Page 4 - Working Paper (Asymmetric Information & Its Impact On Tax Compliance Cost In Indonesia)
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DDTC Working Paper 0113                                                                                                DDTC Working Paper 0113
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                   at  a  certain  level.   Further it  also  important  to   expenses, which may be included into compliance
                   distinguish  between risk-averse  and risk-neutral   cost, such as physiological expenses due a tax issue
                   behaviors.  Such  behaviors  could  influence  a   that is faced by a taxpayer. 7
                   different  outcome in an  asymmetric information
                                                                    3.    Relationship      of    asymmetric
                   situation.
                                                                    information and compliance cost
                      There are two  classic issues which arises
                   from  asymmetric  information:  (i)  moral  hazard,
                   which is a (ex-post) situation where a party lacks   To   analyze   the   relationship   between
                   information about performance of the agreed upon   asymmetric information and compliance cost, we
                   transaction  or lacks the ability  to retaliate for a   have to assume a  model where involved parties
                   breach  of  the  agreement,  (ii)  adverse  selection,   (economic agents) are interacting with each other
                   which  is  a  (ex-ante)  situation  where  a  party   in a tax system. For the purpose of this analysis,
                   lacks  information while negotiating  an agreed   it is assumed that the following parties that  are
                   understanding or a contract to the transaction.   relevant to the model:
                      2.2.  Compliance cost                         •  Taxpayers,  in this case represented  by
                                                                       enterprises;
                      Compliance  cost  are  costs  incurred  by  the
                                                                    •  Tax authorities;
                   taxpayers in meeting  the requirements imposed
                                                                    •  Tax Consultants;
                   on them  by the law and the revenue authorities,
                   over and  above the  actual  payment  of tax  and   •  Tax Court; and
                   over  and above any distortion costs  inherent in   •  The  Public;  as  proximity  the  author  assumed
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                   the nature of the tax.  On the other hand, we have   the  press  and  public  figures  to  represent  the
                   an  administrative  costs;  costs  incurred  by  the   public.
                   public  sector  (such  as  the  revenue  department)
                   for operating the tax system. Generally, there will   For the purpose of this analysis, the interactions
                   be a trade-off between both compliance costs and   between the above parties are further divided into
                   administrative costs.                            the following 4 layers:
                      Compliance cost could be further distinguished   i.  Interaction between taxpayers  and tax
                   between  (i)  mandatory  cost,  which  are  costs   authorities;
                   unavoidable to be incurred  for  complying with   ii.  Interaction between taxpayers, tax authorities
                   requirement of a tax  system such as salary         and tax consultants;
                   expenditure for employees  that  are responsible
                                                                    iii.  Interaction between taxpayers, tax authorities,
                   for preparing a tax return, and (ii) voluntary cost,
                                                                       tax consultants and the tax court;
                   which are costs that are avoidable such as payment
                   for an external tax adviser. 6                   iv.  Interaction between taxpayers, tax authorities,
                                                                       tax consultants, the tax court and the public;
                      It  is  most  often  difficult,  if  not  impossible,  to
                   measure compliance cost accurately, due to its      3.1.  Interaction model layer 1
                   complex nature and connection with other issues.
                                                                       Analyzing asymmetric information in Indonesia
                   It is also often not so clear which costs are to be
                                                                    could be started from the analysis on regulations.
                   accounted  for  as compliance cost, because this
                                                                    This  is important, because regulations  are the
                   is  influenced  by  the  structure,  system  and  tax
                                                                    manifest of contracts,  which is one of the means
                   environment  of  different  countries.  Generally
                                                                    to avoid asymmetric  information situations. In
                   compliance costs are influenced by the following
                                                                    this context, contracts  should facilitate a  clear
                   factors:  (i)  salary  expenses  of  staff  who  are
                                                                    documentation of  expectations  of  parties in
                   responsible  for  tax  matters  in  a  company,  (ii)
                                                                    transacting  with  each other.  In  other words, the
                   expenses for external advisers, (iii) incidental costs.
                                                                    author assumes  regulations as the equivalent  of
                   Besides  the above there are also  other types of
                                                                    contracts for the purpose of this analysis.
                   4 Andreu Mas-Colell,   et.al.  Microeconomic Theory,  Oxford University   Generally, the complexity of regulations is not
                   Press, 1995, p. 479.
                                                                    the only factor  that  contributes to asymmetric
                   5 Sandford (1994): “The costs incurred by the taxpayers in meeting the
                   requirements imposed on them by the law and the revenue authorities,   information. Besides  the above, regulations  that
                   over  and  above  the  actual payment  of  tax  and  over  and  above  any   are frequently changed  from time to time or
                   distortion costs inherent in the nature of the tax.”
                   6 Tracy Oliver and Scott Bartley, “Tax System Complexity and Compliance
                   Costs — Some Theoretical Considerations”,as accessible from  http://  7 Woellner, R. Coleman, C. McKerchar, M. Walpole, M. dan Zetler, J.
                   www.treasury.gov.au/documents/1009/HTML/docshell.asp?URL=05_  (2001), “Taxation or Vexation – Measuring the Psychological Costs of Tax
                   Tax_Complexity_and_Compliance.htm                Compliance”, in Tax Compliance Costs: A Festschrift for Cedric Sandford,
                                                                    (editor: Evans, C. Pope, J. dan Hasseldine, J.), Prospect, p. 35-49.
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