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3
Managing Income Tax Compliance through
Self-Assessment
Andrew Okello
March 2014
WP/14/41
© 2014 International Monetary Fund WP/14/41
IMF Working Paper
Managing Income Tax Compliance through Self-Assessment
Prepared by Andrew Okello
Authorized for distribution by Katherine Baer
March 2014
Abstract
Modern tax administrations seek to optimize tax collections while minimizing administration
costs and taxpayer compliance costs. Experience shows that voluntary compliance is best
achieved through a system of self-assessment. Many tax administrations have introduced
self-assessment principles in the income tax law but the legal authority is not being
consistently applied. They continue to rely heavily on “desk” auditing a majority of tax
returns, while risk management practices remain largely underdeveloped and/or
underutilized. There is also plenty of opportunity in many countries to enhance the design
and delivery of client-focused taxpayer service programs, and better engage with the private
sector and other stakeholders.
JEL Classification Numbers: H20, H24, H25
Keywords: income tax, tax compliance, self-assessment, risk management, Sub-Saharan
Africa
Author’s E-Mail Address: aokello@imf.org
This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily
represent those of the IMF or IMF policy. Working Papers describe research in progress by the
author(s) and are published to elicit comments and to further debate.
2
Contents Page
Foreword ....................................................................................................................................4
I. Introduction and General Overview .......................................................................................5
A. Economic and Fiscal Context ...................................................................................5
II. Approaches to Income Tax Assessment................................................................................9
A. Administrative Assessment System ..........................................................................9
B. Self-assessment Implementation .............................................................................11
III. Status of Implementing Conditions for Effective Self-assessment....................................16
A. Clear and Simple Tax Laws ....................................................................................17
B. Service to Taxpayers ...............................................................................................19
D. Effective Collections Enforcement .........................................................................26
E. Risk-based Audit .....................................................................................................28
F. Effective Interest and Penalty Regimes ...................................................................31
G. Fair and Transparent Dispute Resolution Processes ...............................................32
IV. Lessons and Concluding Remarks .....................................................................................33
References ................................................................................................................................36
Tables
1. Productivity indicators for the CIT and PIT (2011/12) .........................................................7
2. Selected MDGs indicators for selected SSA countries. .........................................................8
3. Self-assessment implementation in the ten SSA countries ..................................................12
4. Aspects of the taxpayer service function .............................................................................20
5. Common observations on TPS delivery methods. ...............................................................23
6. Assessment of the filing and payment function ...................................................................24
7. Key features of current collection enforcement practices. ...................................................27
8. Key features of the current audit programs. .........................................................................29
9. Features of current interest and penalty regimes. ................................................................31
10. Dispute resolution procedures in the ten countries. ...........................................................32
Figures
1. Overall primary balance, excluding grants, 2002 to 2011 .....................................................5
2. Tax revenue, 2001 to 2012.....................................................................................................6
3. Paying taxes ranking (out of 185 countries) ..........................................................................7
3
Boxes
1. Key features of the administrative assessment system ..........................................................9
2. Conditions for a successful self-assessment system ............................................................16
3. Modernizing taxation laws to support full income tax self-assessment ..............................18
4. Elements of a taxpayer service strategy ...............................................................................21
5. Typical taxpayer service program ........................................................................................22
6. Write-off of irrecoverable tax arrears ..................................................................................28
4
FOREWORD
Modern tax administrations seek to optimize tax collections while minimizing
administration costs and taxpayer compliance costs. The most cost effective systems of
collecting taxes are those that induce the vast majority of taxpayers to meet their tax
obligations voluntarily, leaving tax officials to concentrate their efforts on those taxpayers
who do not comply. Taxpayers are more likely to comply voluntarily when the tax
administration: (1) adopts a service-oriented attitude toward taxpayers, and educates and
assists them in meeting their obligations; (2) creates strong deterrents to non-compliance
through effective audit programs and consistent use of penalties; and (3) is transparent and
seen by the public to be honest, fair, and even-handed in its administration of the tax laws.
Experience shows that voluntary compliance is best achieved through a system of self-
assessment.
This paper reviews the key issues in income tax compliance and taxpayer self-
assessment1 in 10 SSA countries.2 The objective is to identify common implementation
gaps and challenges, and draw broad lessons for tax administrations that plan to implement,
or are in the process of strengthening income tax compliance through self-assessment. The
findings also have implications for the design of tax administration reform programs and for
technical assistance intended to help these countries better manage income tax compliance
through effective self-assessment systems.3 Overall, the review suggests that all countries
have introduced self-assessment principles in the income tax law but the legal authority is not
being consistently applied. Many countries, though at different stages, continue to rely
heavily on “desk” auditing all or a majority of income tax returns, while risk management
practices remain largely underdeveloped and/or underutilized. Overall, there is plenty of
opportunity in all the countries reviewed to enhance the design and delivery of client-focused
taxpayer service (TPS) programs, change the attitude of tax officials, enhance trust in
taxpayers and engage with the private sector and other stakeholders in a mutually beneficial
manner. Also, much work is still needed to strengthen and implement selective risk based ex-
post controls.
1 While discussions in this paper are limited to income tax administration, the general principles and the key
issues cut across, and are applicable to all taxes, including the VAT, excises taxes, and customs duties.
2 Botswana, Ghana, Kenya, Lesotho, Liberia, Malawi, Nigeria, Rwanda, Tanzania, and Zambia. They are
English-speaking Sub-Sahara African countries representing three geographical blocks (East, West and South)
and are currently at various stages of implementing income tax self-assessment. Some were early adopters of
income tax self-assessment (in the 1990s) while others are still in the early stages of implementation. Further
some have implemented universal self-assessment while others are implementing self-assessment only for
certain types of tax or taxpayers.
3 This is a qualitative study that has been developed through a review of recent FAD technical assistance reports
and IMF and other research on this topic.
5
I. INTRODUCTION AND GENERAL OVERVIEW
A. Economic and Fiscal Context
1. The majority of the countries under review face serious fiscal challenges. Although
most SSA countries have rebounded from the Great Recession, many of them have been slow
in rebuilding fiscal positions that weakened during the downturn. Central government
revenue, for example, currently falls short of expenditures by unsustainable margins in most
countries (except Botswana, Nigeria, and Zambia)—Figure 1. A number of these countries
(e.g., Liberia, Malawi, Rwanda, and Tanzania) therefore continue to rely very heavily on
donor financing, which is, by its nature, volatile. Against this backdrop, and assuming that
growth remains robust as envisaged, the policy implication is that fast-growing economies
will be required to rebuild fiscal and external buffers, without unduly affecting key social and
capital spending. Overall, most low-income countries and fragile states need to strengthen
domestic fiscal positions by improving revenue bases, to meet investment needs and avoid
risks from unpredictable aid flows (IMF, REO, 2013).
Figure 1. Overall primary balance, excluding grants, 2002 to 2011
Source: IMF World Economic Outlook (WEO) database
2. Tax revenue is very low compared with international standards. Figure 2 shows
total central government tax revenue performance in the 10 countries. In 9 of the countries
(Lesotho is excluded as it is an outlier),4 total central government tax revenue averaged about
16.9 percent of GDP during the period 2008 to 2010.5 This is relatively weak in comparison
with international standards. During the same period, the comparator figure in advanced
countries (the 32-member countries of the Organization for Economic Cooperation and
Development (OECD) is 25.4 percent (IaDB, 2013)—these countries also collect, on average,
an additional 10 percentage points of GDP in social contributions, bringing their tax-to-GDP
4 Receipts from the South African Customs Union (SACU), a common revenue pool that is allocated to member countries
based upon a formula), account for over 60 percent of total tax revenue in Lesotho.
5 Kenya, Liberia, Malawi, and Tanzania stand out as countries that have successfully strived to increase the tax-to-GDP ratio
over the 10-year period, 2002 to 2011.
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Botswana
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Ghana
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Kenya
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
% of GDP
Lesotho
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Liberia
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Malawi
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Nigeria
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Rwanda
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
% of GDP
Tanzania
-15.0%
-10.0%
-5.0%
0.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% of GDP
Zambia
6
ratio to about 35 percent. Income tax is an important source of government revenue but there
is still much potential from this source. It currently accounts for over 7 percent of GDP in
seven countries as indicated in Figure 2. It has also been consistently on a growth trajectory
in recent years in many of the countries under review.
Figure 2. Tax revenue, 2001 to 2012
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% of GDP
Botswana
Tax revenue
Income tax
0.0%
5.0%
10.0%
15.0%
20.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% of GDP
Ghana
Tax revenue
Income tax
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% of GDP
Kenya
Tax revenue
Income tax
0.0%
20.0%
40.0%
60.0%
80.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% of GDP
Lesotho
Tax revenue
Income tax
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
% of GDP
Liberia
Tax revenue
Income tax
25.0%
Malawi
25.0%
Nigeria
15.0%
Rwanda
20.0%
Tanzania
25.0%
Zambia
