A Critical Analysis of Effectiveness of Tax Offences Control Mechanisms Under Rwandan Law
par Charles KABERA
Kigali Independent University - LLB 2008
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 public69(*)"
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 reverse70(*).
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 system71(*).
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 laws72(*).
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 revenue73(*).
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 code74(*). The tax administration should `... appropriate sanctions to non compliant' taxpayers75(*)
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 crime76(*).
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 sanctions77(*).
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 collected78(*).
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 sanctions79(*).
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 taxes80(*)
`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 system81(*)'.
* 69 http://www.cdpp.gov.au/Director/Speeches/19931119mr.aspx, cited on 31/12/2008
* 70 A Freiberg, `Enforcement Discretion and Taxation Offences' (1986) 3 Australian Tax Forum 55, 59.
* 71 Federal Tax Crimes, John A. Townsend, Houston Law School, 2007 ed
* 72 Federal Tax Crimes, John A. Townsend, Houston Law School, 2007 ed
* 73 Federal Tax Crimes, John A. Townsend, Houston Law School, 2007 ed
* 74 Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)
* 75 RRA Strategic Plan, 2009-2010, p. 14
* 76 http://www.springerlink.com/content/n2r8755654mn4q51/ Cited on 30/12/2008
* 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.
* 80 Federal Tax Crimes, John A. Townsend, Houston Law School, 2007 ed
* 81 IMF Report 2007, Next Steps in RRA Modernisation, p. 63.
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