Memoire Online - Effectiveness of Rwandan Law of Tax Administration in addressing Tax Offences

Presented as part of the requirements for the award of the Bachelors Degree in Law

Declaration

I, KABERA Charles, hereby declare that, to the best of my knowledge, the research work presented in this dissertation is original. No one has ever presented it at Kigali independent University or elsewhere for any academic award. Where the work of other individuals was consulted, references were made and indicated in the bibliography. I therefore declare that this work is mine and comes to contribute to the partial fulfilment of a bachelor's degree in Law.

Dedication

I dedicate this research work to my children Charlotte and junior, my Dear mother, sister and brothers and my honest and pertinent friends who stood by me when I needed them.

Acknowledgement

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. Your devotion and commitment towards the success of this work will always be valued.

I owe much tribute to the Almighty God who gave me a life worthy living. 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.

KABERA Charles

Acronyms

General Introduction

i. Background of the study

Rwanda, like any country in the world, aims at national development. Development cannot be attained without financial resources. Yet, we realize that every year a lot of revenue escapes national treasury due to tax evasion and related offences.

The actions of taxpayers -- whether due to ignorance, carelessness, recklessness, or deliberate evasion -- as well as weaknesses in a tax administration mean that instances of failure to comply with the law are inevitable. Therefore, tax administration should have in place strategies and structures to ensure that non-compliance with tax law is kept to a minimum^1(*).

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.

The background to this work is to establish the extent to what the Rwanda tax administration law has addressed the problem of tax offences.

ii. Statement of the problem

Taxes matter. People talk about them, 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 evasion and related tax offences give rise to several legal questions; Whether Penalties and fines are well executed when tax offences are committed, Whether the Rwandan tax administration 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.

This research is therefore intended to find possible solutions for the above questions.

iii. Research Methodology

iv. Objectives of the study

a. General objective

Objective of the study is to analyse the current situation of both civil and criminal responsibility in commitment of tax offences, identify the effectiveness of Rwandan tax administration law in addressing tax evasion. The result of this research will help tax administration to fight against different tax offences.

b. Specific objectives

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

2. assess the degree of tax offences in Rwanda and investigate the causes and consequences of tax offences;

3. Identify legal control measures against tax offences, identify loopholes in controlling tax offences and recommend improvements in the current tax laws.

v. Research questions

7. Is the punishment of imprisonment applied to effectively fight against tax offences?

vi. 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.

vii. 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 should be useful to ULK as a centre of Higher Learning; the university will benefit from the results of this study to help various researchers.

e. To Taxpayers

Through this research study, the tax base will be widened hence easing tax burden on all taxpayers. This research study should 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. An Overview of taxation

The Ruler should act like a bee which collects honey without causing pain to the plant^5(*).

I.1. A history of Taxation

For as long as governments have existed, they have had to come up with ways to finance their activities. Methods of public finance have changed enormously over time.

I.1.1 Ancient Times

In the ancient civilizations of Palestine, Egypt, Assyria, and Babylonia, individual property rights did not exist. The king was sole owner of everything in his domain, including the bodies of his subjects. Thus, instead of taxing individuals to support the government, the king could simply force them to work for him. Ancient kings earned income in the form of food from their lands and precious metals from their mines. If this income did not meet the king's demands, he might lead his armies into neighboring countries to confiscate their property. The conquered peoples might also be required to make payment (known as tribute) to the conqueror in acknowledgment of their submission to his power. If kings were not very wealthy or not very good at stealing from other countries, they would resort to taxing their own people. In societies that operated without money, the ruler taxed farmers by requiring that they turn over some proportion of their crops to the state. Poll taxes were a major source of revenue in Egypt under the Ptolemaic dynasty (323 bc-30 bc).

The government of ancient Athens, Greece, relied on publicly owned silver mines, tribute from conquered countries, a few customs duties, and voluntary contributions from citizens for revenue. It levied poll taxes only on slaves and aliens (non-citizens) and made failure to pay a capital crime^6(*).

I.1.2 Medieval Times7(*)

During the middle Ages, from about the 5th century ad to the 15th century, taxation varied from region to region. Europeans were subject to many forms of taxation, including land taxes, poll taxes, inheritance taxes, tolls (payments for the use of bridges, roads, or seaports), and miscellaneous fees and fines. Many people paid taxes in the form of money or crops directly to the local lord whose land they farmed.

Under the system of feudalism that dominated in Western Europe beginning in about the 11th century, kings, nobles, and church rulers all collected taxes. Kings derived income from their lands, from import and export duties, and from the various feudal dues and services owed by their vassals. For the most part, church officials and nobles were granted exemption from royal taxes, so the burden of taxation fell heavily on the peasantry. When King John of England tried to increase his income by a series of heavy scutages (payments that knights made in lieu of military service), the feudal nobility refused to pay. In 1215 they forced the king to sign the Magna Carta, a document in which he agreed to collect scutage only with the «common consent» of his barons--thus limiting the king's power to tax.

The Roman Catholic Church was a major tax collector during the middle Ages. One of the most important sources of church revenue was the tithe, a compulsory payment of one-tenth of a person's harvest and livestock. The church also collected various fees, fines, and tolls, and required clergy members, such as bishops and archbishops, to make payments to the papacy in Rome.

An important development toward the end of the feudal period was the dramatic growth in the number and population of towns and cities. These urban centres collected revenues using taxes on property as well as sales taxes on certain items.

I.1.3 Historical evolution of taxation in Rwanda

Rwandan history indicates that the first tax legislation was inherited from colonial regimes. Such tax legislations include the Ordinance of August 1912 which established graduated tax and tax on real property. There was another Ordinance of 15th November 1925 adopting and putting into application the Order issued in Belgium Congo, on 1st June 1925 establishing a profit tax.

The order was amended several times up to the Order of 25th March 1960, meant for Rwanda's development and cash in-flow. After independence, the first tax legislation passed was that of 2nd June 1964 governing profit tax, which was repealed and replaced by Law No 8/97 of 26/06/1997 on the Code of Direct Taxes on Different Profits and Professional incomes.

This law was amended from time to time in order to keep pace with time and the changing economic environment. Such other legislative instruments include the 1973 law governing property tax, the tax on license to carry out trade and professional activities, the law N°. 29/91 of 28th June 1991 on sales tax /turnover tax (now repealed and replaced by the law N°. 06/2001 of 20/01/2001 on the Code of Value Added Tax (VAT).

Other substantive Law governing Customs was enacted on 17th July 1968 accompanying Ministerial Order of 27th July 1968, putting into application the Customs Law.

In addition the administration and accountability of taxes and duties in Rwanda was initially under the Ministry of Finance and Economic Planning.

In 1997, Rwanda Revenue Authority was established as an independent body by the law no 15/97 of 8/11/1997 to administer the various taxes and tax related laws and to assess, collect, administer, and account for Fiscal and Customs revenue collected to the Government through the Ministry of finance in accordance with established procedure.

RRA came into the country at a time when public institutions in the nation were either experiencing shortage of qualified staff or bearing the effect of it. Such burden partly linked to the 1994 genocide that caused knowledge and knowledge repatriation.

As a tax administration, RRA entered into an environment and niche that concerned with revenue collection. There was a lot of fraud and smuggling in the country and RRA therefore was seen as an enemy threatening peoples' hot business at time^8(*).

Through article 3(c) of the law no 15/97 of 8/11/1997, Rwanda Revenue Authority was given powers to institute prosecution of Tax offenders^9(*). The RRA was mandated to enforce compliance with the laws that it administers to ensure that taxpayers fully comply with their obligations under the tax laws by heavily guarding against all forms of tax offences.

I.2. Concept 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^10(*).

A tax may also be defined as an imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to raise revenue for government expenditures, although they serve other purposes as well^11(*).

Tax is generally referred to as a compulsory levy by the government upon assessment of various categories. H.L Bhatia (1999:37) defined tax as 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.

According to late professor Ray A, sommerfield of the University of Texas quoted James John Jurinski, said that tax is a non penal but compulsory transfer from the private sector to the public sector levied without receipt of a specific benefit.

According to Saleemi N.A (1981) tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of the service rendered to the taxpayer in return.

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 (NA Saleemi 1991:2-4)

Tax may also be defined as a compulsory contribution of wealth of a person or body of person 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 regime 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 (Saleemi 1998).

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 (Cooper, krever and Vann's income taxation, commentary and Materials; fifth edition 2005).

3. It is a payment by tax payers which is used to benefit all the citizens a case in point the government use the collected revenues to establish infrastructures such as hospitals, schools as well as other public utility services.

2. There is also 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.

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

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

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.3. Justification of Taxation12(*)

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.

I.4. Principles of Taxation

If the major objectives of taxation are to be achieved, taxes should conform to certain criteria. These are summarized in the following principles:

I.4.1 The principle of simplicity

This is Ability of the taxpayer to understand. The principle of simplicity is one of principles of taxation and it advocates that Tax system should be plain, simple to understand by the common taxpayers. It should not be complicated to understand how to calculate and ultimately ascertain how much to be paid. This principle of taxation is so important in that it helps in avoiding corruption as well as exploitation by the taxing Authority

I.4.2 The principle of convenience

This principle emphasizes that both time and manner in which payments are executed should be convenient to the taxpayer. An Economist by Names of Adam Smith said that `Every Tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay'. For instance the payment of Value Added Tax and Excise duty by the consumer is very convenient because the consumer pays the Tax when he buys the commodities at the time when he has the means to buy the product. Furthermore, the manner of payment is also convenient because these Taxes are inclusive in the prices of the commodities

I.4.3 The principle of certainty

According to Adam Smith, there should be certainty in taxation because uncertainty creates favourable climate for tax evasion hence compromising with the Taxation objectives. By this principle, it means that, the tax which each individual taxpayer is bound to pay should be certain. The time, the manner of payment and the amount to be paid must be clear to the taxpayer. Thus, this requires that there should be no element of arbitrariness in a tax. It should be in relation to ascertaining as to when, what and where the tax is to be paid.

I.4.4 The principle of Equality

Taxes should be allocated among individuals fairly and reasonably. In taxation systems, the principle of equality is considered as the most important. As Adam smith put it forward `The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities'. This implies that every person should pay the tax according to his ability and not the same amount. It further means that every taxpayer should not pay at the same rate; rather every taxpayer should pay the tax proportion to his income of the taxpayer blanket

I.4.5 The principle of Economy

1. It should be economical for the state to collect it .This implies that the cost of collecting a tax should be less than the tax revenue to be collected. If it is more, then it is uneconomical to collect such a tax and if the trends continue, that tax should not be levied as best alternative.

2. It should be economical to the Taxpayer. This means that after paying the tax, the taxpayer should remain in the original state. That is to say, the taxpayer should remain with sufficient money to sustain his new business opportunities. Therefore, a heavy tax on incomes discourages savings and investments and hence encourages tax evasion, smuggling and other related offences in order to maximise returns.

Taxes should not necessarily hinder the attainment of economic objectives, including full employment, growth, and stability. Indeed taxes may be used to advance them.

I.4.6 The principle of Elasticity

This principle implies that, Government should raise the tax rates when in need of more revenues and illustrates that taxes should be elastic. Excise duty is one of the best taxes with high degree of responsiveness to a good number of commodities and their rates can periodically be increased to raise more revenue. However, if the rates are exaggerated would cause more problems as this would invite or encourage inflationary pressures in the economy.

I.4.7 The principle of Diversity

This principle advocates that there should be diversity in taxation processes. That is to say, a narrow tax base would not meet the revenue requirements of the country and this even compromise the principle of equity. There should be variety of taxes from different sources. So as very every state nationals contribute to revenue collections according to his ability to pay. However, a large multiplicity of taxes will be difficult to administer and therefore not cost effective

I.4.8 The principle of productivity

This principle states that a tax should be productive to mobilise enough revenues to adequately supplement government foreign sources of funds to finance its social and development projects to benefit all citizens and residents.

CHAPTER II. A critical Analysis of Tax offences

II.1. Tax customs offences

II.2. Tax Evasion, Tax Avoidance and Tax Fraud

II.2.1 Tax evasion

Saleemi N. in his book, (Elements of Taxation simplified) suggested that, tax evasion is an economic crime whereby the taxpayer deliberately tries to avoid paying taxes by either not declaring his true situation of his total income or by claiming higher expenses to offset against his earnings by claiming allowances or relief to which he is not entitled and when the Tax evasion is done, the tax defaulter is legible to fines and penalties as per provisions in the tax/custom law whereby also sentencing Tax defaulter in the prison is provided for^13(*).

Tax evasion is the intentional and fraudulent underpayment or non-payment of taxes. It is paying less than the legally due tax liability by using illegal methods. The crime of tax evasion involves deliberately misrepresenting or concealing the nature of financial affairs to the tax authorities to reduce their tax liability, and may include such dishonest tax reporting tactics as under-declaring income, profits or gains; or overstating deductions^14(*).

For tax purposes, avoidance is the term used to describe taxpayer behaviour aiming at reducing tax liability. This where the taxpayer carries out his or her business in such a way that he will be required to pay less tax by exploiting the loopholes in the tax law/system. Examples of tax avoidance include locating assets in offshore jurisdictions, conversion of to non- or lower-taxed gains, spreading income to other taxpayers with lower tax marginal rates and splitting of business activities to avoid VAT registration^15(*).

II.2.2 Tax avoidance

This is where the taxpayer carries out his or her business in such a way that he will be required to pay less tax by exploiting the loopholes in the tax law/system.

II.2.3 Distinction between tax evasion and tax avoidance16(*)

«The difference between tax avoidance and tax evasion is the thickness of a prison wall^17(*).»

There is an important distinction between tax evasion and tax avoidance. Tax evasion refers to illegal activities deliberately undertaken by a taxpayer to free himself from a tax burden. An example of a tax evasion is where a taxpayer omits income from his annual tax return. Tax evasion is subject to severe penalties.

Tax avoidance, on the other hand, usually denotes a situation in which the taxpayer has arranged his affairs in a perfectly legal manner, with the result that he has either reduced his income or that he has no income on which tax is payable. No obligation rests against a taxpayer to pay a greater tax than is legally due under taxing Act. A taxpayer cannot be stopped from entering into a bona fide transaction, which, when carried out, has the effect of avoiding or reducing tax liability, provided that there is no provision in the law designed to prevent avoidance or reduction of tax. This principle is clearly brought out by the following extract from the judgment of Lord Tomlin in Duke of Westminster v IRC (1953) (at 520):

`Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then however, unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, can not be compelled to pay an increased tax'.

II.2.4 Tax Fraud

Tax fraud may be considered as a form of deliberate evasion of tax which is generally punishable by law. The term includes situations in which deliberately false statements are submitted, fake documents are produced, etc. Sanctions may include civil or criminal penalties^18(*).

CHAPTER III. Types of tax evasion and methods used

III.1.1 Methods used by Tax offenders

Generally there are two ways of implementing tax evasion decision by tax evaders. They are;

· The tax evaders cover up their actual financial situation in case this would have tax implications;

· The tax evaders produce fictitious financial situations which qualify for tax concessions. The apparent fulfilment of condition of tax concession leads either to an effective reduction in the tax paid or to a tax loan for a limited period.

The tax payers decide on these methods opting in favour of one of these two ways of evading tax. Some more details of these methods are given below;

III.1.2 General falsification and deception method

In this method, the evader corrects entries on the basis of falsified documents including fictitious business transaction. They use legal falsification method using fictitious contract i.e. preparing of fictitious employment contract, fictitious sales contract, fictitious service contract, fictitious loan contract, fictitious licensing contract and fictitious leasing contract.

III.1.3 Accounting falsification method

In this method, the evader falsifies accounting documents, prepares self made external vouchers in some cases, old vouchers are re-dated in the way which looks new to the tax auditor. The evader falsifies the amount in the books of accounts. Likewise, they falsify recording of business transaction, false dating of business transaction, false entry of document, and the evaders do not allocate transaction to an account or make incorrect allocation to account. The evader prepares two sets of accounts deliberately external and internal to manipulate taxes. The all efforts of tax evader are concentrated on profit contraction. For this purpose, the evader increases business expenses and contracts revenue. The evader does not disclose withdrawals via assets account and contracts the gross profit. To plough back undisclosed profit, they make financial and other investment outside the company. And at the same time, they retransfer the undisclosed money for financing investment within the company. Other methods of evasions employed by evaders are transfer pricing by non resident companies, head offices expenditure, advertising activities conducted in other countries and expenditures shown in the books of permanent establishment situated in Rwanda.

III.1.4 Customs Evasions

The methods of Customs evasions are outright smuggling, valuation fraud, classification fraud, quality and quantity manipulation, abuse of exemption facilities and diplomatic immunity.

III.1.5 VAT evasion

Methods of evasion of value added tax are absence of issuing proper bills to the buyers, undervaluation at the customs points, fixation of low ex-factory price in internal production and further under valuation by wholesalers and retailers. There is no reliable valuation data base either to control valuation fraud in import or in internal production.

III.1.6 Excise tax evasion

Underreporting of production and sales of excisable goods, quantity and quality manipulation by not showing actual record of raw material imports, local raw materials used in production and removal of final products.

III.2. Indicators of tax offences

· The maintenance of more than one set of records and preparing two sets of final accounts.

· The use of transactions that have no apparent commercial reality or relevance

· Failure to report fully and accurately on income and expenditure by either omitting items of income or claiming inflated deductions or expenses

· Failure to register with Domestic tax department and thereby escaping the tax net

· Some traders keep their stock of goods away from their registered places of business (sometimes in their homes) and distribute them to selected customers

· Some taxpayers attempt to reduce their tax liabilities by splitting their incomes amongst their wives, children and other close relatives or associates.

· Problems associated with businesses being closed and re-opened in different names as if it were a new business.

III.3. Causes of tax offences

Tax offences result from different reasons and do not come out because of natural factors but there some fertile grounds to mature to have its diverse effects on the general economy at large.

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:

III.3.1 Limited resources and capacity 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 skills); poor infrastructure or systems; and lack of support, funding or autonomy from the government.

With RRA unable to adequately carry out their 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. There is lack of experienced personnel with specialised training on audit and investigation activities to deal with Tax offences.

III.3.2 Complexity of the tax law and tax system

It is a frequently heard complaint that tax administration laws are complex, confusing, and arbitrary^19(*). To some degree this is probably unavoidable. A highly complex tax system 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.

The causes of an inefficient tax system can be several: they can originate in the laws themselves. These laws can be exceedingly complex, opaque, and requiring from taxpayers the kind of information and attention that is difficult to provide. Tax laws have often become legislative labyrinths, represented by exceedingly complex tax codes, in which only few can find their way. When interpretation can vary between those who administer the taxes (or even among them), and those who pay them, administrative problems are bound to arise. At times, the laws may be clear but the incentives for the taxpayers may be wrong. For example, 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^20(*)

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 RRA.

III.3.3 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. 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.

III.3.4 High tax and duty rates

High marginal tax rates are a commonly cited factor contributing to the evasion or avoidance of tax. The bigger the difference between the total cost of labour in the official economy and the after-tax earnings (from work), the greater is the incentive to avoid this difference and to participate in the underground economy.

III.3.5 Lack of publicity of tax offenders

Lack of publicity (naming and shaming) of tax evaders is another reason for widespread of tax evasion. Even when the tax evader is caught and punished for tax evasion is not publicised. Therefore, this has encouraged tax evaders to evade tax just because they are not exposed to the public. Perceptions towards the tax system

III.3.6 Attitudes and perceptions towards taxation

In some of tax payers, tax morality is low and there is a strong culture to avoid paying tax. In other words, there is no social disapproval or reprimand for avoidance or evasion of taxes. 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 tax payers escape from paying taxes in conformity to what they are due to pay.

III.3.7 Corruption among some tax officials

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

In addition, like in other parts of the public sector, corrupt behaviour within the revenue administration includes abuses of positions, such as:

· Recruitment, dismissals, promotions, transfers of staff for payment or favours (for instance, recruitment of friends and relatives)

Corruption is present when public officials abuse their positions of public authority for private gain.^22(*) Such corruption undermines confidence in the tax system, negatively affects willingness to pay taxes, and reduces a country's capacity to finance government expenditures.^23(*)

No government can expect taxpayers to comply willingly with a tax structure that they consider unfair or when they are unconvinced that any of the money collected is put to good use. 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^24(*).

Taxes that require frequent interaction between the tax authority and individuals, such as taxes on international trade, seem to be more affected by corruption than most other types of taxation. This suggests that if the government needs to raise more tax revenues in a way that minimizes distortions and maximizes social welfare, it should implement reforms that either reduce corruption or raise revenues from tax categories that are less susceptible to corruption^25(*).

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^26(*).

III.3.8 Low literacy and education

Low literacy level makes it very 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.

III.3.9 Poor economic development/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.

III.3.10 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.

III.4. Consequences of Tax offences

According to Syed M. Ahsan^27(*), not only from the view point of financing public expenditure but also to reduce negative impacts of tax leakages, the control of tax evasion and avoidance is necessary. Negative impacts of tax evasion and avoidance on economy are as follows:

III.4.1 Cost of non compliance to evaders

Expenses incurred to carry out evasion activities and in follow-up efforts to prevent detection and conviction.

III.4.2 Cost of investigation to authorities

III.4.3 Additional Compliance cost to honest tax payers

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

III.4.4 Honesty loses and evader wins

Tax evasion may drive some firms out of business as they are unable to compete with owners that successfully avoid taxes such possibilities may be unwillingly aided by a deliberate government policy to lower taxes or no tax to small firms.

III.4.5 Increase in inequity

Tax avoidance and evasion increase inequity as opportunity of evasion and avoidance is not equally available to all.

III.5. Type of Taxes mainly exposed to tax offences

III.5.1 Taxes on company profits

According to the law, all companies operating in Rwanda for the aim of making profits are taxed, this is illustrated in article no 3 of the law no 9/97 of 26^th June/1997.

This tax is imposed on profits realised by the companies legally registered in Rwanda, cooperatives, societies and their unions, public establishments enjoying financial autonomy, and other registered and non registered societies, whatever their status grouping at least two or more patterns having an aim of making profit.

III.5.2 Tax on profits made by self-employed people

Normally this kind tax is imposed on income or profit made by self employed people excluding pensions payments and income not related to them. This income is from professional businesses obtained during the year of winding up business operations, and it is paid once in the year.

III.5.3 Professional tax on remuneration

Professional tax on remuneration is imposed according to law no 8 and law no 9/97 of 26^th June/ 1997. It is imposed on remuneration received by all people who are paid by their employers or third parties with or without a contract. This remuneration includes salary of administrators, managers' commission agents and liquidator of companies and other fixed or valuable payment of any nature.

III.5.4 Customs duties

These are duties inscribed in the customs tariff for goods which enter or which leave the customs territory^28(*). All these duties are payable to customs on import or export goods.

Custom is an administrative apartment specifically responsible for the application of legislation concerning the importation of goods and the receipt of public taxation produced by the duties and taxes to which those goods are subject.

III.5.5 Value Added Tax (VAT)

VAT is levied on the supply of goods and services made in Rwanda and on importation of goods and services into Rwanda, except those that are exempted.

VAT is paid by the consumer of taxable goods and services but is only levied by taxpayer registered for VAT. Every registered taxpayer for VAT must submit VAT monthly returns within 15 days after the month to which returns relates.

The monthly returns indicate VAT charged on sale (output tax) and VAT paid on purchases (input tax). VAT payable is the difference between the output tax and the input tax, the tax payer will pay the difference and if output tax is less than input tax he will claim for refund.

III.6. Taxpayer compliance29(*)

Despite improvement in taxpayer compliance especially for large taxpayers, most small and medium taxpayers still face difficulties in complying with their tax obligations. Some taxpayers still have difficulties in keeping books of accounts and as such have impact on certain taxes that require proper invoicing like VAT.

Medium-size enterprises generally keep records, however common compliance issues include understating sales, overstating purchases, falsifying documents (e.g., VAT invoices), and creative accounting (such as keeping of two sets of books). Small and micro business operators generally have low literacy and numerical skills, and have limited understanding of both the tax system and business record keeping. Also some taxpayers fail to file and pay on time.

In addition, RRA encounters many forms of VAT refund and credit fraud, such as fake exports, overstated input tax, understated output tax, and illegitimate businesses registered for the sole purpose of defrauding the government. On average, RRA rejected 18 percent of VAT refund claims lodged, the majority being from medium-size enterprises.

Smuggling of goods from neighbouring countries continues also to surface in districts bordering Uganda and DRC. Other methods of smuggling and tax evasion are also being employed by the business community including forging of documents for imported goods.

CHAPTER IV. Existing problems and appropriate strategy

IV.1. RRA dealing with tax fraud and investigation30(*)

According to RRA Annual Report for 2007, 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, evaders 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.

During the course of the year 2007, 17 investigation cases out of 48 planned were finalised with a total assessment of Rwf 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 Rwf 256.9 million. Thirty five cases were sent for prosecution and were yet to be concluded in the courts of law. 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.

IV.2. 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.

IV.2.1 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.^31(*)

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.

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^32(*).

Clearer presentation of the provision on depreciation^33(*) 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%.

RRA should continue to propose reviewing tax laws with the intention of reducing complexity and burden on both taxpayers and the tax administration.

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.

IV.2.2 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

IV.2.3 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:

IV.2.4 Application of adequate penalties34(*)

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 evaders 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.

IV.2.5 Prosecution, Sanctions and Penalties

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^35(*).

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^36(*).

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^37(*).

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^38(*).

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.

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.

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.

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-evader 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^39(*).

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^40(*)

`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^41(*)'.

IV.2.6 Tax amnesties

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 evaders 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 evaders 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 evaders 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.^42(*)

IV.2.7 Access to third party records and the power to issue summonses43(*)

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

IV.2.8 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.

IV.3. Application of Administrative sanctions44(*)

Administrative control is about the use of operational and administrative measures such as reducing the compliance cost/burden on taxpayers; actively registering the tax base, introducing record keeping requirements, to improve compliance behaviour, etc.

RRA should continue working towards reducing the compliance cost/burden on taxpayers. The requirement for tax clearance certificates; the creation of specialised units to deal with compliance risks (such as Risk Management and Intelligence Unit in Customs); and the active registration of taxpayers are also common initiatives. Invoicing/receipting requirements and decentralising the tax office will also be used.

· 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

Additional administrative measures against tax defaulters in Customs & Excise department are stipulated below.

Pursuant 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;

IV.3.1 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:

IV.3.2 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.

IV.3.3 Taxpayer assistance and education

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^45(*).

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.

IV.3.4 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

IV.3.5 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.

IV.3.6 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.

IV.3.7 Publicising prosecution cases and penalties

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.

IV.4. 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.

IV.5. 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.»

IV.5.1 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.

IV.5.2 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.

IV.5.3 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.

IV.5.4 Cross border activity46(*)

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».

IV.6. Stamping out corruption and tackling inefficiency47(*)

Before 1997, Tax and customs (in Rwanda) used to be managed by two different and under-staffed departments in the Rwandan Ministry of Finances. 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 weren't being collected efficiently enough.

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.

IV.7. Audit activities

During the fiscal year 2007, Small and Medium Taxpayers Office concluded 455 audit cases based on period (one fiscal year) against 480 audit cases planned which is an achievement of 94%. 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:

Table 1: Amount of additional assessments and penalties by tax in SMTO (Values in Rwf)

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.

Conclusion

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.» ^48(*)

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.

Tax administration 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, the central bank, Social Security Fund, the Army, and many others, need work together.

Finally, government departments and 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^49(*).

Bibliography

* ¹ Managing and Improving Tax compliance: Centre for tax Policy and administration

* 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 Mahabharata, in Tax Law Design and drafting, Val. 1 Victor Thuronyi, IMF, 1966

* ⁹ Law No. 15/97 of 11/08/1997 establishing RRA (O.G. No. 22 of November 15, 1997)

* ¹⁰ Nicholas, T., Taxation in Kenya(Principles and Practices), 5^th Revised Edition, 3003

* ¹² Nicholas, T., Taxation in Kenya(Principles and Practices), Nairobi, 5^th Revised Edition, 2003, P.2

* ¹³ Ruboneza A, The contribution of Revenue protection department on revenue collections in Rwanda Revenue Authority.»A case study of RPD, p. 22

* ¹⁶ Jordan, K., et al, SILKE: South African Income Tax, Lexis Nexis, Butterworth, Durban, 2006, p.515

* ¹⁹ Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)

* ²⁰ The Reform of Tax Administration, Vito Tanzi and Anthony Pellechio, IMF, Feb 1995 P. 2

* ²¹ Key Steps to address corruption in Taxes and Customs, by David Child, May 2008, No. 15

* ²² Corruption, Fiscal policy and Fiscal Management: Fiscal Reform in Support of Liberalisation, June, 2006, P. 9

* ²³ An introduction to the Design and Development of Tax Policy in Developing and Transitional Countries, Richard M. Bird and Eric Zolt.

* ²⁶ Corruption, Fiscal policy and Fiscal Management: Fiscal Reform in Support of Liberalisation, June, 2006, P. 12

* ^{28 Art. 1 par. 16 of} ^{Law
N° 21/2006} ^{of 28/04/2006} ^{Establishing The Customs System
(O.G. N° 13/2006 Of 01 July 2006)}

* ³³ Article 24, paragraph one, of Law No. 16/2005 on the Law on Direct Taxes on Income

* ³⁴ The Reform of Tax Administration, Vito Tanzi and Anthony Pellechio, IMF, Feb 1995 P. 13

* ³⁸ Tax Law Design and Drafting (volume 1; International Monetary Fund: 1996; Victor Thuronyi, ed.)

* ³⁹ The Ireland Law Reform commission, Report on a Fiscal prosecutor and Revenue Court, 2004

* ⁴² Designing a Tax System for Small Businesses: A guide for Practitioners, The World Bank group, October , 2007

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

* ⁴⁸ Administrative Dimensions of Tax Reform, Richard Bird, April 2003, P.32

* ⁴⁹ Designing a Tax reform Strategy: Experience and guidelines, Carlos and Katherine Baer, IMF, March 1997, P.5