties have since increased from 300 percent of tax, Dollars 10,000 fine and a maximum of 3
years imprisonment to 400 percent of tax, Dollars 50,000 fine and a maximum of 5 years
imprisonment.
86
Kristy D, Tax Evasion and Avoidance, 2006, p.44.
87
http://www.taxcounsel.co.nz/Services/Tax+Prosecutions.html, cited on 24/12/2008
88http://www.financialexpress.com,
accessed on 29/12/2008.
46
This subsection proposes enhancement of prosecution, imprisonment and publication of tax offenders
to improve compliance with their tax obligation.
III.1.2.1 Prosecution and imprisonment of tax offenders
Penalty structures under Rwandan tax system should be ‘escalating’ in nature and range from the
administrative and criminal prosecution and imprisonment for the most serious of cases. For example
in Malawi, the law on penalising tax evasion was amended to include a non-optional prison term where
one is found guilty of intentional tax fraud. Some countries such as Malaysia go one step further and
ban directors who are prosecuted from practicing again for 5 years.
Effective prosecutions are also dependent on the judicial system. Unfortunately, some judges do not
see violation of tax laws as a serious crime and perpetrators are often let off with lenient penalties or
sentences, which further encourages commitment of tax offences. Hence, tax administration should
look to form stronger links to judges and include education initiatives aimed at that segment to help
them recognise the detrimental effects weak enforcement can have on violation of tax law.
III.1.2.2 Publication of tax offenders
Another component of transparency that constitutes the strongest mechanism to control tax offences
is clearly the publicity given to prosecution and conviction of individual tax offenders 89. Not only can
publicity be used to heighten the perception that the likelihood of detection is high and hence
encourage compliance with tax obligations, it also helps to improve the credibility of the tax
administration by showing taxpayers that it can and will actively pursue those who choose to violate
the law. Even company boards will realise that publicity, namely ‘naming and shaming’ attacks on
alleged tax avoiders will damage their reputations in the eyes of important stakeholders, which can
lead to sharp short-term share price falls and the unwelcome attention of tax authority.
Publicity should not only be limited to prosecuted cases, it should also be extended to personal
income of taxpayers. Although not really used by many tax administrations, some countries also
publicise personal income tax information, such as the amount income earned and the amount of tax
paid by an individual. For example, in Sweden, aggregate information from an individual's tax return
(i.e., gross and net salary, tax paid) is public information, available to anyone. Proponents for the
89
United States Practices in Estimating and Publicizing Tax Evasion, African Economic Policy Discussion Paper No 15,
May 1995, p.9.
47
publication of personal income tax information argue that publicity can prevent taxpayer fraud and
evasion as well as prevent ‘maladministration’ of tax laws, including ‘favouritism’ by tax officials.
Moreover, open returns help keep the system honest because members of the public can discover
schemes not caught by the tax officials and they can insure that officials are administering the system
honestly. By keeping the system honest, publicity increases taxpayer confidence in the fairness of the
system, which in turn has the salutary effects of increasing voluntary compliance and revenues.
III.1.3 Enhance the external appeals mechanism
In order to improve current appeals mechanism, the current tax procedure law should be amended to
provide for establishment of a professional and independent tax tribunal that could hear matters of fact
and law in relation to the assessment under appeal. The tax tribunal should comprise experienced and
suitably qualified (law, accounting and commerce) professionals who are appointed to permanent
positions and who are genuinely independent of both the private sector and the revenue authority.
These positions should be remunerated so as to attract high quality candidates. Only questions of law
should be appealable to the courts of law because usually courts of law have limited experience in
technical issues (e.g. taxation issues and financial and accounting issues).
In United Kingdom, for example, when there is disagreement on the decision made by the Revenue
Administration, the taxpayer can either appeal to the Special Commissioner or General Commissioner.
These two tribunals are independent of Revenue administration. The job of these Commissioners is to
look objectively and impartially at the facts of each of the case brought to them, apply the law to
these facts and decide whether the original decision was right or wrong.
In Ireland, when an appellant is not satisfied with the decision from Revenue Administration, he
appeals to the Commissioners through the Inspector of Taxes; the tax inspector decides whether or
not grounds for such an appeal to the Appeal Commissioners exist. These Commissioners are
separate from Irish Revenue Services. If it is considered that no grounds exist the Inspector of Taxes
may advise the appellant of this and the appellant has the option to appeal this decision (i.e. the
decision that no grounds exist) to the Appeal Commissioners. The Inspector will communicate with the
Appeal Commissioners, concerning a date for the hearing etc., and acts as a conduit between the
Appeal Commissioners and the appellant taxpayer.
48
III.2. Administrative Mechanisms proposals
The administrative mechanisms proposed under this section are in control of tax offences were:
Enhance Taxpayer Registration and De-registration, Enhancing taxpayer assistance and education
programs, Stamping out corruption.
III.2.1 Enhance Taxpayer Registration and De-registration
Tax offences cannot be controlled without knowing the actual number of taxpayers in the country. This
number can be established through proper registration and de-registration procedure. The
Administration should provide an accurate register cleanup of all taxpayers by identifying active and
passive ones.
Specific programs are needed to identify active taxpayers not in the tax net and passive ones who can
be safely de-registered. The taxpayer registration can be enhanced by improving the quality of
taxpayer register and strengthening taxpayer recruitment exercise. Improve the quality of taxpayers
register
The measures that can be taken to improve the quality in taxpayer registration include the following:
a) Taking on board an effective procedure that will ensure that all taxpayers are registered within
the time stipulated by the law, with little or no leakages;
b) Setting up standard forms of registration that are comprehensive enough to exclusively
identify and locate a taxpayer;
c) Completing all mandatory fields in the registration form in full when registering a taxpayer;
d) Adopting an effective mechanism that ensures the updating of a taxpayer’s registration
information whenever changes occur in the status of the taxpayer;
e) Ensuring that there are adequate mechanisms for monitoring de-registered taxpayers;
f) Putting in place adequate procedures for monitoring the growth or decline of taxpayers’
revenues that may qualify them for an advanced or lower level of registration;
g) Allowing online application for a tax de-registration. This will reduce compliance costs and
administrative burdens Reducing number of visits by taxpayers to RRA,
h) Considering notifying a taxpayer that he/she is de-registered using e-mail, fax or registered
mail. This will reduce compliance costs and administrative burdens Reducing number of visits
by taxpayers to RRA.
49
III.2.1.1 Strengthen Taxpayer recruitment
The mechanisms that can be put in place to strengthen taxpayer recruitment may include:
a) The Taxpayer Service Department should constantly encourage taxpayers register voluntarily.
It should do this by conducting seminars, advertising in News papers, Television, and Radio
on a regular basis.
b) While the registration of all persons engaged in business should be pursued rigorously, care
should be taken not to coerce and register taxpayers that do not qualify for a given type of tax
unless they qualify as per the provisions in the law. The following benchmarks should be sued
to register taxpayers for each type of tax:

for VAT, a turnover of RWF 20 million (unless the taxpayer registers voluntarily);

for PAYE, engagement of one employee; and

for Personal Income Tax an annual turnover in excess of RWF 1.2 million. Observing
these policies strictly minimizes the volume of de-registration.
c) Assign an officer in the office that issues trade licenses. This officer becomes responsible for
making taxpayers complete the registration form, collect copies of the required documents
such as trade licenses; immediately when they obtain the trade licenses. The same officer
informs the new taxpayers to come to the Domestic Tax Department and obtain their TIN
certificates within 7 days. There may also be a link between the RRA systems and the office
that issue trade licences so that RRA can get the information regarding the trade licence
electronically. These traders may be automatically registered for tax purposes and be followed
up for enforcement if they do not voluntarily report to the tax administration. If the RRA
become in full control of the situation at the licensing office, the leakage becomes minimized.
d) Conduct field visits to identify and recruit unregistered taxpayers or those not registered for
VAT or PAYE while they do qualify. Field visit is time consuming and an expensive operation
to perform on a daily basis and should be done only periodically by organizing officers for the
purpose once every quarter.
When an unregistered taxpayer is identified, or a registered
taxpayer not complying submitting returns is discovered, raise an affidavit for immediate
registration and/or assessment. The findings of the field visit should be documented and the
database in SIGTAS should be updated accordingly.
50
e) Using the interface functionality of SIGTAS with Asycuda++, compare those registered in the
import export activity business in SIGTAS with those actually importing merchandise as per
the Asycuda++ database. Identify those that are not registered for tax while importing
commercial merchandise. Contact these importers, make them sign an affidavit, register them
for the relevant taxes and pass them to the Assessment Group for follow up.
f) Review the vehicle importation database on annual basis to identify persons that have
imported more than one vehicle in a period of two years. When discovered the more than one
vehicle imported in two consecutive years is considered as commercial importation and
becomes subject to all relevant taxes. Make the importer sign an affidavit, and pass it to the
Assessment Group.
g) Consider implementing a mechanism which will allow data exchange and sharing between
RRA and commercial register agency and any other licensing agencies. This facilitates tax
registration process and to avoid multiple submissions of the same information by taxpayers.
III.2.1.2 Expected benefits from improved taxpayer registration and recruitment
The proposed mechanism will provide the following benefits:
a) Widens the tax base as many taxpayers will be found in the tax net
b) Makes registration and de-registration consistent and auditable
c) Improves taxpayer service
d) Tightens the RRA’s grip on new taxpayers that emerge as the economy develops
e) Minimises non-compliance by tightening the gaps that person use to evade taxes
f) Promotes equity and fairness in the tax administration as those persons that remain outside
the tax net reduce significantly.
III.2.2 Enhance taxpayer assistance and education programs
Taxpayer education and assistance programs should be enhanced through providing information and
other tools to taxpayers, giving special attentions to small businesses, visiting taxpayers’ premises,
providing relevant information to new taxpayers, and easing tax payment process.
III.2.2.1 Provide information, and tools to help taxpayers
In providing information and tools to taxpayer, the following issues should be put under consideration:
51
a) Are the authority’s administrative requirements clear?
b) Are there clear information products available, at relevant levels of detail, in the language of
the taxpayer? Are these products accessible in the taxpayers’ channels of choice (e.g. webbased, paper-based, CD-Rom)?
c) Has there been adequate communication and marketing of the information available? Has this
included publication in relevant industry or community vehicles?
d) Are effective support services available to meet taxpayers’ needs? (e.g. telephone enquiry
services, web services, educational field visits, etc.)
e) Have opportunities been taken to remind those potentially at risk of what their obligations are?
III.2.2.2 Giving Special attention to small businesses
The administrative burden of tax compliance has been shown to fall more heavily on small businesses
than on large businesses. From this context, a specific program should be implemented to help those
new to business to get established. A pilot program should be conducted where those new to business
will be given a personal phone-call from a tax officer to check if the business operator had any
questions about his tax obligations. The objective of this study will be to establish whether those who
were contacted will be more compliant (i.e. lodge on time and have smaller debts) than those who
have not been called.
III.2.2.3 Visits to taxpayers premises
Visits to business premises are also helpful because they offer a personalised and direct approach to
assistance, but these visits need to be carefully pitched because they could be viewed as an
enforcement approach, leading to more angst and fear! It is more common to establish shop fronts or
call centres where taxpayers can access to seek assistance or information to help them comply, or to
conduct seminars or workshops for groups of taxpayers.
III.2.2.4 Providing relevant information to new taxpayers
RRA should consider starting an on-boarding program for new taxpayers. When taxpayers register
with the RRA, they should be provided with all the necessary information, tax returns and instructions
they will need to meet their filing and paying requirements.
The new taxpayers should be educated of their responsibilities as taxpayers and what they are
expected to do to enhance compliance with tax laws. RRA should prepare on-boarding package that
52
contains all necessary information forms, laws, regulations and documents which a new taxpayer will
need.
III.2.2.5 Easing tax payment process
RRA should also consider designing utility software that does the calculation of taxes and fines for the
taxpayer and validates entries. Distribute this program free of charge on a CD and through the RRA
website. Include a checklist to help the taxpayer “get it right the first time˝.
RRA should allow taxpayers to pay their tax liabilities through different commercial private banks in
addition to the one located in RRA premises.
III.2.2.6 Expansion of electronic services
RRA should expand a range of electronic services provided (such as RRA website, online registration,
e-filing and portals,). It is believed that there will be an increase in the number of taxpayers and tax
advisers taking advantage of the ease and convenience these services provided.
III.2.3 Stamping out corruption
In order to curb down corruption in the revenue administration, tax officials must be adequately
compensated, so that they do not need to steal to live. They should be professionally trained,
promoted on the basis of merit, and judged by their adherence to the strictest standards of legality and
morality. Tax officials should have relatively little direct contact with taxpayers and even less discretion
in deciding how to treat them90.
III.2.3.1 Staff Salaries and welfare
If tax officials are paid a wage that they cannot live on, they will, almost certainly, ‘help themselves’ to
survive. If the wages within the revenue administration are substantially lower than in comparable
positions outside, yet little staff turnover occurs; that should be reason for management concern.
Addressing staff welfare is also important in reducing staff’s inclination to corrupt practices. One
practical step is to recognise that staff may experience periods of financial difficulty, for instance
90
Richard M., BIRD AND ERIC M., An Introduction to the design and Development of Tax Policy in Developing and
Transitional Countries. World Bank, April, 2003, p.37.
53
caused by family medical bills. An accessible staff loan facility may help overcome this. Staff welfare is
a particular issue especially in customs, as officers are often required to work either during anti-social
hours (shift work), or at remote stations like away from their families where offices are often
rudimentary with poor living accommodation and harsh conditions. These officers should be given
hardship allowances to improve their motivation.
III.2.3.2 Staff Code of conduct
RRA should be adamant to its code of conduct. This might include rules about and declarations of
outside business activities that present a possible conflict of interests, including those of close family
members. Every new staff should be provided with a copy of staff code of conduct. Likewise, regular
declarations of assets should be emphasised and regularly cross-checked. Gifts and hospitality are a
common issue of concern for revenue collectors, as they, by definition, have regular dealings with
clients. Practices vary widely between countries and cultures, but the key issue is to define clearly
what is permitted and what is not. A gift register should be introduced to record gifts received by tax
officials especially those who conduct field audits.
III.2.3.3 Management
Managers can obviously have a marked influence on corruption. Staff may tend to follow the good or
bad examples set by managers. Managers should be encouraged to design and institutionalise checks
and balances so that individual lapses are both more difficult to perpetrate and easier to detect. They
should also require record-keeping of decisions, particularly in exercising discretion. The deployment
of staff needs to be actively managed. Staff should not be permitted to switch shifts, alter days off, or
change their work location without the agreement of management. Managers must be alert to staff
seeking to be ‘in the right place at the right time’ in order to facilitate tax offenders.
At a practical level, there are many steps that can be taken to ‘disrupt’ corruption, such as the regular
rotation of staff from risky locations and posts. Access control systems such as key pads or swipe
cards can be used to prevent staff from visiting areas where they do not work. Restricting the access
of unofficial visitors is also good practice. Swipe cards have been introduced in RRA but their use is
not yet monitored.
III.2.3.4 Tax payment mechanism
54
Simplification of payment procedures and greater efforts on educating those involved in the
transactions (taxpayers, importers, agents) are very important. If clients know what is required, and
can do it unaided, they will be less motivated to corrupt revenue officers for assistance.
Tax payment mechanisms should be transparent and made public. If possible, officers should not be
permitted to accept cash tax payment in the field. Ideally, all payments should be made by taxpayers
directly to banks.
Many internal frauds rely on taking the correct payment from the taxpayer and only banking part of the
remittance, typically in collusion with company employees, bank officers, and/or a revenue accountant.
To make this harder to perpetrate, secure receipts are required. A further measure is to send
electronic confirmations (or periodic account statements) directly to clients to verify the amount of
remittance received.
III.2.3.5 Safeguarding information and use of IT Systems
IT systems are becoming more prevalent in revenue administration and require careful design to help
reduce the opportunities for corruption. Systems must have facilities for retrieving or monitoring
records of queries made by individual members of staff. Information held by the administration,
whether on paper or electronically, must be safeguarded. Managers should be aware of the possibility
that information on business competitors might be sold to taxpayers or misused in other ways. Access
to information should be controlled and records kept showing who accessed the information and when.
III.2.3.6 Deployment of Audit teams
Fertile ground for the payment of bribes is provided when irregularities are discovered by auditors. It is
important for RRA managers to deploy teams to undertake specified tasks rather than to allow staff to
select their ‘targets’. Further, there must be risk-based management controls over the conduct of the
work, including accompanied or follow-up visits, and thorough checking of reports. It may also be
necessary to have a programme of follow-up visits by an effective, risk-based, internal audit team
supported by external audit controls.
This chapter has provided both legislative and administrative mechanisms that can be used to address
the weaknesses that were discussed in the second chapter. In order to ensure that the control of tax
offences is improved, there should be opportunities for voluntary disclosure; powers to get information
for audit and investigation purposes should be provided to tax auditors; prosecution, imprisonment and
55
publication of tax offenders should be applied to those convicted of tax offences; the external appeals
mechanism should be enhanced; tax auditors should be given powers to conduct unannounced audit
visits; Taxpayer Registration and De-registration procedure should be enhanced; taxpayers should be
encouraged to seek invoices from suppliers; incentives/rewards should be provided to compliant
taxpayers to make them remain compliant and encourage others to comply; assistance and education
should be extended to intermediaries; relevant information and tools should be made available
taxpayers to help them; and finally, every effort should be made to stamp out corruption that is still
existing among some tax officials.
56
GENERAL CONCLUSION
This paper has explored the many contemporary issues connected with the infringement of tax
legislation in Rwanda. It would be natural to ask whether any definitive resolutions can be predicted in
order to construct a more effective and equitable system of addressing tax offences under Rwandan
law.
Unfortunately, many other countries are wrestling with similar problems although most have a much
longer legislative history in comparison with Rwanda. The common solution is gradual improvement of
tax legislation accompanied by elimination of systemic problems.
Whilst there are many things that Tax administration can do to prevent, detect and deal with different
kinds of tax offences, it should be acknowledged that the effective way of combating of such practices
needs to be approached at the whole of government level. Those who commit tax offences are
probably committing frauds against more than one government department or agency. Hence, the
Local authority, the immigration Authority, the Police, Rwanda Bureau of Standards, the central bank,
Social Security Fund, the Army, and many others, need work together. These government Agencies
should also work together to demonstrate to taxpayers how their money is being spent to benefit the
population. If taxpayers cannot see any benefits of paying taxes, they will be more inclined to evade
their taxation responsibilities. Similarly, effective control and monitoring of corruption across the board
is equally important in encouraging compliant tax behaviour.
The opportunities to achieve success in addressing tax offences are facilitated by an environment
which embraces the rule of law, a political commitment to public sector reform, a political commitment
to combat corruption, and rational tax policies.
A well functioning tax administration, perceived as treating all taxpayers fairly and with respect, and
concerned with collecting only the proper amount of tax, will go a long way towards achieving the goal
of voluntary compliance which benefits everyone.
While no one enjoys paying taxes, seeing others escaping the tax net while you are attempting to pay
your fair share is even less appealing. The general public should therefore be encouraged to report tax
offenders.
57
The preventive measures should be given priority over punitive measures while tackling fraudulent
activities. This should be the principle of legislation and enforcement. Tax Fraud can be curbed by
making tax laws less complex and leaving less scope for subjective decision.
The goal of taxpayers is to maximize their financial position; as such they will continue to evade taxes
as long as benefits from delinquency outweigh the risk of detection and punishment. Application of
severe penalties is of no help if many tax evaders do not get caught.
Rwanda Tax administration needs to continually review its systems, strategies and skills to keep pace
with the problem of violations of tax law. That is why we suggest the following means as a better way
to control tax offences: there should be opportunities for voluntary disclosure; powers to get
information for audit and investigation purposes should be provided to tax officials; prosecution,
imprisonment and publication of tax offenders should be applied to those convicted of tax offences; the
external appeals mechanism should be enhanced; Taxpayer Registration and De-registration
procedure should be improved and every effort should be made to stamp out corruption that is still
existing among some tax officials
58
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