CHAPTER 5. Alternatives to Amnesties
- Eric Le Borgne, and Katherine Baer
- Published Date:
- July 2008
The previous sections have highlighted some of the shortcomings of tax amnesties: (1) immediate gross revenue collection is, at best, limited to a low (single-digit) share of revenue collection; (2) short-term gross revenue collection often far exceeds net revenue collection (i.e., net of administrative, advertising, forgiven fines, and penalties); and (3) the negative compliance effects can more than outweigh any of the short-term revenue benefits.
Given these shortcomings, in this chapter we review some of the strategies that could be implemented instead of a tax amnesty program. These strategies tend to target the source of the original problem: weak tax compliance. Weak compliance is often the result of several factors, notably (1) weak administration, (2) a weak legal system (or enforcement of the law), and (3) inadequate tax policy (e.g., a tax system that is too complex, regressive taxes, high tax rates). Clearly, addressing some of these areas of relative weakness takes time (and the formulation of medium- to long-term strategies); however, some short-term measures can also be implemented.
Alternative Strategies for the Medium and Long Term
Alternative strategies for the medium and long term should aim at (1) strengthening the legal framework for tax administration, basic tax administration procedures, and management and (2) simplifying the tax policy regime while at the same time broadening the tax base and reducing tax rates.
Experience with tax amnesties in many countries suggests that two of the fundamental questions that the tax administration must ask are, why is a tax amnesty being considered in the first place, and what are the alternatives to such amnesty programs?
Clearly, in the medium and long term, a major objective for country authorities should be to strengthen the legal framework for tax administration, as well as its basic systems and procedures, with a view to (1) encouraging taxpayers to comply voluntarily with their obligations (registration, filing, and payment of taxes) and (2) helping prevent a situation of massive noncompliance (e.g., large numbers of nonregistrants, high nonfiling and nonpayment rates, and a large and increasing stock of tax arrears)49 that motivates introducing tax amnesties in the first place.
In light of some of the weaknesses in the legal framework for tax administration in many developing and transition countries, specific measures that could be considered to strengthen this framework include
Removing the legal obstacles to the tax administration’s access to taxpayer information.
Requiring taxpayers to provide a guarantee when filing an appeal against the tax administration, instead of automatically suspending or canceling administrative actions to enforce collection of overdue tax when an appeal is filed.50
Establishing appropriate interest penalty regimes (Box 3).
Endowing the tax administration with appropriate collection enforcement powers. The tax administration should have the legal powers to recover arrears and impose penalties without prior court approval. Enforcement powers should also include the ability to write off individual tax debts that are deemed unrecoverable.51
Establishing an effective and fair payment installment program for taxpayers who temporarily cannot comply with their tax obligations but are willing to do so.
At the same time, a priority for the tax administration should be to strengthen its core systems and procedures:
Ensure the taxpayer register is complete, accurate, and secure.
Reduce the rate of nonfilers, stopfilers, and delinquent taxpayers.
Strengthen collection enforcement processes (e.g., improve the quality of tax arrears data; analyze the stock of arrears and categorize arrears according to those that can be recovered and those that are unrecoverable; target enforcement efforts at recoverable arrears—usually by focusing on the most recent and largest arrears first; provide guidelines for writing off tax arrears that have been deemed unrecoverable; ensure that the tax administration has the proper organization and staffing to carry out enforcement work).
Design and put in place appropriately designed payment installment programs.
Strengthen the audit function and evaluate the final results of audits, including the actual payments obtained from assessments (with a view to preventing the accumulation of unpaid additional assessments that simply add to the stock of tax arrears).
Box 3.General Guidelines for Defining an Appropriate Interest Penalty Regime
The principle for establishing a sound interest penalty regime is that the rates should not be too low because otherwise the government is merely providing some discount financing, but they should also not be so high as to become difficult for the tax administration to enforce, such as for equity reasons. Overly high interest penalties can also contribute to exponential growth of tax arrears in a short period, making it difficult or impossible for taxpayers who would like to settle their outstanding tax debts to do so. An interest rate that is a few points above the prevailing commercial bank lending rate could meet both objectives, that is, prevent the government from providing discount financing while ensuring a degree of fairness.
In addition to the above, good management of the tax administration is, in the end, a key factor in improving the effectiveness of the tax administration and raising taxpayers’ compliance levels over time such that recourse to tax amnesties becomes the exception rather than the rule. This will require, among other things, establishing simple and effective management performance indicators that provide basic information on the progress of core tax administration functions and alert the tax administration’s management when problems arise in any given area of tax administration.
Alternative Strategies for the Short Term
At the same time as introducing the above medium- to long-term reform measures to improve compliance, the tax authorities can also introduce short-term measures aimed at (1) raising revenue in the short term and (2) improving short-term compliance with a view to improving future revenue. These are the very goals often ascribed to tax amnesty programs introduced by governments.
All the short-term measures discussed below follow the general recommendation that up-front write-offs of tax liabilities, including interest and penalties, should be avoided.
Payment Installment Agreements
One alternative to such write-offs is to allow taxpayers to pay past obligations in installments over a certain period. The preferred option is for the period to be relatively short, for example, 12 to (at most) 18 months, in the form of a payment facility, also referred to as a payment installment agreement. Another desirable characteristic is for the tax administration to offer one, or few, payment installment programs, with clear eligibility criteria and strict requirements for compliance with agreed payment conditions. Experience has shown that the existence of many such programs at the same time, or of concurrent programs with different eligibility requirements and conditions, tends to discourage taxpayers’ compliance and complicate the work of the tax administration. Box 4 summarizes the main considerations that a tax administration should take into account in designing an effective payment installment program and the key elements of such a program.
Payment Installment Agreements in Situations of Economic Crisis
The occurrence of a major economy-wide shock presents a special challenge to tax administrations in helping prevent taxpayers from significantly increasing their tax arrears. In the face of systemic disruptions in the economy, some tax administrations have adjusted their collection enforcement programs to allow greater flexibility in paying tax debts to those taxpayers facing genuine hardships caused by external events. At the same time, the tax administration must maintain the tax payment discipline of the overall taxpayer population. An example of this approach can be found in the actions taken by the Inland Revenue Authority of Singapore during the Asian financial crisis in the late 1990s as described in Box 5.
Extended Payment Installment Arrangements
A second-best option, one that the Brazilian tax authorities introduced in 2003 (Box 6), is to allow taxpayers to pay overdue tax obligations over a relatively long time. Such an arrangement has the effect of reducing the net present value of the tax liabilities (which is in essence equivalent to a tax amnesty), but requires payment of the nominal amount of tax owed in full. Thus, even though there is a reduction in the net present value of the amount of tax arrears paid, it may not be as drastic as the reduction from a one-time amnesty. Also, the potentially beneficial effects on compliance resulting from requiring delinquent taxpayers to pay tax arrears, even if over a longer period, should not be ignored.
Box 4.Characteristics of an Effective Installment Payment Program
Best practice would suggest that a system of payment installment arrangements should take into account a number of factors:
Whether the proposal to pay tax arrears over an extended period is realistic based on the facts of the individual case;
The taxpayer’s compliance history and the likelihood of future compliance;
Whether the taxpayer has previously had, and adhered to, an installment arrangement of taxes or social contributions;
Whether the taxpayer has filed all required tax returns;
Whether the arrangement maximizes the amount of recovered tax from the taxpayer—or whether bankruptcy and recovery of at least part of the amount of tax owed in the shorter term would be a better approach; and
Protection of the integrity of the tax (or social contributions) system.
The following are some key elements of a payment installment agreement:
Payment should be for taxes imposed by an assessment issued in accordance with the tax code;
The taxpayer should be in financial difficulties at the time of the application;
The relief should be necessary or desirable in order to maximize net revenue over time;
The application should be in writing;
The application should be for any amount that is, or is likely to become, liable for payment;
Any arrangement should be in two or more installments;
Relief may be cancelled if the taxpayer fails to meet the installment arrangement or provides misleading information to obtain an installment arrangement; and
Installment arrangements of more than a certain amount should require approval of the tax administration’s headquarters office.
Box 5.Singapore: Managing Tax Arrears During a Financial Crisis
The financial crisis that affected Asia in 1997 raised concerns within Singapore’s tax administration that severe liquidity problems associated with the crisis could lead many companies and individuals—even those with good tax compliance histories—into accumulating large amounts of tax arrears. To prevent this problem, the Inland Revenue Authority of Singapore (IRAS) put in place a program designed to give eligible taxpayers some extra breathing space to pay their tax liabilities. This program included the following measures:
Individuals who lost their jobs were entitled to defer payment of their taxes for up to six months or until they found a new job, whichever came first.
Individuals facing severe cash-flow difficulties were permitted to pay their taxes in interest-free installments, with the extension period determined on a case-by-case basis.
Companies facing severe cash-flow problems were allowed to apply for “extended” installment plans—with or without interest, depending on the circumstances—which could be for a period of up to 50 percent longer than that under standard installment plans available to taxpayers.
Companies could pay off their tax arrears in a flexible manner—subject to late payment penalties and interest charges—based on available cash flow.
Eligibility for any of these special measures was restricted to taxpayers with good compliance histories who could produce documentary evidence that full and immediate payment of taxes would cause a genuine hardship. Enforcement officers reviewed each request for assistance on a case-by-case basis, taking into account documentation of the taxpayer’s financial position.
As it turned out, only a relatively small number of individuals and businesses sought relief under the IRAS program, and the ratio of tax arrears to current tax collections increased only temporarily from 6.3 percent in 1997 to 8.2 percent in 1998 before declining to 7.1 percent in 1999. IRAS believes that its special debt program helped to improve taxpayers’ perception of the fairness of the tax system which, in turn, helped to preserve the generally high level of compliance among taxpayers during a very difficult period.Source: Brondolo (2001).
Permanent Programs to Encourage Voluntary Disclosure of Violations
Instead of one-time amnesties, some countries have standing or permanent programs that provide for more lenient treatment of voluntary disclosures of tax violations at any time. Such programs may be better described as part of the penalty structure. Properly structured and in the presence of proper enforcement efforts, these measures may be a cost-effective way to encourage voluntary disclosures of violations and may make a temporary amnesty unnecessary. A number of countries have such measures, including Denmark, Germany, Mexico, the Netherlands, Norway, Sweden, and the United States.52
Box 6.Brazil: Payment Installment Agreements
The Special Installment program (Parcelamento Especial, or PAES) provides for taxpayers who have federal tax arrears (declared or previously undeclared) to settle their debts over five years (in a maximum of 60 monthly payments). The monthly interest rate that applies varies from 1.0 percent to 5.7 percent, depending on the date on which the taxpayer entered into the installment payment agreement. Thus, taxpayers who concluded agreements with the federal tax administration immediately after the law introducing the PAES program (Law 10.684 of May 30, 2003) was approved, and who started making monthly payments immediately, were subject to lower monthly interest rates than were those who concluded agreements and started making their monthly payments later. Under the program, taxpayers must make a minimum monthly payment for the duration of the agreement; the minimum amount depends on whether the taxpayer is a legal entity or an individual. Certain types of taxes and taxpayers are not eligible for the program, including, for example, taxes withheld at source, tax arrears that have already been rescheduled under other payment installment programs, and arrears that are being appealed by the taxpayer or that the courts have decided are owed to the treasury.Source: IMF staff.
Tax arrears may also accumulate because a large number of registered taxpayers are inactive but nevertheless appear in the taxpayer register as having a taxable economic activity. Such taxpayers are steadily accumulating tax arrears. The underlying problem in this case is an inaccurate taxpayer register.
However, one has to be mindful of an opposite concern, namely a situation in which the tax administration uses this right to send a very high tax assessment to, say, large taxpayers and then asks them to pay a large share of this inflated tax assessment (e.g., 20 percent to 30 percent) before entering into any appeal.
An appropriate application of write-off powers would enable the tax administration to remove from its accounts those debts that are deemed unrecoverable because the taxpayer has declared bankruptcy, is under a process of liquidation, or would otherwise face a major financial hardship in meeting his or her tax obligations.
See also Andreoni (1991) for a theoretical case regarding the desirability of a permanent tax amnesty.