Many countries have implemented tax amnesty programs with the objectives of improving tax compliance, enhancing government revenue and encouraging the repatriation of offshore assets by offering generous tax incentives and immunity from prosecution. Generally, such programs have been successful, but some have failed to generate the expected results.
Case Studies
Australia launched its tax amnesty program in 2014. At the end of the program, thousands of high net worth individuals (“HNWIs”) reported billions of dollars in undeclared assets and income.
Indonesia implemented a nine-month tax amnesty program that ended on March 31, 2017. The program was largely successful as it generated about 80 percent of the expected revenue. According to a 2017 BNP Paribas Asset Management report, the program boosted Indonesian government tax revenues by 3.6 percent year-on-year in 2016, and helped to fund infrastructure spending and keep the fiscal deficit within the statutory limit of 3 percent of GDP.
South Africa has implemented tax amnesty programs at different times. In 2003, the program resulted in an additional tax revenue of 2.9 billion South African rand from about 69 billion South African rand wealth declared. Interestingly, about 70 percent of the wealth declared was held offshore illegally. The country also launched another amnesty program from October 1, 2016 to August 31, 2017 to give opportunity to non-compliant tax payers to report unauthorized offshore assets and income. According to BusinessDay, about 3.3 billion South African rand of the planned amnesty revenue of 4.5 billion South African rand was generated, representing about 73 percent performance. One hundred ninety five HNWIs applied to the South African Revenue Service to regularize their tax affairs. Since the inception of their amnesty program, about 800 HNWIs have taken advantage of the program.
In 2016, in response to the need to boost tax revenues and reduce the fiscal deficit, the Nigerian Federal Inland Revenue Service (“FIRS”) launched a 45–day tax amnesty program for corporate organizations. According to available FIRS reports, the program generated about 94 billion Nigerian naira and brought 2,700 taxpayers into the tax net. Buoyed by the success of that program, the Federal Government announced a broader amnesty program under the Voluntary Assets and Income Declaration Scheme in 2017. Taxpayers that take advantage of the Scheme will be immune from criminal prosecution and payment of interest/penalty, provided that they fully and accurately declare previously unreported assets and income. Participants in the program (also open to those under audit) can settle assessed tax liabilities in installments over a three–year period, subject to the discretion of the tax authorities.
The program, which was targeted at both companies and individuals, was initially meant to run for nine months up to March 31, 2018. However, due to popular demand by taxpayers, the government extended the program for another three months to June 30, 2018. According to available reports, the program has only generated about 30 billion Nigerian naira and increased the number of taxpayers from 14 million in 2016 to 19 million as of May 2018. Based on the target amnesty revenue of 360 billion Nigerian naira ($1 million), the amount realized to date is less than 10 percent of the target. The expectation is that the amnesty revenue will significantly increase based on the number of applications that have been sent since the beginning of June 2018.
Why Do Some Amnesty Programs Fail?
As can be seen above, not all tax amnesty programs have achieved the expected results. The question, therefore, is why do some programs succeed and others fail?
- Some non-compliant taxpayers believe that if they participate in an amnesty program and declare complete and accurate information, they will be targeted for enhanced scrutiny in future. Consequently, these taxpayers will choose not to participate unless they receive an assurance that this will not be the case.
- Most amnesty programs only focus on short-term increase in revenue. Further, there is no adequate cost–benefit evaluation of the program. Amnesty programs should be geared towards enhancing voluntary compliance. However, if they are not properly evaluated, it may discourage already compliant taxpayers from remaining compliant, especially if they feel that the tax authorities are not acting in their interests. Therefore, any amnesty program that does not strike an adequate balance between encouraging voluntary tax compliance and deterring non-compliance will not succeed.
- The design of some tax amnesty programs may result in some unintended consequences. In some programs, periods under tax audit are not considered. Consequently, a company that could have taken advantage of the program may find itself exposed to significant interest and penalty on conclusion of the audit. In some other cases, where periods under audit are included, applicants for tax amnesty may not be able to get a refund of the tax paid under the program. The companies in this situation will, therefore, choose to go under the normal audit, which can, at least, result in a claim for tax refund.
- Some companies view a tax amnesty program as admission of guilt and would therefore not want to take advantage of the program, especially where they believe that the risk of detection is low due to perceived lack of diligence on the part of the tax authorities. Such companies would rather wait to be audited, if ever they are audited, and pay the relevant interest and penalty where applicable. In Nigeria, the issue of interest/penalty does not even arise unless the demand note for the additional assessment has become final and conclusive. Consequently, it makes commercial sense for these companies to wait for the result of an audit rather than make voluntary disclosure of their undeclared assets and income.
- At times, the tax authorities do not fulfil their side of the bargain. For instance, the Executive Order No 004 of 2017 signed by the Acting Nigerian President specified that interest and penalty would not apply to any self-assessed tax liability arising from the program, provided that it is accurate. However, the Nigerian tax authorities have, at various fora, declared that interest and penalty would not apply to only those declarations made by December 31, 2017, while those made after this date would be liable to interest. Such disregard for the provisions of the enabling regulation may have a negative effect on those that may have wanted to take advantage of the program to regularize their tax affairs.
- Defaulting taxpayers have also raised concerns about the confidentiality and security of the information provided under the tax amnesty program. This is because of the potential damage to corporate and/or personal reputation that may arise from the publicity of such information. This is understandable, at least in the case of Nigeria, where most of the defaulters are HNWIs.
Way Forward
Undoubtedly, amnesty programs should form part of the tools available to tax authorities to encourage voluntary compliance while also deterring non-compliance. Therefore, the program should be designed in such a way that will create a high risk of detection for those who should have participated in the program but chose not to. The ability of the tax authorities to do this largely depends on the resources and technology available to them. However, this issue may be mitigated, at least in respect of assets stashed abroad, given that many countries have now signed up to the Common Reporting Standard, which guarantees the automatic exchange of information.
It is also important that non-compliant organizations and/or individuals recognize and believe that tax authorities will enforce the sanctions specified in the program to the letter to encourage active participation in future programs.
There are taxpayers that have incomplete records or that are not able to produce records beyond a certain period. This can act as a disincentive to their participation in the program. It is, therefore, important that this matter is addressed prior to the announcement of the program. There must be some guidance as to how the tax authorities will address this situation. However, it should be acknowledged that each participant will be treated on a case-by-case basis.
Planning Points
In conclusion, for a tax amnesty program to be successful, it must be properly designed with clearly defined objectives. It must help to increase tax revenue by increasing compliance levels among taxpayers while also discouraging non-compliance. There must be full assurance about the confidentiality and security of the information provided by participants under the scheme.
Adewale Ajayi is a Partner, Tax, Regulatory and People Services, KPMG in Nigeria.
He may be contacted at: adewale.ajayi@ng.kpmg.com
References:
1. BNP Paribas Asset Management Report
2. BusinessDay, March 9, 2017
3. Thisday, July 23, 2017
4. Premium Times, June 6, 2018
5. FIRS Executive Chairman’s Presentation on Achieving Voluntary Tax Compliance–The VAIDS Option, February 20, 2018
6. Executive Order No 004 of 2017 on Voluntary Assets and Income Declaration Scheme
7. OECD Report on Update on Voluntary disclosure Programs–a Pathway to tax compliance, 2015
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