Page 7 - Working Paper (Tax Policy Options during Economic Downturn)
P. 7

DDTC Working Paper 1315

                         Brondolo  where he analyzed deeply on the          Table 2: Greater risk of Non-Compliance 16
                         challenges  and  policy  options of collecting
                         taxes  during  an economic  crisis.  In the       No  Possible Scenarios
                         paper, he elaborated that tax administration
                                                                             1  During tight credit conditions, taxpayers
                         encounters  growing  compliance  risks                may be tempted to use tax evasion and
                         involving  such  issues  as  tax  arrears,  loss-     withheld from their customers or employees
                         reporting business, and  tax  withholding,            as an alternative source of financing for their
                         and  growing  shadow  economy.  At  the
                         same time, tax  administration requires             2  As the probability of bankruptcy imminent,
                                                                               taxpayers perceive the downside risks of tax
                         to provide  taxpayers  with additional
                                                                               evasion to be minimal compared with the
                         support and  assistance to help  them cope            potential upside gains (avoiding bankruptcy).
                         with  their  obligations. While a decrease
                                                                             3  Shifting in structure of the economy from
                         in compliance during  the slowdown may                formal to informal where compliance is likely
                         have some countercyclical  effects on the             to decline and hard to monitor.
                         economy, tolerating noncompliance is not an         4  Taxpayers’ believe that during the crisis,
                         appropriate response to the crisis because            tax administration to be less stringent in
                                                                               enforcing the tax laws and making it less
                         it is distortionary, inequitable, and perhaps
                                                                               risky or more socially acceptable to evade tax.
                         most importantly, hampers the rebuilding of
                         tax bases over the medium-term .
                            Brondolo  encourages tax  agencies  to           During  an  economic  stress,  many
                         develop  a  tax compliance  strategy that        firms  face  severe  financial  difficulty  that
                         is structured  around several  objectives        may harm  their  businesses  and  probably
                         in  responding  to  the  crisis:  (i)  expanding   resulting  in permanent business  shut
                         assistance  to  taxpayers;  (ii)  refocusing     down. Tax administration may help keeping
                         enforcement  on  the  highest  revenue  risks;   alive  firms  through  several  measurements
                         (iii)  introducing  legislative  reforms  that   including advance payments , accelerating
                         facilitate administration; and (iv) improving    tax  refunds, tax  payment installment  and
                         communication and outreach programs.             payment extensions. In terms of tax refunds,
                         Some measures such as tax amnesties and          some countries recently introduced reforms
                         moratoria on audits are counterproductive        that  can be done more quickly.  Tax  laws
                         and should be avoided as he mentioned.           in many countries  stipulates that  allow
                                                                          finally  distressed  taxpayers  to  install  their
                            Additionally, he  recommended  tax
                                                                          tax  liabilities payments. The installments
                         administration in one’s  country to keep in
                                                                          typically range from one to two years during
                         mind a number of key points. First, early
                                                                          with time interest accrues but late payments
                         warning  of emerging  compliance  risks
                                                                          penalties are most likely waived. However, it
                         is  crucial  for  their  mitigation.  Second,  a
                                                                          is important to scrutinize the performance
                         high-level  group  needs  to  be  established
                                                                          of each business during this economic stress
                         within the tax  agency to coordinate the
                                                                          before they can join into this installment
                         development  of the crisis  strategy. Third,
                         government support for tax administration
                         is more important than ever during a crisis.        Furthermore, during  the crisis  some
                         Finally, tax agencies should align their near-   tax  administrations provide assistance
                         term  compliance  strategies  and  medium-       to taxpayers.  Two good  examples of this
                         term  modernizations  plan.  Table  2  below     approach are the Australian  Taxation
                         describes  reasons  of an increased  risk of     Office  (ATO)  small  business  program  and
                         noncompliance during the crisis.                 the  IRS  volunteer  income  tax  assistance
                                                                          program.  The  ATO  helps  business  filling
                                                                          tax  registration and comply with their
                                                                          tax  obligation  and improve their  business
                                                                          record keeping.  During the crisis, ATO also

                                                                    16.  Previous studies linked  a  negative  correlation between  taxpayers’
                                                                    filling and reporting compliance with  the  unemployment rate.  There
                                                                    was also a study shows that corporate income tax evasion is negatively
                                                                    correlated  with access to credit, suggesting that compliance can be
                                                                    expected to decline when an economic donwturn is combined with tight
                                                                    credit conditions.
                   14. Brondolo, John (2009),”Collecting Taxes during and Economic Crisis:   17. Advance payments are calculated not on the basis of the previous
                   Challenges and Policy Options”, IMF Staff Position Note.  year’s tax liability but estimates based on current  year revenues and
                   15. Brondolo, John, ibid.                        expenses.
   2   3   4   5   6   7   8   9   10   11   12