Memoire Online - A Critical Analysis of Effectiveness of Tax Offences Control Mechanisms Under Rwandan Law

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.

Esteemed acknowledgement is attributed to Rwanda Revenue Authority, my employer for allowing me to further and diversify my studies while performing my usual duties.

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 Mr. 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.

Special thanks also go to my colleagues at work for being so friendly and supportive during this period.

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.

Acronyms

General Introduction

i. Background of the study

With the growth and increasing globalisation of businesses (including the increased mobility of capital and rise of e-commerce), the opportunities for taxpayers to commit tax offences are expanding, prompting the need for the tax administration to continually update and broaden the strategies it uses to deal with these offences.

Rwanda has had a tax system since the earliest days of colonial settlement. Today, the government collects over RFR 252.584^1(*) billion in taxes and duties. These taxes fund vital public services, like hospitals, the police, and our schools, to mention but a few. Taxes also have powerful effects on the size and shape of the Rwandan economy. They make an impact directly and indirectly on how, where and when Rwandans save, work and invest. Yet, we realize that every year a lot of revenue escapes national treasury due to tax evasion and related offences. A good tax system needs to be robust and efficient in terms of revenue collection, compliance improvement and control of tax offences.

Indeed over forty percent (40%) of the country's budget is financed by «foreign partners». This tends to put undue pressures on the government when the expected foreign funds are not forthcoming. To minimize the foreign dependency, it is imperative for the government and the Tax Administration to redouble their efforts in domestic tax revenue maximization.

Before 1997, Tax and customs in Rwanda used to be managed by two different and under-staffed departments in the Ministry of Finance. Within these departments, the same people were responsible for both generating tax policy and organizing the collection of taxes. This gave rise to problems such as tax evasion and the special treatment of friends of senior officials and ministers. In addition, unqualified and corrupt revenue officers, and out of date systems, meant that taxes were not being collected efficiently enough.

Rwanda has made a substantial effort to adjust all its laws and regulations to best serve its national interests and to respect international priorities. Since 1997, many new laws have been enacted to meet the contemporary need of public regulation. One of the most cumbersome and problematic issues Rwanda has been consistently working on is the tax legislation of this country.

This research paper addresses the issues connected with the current problems in Rwanda tax legislation, especially in the area of tax offences and the legal responsibility for related unlawful activity. The paper critically analyzes the notion of how tax obligation and tax offence are currently interpreted as well as how the tax authority and other state authorities address any breach of tax law. Further, the paper briefly discusses different types of legal responsibility for tax offences and legal punishment foreseen in various laws of Rwanda.

One difficulty encountered with research analysis is that the relevant provisions concerning responsibility and punishment for tax offences are distributed throughout different legislative acts, i.e. in Criminal Code, Administrative Code as well as in other Financial and Tax laws and bylaws. A second difficulty lies in determining the necessity for rigorous penalties that ensure effective prosecution of committed tax related offences and their adequacy to the type of tax infringements. This paper attempts to ascertain whether it is feasible to reach a compromise between the above-mentioned conflicts of interest.

This paper first of all, attempts to determine what the notions `tax obligation' and `tax offence' entail and what are the most recurrently committed tax offences. Secondly, this paper scrutinizes what Criminal, Administrative and Civil-Financial liabilities are envisaged for the infringement of tax legislation in Rwanda.

Finally, the paper discusses the effectiveness and acceptability of these types of punishments and attempts to offer some recommendations towards their improvement.

ii. Statement of the problem

People talk about tax matters, complain about them and try to dodge them when they can^2(*). 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. How people and businesses react in turn affects the level and structure of taxation^4(*).

Tax offences give rise to several legal questions; Whether Penalties and fines are well executed when tax offences are committed, Whether the Rwandan tax law fully addresses the problem of tax offences, whether Rwandan courts are strong enough to prosecute tax offenders, whether a `prevention is better than cure' approach is applied by the tax administration to prevent tax offences before they are committed.

iii. Research questions

This research is intended to find the possible solutions for the following questions:

1. How effective are Rwanda legal instruments and administrative measures in addressing tax offences?

iv. Research Hypothesis

v. Research Methodology

This involved Analysis Secondary data which textbooks on taxation, Taxation Law, tax administration, Rwandan legal texts, Legal texts of other, Documentation from RRA, RRA website, Websites of other tax administrations, papers presented in national and international seminars, conferences and workshops and Electronic data related to taxation.

In order to obtain data related to the objectives of this research, selected taxpayers were interviewed to know their perception towards taxation and what they expect to be done to improve their tax compliance levels.

This method was used in order to scrutinize things that cannot be easily sported out such as the activities and attitudes of tax administrators and taxpayers respectively. For example, using this method, the researcher observed the attitude of taxpayers towards tax administration and vice versa. The researcher mainly used observation method when he attended the Appeals Committee meetings to observe how tax appeals process is conducted and establish whether the taxpayers' rights and obligations are considered.

vi. Objectives of the study

a. General objective

Objective of the study is to analyse the current measures to control tax offences under Rwanda tax system and recommend measures that the Rwandan tax administration can use to minimise commitment of tax offences.

b. Specific objectives

The research study will highly focus on specific objectives particularly which will be to:

vii. Scope of the study

This study covers taxes that are mainly exposed to tax offences; customs, value added tax, income tax and excise. Other taxes and non-tax revenue are beyond the scope of this research work.

1. Existing tax offences control provisions of different Acts and their implementations,

2. Administrative, institutional, legal and other constraints in tax compliance and enforcement of tax laws,

viii. Significance of the study

c. To the researcher

As a student who took Law option, the research will help the researcher to accumulate practical knowledge and competent skills in the area of study from the research findings and possible recommendations through research findings thus being able to solve practical problems related to tax offences.

d. To ULK

The research findings will be useful to ULK as a centre of Higher Learning; the university will benefit from the results of this study to help present and future researchers at the University.

e. To Taxpayers

Through this research study, the tax base will be widened hence easing tax burden on all taxpayers. This research study will also be of significant importance to taxpayers who choose to comply by providing them with convenient ways to undertake transactions with the tax administration as well as providing taxpayers and their advisors with the information they need to understand and meet their tax obligations.

CHAPTER I. Overview on 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...'

I.1. Definition of Tax, Tax Offence and related terms

I.1.1 Introduction

Taxes are levied in almost every country of the world. It has been suggested that the tax system has become the `maid' of all work^5(*). This description emphasizes the range of functions that taxes and tax systems might perform or be asked to perform. These functions often include a combination of a management, a redistributive function and general need to raise revenue.

I.1.2 Definition of Tax

A tax may be defined 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 them. It is in effect a contribution designed to reduce private expenditure in favor 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 economy^6(*). A tax may also be defined as an imposition of compulsory levies on individuals or entities by governments.

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 government^7(*).

A tax is a non penal but compulsory transfer from the private sector to the public sector levied without receipt of a specific benefit^8(*).

A tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of the service rendered to the taxpayer in return^9(*).

Also professor Seligman suggests that 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.

A tax is defined as a compulsory levy imposed on the nationals and residents to meet expenses which are incurred by a government for the common cause^10(*).

Tax may further be defined as a compulsory contribution of wealth of a person or body of persons for service of public powers. It means taxes are a portion of the produce of the land and labour of a country placed at the disposal of the government.

Taxation can as well be defined by as a system where by the government imposes compulsory contribution for public purpose.

The above definitions points out or encompasses three main characteristics of the tax and the following deserves mention;

1. Tax is not levied for a return for a specific service rendered by government to tax payers. 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^11(*).

2. 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^12(*)

3. 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.

1. There is sales tax that is imposed on sale of commodities but in Rwanda it can be paid after sale such as VAT on some goods that may be imported

2. Also there is also income tax that is imposed on incomes of individuals and among others there is Pay as You Earn (PAYE) on employee's income

3. Custom duty is another kind of tax that is imposed on imports or exports, though in Rwanda, the exports are exempted from this tax

4. Exercise tax which is imposed on production or importation of some commodities

5. Further still, there are fees that are paid for services rendered by the government directly such as import license, road license and so on.

I.1.3 Classification

1. A direct tax is a tax whose incidence of the tax burden rests upon the person paying the tax. Direct taxes affect the individuals or firms directly through a deduction from their earnings. An example of a direct tax is PAYE and tax on income.

2. An indirect tax is said to be a tax whose incidence of tax burden can be shifted. They are paid to the government by an intermediary and can be passed on the consumer by including the tax in the final price. An example of an indirect tax is VAT and Consumption Tax.

I.2. Justification of tax

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^13(*). 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, can not 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 to justify of taxation.

I.2.1 Economic Stability

Firstly taxes are imposed to maintain economic stability in the country. 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 stabilise the economy as much as goods having high income elasticity of demand are taxed more heavily.

I.2.2 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 environmental stability^14(*)

I.2.3 High employment level

When the revenue collected is used into developmental affairs, individuals get employed due to more employment opportunities created.

I.2.4 Fair distribution of income

There is also another reason which is fair distribution of income (Reduction of income inequality). Here the government imposes taxes to achieve equality in the distribution of national income where by 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 is PAYE system.

I.2.5 Protection policy

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 neighbouring countries. Protecting home industries also solves a social problem of unemployment as local gain capacity they absorb unemployed skilled manpower.

I.2.6 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.2.7 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.2.8 Controlling Inflation

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 income^15(*).

I.2.9 Tax offence

Rwandan Tax law does not define a tax offence. However under article 106 of the Russian Tax code, a tax offence is defined a tax offence 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^16(*).'

In other words, this article ensures that the act cannot be regarded as tax offence unless four elements of tax offence 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 and (iv) Tax Code foresees a responsibility for such an act.

The notion of tax offence under Rwandan tax law slightly differs from the Russian definition. The academics depict `tax offence' «as an unlawful, culpable action or inaction, that results in non-fulfilment or inappropriate fulfilment of tax obligations foreseen in the tax legislation and such action or inaction breaches the rights and legal interests of participants of tax relations and legislation foresees legal responsibility for that^17(*)»

I.3. Main tax offences under Rwandan tax law

I.3.1 Consumption Tax Offences

According to consumption tax law on some imports and locally manufactured products, the following are some of the offences that may be committed by Oil products dears:

· Failure to allow the Authority easy access to all premises and petrol stations for evaluation and inspection purposes;

· Failure to make a declaration to the Authority before any petrol station is started up so that its premises may be inspected first;

· Failure to affix a standards certificate as required by an authorized officer;

· Failure to present any document providing details as to what is required by the Authority's inspection;

· Failure to report beforehand to the Authority and in writing any changes, damage, increase or decrease of tanks and pumps;

· Failure to make a declaration to the Authority as regards any premise used for the sale oil products;

· Failure to have pumps be inspected and present their related standards certificate;

· Failure to store and sell oil products that are contained in tested underground tanks or any other tested types of store;

· Failure to have standards certificates for meters of pumps meant for oil products selling;

· Failure to allow easy access for experts or those representing the Agency endowed with expertise in testing whether underground tanks, pumps or meters respect standards;

· Failure to allow easy access to an authorized officer sent by the Commissioner General to carry out relevant inspection in a given petrol station;

· Failure to authorize any qualified person to carry out any activity or check whether legal provisions are respected.

I.3.2 Income Tax offences

According to Law on Tax Procedures^18(*) the following are provided as VAT offences:

I.3.3 Value Added Tax violations

The following administrative fines are imposed to persons who do not comply with provisions of Value Added Tax:

· 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

· Aiding, abetting, obstructing or attempts to obstruct the activities or duties of the Tax Administration in the exercise of its powers.

I.3.4 Customs offences

According to article 215 of Customs law, the general principles of Criminal Law apply to Customs offences, unless provided otherwise by this Law^19(*).

· importation under declaration of prohibited or restricted goods using false or fraudulently obtained documents;

· incorrect declaration of goods aimed at reducing import duties, established subsequent to clearance of the goods;

· incorrect declaration of goods established subsequent to clearance of the goods;

· incorrect declaration of goods or use or issue of incorrect documents in view of obtaining refund or drawback of duties;

· use of goods for purposes other than those for which favourable tariff treatment, suspension or total or partial exemption of customs duties and taxes is granted;

· unlawful removal of goods from the customs procedure under which they were placed;

· removal of seals or of any other distinctive signs, affixed for control purposes by Customs officers on means of transport, packages, containers, etc;

· non-compliance with requests or orders of Customs officers and resistance or obstruction to Customs officers in performing their duties;

· failure to keep mandatory documents, or to produce them on request by a Customs officer;

Under Rwandan customs law, Customs offences are sanctioned with imprisonment, fines, confiscation. In addition to these Penal sanctions, customs offences may be subject to administrative measures.

Unfortunately, Rwandan tax laws do not give provision for offences by tax officers. However the According to EAC CMA provides the following offences:

· A person who directly or indirectly asks for, or takes, in connection with any of his or her duties any payment or other reward, enters into any agreement to do, abstain from doing, permit, conceal, or connive at, any act or thing whereby the Customs revenue is or may be defrauded, or which is contrary to the provisions of this Act or the proper execution of his duty, commits an offence and shall be liable on conviction to imprisonment for a term not exceeding three years.

· A person who directly or indirectly offers, or gives to any officer any payment or reward, Proposes or enters into any agreement with any officer in order to induce him/her to do, abstain from doing, permit, conceal, or connive at, any act whereby customs revenue is defrauded or which is contrary to the provisions of this Act or the proper execution of his duty, commits an offence and shall be liable on conviction to imprisonment for a term not exceeding three years. A person who discloses, except for the purposes of this Act or when required to do so as a witness in any court or with the approval of the Commissioner, any information acquired by him or her in the performance of his or her duties relating to any person, firm, or business of any kind commits an offence and shall be liable on conviction to a fine not exceeding two thousand five hundred dollars or to imprisonment for a term not exceeding three years or to both such fine and imprisonment.

I.4. 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 as follows.

I.4.1 Historical

Rwanda, like Most of other developing countries was colony of European powers. Their independence was preceded by a struggle for liberation from the foreign rulers. In this struggle, 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.4.2 Lack of civic sense

In Rwanda, like any other developing world, people lack civic sense. Laws have no sanctity in their eyes. People are all the time thinking about their rights and privileges. Little attention is paid to the obligations. In this frame of mind, parting with money becomes much more difficult.

I.4.3 Cash economy

In an economy like Rwanda, which is predominantly cash based, it is not only easy but also safe to conceal income. In such economies, evasion has a very conducive atmosphere to thrive on. It, therefore, spreads very rapidly.

I.4.4 Complexity of laws

It is well known that tax laws are often complex, confusing, and arbitrary^20(*). 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.

At the same time, complexity of the tax law also encourages large companies, high wealth individuals and their advisors to look for ways to minimise their tax. In such a case, the government may react by resorting to the retrospective patching up of loopholes in the law and this can create even more inconsistencies and more advantages for them to take advantage of. This has resulted into taxpayer being with an upper hand to evade taxes, and at times, through the help of some individuals that are expelled from the tax administration organ.

I.4.5 Complexity of tax system

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.

In addition, in some countries, the penalties for delaying the payment of taxes are so ridiculously low that the taxpayers simply do not bother to send the tax payments at the time they fall due, thus creating tax arrears and administrative problems. For them borrowing from the government becomes the cheapest source of credit^21(*)

I.4.6 Tedious procedures

If the law is difficult, the procedure for assessment is even more complex. People would therefore like to stay away from the tax net as long as they possibly can through commitment of different tax offences.

I.4.7 High rates of taxes

High tax rates may persuade some individuals to non compliance. 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. However, low rates may not promote payment of taxes but high rates are definitely ill-conducive for tax compliance.

I.4.8 Limited resources and capacity of tax administration

Unfortunately, the limited resources and capacity of tax administration is a reality and often means that Tax offences activities remain 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 support, 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.4.9 Government regulations and prohibitions

This factor is related to the complexity of the tax laws/system discussed above, but also encompasses the rules and regulations imposed by other government agencies. In this case, the costs associated with formalising a business such as registration costs, permits, yearly costs for accounting and secretarial services may discourage formalisation and provides disincentives for taxpayer to be compliant and resort to commitment of different tax offences. Excessive amounts of regulation can also encourage corruption, as taxpayers try to bribe their way through the red-tape.

The lack of coordination between government agencies also exacerbates this problem. Therefore, a considerable degree of the ease which the informal sector can bloom and grow is attributable to the extent to which business activity regulatory rules are enforced by the relevant authorities and the extent to which these authorities cooperate with the tax administration in dealing with the problem.

I.4.10 Tax offenders are not named and published

Persons committing breaches of tax laws in Rwanda have not been described as criminals. In international tax literature, they have been described as "white collar criminals" and evasions and avoidance acts as "white collar crimes". Since they are not named they are not demotivated to commit tax offences^22(*).

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. Therefore, this has encouraged tax offenders to evade tax just because they are not exposed to the public.

I.4.11 Attitudes and perceptions towards taxation

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 colleagues. The perception of Tax offences as a crime is also low. 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.

I.4.12 Corruption among some tax officials

Corruption is present when public officials abuse their positions of public authority for private gain.^23(*) Such corruption undermines confidence in the tax system, negatively affects willingness to pay taxes, and reduces a country's capacity to finance government expenditures.^24(*) There is considerable potential for corrupt practices in revenue administration involving tax officers, taxpayers, importers and customs clearing agents.

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 include:

· Charging for help to overcome complicated procedures and to qualify for exemptions or duty free treatment

· Turning a blind eye to non-registration for taxation, smuggling, and fraud (in customs, for instance, the declaration of false values supported by fraudulent invoices)

· Overstating values, over-assessing tax to instigate corrupt deals with importers and taxpayers

· Diverting of cash, including issuing cheques for false repayment claims, for instance, value added tax (VAT) refunds

· Receiving payment to complete tax returns for taxpayers or customs entries for importers

Our understanding of the nature of fiscal corruption has improved significantly over the last decade but it is still limited in several ways. Similarly, our understanding of the relative effectiveness of policy responses and anti-corruption strategies has also improved but is far from complete^25(*).

I.4.13 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 web 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. RRA needs to think of other methods to disseminate information such as running face-to-face seminars and workshops.

I.4.14 Poor economic development and poverty

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.

I.4.15 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 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.4.16 Unemployment in border areas

In some cases, the unemployed are used to smuggle goods, for example, high level of unemployment in border areas induce individuals to smuggle goods and evade customs duties and other taxes collected at customs. And there may 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.

I.5. Negative impacts of Tax offences

I.5.1 Cost of non compliance to tax offenders and the government

Expenses incurred by tax offenders to commit tax offences are high. Also efforts to prevent detection and conviction are high and a burden to the government.

I.5.2 Honesty loses and offender wins

Tax evasion may drive some firms out of business as they are unable to compete with owners that successfully evade taxes.

I.5.3 Additional costs to honest tax payers

Additional compliance cost is borne by honest taxpayers in terms of record keeping etc in view of the possible investigation.

I.5.4 Loss of Government Revenue

Also Government revenue is spent on the enforcement side including investigation, prosecution and punishment of tax offenders.

I.5.5 Distortion of market prices

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.

I.5.6 Collapse of local industries

A country achieves better economic growth by developing its own industrial base. Tax evasion in form of Smuggling undercuts prices of the locally manufactured goods, thus destroying the market for local products. This leads to collapse of local industries.

I.5.7 Unemployment

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.

CHAPTER II. A critical Analysis of Control and Prosecution of Tax Offences

II.1. Rules and Procedures in control of tax offences

II.1.1 Introduction

Although Rwandan Tax Law clearly asserts which acts are accepted as clear violation of tax legislation, 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 evasion^26(*), creation of illegal organizations and violation of cash payment disciplines^27(*). Hence, in practice there are more cases, which can be determined as tax offences.

Another contemporary problem in the field of responsibility for tax offences involves provisions regarding procedural matters of proving violation of tax law. More specifically, there are no appropriate rules that distinguish breach of tax law by an individual from a breach of tax legislation by a legal entity. For example, in the case of a trainee accountant who makes a minor error and mistakenly overstates or understates the accounting information in Rwandan tax law there is no clear response to the question of who is responsible: The legal entity or the accountant?

Another aspect of the current tax law of Rwanda is the absence of some fundamental conceptions like theoretical composition of tax offences. More precisely, very few academics have ever discussed the elements of tax offence. Therefore, the such conceptions of Tax Law are mainly based on other branches of law such as Administrative Law and Criminal Law. Consequently, tax authorities and other law enforcement organs usually need to apply an analogous system of the determination and proof in tax law^28(*).

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 tax evasion can carry the very distinct risk of imprisonment as well as heavy fines^29(*). The threat of long imprisonment may create some amount of fear and induce offenders to pay their taxes^30(*)

Finally, tax offences may be specified in tax law covering matters such as late filing, late payment, and failure to declare taxable income or transactions, and negligent or fraudulent misstatements in tax declarations^31(*).

II.1.2 Current rules applied in control of tax offences

Examples Issue oriented audits handled were 32 and the comprehensive audits were 423. In SMTO, additional assessment (tax and penalties) raised as a result of audits an amount equivalent to Rwf 3.2 billion or 8.3% of total amount collected by the office as shown in the table below:

Type of Tax	Additional taxes
Type of Tax	Principal	Penalties	Total
VAT	857,106,963	11,252,596	868,359,559
PAYE	131,391,156	66,466,498	197,857,654
Profit tax	1,564,960,924	594,245,307	2,159,206,231
Total	2,553,459,043	671,964,401	3,225,423,444

Comparing amount recovered from audits and that collected through self assessment, the compliance ratio in this segment is 91.7%. This figure however good it is does not mean that informal sector has reduced. The reason is that the Authority has focused its efforts to the existing taxpayers in this segment in order to improve its compliance.

In Large Taxpayers Office, 266 cases were audited comprehensively against 256 cases planned, thus an achievement of 103.9%. Out of 266 cases audited, 191 were finalised contributing an additional amount of Rwf 12.8 billion. The table below shows in details the additional assessment raised as a result of audits for 2007 in LTO. This makes it 88.8% compliant.

Type of Tax	Additional taxes
Type of Tax	Principal	Penalties	Total
VAT	4,353,407,287	812,028,587	5,165,435,874
PAYE	307,582,907	83,049,271	390,632,178
Profit tax	4,402,186,628	995,580,490	5,397,767,118
Excise duty	290,955	29,096	320,051
Withholding Tax	1,426,986,107	504,872,516	1,931,858,623
Total	10,490,453,884	2,395,559,960	12,886,013,844

In Customs and Excise Department, 43 post clearance audits were conducted against 208 planned for 2007, thus an achievement of 20.7% and revenues recovered totalled to Rwf 353.2 million. This underperformance was due to restructuring that was going on and shortage of staff in the department.

II.1.3 Customs Department

Efforts have been made in fighting importers who use forged invoices, dumping and monitoring international transit malpractices which had developed especially in paper work. Special attention was also given to operations aimed at fighting smugglers of some sensitive products such as liquors and wines, offenders of value added tax and users of forged documents. Also, operations were carried out in markets and trading centres where several smuggled goods were seized^32(*).

During the course of the year 2007, 17 investigation cases out of 48 planned were finalised with a total assessment of RFR 1.065 billion and 14 cases were in progress at the end of the year.

RRA encountered various forms of VAT refund and credit fraud, such as false claim on exports, overstated input tax, understated output tax and illegitimate businesses registered for the sole purpose of defrauding the government. On average, 18 percent of VAT refund claims lodged were rejected.

In addition, many seizures of fraudulent cases led to recovery of taxes that would have otherwise been evaded. The total revenue recovered was RFR 256.9 million. Other violations recorded in 2007 were undervaluation, misclassification, and transit violations.

Other efforts to eradicate or minimize customs fraud and tax evasion have been made by RRA. Information exchange with sister Revenue Authorities on imports destined and transiting through Rwanda was enhanced. Information and documents exchanged with other authorities are composed of true costs for the major exports and imports to our country and will enable RRA create a database capacity for disqualifying fake invoices declared at customs. This has been the most practice used by a majority of non compliant importers.

During the year 2007, RRA continued to monitor the application of the tax laws in order to identify any areas of difficulty that may require legislative amendment. In this respect, a document containing areas of possible amendment to the tax laws was prepared. This document has been updated since then and was used as a basis for proposing the amendments to both the Law on Direct Taxes on Income and the Law on Tax Procedures^33(*).

Clearer presentation of the provision on depreciation^34(*) on Plant and Equipment, which poses ambiguity as to whether the rate for depreciation of heavy plant and machinery falls under the 5% straight line bracket method or if it falls in the depreciation method of pooling at 25%.

§ The tax treatment of finance leases which is missing in the current tax legislation.

§ Sanction against non-compliance to VAT invoicing: The requirements for items that should be shown in a VAT invoice are specified in the law on Tax Procedures. However, this provision is not supported by sanctions for non-compliance.

For example in 2006, Customs law of 1968 which was complicated and outdated was abrogated and replaced by law no 21/2006 on customs systems, with a view to simplifying it and making it more taxpayer friendly.

Also in 2007 RRA participated in the policy initiative of the law modifying law no 26/2006 of 27/05/2006 determining and establishing consumption tax on some imported and locally manufactured products. The tax on airtime was dropped from 10% to 3%.

II.2. Powers to investigate tax offences

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. The tax administration can either get the necessary information from the taxpayer or from the third party.

II.2.1 Powers to get information from the taxpayer

According to articles 12 and 13 of law on tax procedures35(*) all persons engaged in business activities must keep books of accounts and records. However, it is necessary to distinguish three (3) categories of taxpayers:

1. The physical persons (not business companies) with annual turnover less or equal to 1.200.000 Rfr: Taxpayers falling under this category are not required by the law to keep the books of accounts and records.

The taxpayers with annual turnover less than twenty (20) million Rfr: This category of the taxpayers is obliged by the law to keep the books of accounts only related to their tax liability. It is mainly the sales, wages and salaries paid by the taxpayer;

The taxpayers with annual turnover more than or equal to twenty (20) million Rfr: These taxpayers are obliged by the law to keep a detailed set of books of accounts and records composed of:

· Records showing daily income and expenses and to the taxpayer's business activity;

· Records showing purchases and sales of goods and services related to the taxpayer's business(Purchases and sales accounts);

· Records showing trading stock at the end of tax period (Annual stock inventory).

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 Rwanda36(*) at least for a period of ten years. The obligation to keep these sets of accounts is made in order to facilitated the authorised tax officer have access to them and conduct verification and establish whether any tax offence has been committed.

Once the books of accounts and records are produced and provided to the tax authorised officer, they are verified to establish whether they comply and are in conformity to the reality of the business activities under investigation.

The authorised tax officer has the right to enter into the taxpayer's business premises as well as the houses of dwelling or residence (private buildings). The authorised officer can have access to and enter into the taxpayer's premises (both business premises and private premises) without issuing any written notification. The authorised tax officer can carry out this activity between 7.00 am in the morning and 6.00 pm in the evening)37(*). However this entry should be conducted in application of the constitutional principle of the respect of the private life.^38(*) In the case where the taxpayer refuses the authorised officer the access to his premises, the tax administration can request search warrant from the prosecution. When the tax administration gets the above mentioned permission, it may seek the assistance of the governor of the province, the Mayor of City of Kigali, the Commander of Police or the mayor of the District or Town to in order for the search to be conducted ^39(*)

II.2.2 Powers to information from the third party

Based on the seriousness of tax fraud, the tax administration has the powers to get information from third parties during the investigation of possible tax offences. 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^40(*). These services must provide the authorised tax officer with all information and documents that they possess. However In the case these information or document concerning or related to judicial procedure, they can neither nor shown to the tax administration without the authorization of a competent Prosecutor.

II.3. Contradictory and Assessment without notice

II.3.1 Contradictory procedure

This procedure is applied when the Tax Administration discovers a miscalculation, an omission, a misrepresentation, an understatement of income or any other error in the tax declaration or an assessment. In such a case, the tax administration has the right to issue an adjusted assessment through submission of rectified declaration form to the taxpayer.

In case the tax declaration form is rectified, the Tax Administration sends a rectification note to the taxpayer. The note contains a draft of the adjusted assessment and all the elements leading to the adjusted assessment. The rectification note contains fines determined by the Tax Administration in case of non-compliance with the tax laws.

The taxpayer has the right to give his or her written opinion on the rectification note within thirty (30) days. The taxpayer may also transmit additional evidence or information to indicate that the adjusted assessment is incorrect. The taxpayer has the right to a hearing on condition that he or she requested for it in his or her reply.

The rectification note may be issued in a period of three (3) years, starting from the day of the filing of the tax declaration. A rectification note has to be issued at least on the last day of the three year period. The prescription period is interrupted if the taxpayer has been informed to be audited by the Tax Administration, when there has been an affidavit thereof or by other deeds of acknowledgement by the taxpayer concerning the tax liabilities and all other provisions provided in the other laws.

· a period of thirty (30) days, in case the taxpayer has not replied to the rectification note;

· the Tax Administration has sent a notification to the taxpayer declaring that none or a part of the observations or remarks of the taxpayer are uphold;

· the hearing of the taxpayer followed by a written notification by the Tax Administration to the taxpayer declaring that none or just part of the observations or remarks of the taxpayer are upheld.

II.3.2 Assessment procedure without notice procedure

The law on tax procedure provides different case when assessment procedure without notice can be started; that is when:

· a tax declaration was filed after the day mentioned in the Law on Taxes and there was no proof given of «force majeure» justifying the delay in filing;

· the taxpayer was unwilling to cooperate with a tax audit officers or did not provide the information requested;

In the event of the assessment procedure without procedure, the Tax Administration sends a note of an assessment procedure without notice to the taxpayer. The note contains all reasons why the assessment procedure without notice was conducted. It may also contain fines in case of non-compliance with the tax law. All proofs available to the Tax Administration can be used to carry out an assessment procedure without notice.

The taxpayer has the right to give written observations and remarks to the note of an assessment without notice in a period of thirty (30) days. He may also transmit additional evidence to the Tax Administration to prove that the assessment procedure without notice was not effectively conducted.

The assessment procedure without notice may be conducted in a period of five (5) years, starting from January 1st, following the tax period. A notice of assessment procedure without notice has to be issued at least on the last day of five (5) year period.

If there are serious indications of tax fraud, the Tax Administration can issue an immediate assessment without notice.

· after thirty (30) days, if the taxpayer does not reply the assessment procedure without notice;

· After the Tax Administration has sent a notification to the taxpayer declaring that none or part of the observations or remarks of the taxpayer are upheld;

· After written or verbal explanations of the taxpayer of which the tax administration notified the taxpayer that none or part of the observations or remarks of the taxpayer are upheld;

Finally, it should be noted that in case of assessment without notice, the burden of proof lies with the taxpayer. In other words, the taxpayer should give the proofs that contest the elements appearing in the assessment without notice^41(*).

II.4. Sanctions in case of tax offences

II.4.1 Sanctions based on the law on Tax procedure

In case of an administrative tax offence, the taxpayer cannot be prosecuted through tribunal because there is no criminal law that has been violated. On the other hand, the tax offence will be liable of administrative sanctions provided by the fiscal law. These sanctions are the pecuniary sanctions and the accessory sanctions.

The pecuniary sanctions are of three: the stationary fines, the proportional fines and the interests for late payment.

The fixed fines are the amounts that constitute an administrative sanction for a noncompliant taxpayer. According to article 60 of LTP, the administrative offences which lead to fixed amount fines are applied to a taxpayer who fails to:

· one hundred thousand (100,000) Rwanda francs if the taxpayer's annual turnover is equal to or less than twenty million (20,000,000)Rwanda francs;

· three hundred thousand (300,000) Rwanda francs if the taxpayer's annual turnover exceeds twenty million (20,000,000) Rwanda francs;

· 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^42(*).

The fixed amount fines apply only to one tax offence. This means that if the taxpayer commits several offences mentioned above, he will be liable to pay as many fines as the number of committed offences.

Finally, it should be noted that that in case the same violation is committed twice within (5) years, the fine is doubled. In case the same violation is committed again within such five (5) years, the fine is four times the original fine^43(*)

The proportional fines are the administrative sanctions that constitute percentages calculated on the tax due. These fines take place in three (3) situations: late payment of the tax, misrepresentation of the due tax and non-payment of VAT.

In case of late payment of tax, the taxpayer is subject to tax increased by ten percent (10%) of the tax payable. The taxpayer is not subject to this fine if the Commissioner General provides the taxpayer with an extension for filing of the declaration. The proportional fine is calculated based on the tax excluding the fines and interests of late payment^44(*).

Concerning the understatement of a tax due through understatement of received income, overstatement of deductible expenses or understatement of tax rate, the taxpayer is subject to the following fines^45(*)

· ten percent (10%) of the amount of the understatement if the understatement is equal to or more than five percent (5%) but less than twenty percent (20 %) of the tax liability he or she ought to have paid;

· fifty percent (50%) of the amount of the understatement if the understatement is twenty percent (20%) or more but less than fifty percent (50%) of the tax liability he or she ought to have paid;

· one hundred percent (100%) of the amount of the understatement if the understatement is fifty percent (50%) or more of the tax liability he or she ought to have paid.

However, if the taxpayer rectifies his tax declaration before he is notified that he will be audited he is not subject to the above fines.

Finally, concerning VAT violations, the following administrative fines are imposed to persons who do not comply with provisions of law on Value Added Tax^46(*):

· in the event of operation without VAT registration where VAT registration is required, fifty percent (50%) of the amount of VAT payable for the entire period of operation without VAT registration;

· 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 percent (100%) of the amount of VAT for the invoice or on the transaction;

· for issuing of a VAT invoice by a person who is not registered for VAT is assessed a penalty of one hundred fifty percent (150%) of the VAT which is indicated in that VAT invoice and is due to pay the VAT as indicated on that VAT invoice.

Concerning decentralised taxes violations, where declaration has either not been made, is made late, is fraudulent or incomplete, the taxpayer pays a surcharge equal to 40% of the amount due^47(*).

In case of late payment, the taxpayer is required to pay interest on the amount of tax.

The interest rate is fixed at the inter bank offered rate of the National Bank of Rwanda increased by two (2) percent and which is set every year on January 1st. Interest is calculated on a monthly basis, non-compounding, counting from the first day after the tax should have been paid until the day of payment, which is included. Every month started will count for a complete month. The interest is always payable, even when the taxpayer has started an administrative appeal or a judicial appeal against the assessment. However, interest accrues can not exceed one hundred percent (100%) of the amount of tax. This is to avoid the case where the interest payable can be greater than the main of the due tax.

For the decentralized taxes, Taxes not paid in the specified time shall bear such interest for the District or Town as is determined by the District or Town Council. However, this interest cannot exceed 1.25% per each month late payment, and is calculated from the date 'the taxes were due to the date they are paid. A late payment interest is calculated as follows^48(*):

· late payment interests is calculated from the basic tax plus surcharges and fines due.

The law on tax procedure states that `A taxpayer who commits fraud is subject to a fine of two hundred percent (200%) 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^49(*)'.

Further more, the same law states that `In case a person intentionally fails to deliver the tax withheld to the Tax Administration, he or she is subject to a fine of two hundred percent (200%) of the unpaid tax. In addition, the Tax Administration refers the case to the Prosecution service. In case of conviction, the taxpayer can be imprisoned for a period between three (3) months and two (2) years^50(*)'.

II.4.2 Additional sanctions

Apart from administrative sanctions provided by tax laws, any person who commits offences provided for by the tax law may be subject to two categories of additional sanctions: those taken by the Commissioner General of RRA and those taken by the competent tribunal^51(*).

Sanctions taken by the Commissioner General of RRA include closure of business activities for a period of thirty (30) days and publishing the tax offender in nationwide newspapers.

The additional sanctions taken by courts/tribunals include barring the tax offender from bidding for public tenders and withdrawal of a business register. The sanctions taken by tribunals/courts are based on the gravity of the offence committed.

II.4.3 Administrative Sanctions provided for by Customs law

According to article 226 of the n° 21/2006 of 28/04/2006 establishing the Customs System, Customs may take one or more of the following administrative measures against one or more of the offenders of the Customs law:

· Temporarily deny access to Customs offices, bonded warehouses, or temporary storage facilities;

· Temporarily suspend or terminate his/her authorization for a customs procedure with economic impact;

II.4.4 Other sanctions not mentioned in the law

Other administrative sanctions taken by the tax administration but not mentioned in the tax law include:

· Refusal to benefit from facilities of payment in instalments of their tax arrears;

· Non renewal of the of clearing agencies' license due to poor performance record

According on law on tax procedure, A person who obstructs or attempts to obstruct the activities or duties of the Tax Administration in the exercise of its powers, aids, abets or conspires with another person to commit a violation of tax Law, is subject to penalties as those provided to the taxpayer^52(*).

II.5. Settlement of disputes

The application of the tax laws is source of a lot of litigations and disputes between the tax administration and the taxpayer. This is because in many cases these parties are in disagreement as each party believes that it has been injured by a decision taken the other party. Settlement of these disputes has two phases; namely, Administrative appeal phase and judicial appeal phase.

II.5.1 Administrative Appeals

When a litigation concerning application of tax law occurs, the taxpayer has the right to introduce the case before the competent tribunal. However, the case cannot be lodged in the courts unless the case has not been settled on administrative level.

The taxpayer, who has a period of seven (7) days from the receipt of the note of assessment in order to pay for the tax due to the National Treasury, has also thirty (30) days from the date of receipt of this note a right to appeal to the Commissioner of RRA if he is not satisfied with the contents of tax assessment notice^53(*). The objective of this appeal to the Commissioner General is to contest the amount of tax assessed. It should be noted that this appeal does not suspend the obligation to pay tax, interest and penalties. However, upon the written request by the taxpayer, the Commissioner General may suspend the disputed amount of tax for the duration of the appeal^54(*).

The Commissioner General makes a decision on the appeal within a period of thirty (30) days and sends it to the taxpayer. The Commissioner General may extend this period once for another thirty (30) days and informs the taxpayer. When no decision is taken within this period, the appeal is assumed to have a basis. When the appeal is found to have a basis, the Commissioner General discharges the taxpayer from the respective tax liability, interest and penalties^55(*).

Concerning decentralized taxes, the law provides that `If the taxpayer is not satisfied with the decision taken by the Council, he/she refers the matter to the courts. In that case, the confiscation of assets is suspended until the courts have given their verdict^56(*)'. However, this law does not specify the period for appeal.

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^57(*). This Commission is instituted by the Prime Minister's Order No 08/03/2007 on Establishment, Composition and Functioning of Tax appeals Commission.

The tax Appeals Commission is responsible for settlement of disputes between the tax administration and taxpayers who are not satisfied by the decision of the Commissioner General^58(*).

The Tax Appeals Commission shall be composed of the Minister having Finance in his attribution or his delegate who is also the Chairman, a representative from Rwanda Revenue Authority, who is the Secretary, and three other members appointed from amongst persons with reputable integrity that have been proven to be highly knowledgeable in commercial, financial and legal matters as well as in any other relevant field, nominated by the Minister having Finance in his attributions.

The taxpayer who is not satisfied with the decision of the Commissioner General appeals to the Appeals Commission within thirty (30) days after receipt of the decision of the Commissioner General^59(*). The Appeals Commission makes a decision on the appeal within a period of sixty (60) days (after receipt of decision of the Commissioner General) and sends the decision to the taxpayer in writing. When no decision is taken within this period, the appeal is assumed to have a basis^60(*).

When the appeal has been fully or partially accepted, the Appeal Commission will discharge the taxpayer from the respective tax liability, penalties and interest accordingly. The Appeals Commission will notify the Tax Administration of the decision in writing.

II.5.2 Judicial Appeals Phase

The option for judicial appeals cannot be resorted to unless the dispute is not settled during the administrative appeals process. If the taxpayer is not satisfied with the decision of the Appeals Commission, he can make a judicial appeal and take the case before the competent tribunal within thirty (30) days after the receipt of the decision of the Appeals Commission^61(*). Also Law Organic Law modifying and complementing the Organic Law n°07/2004 of 25/04/2004 determining the organisation, functioning and jurisdiction of Courts States that `in matters related to government tax, cases shall be heard by specialized tax chamber of a Higher Instance court situated where a tax collection bureau is located.^62(*)' Actions related to tax disputes are governed by the organic law n° 07/2004 of 25/04/2004 determining the organisation, functioning and jurisdiction of courts^63(*)

CHAPTER III. Recommendations for improvement

III.1. Legislative measures

Legislative control has to do with the nature and design of the tax laws, and the legal provisions and specifications that can be used to help RRA carry out its duties effectively and efficiently. Legislative control includes such things as anti-avoidance provisions; powers of access; review of the tax laws; penalties and sanctions; and tax amnesties.

III.1.1 Simplifying and amending the law

A well-drafted tax law spells out with precision the matters that are within its scope. But precision is not enough. A law should not be precise at the expense of being complicated and impossible to understand. The easier a tax law is to understand, the lower will be the compliance costs, both for taxpayers and for tax administrators.^64(*)

It is commonly known that good compliance outcomes begin with good legislation. Law that is clear and unambiguous with regards to its intent and interpretation provides a solid base upon which to build administrative compliance programmes and compliance risk management. Difficult or ambiguous law creates increased opportunities for taxpayers to behave in ways that were unintended by the law. In many ways, good law underpins the tax authority's ability to deliver procedural fairness in the conduct of its administration. If taxpayers perceive the law to be unjust or inappropriate, inevitably, there is an increased risk of non-compliant behaviour.

RRA should continue to propose reviewing tax laws with the intention of reducing complexity and burden on both taxpayers and the tax administration. Simplified legal instruments [should be put] in place and accessed through multiple channels^65(*)

However, it should be noted that simplification are often taken over by the piecemeal amendment of the tax laws to close loopholes that taxpayers have taken advantage of to avoid tax. This may actually lead to increased complexity rather than simplification and in some cases further increases the opportunities for Tax offences.

It is also important to remember that it is not just simplification of the tax laws in isolation that can encourage compliant behaviour. There are other regulations and restrictions imposed by other Government agencies such as RIEPA, RBS, etc that can also be simplified to provide incentives for taxpayers to comply. For example, even if the tax laws are simplified, if processes required to register a business are still onerous, taxpayers will not have an incentive to register their business in the first place.

III.1.2 Strong investigative powers

Strong powers of access to buildings, places, files and documents are highly important to the efficient and effective operation of tax and Customs inspectors. In fact, strong powers of access are rated as one of the most effective measures they use to combat Tax offences. These powers of access are stipulated by the tax and customs laws

III.1.3 Powers to seize of remove materials

Often access powers are not sufficient to enable Tax and Customs Auditors to carry out their duties. For example, where the investigator may wish to access large documents which require lengthy periods to read or copy, or where the investigator fears that materials or documents may be destroyed or altered if they are not copied or removed immediately. In response, Tax and Customs auditors should seize or remove materials or take possession of books and other relevant items where the officer is of the opinion that the records:

III.1.4 Application of adequate penalties66(*)

Penalties for non-compliance are an essential element of a robust tax system^67(*). 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, such as failure to file returns and to pay on time. It is important that the interest provisions for late tax payment compensate the government for the time that the taxpayer has use of the government's revenue. The total interest cost for late tax payment should exceed the interest rate for borrowing money...it should be less costly for the taxpayer to borrow to pay taxes rather than to delay paying taxes as a way to obtain cheap financing from the government. In addition, if registration and other requirements critical for a smooth functioning tax system are adopted, adequate penalties should be applied for violation of these requirements as well.

Probably the most traditional measure that has been used by the tax administration to deal with tax offenders is the application of fines or penalties, both administrative and criminal. For example, interest can be charged on tax owed; penalties can be levied for providing incorrect/false information; penalties can be imposed if an employer fails to withhold tax; and fines can be issued for late lodgement or non-lodgement. Penalties can also be issued on advisors. The idea is that the imposition of heavy penalties, coupled with the increased risk of detection and strong enforcement, reduces Tax offences.

The general view is that for penalties to act as effective deterrents, they need to be compelling and applied consistently and quickly. At the same time, the penalty structure also needs to be realistic so that administrators are not actually reluctant to use them. For example, if the penalties are so severe and inflexible, they are hardly ever used! The clarity and fairness of penalty structures is also important. If a taxpayers make an honest mistake in their tax returns or if they could not pay their tax on time due to severe personal circumstances, there should be flexibility in the penalty structures to allow the tax administration to take these issues into account and either waiver the penalty and/or work with the taxpayer to arrange for ways the tax debt can be repaid. In both these circumstances, an inflexible penalty structure may have the effect of alienating the taxpayer and encouraging them to disappear altogether from the tax net, resulting in revenues that will never be recovered.

The structure, severity and coverage, of penalties should increase with: (1) the potential revenue loss due to the tax offence; (2) the difficulty and cost of detecting the offence; (3) the effect of the offence on other taxpayers; (4) the offender's state of mind-a higher penalty should apply if the offence is deliberate and pre-planned; and (5) recidivism. Penalties for non-compliance should be inversely related to the ease of compliance.

Different attitudes to paying tax may require different responses to collecting tax. The tax administration should use this model to show how it meets different attitudes with different responses designed to encourage and support tax compliance. The model represents best practice in this area internationally.

The aim for this model is to move people who are not complying into a position where they are. The points discussed here are intended to help ease the transition to compliance for those willing to change. For those not willing to change, the full force of the law should then be applied, with the hardcore of offenders attracting the severest penalties.

III.1.5 Prosecution, Sanctions and Penalties

Where criminal conduct is involved, it shouldn't be dealt with administratively by the tax office" and "If people are engaging in illegal tax evasion, getting them to settle up without criminal proceedings means the wrong message is being sent to the tax-paying public^69(*)"

The effective application of penalties needs to be coupled with firm and timely prosecution of cases. The high cost and lengthy duration of prosecutions minimises the deterring effect of sanctions and leads to negative taxpayer perceptions.

Tax offences, however, have been treated as a special form of offending, quarantined from the general types of criminality, in that the non-enforcement of the law, together with the use of civil rather than criminal penalties has, in the past, allowed the taxation system to decay and fall into disrepute. Further, by allowing major illegalities to go unsanctioned, enforcement authorities have allowed the development of endemic cynicism and general disrespect for the law that may take years to reverse^70(*).

Since the goal of the tax system is overall tax compliance, the penalties are properly viewed as incentives for compliance or, alternatively, disincentives for non-compliance. The tax system imposes civil (monetary) penalties for non-compliance and criminal (incarceration, fine and other punishments) penalties for non-compliance. On a scale of culpability, the criminal penalties are viewed as the punishment for conduct deemed more offensive to the tax system^71(*).

The government's objective in tax prosecutions is to get the maximum deterrent value from the cases prosecuted. To achieve this objective, the government's tax enforcement activities must reflect uniform enforcement of the tax laws^72(*).

The criminal tax enforcement system must be understood in the context of the role it plays in the overall tax system. The tax system raises revenue for the Government. The Government could not function if it could not raise revenue^73(*).

It is possible, in theory, to prosecute an offender for evasion of any amount of tax or duty. However, there is an obligation of tax administration not to waste Government money on prosecuting cases where the revenue evaded is likely to be less than the cost of prosecuting. It is important to bear this in mind when selecting cases for prosecution.

Another important aspect of improving compliance is the provision of effective sanctions for failure to comply. Typically, sanctions can be of a civil or a criminal nature, and most jurisdictions provide for both, although in some jurisdictions criminal sanctions would be included in a separate criminal code^74(*). The tax administration should `... appropriate sanctions to non compliant' taxpayers^75(*)

Penalties should be applied to tax offenders in an escalating nature and range from the administrative and criminal penalties, to imprisonment for the most serious of cases based on taxation law.

However, the main purpose of penal policy is to provide an opportunity for the offender to reintegrate himself or herself into society and to rectify the damage both to the victim and to society caused by the crime^76(*).

Other research evidence suggests that a tax system that combines both penalties and rewards is more effective in maximizing compliance than a system that focuses solely on sanctions^77(*).

Imprisonment frustrates these objectives and should be reserved for habitual serious tax offenders and for grave offences that do not readily lend themselves to alternative sanctions.

Putting primary reliance on alternative sanctions should produce considerable savings in costs and in manpower, alleviating some of the pressure now experienced by an overburdened criminal justice system.

To help achieve more efficient and effective prosecutions, the Tax administration should set up an independent and purpose-built prosecution liaison unit. This unit should be fully equipped with the expertise to successfully investigate cases for prosecution and also execute care in the cases they select for prosecution to ensure sufficient return on investment and positive impact on wider taxpayer perceptions.

Tax evasion is a crime in almost all countries and subjects the guilty party to fines and/or imprisonment - in China the punishment can be as severe as the death penalty. In Switzerland, many acts that would amount to criminal tax evasion in other countries are treated as civil matters. Even dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are dealt with in the Swiss tax courts, not the criminal courts. However, even in Switzerland, some fraudulent tax conduct is criminal, for example, deliberate falsification of records. Moreover, civil tax transgressions may give rise to penalties. So the difference between Switzerland and other countries, while significant, is limited. It is often considered that extent of evasion depends on the severity of punishment for evasion.

To put it broadly, society needs the reassurance that serious tax evasion is viewed with the utmost gravity and that all tax paying citizens are expected to comply with what is a principal obligation of citizenship, the payment of tax due. The prosecution of an accused tax-offender in a criminal court is by no means the only serious sanction which may be imposed, yet it is the most visible and formal way in which society can show its disapproval for such anti-social and illegal conduct. Furthermore, it is likely (although not quantifiable due to lack of data) that an increase in prosecutions will lead to increased tax compliance which in the long run should result in an increase in the amount of revenue collected^78(*).

Other research evidence suggests that a tax system that combines both penalties and rewards is more effective in maximizing compliance than a system that focuses solely on sanctions^79(*).

Unfortunately, some judges do not see tax evasion as a serious crime and perpetrators are often let off with lenient penalties or sentences, which further encourage Tax offences behaviours. Hence, Tax Administration should look to form stronger links to Prosecution Department and include education initiatives aimed at that segment to help them recognise the detrimental effects weak enforcement can have on Tax offences behaviours.

The prosecution of any particular tax crime has the purpose of not only punishing the offender, but more importantly of sending a message to the entire population of taxpayers (or should be taxpayers) to give them the incentive to get right on their taxes^80(*)

`Appropriate sanctions should be consistently applied to taxpayers who falsely claim refunds, or do not comply with record-keeping requirements. Refund-related fraud should be prosecuted through the criminal justice system^81(*)'.

III.1.6 Tax amnesties

The practice of tax amnesty is not a new phenomenon; its history goes as far back as to ancient Rome. In the contemporary period, many developed as well as developing countries all over the world have increasingly conducted tax amnesties as part of their fiscal programs. Some countries have made repeated use of amnesties and sometimes the repetition of amnesty took place at an interval as short as every two years^82(*).

Tax amnesty is a limited-time opportunity for a specified group of taxpayers to pay a defined amount, in exchange for forgiveness of a tax liability (including interest and penalties) relating to a previous tax period or periods and without fear of criminal prosecution.

Tax amnesty is a good and positive move to allow taxpayers to come back into the tax system. A tax amnesty should give tax offenders the opportunity for voluntary disclosure and to lift the burden of waiting for tax administration discover them through audits and investigations accompanied by heavy penalties with interests and criminal prosecutions.

The purpose and objective of the tax amnesty will be to provide tax offenders with an incentive to stop evading tax permanently and improve the tax compliance culture.

Generally, Tax amnesty will be one opportunity for targeted taxpayers to come forward and disclose their past evasion. It will offer an attractive advantage for offenders to disclose evaded taxes and duties. The tax amnesty will also be backed up by intensive audit activity focused on those who within the taxpayers in question do not come forward under an amnesty offer.

In fact, it is important to ensure that a proportion of businesses using an amnesty are subjected to subsequent scrutiny to ensure that the amnesty is not used to deflect...attention away from serious non-compliance.^83(*)

III.1.7 Access to third party records and the power to issue summonses84(*)

The tax administration 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 records

III.1.8 Indirect Methods of Assessment

The law should specifically authorize the tax administration to use alternative methods to establish or verify the amount due, whether the tax involved is income, VAT, or another tax. The taxation authority should be permitted to use these alternative forms whenever the taxpayer fails to provide the records otherwise required in a complete and accurate form.

III.1.9 Introducing invoicing/receipting requirements

Requirements for invoices and receipts should be emphasized with the goal of improving the quality of the audit trail and increasing transparency for consumers by enforcing prescribed documentation and record maintenance by businesses. Taxpayers should ensure that tax invoices:

III.1.10 Introducing record keeping and accounting codes

Poor recording keeping is one of the key barrier that RRA meets when reviewing or auditing businesses.

The law or regulations should specify taxpayers' obligations to keep books of account and other records necessary for determining tax liability. These would include the content and form of invoices, what taxpayers must use them, and under what circumstances.

The tax administration should compel businesses to keep better records by providing assistance and information on record keeping; providing recording keeping tools; and/or by using the law to make certain reporting, record keeping or accounting standards mandatory.

III.1.11 Taxpayer assistance and education

Assisting taxpayers by improving the flow and quality of information or educating them into becoming more responsible citizens (eg TV campaigns) might yield greater revenue rather than if it were spent on enforcement activities. Some Anglo-Saxon revenue authorities support taxpayers through a range of easily accessible explanatory leaflets and provide a useful site on the Internet^85(*).

Tax administration should recognise that the traditional tax infrastructure of law, auditors, penalties, debt collectors and court cases needs to be supplemented by measures to boost taxpayers' commitment to pay tax and their trust in the tax administration.

The tax administration should use different measures to assist and educate taxpayers, such as providing information and tools to help taxpayers comply; providing rewards and incentives for good compliance; and involving taxpayers in consultative forums. At the same time, taxpayers will also help the tax administration by acting as informants and establishing good taxpayer behavioural norms.

In 2007, taxpayers' education continued especially on the new tax and customs laws with a view to enhance taxpayers' compliance. Several seminars, workshops and consultative meetings with taxpayers, both small and large were organised in all provinces and Kigali City. Also three seminar sessions on new fiscal laws with lawyers were organized in collaboration with the Supreme Court. Sixty meetings at district level were also organised through Tax Advisory Councils^86(*).

RRA has taken ground breaking initiatives to sensitise the business community on Value Added Tax (VAT) collection. Some taxpayers are not informed about the law while others lack financial accounting skills and end up committing mistakes unintentionally. In this regard, VAT campaigns were organised in different venues of Kigali City. RRA has come closer to help taxpayers understand the law and train them to handle financial accounting matters so as to avoid fines. Also RRA wanted to hear the concerns of taxpayers to enable it tailor make solutions.

During the year 2007, RRA continued to give relevant information to taxpayers to enable them comply with their tax obligations. In this regard, the design and content of the RRA's website was upgraded to provide easily more comprehensive and targeted information to our customers.

III.1.12 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 compliance 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. Such a process should include consideration of the following issues:

· 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. web-based, paper-based, CD-Rom)?

· Has there been adequate communication and marketing of the information available? Has this included publication in relevant industry or community vehicles?

· Are effective support services available to meet taxpayers' needs? (e.g. telephone enquiry services, web services, educational field visits, etc.)

· Have opportunities been taken to remind those potentially at risk of what their obligations are?

Other measures include expanding 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.

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.

There is also importance of tax consciousness and the tax administration is introducing a strategy of increasing public awareness amongst the younger generation. This is being done through series of debates and essay-writing competitions at school level. It is hoped that this effort will generate tax consciousness among the younger generation who will then become law-abiding citizens.

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.1.13 Informing taxpayers of high risk areas

Letters advising taxpayers that the authority is aware of a specific risk and inviting a specific response should be sent to high risk taxpayers. Such letters have dual utility - they prompt compliant behaviour from the potentially non-compliant (deterrence) and they support the perception among the compliant that their compliance is not in vain, that is, wrongdoers are being pursued (reinforcement). The tax administration should also publish the entire programme of compliance activities on the on the website. This programme will serve to raise the awareness of taxation compliance.

III.1.14 Educating taxpayers to seek invoices from suppliers

To help improve the quality of the audit trail, the tax administration should conduct educational campaigns to encourage taxpayers to seek invoices/receipts from businesses/suppliers. The main argument being used to sell the idea to taxpayers is consumer protection - consumers will be informed that they have very little recourse if they pay cash for the goods and services when the goods and services turn out to be unsatisfactory. They should be encouraged to ask for invoices and receipts which are important evidence for the purchase and after-sale service. «Get it in Writing!» campaign is a good example of such an initiative. «Get it in Writing!» is a campaign to warn consumers of the risks involved in dealing with contractors who offer `under-the-table' cash deals and to explain why it is important to insist on a written contract and get receipts.

III.1.15 Publicising prosecution cases and penalties

The component of transparency that constitutes the strongest incentive for tax compliance is clearly the publicity given to prosecution and conviction of individual tax offenders^87(*). Not only can publicity be used to heighten the perception that the likelihood of detection is high and hence encourage voluntary compliance, 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 evade/avoid 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.

III.2. Providing opportunities for voluntary disclosure

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. 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 future compliance behaviour as well. Therefore, the tax administration should provide taxpayers with the opportunity to voluntarily disclose. For example, RRA Voluntary Disclosures Policy allows 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.

A valid disclosure must meet four conditions. These conditions require that the disclosure be voluntary, complete, involve the application or potential application of a penalty, and generally include information that is more than one year overdue. If the tax administration accepts the disclosure, the taxpayer will have to pay the taxes or charges owing, plus interest. However, the taxpayer should not be subject to penalty or prosecution for those amounts accepted as a valid disclosure^88(*).

III.3. Using informants and tax evasion referral hotline

RRA provides avenues for taxpayers to report incidents of tax evasion (usually anonymously), with a number offering rewards in cases where information provided leads to a legitimate discovery of tax evasion.

Article 4 of the Ministerial order No 002/07 of 09/05/2007 governing the implementation of the law No 25/2005 of 04/12/2005 on tax procedure states that «an amount equivalent to ten percent (10%) of the value of fines and penalties prescribed in Chapter XI of law No 25/2005 of 04/12/2005 on Tax Procedures should be given as an award to any person who denounces a taxpayer who engages in the tax fraud.»

Also Article 143 of the Ministerial decree No 003/07 of 09/05/2007 implementing the law No 21/2006 of 28/04/2006 establishing the Customs System provides that «persons providing information outside their areas of responsibility that contributes to establishing customs offences that leads to subsequent recovery of duties and taxes should be granted a reward equivalent to ten percent (10%) of duties and taxes recovered.»

III.3.1 Involving taxpayers in consultative forums

By consulting with taxpayers, RRA designs processes, systems and legislation that are likely to be better accepted by taxpayers, hence increasing voluntary compliance. RRA should provide opportunity for taxpayers to voice their opinion on any changes and new initiatives. Also RRA should, or regular basis, conduct formal taxpayer surveys to gather taxpayer feedback.

III.3.2 Intermediary assistance and education

The tax administration should acknowledge the important contribution that intermediaries make in assisting the tax authority to combat Tax offences and encourage voluntary compliance. Intermediaries do not only include tax practitioners (i.e. accountants, tax and clearing agents, book-keepers) but also lawyers, auditors, banks, post offices, transporters, industry associations, professional bodies, etc. Intermediaries can be used to:

· Identify new areas of risk (e.g. by reporting suspicious transactions or practices)

· Act as distribution channels for the tax administration (e.g. taxpayers can make payments via banks; tax practitioners can disseminate information on new legislation or new initiatives to their clients)

· Help inform or test new policy/legislation or initiatives to ensure they will resonate with the proposed target audiences - intermediaries are often in a better position to understand the business realities faced by operators

· Identify new ways or options for dealing with emerging issues or better meeting the needs of client groups

· Help promote and encourage compliant behaviour (e.g. tax agents may advise their clients of areas of risk).

Given the importance of intermediaries, it is important that RRA should pursue measures to ease the burden on them, particularly for tax advisors and tax and clearing agents who frequently liaise with the tax office. Many of the customer service initiatives that RRA is currently pursuing for taxpayers, such as the development of electronic services and provision of information, can also be undertaken for intermediaries.

III.3.3 Establishing task force of experts to advise tax RRA

Independent task forces, comprising of external experts and representatives, should be established, to advise RRA on certain strategies or initiatives. Task forces can add value by offering different perspectives and alternative strategies to deal with emerging issues.

For example, The Technical Committee can be established with the following objectives:

· Simplifying the taxation of business income to facilitate compliance by taxpayers and administration by RRA.

· Enhancing fairness in the tax system by ensuring that all businesses share the cost of providing government services.

· Encouraging the taxpayers to play a greater role in ensuring the integrity of the tax system

· Working with other agencies to help educate new businesses about their taxation obligations

· Relaxing reporting requirements for businesses with good tax records whilst making reporting obligations more onerous for those with bad tax records.

III.3.4 Cross border activity89(*)

Complex international arrangements increase tax risk because, often, a small part only of the arrangement can be identified in one country but can significantly reduce taxes across multiple jurisdictions. The lack of information exchange amongst revenue agencies means that these activities often go undetected.

The most effective countermeasure against such arrangements is to work closely with counterparts in neighbouring countries as well as other major trade partners, by sharing information on specific arrangements or taxpayers and undertaking coordinated, simultaneous audits where appropriate. In order to share information, exchange of information provisions in agreements for the avoidance of double taxation or in Customs MOUs is required. Therefore, it is important to expand the existing network of treaties, especially with major trading partners. Cross border arbitrage involves the use by large businesses of complex structuring and hybrid financial instruments to obtain benefits, such as duplicate deductions or credits, not intended by law, or designed to take advantage of inconsistencies between the laws of different jurisdictions. Transfer pricing on the other hand revolves around outcomes that are not in line with the «arm's length principle».

III.4. Stamping out corruption and tackling inefficiency90(*)

As long as the revenue departments remained in the public sector, it was felt that the myriad problems of Rwanda's tax system were unlikely to be solved. Tax policy needed to be separated from tax administration, employees required incentives for improving their performance (and penalties for misconduct), and more investment had to be put into equipment and infrastructure.

Integrity is a key requirement for revenue administration and considerable effort is needed to tackle the challenges encountered. These challenges relate to (1) the external environment, (2) staff management, (3) facilities and equipment for staff, (4) business procedures, and (5) internal investigation. What follows are some examples of practical steps that can be taken to combat corruption:

Salaries: Personnel policies have a bearing on the propensity of staff to engage in corrupt behaviour. Obviously salaries are a factor. If staff is 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.

Welfare: 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 caused by family medical bills. An accessible staff loan facility may help overcome this. Staff welfare is a particular issue in customs, as officers are often required to work either during anti-social hours (shift work), or at remote stations away from their families where offices are often rudimentary with poor living accommodation and harsh conditions.

Codes of conduct: RRA should be adamant to its code of 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. 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 is to define clearly what is permitted and what is not. A gift register should be introduced to record gifts received by tax officials.

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 illegal acts (e.g. smuggling by arriving friends or relatives).

Work relations: 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. In the office, access control systems (e.g. key pads or swipe cards) can be introduced to prevent staff from visiting areas where they do not work. Restricting the access of unofficial visitors is also good practice. It is important to channel interactions between the client and the officer and to have designated contact points for enquiries. Importers and customs clearing agents should

Submit customs entries electronically (Direct Trader Input). Risk assessment methodologies should be used to modify procedures so that staff sees only those documents that they need to review. In customs, such selection methods can be employed either to identify goods for checking or to specify the checks that are to be carried out. It is also effective to have random selections or reselections for quality control purposes.

Payment mechanisms: 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 or by electronic means. Where cash payments are accepted, they should be made to a dedicated cash office. Where cheques are accepted as payment, they should be marked immediately upon receipt in order to avoid recycling (stating the client's name as well as the tax identification number or customs entry number).

Information: Many internal frauds rely on taking the correct payment from the taxpayer or importer 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. 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.

Service delivery: Opportunities for malpractice are likely to be reduced by publishing procedures, rules, costs, and charges for services, by establishing service charters, and by making help-line facilities and enquiry centres available, as well as by establishing appeal procedures in case of complaints. Simplification of payment procedures and greater efforts on educating those involved in the transactions (taxpayers, importers, agents) are also important.

If clients know what is required, and can do it unaided, they will be less motivated to pay revenue officers for assistance. An accessible and well-publicised channel for handling complaints on revenue administration is also important - this may be an independent adjudicator or ombudsman outside the administration, or a designated office within the administration itself.

Audits: Fertile ground for the payment of bribes is provided when irregularities are discovered by auditors. It is important for managers to deploy teams to undertake specified tasks rather than to allow staff to select their `targets'. For customs, there should be a programme of post-importation audits by staff not involved in entry processing, with audit cases being assigned at random. 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.

Important anti-corruption measures within the tax administration include updating and modernizing tax administration procedures; restructuring the internal organization based on function (identification, assessment, billing, etc.) rather than by type of tax; limiting the discretionary power of tax officials; reducing number of clearances that are required from taxpayers to complete the compliance process (i.e., the number of forms, certifications, signatures, stamps, etc.), exploring the use of electronic filing and tax liability self-assessment.

Tax officials must therefore be adequately compensated, so that they do not need to steal to live. They should be professionally trained, promoted by merit, and judged by their adherence to the strictest standards of legality and morality. To remove temptation, the money should be kept out of the tax administration and channelled through banks. Officials should have relatively little direct contact with taxpayers and even less discretion in deciding how to treat them. How they behave in such contacts must be monitored in some way^91(*).

Conclusion

This paper has briefly 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. The Tax Law of this country has the potential to become more elaborate but systematic and fair, transparent and predictable in the future. Accordingly, the forthcoming plan of the Rwanda government to substantially modify the Tax Law in pursuit of these goals is welcomed as a long-awaited universal remedy to the current situation. One can only wait and observe what the future holds for this field of law.

In the words quoted by Richard Bird, Wallschutzsky (1989) has suggested that the key elements in such a strategy must be summarised as follows: «Keep the tax laws as simple as possible; aim for a global tax with few exemptions, rebates, or deductions; Do not try to use the tax system to achieve too many social and economic goals; Continually monitor the tax system; Concentrate on basic tasks such as collection of taxes at source and ID number system; Do not collect more information than can be processed; actively encourage good record keeping; and, Aim, as a long term goal, for self assessment.» ^92(*)

Therefore in order to improve the level of tax compliance and minimise the level of tax offences, the tax administration should: Provide high quality services to their clients, reducing the cost of compliance through simplification of the laws; Provide a level-playing field to all the taxpayers by securing registration with a safe TIN, enhancing the penalty system, and working to combat stop-filers, late filers, and delinquents; Increase the overall efficiency of the tax system and improve the effectiveness of the tax administration by prioritizing its activities, and concentrating its scarce resources on highly productive tasks- A focus on the large taxpayers is essential because of their critical importance to the revenue base; Bring the small business sector into the tax net effectively. While recognizing that the tax administration has only a limited number of skilled staff to deal with the large number of small business taxpayers operating in the community, it is important that a tax compliance culture be developed within this sector; Undertake effective audits to build a long-term compliance ethos among the taxpayer population;

The Tax system should be managed in an open and accountable way, that it is balancing education and enforcement functions. This reflects a `prevention is better than cure' approach.

RRA should actively communicate areas of risk and concern so that taxpayers understand the Authority's position and the response they can expect.

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 combating of such practices needs to be approached at the whole of government level. Those who evade or avoid taxes 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 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 or avoid 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. Given this environment; adequate resources; an information management system based on a unique TIN; technical assistance by experienced consultants; and a reasonable timeframe, success will be achieved.

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 preventive measures should be given priority over punitive measures while tackling fraudulent activities. This should be the principle of legislation and enforcement. Fraud can be curbed by making tax laws less complex and leaving less scope for subjective decision.

Establish separate investigation unit and investigate taxpayers who fall in high revenue risk area. Start criminal proceeding against the offenders. Tax Administration needs to set annual target of investigations in both Customs and domestic taxes. Improvements in tax administration, however, are never final, and reform efforts need to be continuously updated. Otherwise gains in effectiveness can easily be reversed^93(*).

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. Therefore Rwanda Tax administration needs to continually review its systems, strategies and skills to keep pace with the problem of tax evasion.

* ² An introduction to the Design and Development of Tax Policy in Developing and Transitional Countries, Richard M. Bird and Eric Zolt.

* ⁴ An introduction to the Design and Development of Tax Policy in Developing and Transitional Countries, Richard M. Bird and Eric Zolt.

* ⁵ J.Kirkbride and A.A Olowokkufu, The Law and Theory of Income Tax, p.2, 2001

* ⁶ Nicholas, T., Taxation in Kenya(Principles and Practices), 5^th Revised Edition, 3003

* ¹² Cooper, Krever and Vann's income taxation, commentary and Materials; 5th edition 2005.

* ¹⁷ Shaulov D.I. and Cann U.T. (2000) «Foundations of tax legislation», «World of economics and law» publishing house, 2000, Tashkent p. 71

* 18 Law n° 25/2005 of 04/12/2005 on tax procedures

* ²⁰ Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)

* ²¹ The Reform of Tax Administration, Vito Tanzi and Anthony Pellechio, IMF, Feb 1995 P. 2

* ²² Study For the measures of Tax Compliance habit and Leakage Control, October, 2006

* ²³ Corruption, Fiscal policy and Fiscal Management: Fiscal Reform in Support of Liberalisation, June, 2006, P. 9

* ²⁴ An introduction to the Design and Development of Tax Policy in Developing and Transitional Countries, Richard M. Bird and Eric Zolt.

* ²⁵ Corruption, Fiscal policy and Fiscal Management: Fiscal Reform in Support of Liberalisation, June, 2006, P. 12

* ²⁶ Rwandan Tax Law does not definition of tax evasion neither does it mention the term.

* ²⁸ For further details refer to the General Provisions of the Criminal Code of the Republic of Rwanda.

* ³⁴ Article 24, paragraph one, of Law No. 16/2005 on the Law on Direct Taxes on Income

* ⁴² The large taxpayers are designated by the tax administration on basis of the different criteria of which the most important criterion is having the annual turnover equal or more than 150.000.000 Rfr.

* ⁴⁷ Article 28 of law no 17/2002 of 10/05/2002 establishing the source of revenue and its management

* ⁴⁸ Article 31 of law no 17/2002 of 10/05/2002 establishing the source of revenue and its management

* ⁵⁶ Article 33 of law no 17/2002 of 10/05/2002 establishing the source of revenue and its management

* ⁵⁸ Article 1 of Prime Minister's Order No 08/03/2007 on Establishment, Composition and Functioning of Tax appeals Commission

* ⁶³ See article 80.1 of Organic law n° 07/2004 of 25/04/2004 Determining the Organisation, Functioning and Jurisdiction of Courts

* ^{66 The Reform of Tax
Administration, Vito Tanzi and Anthony Pellechio, IMF, Feb 1995 P.
13}

* ⁶⁷ ^{Tax Compliance:
Report to the Treasurer and the Minister of Revenue by Committee of Experts on
Tax Compliance, December, 1998}

* ^{68 Source: The way forward -
achievements and future direction,} ^{Inland Revenue Department, August
2003}

* ⁷⁰ A Freiberg, `Enforcement Discretion and Taxation Offences' (1986) 3 Australian Tax Forum 55, 59.

* ⁷⁴ Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)

* ⁷⁷ J Falkinger and H Walther, `Rewards verus Penalties: On a New Policy on Tax Evasion' (1991) 19 Public Finance Quarterly 67-79.

* ⁷⁸ The Ireland Law Reform commission, Report on a Fiscal prosecutor and Revenue Court, 2004

* ⁷⁹ J Falkinger and H Walther, `Rewards versus Penalties: On a New Policy on Tax Evasion' (1991) 19 Public Finance Quarterly 67-79.

* ⁸² Hari Sharan, Essays on Value added and Tax Amnesty programs, West Virginia University, 2005

* ⁸³ Designing a Tax System for Small Businesses: A guide for Practitioners, The World Bank group, October , 2007

* 84 Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)

* ⁸⁵ Ken Devos, Penalties and Sanctions for Taxation offences in Selected Anglo-Saxon Countries: Implications for Taxpayer compliance and Tax policy,

* ⁸⁷ United States practices in Estimating and Publicising Tax Evasion, African Economic Policy Discussion Paper No 15, May 1995, P.9.

* ⁹³ Designing a Tax reform Strategy: Experience and guidelines, Carlos and Katherine Baer, IMF, March 1997, P.5

A Critical Analysis of Effectiveness of Tax Offences Control Mechanisms Under Rwandan Law

Dedication

Acknowledgement