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Angels and Demons, also known as tax authorities and tax payers...Could it be any different?

10 Mar 2010

The behaviour of tax payers has often been investigated from a political perspective focusing on the complexities of tax law and shadow economy, as well as from an economic perspective with emphasis largely on the impact of tax audits, penalties, tax rates and net income. Why, because tax authorities want tax payers to be fully compliant. However, this relationship has rarely been researched from a behavioural economic and economic-psychological aspect, and aspect which would analyse various attitudinal variables, norms, equality and decision anomalies. This relationship's economic psychology, the various aspects and motives of tax behaviour, be it lawful compliance or tax evasion, has just recently been acknowledged, examined and analysed by some academics dealing with tax law. Taxand Hungary explores the relationship between tax authorities and tax payers

Currently, in Hungary, we witness a highly antagonistic climate in which tax authorities and tax payers work against each other, like 'cops and robbers'. Tax compliance is seen as the power of tax authorities, keen on threatening taxpayers with tax audits and punishments enforcing tax compliance. Such behaviour evokes mistrust and non-cooperation, where taxpayers are keen to optimise their own profit, to the point where they feel nearly justified to evade taxes, as it pays off.

In a dream world this ugly reality would become a harmonised and balanced relationship, a synergistic climate, in which tax authorities and taxpayers work together; where compliance would no more be enforced but rather become voluntary. In this dream world there would be a mutual trust between tax authorities and tax payers, where they would cooperate to manage and resolve problems; where companies would survive tax audits without major heart attacks, severe penalties, and ultimately litigation would no longer be necessary. There would be fairness on behalf of tax authorities when treating taxpayers.... But could this be too good to be true? Perhaps not?

What would be necessary to create such harmony? A cooperative and interactive climate between tax authorities and taxpayers, which would presuppose citizens' trust in authorities in general, where they would feel less distance between them and tax authorities, versus the power of authorities to control taxpayers effectively. If it were to be effective, the possible outcome might be voluntary compliance, compared to the current enforced compliance (or non-compliance). It would also presuppose moral considerations and just concerns, where the citizens' trust would play a crucial role. It would be interesting to find out what would be the motivation to comply, other than fear, and what could lead to high tax morale.

The question is, whose tasks is it to develop such interactive strategies between tax authorities and taxpayers? Could a climate of trust and voluntary compliance ever be reached?

In the current climate there is a growing concern of the legalities associated to an ever-increasing globalisation of businesses and that of the complexity of business structures. It should also be highlighted that legality is the dividing line between evasion and avoidance. However, most of the times the law itself is unclear, leaving some very obvious loopholes, which can be taken advantage of. Also, tax authorities face the problem of the complexities of public finance and law, as well as ambiguities in interpreting and executing it. As a result, tax laws have become so intricate that even experts, such as accountants, lawyers, and tax officers have difficulty interpreting many of the law's provisions. At the same time tax professionals make particular efforts to find more and more sophisticated ways of tax planning aimed at reducing tax payments, widening the gap further between the letter of the law and the spirit of the law, thus leaving guilty minds behind. The result? A vicious circle, newer regulations and laws are established in response to aggressive tax avoidance.

Taxand's Take

The complexity of the law has made compliance very difficult and very time consuming to the extent that Hungarian businesses consider taxation their most significant business compliance cost. On the other hand expert tax professionals, i.e. tax lawyers and tax advisers, are increasingly specialising in particular fields of expertise as the complexity renders it impossible to be an expert in general tax law. Some famous academics of tax law state that in OECD countries one of the major problems in tax administration is understanding what has to be administered: namely the tax laws and how to interpret them. As a result of this increasing complexity many countries have endeavoured to simplify the law, especially for the self-employed and small business owners. In some cases the outcome has been less successful than desired.

The future is, however, tax simplification as well as a higher level of cooperation, openness and transparency, and efforts need to be made to avoid a greater compliance burden on the already over-administered companies. Doing this would require less efforts and underlying costs than the cost of doing nothing at all. The requirements for transparency should apply to tax authorities just as much as to taxpayers and their tax advisors. A mutually agreed set of behaviours and common monitoring is also needed to ensure that all parties have equal interest and accountability in making it work. It's not by chance that a recent OECD tax study has come up with recommendations to build mutual trust between taxpayers and tax authorities. This would be a welcome breakthrough encouraging collaboration on tax, i.e. enhanced relationships, in which tax advisors help their clients to avoid errors and deter unlawful or overly aggressive activities. Each country is obviously starting from a different stage in the development of their tax system, local culture and practice and so each country will need to develop its own route map. Until the desired level of cooperation will be reached, we will see tax authorities' and tax payers' relationship in Hungary as that of cops and robbers. Perhaps a better way analogy could be angels and demons? It's up to you to decide who is on which side.

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Taxand's Take Author