ethics in tax administration
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Ethics in Tax AdministrationTRANSCRIPT
Ethics in Tax Administration
Group Number 1
Sandip Garg
Anshu Shukla Pandey
Sunil Kumar
Dinesh Sawkmie
N. Jayasankar
A Study carried out at the Indian Institute of Management, Bangalore
Advanced Mid-Career Training Programme for
Commissioners of Income-tax
03rd July, 2015
Take Deviation
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• The senses say “myself first”.
Ethics says “I must hold myself last”– Swami Vivekananda
• If it is not right do not do it.
If it is not true do not say it– Marcus Aurelius
• It is the love of right that drives men wrong– Kim Stanley Robinson
• Price is what you pay,
Value is what you get– Warren Buffet
• Philosophical Abstraction and Foundation– Ethics – definition and narrative– Need for Ethics in Tax Administration
• (Evolving) Context– Tax Administration: The Sovereign Nation’s Perspective
• Economic Framework and Revenue Risk Assessment• India-specific Challenges• Harmonizing Stakeholder Behaviour
– The Indian Experience• Case Examples of Un-Ethics
• Studies on Ethical Models– The Taxpayer Compliance – Tax
Administration Interface
• Findings and Recos– What we have done– What we need to do
Philosophical Abstraction and Foundation
self-inquiry (vichara) and quo vadis? • Must Tax Administration follow ethical formulations? Possess ethical
dimensions? Self-regulate through ethical boundaries?
• Must Tax Administrators be ethical?
• Must Tax Payers be ethical?
Organizational interest versus national interestCompetitive advantage versus harmony and service
Just-in-time hearings and assessmentsDenials of fairness and natural justice
Attaining budgets and performance measuresStatistical subterfuge and gladiator mentality
Personal interest versus organizational interestSelf-centricity, narcissism, careerism, agency problem, empire building
Is God (Nature) Ethical?
ethics: definition and drivers
• A standard of behavior that instructs human beings on their action in different situations – Impacts transactions and relationships between the individual and
the society at large including organizations
• Commonly mistaken for: – Law – the law can guide or impose ethical action, but the law may not
always be ‘ethical’ (e.g. apartheid, euthanasia)– Culturally accepted norms – Some cultural practices are not ethical
(e.g. honour killings, slavery, caste system). • NB: Some have evolved into ethical standards and law
• What drives ethics? Personal sense of right/wrong (intuitive)
Information, knowledge and wisdom (or lack of these) - cognitive Perceptions of rewards and threats – system-generated
Will – discipline and energy towards a higher ideal and/orsubjugating self to a “noble” cause
ethics: modelsSome Abstract Models• The website of the Santa Clara University, CA, USA show up
the following 5 approachesUtilitarian ApproachBalances good/harm; creating greatest good over harm
The Rights ApproachRespect and protect individual rights
The Justice ApproachTreat all humans fairly
The Virtues ApproachEthical action
The Common Good ApproachShould contribute to the common good of society ETHICS
Other ApproachesThe winner gets all; To each according to his ability/contribution; Equal Division; Total Sacrifice
ethics: personal to organizational
• Making people conform– Appealing to innate sense of “goodness”
– Emphasizing true goals and methods
– Inspiring them to act through
What is good and what is bad, do we need to teach these to anyone? - Plato
Personal judgementalism versus systemic mechanistics
Passive passion versus active participation/implementation
Do your positions/actions prick your conscience?
Contributionism Harmonizing with the larger
Organizational/societal issues and challenges in the adoption and institutionalization of ethics
Creating a system-driven environment of trust, incentives, checks and “sticks”
Leadership and Example
(Evolving)
Context
ethics in tax administration
• As with all professions that require human interaction and judgment, there are ethical issues facing tax administration
Asses taxes (including to the Best of Judgment)Collect Revenue; Seize PropertyGarnish Bank AccountsCommence/conclude legal (criminal/civil) proceedings
Loss of property and incomeImprisonment
Powers of Tax Administrators Taxpayers
Loss of some of their fundamental human rights
Tax Administration
Our “ethical” transactions with public/stakeholders need to be based on the 4 pillars
impact
ethics in tax administration
• Our decisions/actions surround these pillars
• Imbalanced pillars
Tax Administration
Equity
TransparencyAccountability
• Acceptance of gifts• Conflict of Interest• Selective application of or
inconsistency in applying – the law• Political influence• Confidentiality/secrecy• Discretion• Corruption• Lack of Autonomy Fairness
Principal objective of tax administration in a country
Maximize voluntary compliance with tax provisions and
regulations
tax administration environment
Overall Tax Policy and Administration(Tax Officials)
Tax Payers
The Environment
The Transactional Interplay
International Trends
Economic Behavioural
Output Maximization
Ethics
the tax administration context• Taxes aim to better the (economic) environment and:
– are transfers from the rest of the economy to the government– provide financial resources to its activities and operations
• Both Economic and Behavioural Dynamics influence the interplay between the Tax Administrator driven Environment and the Tax Payer
• Economic
Behavioural: Taxes and taxation impact taxpayers
Administering tax policies
Administrative costs (of tax organizations)
Compliance costs (of tax payers)
affect incentives to work, save, invest, and take risks
impact on economic activity
affect employment, incomes, and tax base
Environment
the evolving (tax administration )context• Need for tax policy-makers/administrators to continuously review whether
the laws, regulations, and administrative practices are negatively impacting economic activities
• Revenue risk assessment merits to be an integral part of any tax administration organization
• Tax administration challenges even more severe in India
Overall Tax Environment(Tax Officials)
Tax PayersPolicy/AdministrativeDrivers
BehaviouralDrivers
India’s Global Integration: Economic, Legal, Accounting
India’s Rapid Economic Growth
Increasing global incomes of mobile individuals
Specialized skilled staff, and institutional memory facilities
Our systems, structures and functioning needs to deal with the above
Sensitivity in engaging them and sustaining international activities
evolving context• To change the environment, we therefore inter
alia need to address the following:– Reconsider our approach and behaviour towards
existing Indian and foreign taxpayers• Incentivize their work, savings, investments, and
taking of risks• Develop appropriate sensitivities towards not
hampering the engagement of foreigners and the Indian Diaspora with India
– Examine whether our laws, regulations, and administrative practices are negatively impacting economic activities
All the above mean:• Transparently set codes of ethical conduct by all –
mutually and collectively acceptable to all• Better Systems and Control Mechanisms
The Indian ExperienceCase Examples of Un-Ethics
case examples
In Domestic Taxation
• Misuse of Section 40(a)(ia) of the Act– Unmindful of chargeability to tax in India
• Raising Demand and attaching bank accounts without granting opportunity to meet budget targets– Artificial delays in granting of refunds
• Surveys and Searches – violations of rights– Non-transparent behaviour
case examplesIn Transfer Pricing
• Asymmetric selections of comparables in TNMM/RPM/CPM– Sliding the window by cherrypicking and rejecting comparables– Fallacy of incomplete evidence; Confirmation bias
• Aggressive valuations of Corporate Guarantees, Brand Values and other Intangibles– Models based on Credit Ratings– Abuse of the DCF Model
• Non-consideration of business realities in rejecting adjustments
• Valuation of Intellectual Property by MNEs
• Reluctance to publish Pricing Policy
case examplesIn International Taxation• Base Erosion and Profit Shifting (BEPS) by MNEs
ForCo(in India)
MaurCo(Subs)
IndCo(Subs)
Equity/Debt
Debt
Dividends/Interest
Interest
• Outbound Transfer of IP
ParentCo
MaurCo(Subs)
IndCo(Subs)
IP Transfer
Cost-sharing payments
Royalties
• Inbound Treaty Shopping
Studies on Ethical Models
ethical modelsInternational trends
• Seminal paper titled “A Critical Review of Ethics and Moral Dilemmas in Tax Compliance Research” by Afidah Sapari, Ern Chen Loo and Margaret McKerchar [Proceeding paper (2010): 9th International Conference on Tax Administration - Building bridges] shows that ethics are a strong determinant of compliance behavior
• States/contains, inter alia, the following:
– The Economics of Crime versus that of Tax Offences
– Unlike criminal laws
Concerns about tax evasion enablers Transparency, full disclosure
Proceeds of CorruptionInformation sharing (Swiss Banks)
The ethics of taxpayers
Tax compliance requires a series of actions involving substantial effort, reading, computation skills and judgement. Deliberate decision not to comply may not be the only reason behind non-compliance
evolving context• Research Literature on the Economics of Crime suggests the use of harsh
sanctions, penalties and tax audits to deter tax evasion• Limitations of deterrence theories: These enforcement measures still do
not explain why taxpayers comply– Different taxpayers, different objectives and beliefs
• The Theory of Reasoned Action (TRA): Attitude to Behaviour and Subjective Norms
• Relationship between intention and actual behaviour: passive to active– Not the only determinant; Additional variable – perceived behavioural
control [The Theory of Planned Behaviour (TPB)] – perception of extent on control an individual has over a particular behaviour
TPBBehavioural Intention
Attitude to Behaviour
Subjective Norms
Perceived Behavioural Control
evolving context
The ethics of tax administrators• Do Taxes Matter? Tax Compliance and Morality by James Alm and Benno
Torgler [Journal of Business Ethics [July 2011, Volume 1, Issue 4, pp 635-651] speaks of 3 paradigms
• Based on the finding that individuals are not merely rational and self-interested but also ethical
Traditional “Enforcement” paradigm – neo-classical
Less traditional “Service” paradigm – kinder and gentler administration
New “Trust” paradigm – on a foundation of ethics
Ethics is increasingly a variable in tax compliance behaviour studies
Need to change the Tax Administration Environment
Employ not merely administrative/policy/economic measures but also
Measures that will attend to TPB
Findings and Recos
1. Dispute Resolution Panel2. Filtering of cases– substantial Revenue and
Substantial Question of Law
tools - direct• What needs to be done
Ethical Standards and Principles
Code of Conduct
An Effective Enforcement System
An Effective Tax Appeal System
Standard of behavior expected of the employees in the performance of their duties. The code provides guidance as they make decisions, both personal and professional
The code aims to:
1. Standardize behavior2. Establish minimal standard of conduct3. Formalize existing practices
should have the following traits:
1. Written and (legally) enforceable code;
2. Clearly defined penalties for infractions;
for minor offenses (administrative discipline and punishment);
for fraud and corruption (prosecution);
3. Obligation to Report (Protection of Whistleblower);
4. A continuous education system that creates awareness of responsibility for both the taxpayer and the public;
5. An independent monitoring system/mechanism to ensure compliance
tools – indirect (environmental)
• Standardization– of Procedures – Norms
• Simplification– of the Tax System
• Professionalism
1. Reduce discretion of officials2. Limit scope of scrutiny3. Limit one-one/out of office contact
with the taxpayer4. Internal controls5. Performance Standards
1. Simple and clear rules2. Anti-convolutism [e.g. fewer exemptions]3. Concerted effort to remove ambiguities/
loopholes
1. No political appointments2. Recruitment/promotion on merit3. Responsibilities clearly defined (job
description manuals)4. Segregation of duties5. Staff rotation and continuous training
schemes
• What needs to be done
• Enforcement: AIR CIB, Third Party Info, DWBA
• Services: E-Filing, CPC, CPC (TDS), Refund Banker, AAR, APA
• Trust: Self-Assessment, Advance Tax, SHR
what has been done
context• International trends today
– Functional organization of tax departments• Separation of Assessment from Collection and Audit
– Staff specializing in:• Particular sectors of the economy• Activities such as Information Technology, Audit and Enforcement; and • Areas such as International Taxation
– Information and knowledge management systems• Specialized staff with Data Mining and Tax Information Network
capabilities• Appropriate policy and administration feedback loop
• The above will require increased use of reliable third-party data
context• The compartmentalized view of different taxes is passe; the tax system is viewed as a whole (e.g. LTUs)– Communication links and
cooperative arrangements between administration of different taxes
• E-tax services are increasingly essential; India has progressed along company accounts and tax collection– Lower transaction costs needed
for individual income tax
Taxpayer Service Orientation essential for high level of voluntary compliance
Excessive and arbitrary use of statutory powers increases the difficulty in collecting revenue
The collective ingenuity of the tax payers, and the increasing sophistication and mobility of financial services industry always greater than those of the tax administrators
• Jerry Rao letter Mphasis • Bimal Jalan statement
evolving context
• The following should be consistent with the above objective• Societal norms of acceptable (ethical) behavior by all
stakeholders are also relevant. The stakeholders include:– tax officials and tax payers
• Appropriate incentives and disincentives to taxpayers are needed for high level of compliance
Overall Tax Policy
The Tax Administration Environment
Overall Tax Policy and Administrative Environment (Tax Officials)
Tax Payers
Maximize voluntary compliance with tax provisions and
regulations
International Examples
• Malaysia: Gap between self-reported and assessed taxable incomes ranged between 47.2% (RM 75.4 billion) to 49.4% (RM 99.1 billion) during 1995 to 1997