INSTITUT D’ENSEIGNEMENT SUPÉRIEUR DE RUHENGERI
Accredited by Ministerial Order N° 005/2010/ MINEDUC of 16 June 2010
FACULTY OF ECONOMICS SOCIAL SCIENCE AND MANAGEMENT;
DEPARTMENT OF Enterprises Management
THE EFFECTS OF TAX AUDIT AND INVESTIGATION ON TAX EVASION CONTROL IN UGANDA.
CHAPTER ONE
GENERAL INTRODUCTION
This chapter will cover background to the study, statement of the problem, objectives of the study, research hypotheses, scope of the study, justification of the study, definition of key terms and conceptual framework
1.1 Background
Historically tax evasion is not a new practice. the first record of organized taxation comes from Egypt around 3000 B.C., the Pharaoh would send commissioners to take one- fifth of all grain harvests as a tax. Tax practice continued to develop as Greek civilization overtook much of Europe, North Africa and the Middle East in the centuries leading up to the Common Era, however although taxation has a long history, it played a relatively minor role in the ancient world, due to the practice of some of the traders and farmers not presenting the actual figures of their output to pay less grains (Wallace, 2015).
The industrial revolution in USA brought the need for taxes to be enacted, in the US, the first taxes were enacted in USA in 1797 in order to fund the U.S. Navy. It was repealed, since most business men viewed taxes as an oppression but was reinstituted over the years, often in response to the need to finance wars (Ermasova, Haumann, & Burke, 2021). Taxation in Africa dates back to 1885 when European countries decided to make colonies in Africa. In the late 1890s, the German colonial administration imposed an annual head tax of three rupees on all adult males, this was equivalent to more than a month’s wages, and was designed to force Africans out of the domestic economy to work for wages for the government and private German and South African settlers while the British introduced poll taxes in the 19th century (Ghana) and early in the 20th century (Eastern Nigeria, Kenya, Nyasaland, Northern Rhodesia, Sierra Leone, Tanganyika and Uganda) (Ali, & Katera, 2017).
Taxes enable the state to redistribute wealth to alleviate poverty. They also provide education, healthcare, social security, pensions, efficient public transport, clean water and other public services taken for granted in developed economies (Dube, & Casale,2016). But in both developed and developing countries, tax revenues are being undermined by the ability of some of the wealthiest taxpayers including many transnational companies to effectively opt out of the tax system. They do this through a combination of ingenious (and lawful) tax haven transactions, and huge tax concessions awarded by governments, there by evading most of the taxes (Keen, 2012).
Governments around the world are losing $427 billion each year to tax avoidance and evasion as companies and wealthy individuals shift their money to tax havens. The United States government is the single biggest loser in absolute terms, missing out on about $90 billion in tax revenue a year. Poorer countries, meanwhile, are losing a larger share of their total tax revenue to the abusive practices like tax evasion and about 5.8 percent vs. 2.5 percent in high-income countries. Africa loses about $25 billion a year, mostly from corporate tax abuse. That equals about 7 percent of the continent’s average tax revenue each year, Europe loses $184 billion a year, more than half of which is from private tax evasion. The losses equal about 3.4 percent of the region’s average tax revenue while Asia loses about $73 billion, or about 1.5 percent of the region’s annual tax revenue. North America loses $95 million, or about 2.3 percent (Kemme et al., 2020).
The poor regulation and tax enforcement has created new transnational spaces where economic actions take place without much regulation, taxation or surveillance. Behind a wall of secrecy, corporations can devise complex schemes to boost their profits. The activity of offshore companies and tax havens is therefore central to the antisocial tax practices of corporations and elites. A 2015 report by the UN Conference on Trade and Development estimated that profit-shifting by multinational companies’ costs developing countries US$100bn a year in lost corporate income tax. International Monetary Fund researchers, estimated that developing countries may be losing as much as US$213bn a year to tax avoidance. In addition, Oxfam estimated that developing countries lose between US$100 billion to US$160 billion annually to tax evasion (Ndajiwo, 2020).
African countries are being cheated out of billions in tax revenues mainly by large foreign companies in the energy and resource sectors, but also increasingly by small and medium-sized enterprises, such as safari organizers in countries such as Kenya, Tanzania, South Africa and even Egypt. According to the Organization for Economic Cooperation and Development (OECD), the annual losses of up to $50 billion (€44 billion) have actually exceeded the amount of development aid given to Africa in the same amount of time. Meanwhile, the United Nations Economic Commission for Africa (UNECA) puts the estimate much higher at $100 billion (Aumeerun, Jugurnath, & Soondrum, 2016).
Tax evasion is a situation where tax liability is fraudulently reduced or false claims are filled on the revenue tax form (Fagbemi, Uadiale & Noah, 2010). It is a deliberate and willful practice of not disclosing full taxable income in order to pay less tax (Soyode & Kajola, 2006). According to the UN’s Economic Commission for Africa’s Report on the High-Level Panel on Illicit Financial Flows from Africa, there was a US$40 billion outflow from Africa due to trade mispricing in 2010. With corporate tax rates averaging out at 28 per cent in Africa this equates to nearly $US11 billion in lost tax revenues (Lediga et al., 2019).
Enhancing domestic resource mobilization is of great importance for many countries in Sub-Saharan Africa (SSA) (Mas’ud et al., 2014).). Domestic resource mobilization enhancement among SSA countries not only reduces reliance on recently volatile and diminishing grants and concessional loans but also provides the wherewithal for governments to provide quality public services which could induce factor productivity growth thereby fostering economic growth, ameliorate poverty, and reduce inequality. However domestic revenue mobilization efforts in SSA countries are undermined by exemptions, informality and tax evasion (Fuest and Riedel, 2009).
Tax audit is the examination of taxpayers’ tax report by the relevant tax authorities in order to ascertain compliance with applicable tax laws and regulations of state (Kircher, 2008). It is a special audits carried out by tax officials from relevant tax authority(ies) with an approach and scope of work slightly different from that to be carried out for audit under Companies and Allied Matters Acts-CAMA1990 (Ali et al., 2014).Tax investigation on the other hand defers from tax audit because it would be carried out when a taxpayer is suspected to have committed tax fraud in the form of tax evasion which could be due to: failure to file tax returns; filing of incomplete or inaccurate returns; failure to register for tax purposes (Olaoye, & Ogundipe, 2018). The activity is mainly conducted by tax inspectors who have special training and competence in investigation techniques with or without the assistance of police investigators and enforcers with the aim of exposing all the circumstances of tax fraud and to obtain evidence for possible prosecution (Enofe, et al., 2019).
The government of Uganda has been suffering from a widening fiscal deficit and a rising debt burden. Fiscal deficit was 8 percent of Gross Domestic Product (GDP) in 2018/19 from 6 percent in 2017/18 and net present value of debt rose to 32 percent of GDP in 2018/19 from 30 percent (GoU 2018). Fiscal deficit and debt have largely been driven by dismal tax collection. Lakuma and Lwanga (2017) attribute low tax collection in Uganda to Tax evasion by cooperate organizations mainly multinational organizations. The presence of a large informal sector, weak checks and balances, and the lack of social norms for tax compliance. Also, tax mobilization efforts in low-income countries are generally low due to exemptions and tax evasion (Levin, & Widell, 2014).
Consequently, Uganda’s tax to GDP ratio has stagnated between 12- 13 percent since 2004/5 (Ssewanyana and Kasirye 2015). Indeed, Uganda compares poorly to its regional neighbors’ with regard to tax revenue mobilization due to high levels of tax evasion for instance, the corresponding tax realization rates for Kenya, and Tanzania were 16 percent of GDP respectively in 2016 (World Bank 2018). Collecting income taxes is even harder than collecting other taxes, such as trade taxes, because income tax collection requires a much more elaborate system of monitoring, enforcement, and compliance (Besley and Persson 2014). The USAID (2013) tax database shows that in 2012/13, Uganda collected 1.86 percent of GDP in income tax, which was low compared to the low-income countries average (3.30 percent). In this regard, reducing tax evasion is an urgent issue in Uganda, as the government seeks finances to reduce the infrastructure deficit, expand access and quality of social services and reduce dependency on aid and debt (Mawejje and Ouma 2015).
In Uganda, for example, other than the post-2011 period where economic growth has been sluggish, the economy recorded impressive growth rates averaging 7% per annum in the 2000s (Hausmann et al., 2014). However, in spite of the impressive growth rates the tax to GDP ratio has largely been inelastic (Muhumuza, 1999) stagnating at 13% over the last decade (Ssewanyana et al., 2011) notwithstanding both tax policy and administration reforms over the period. The inelasticity of tax revenue to Uganda’s economic growth could be attributed to: the pervasiveness of the informal sector (Muwonge et al., 2007), narrow tax base (Ssenoga et al., 2009; AfDB, 2010; Matovu, 2010), and the effect of tax breaks (Gauthier and Reinikka, 2006).
Psychologically, tax payers irrespective of economic status are unwilling when it comes to the payment of tax liability which results to their evasion and avoidance of tax. Government on its part institutes tax enhancing mechanism such as reform in tax laws that allows for self-assessment, enticing tax allowance, e-payment system, tax payers’ educational programs, penalties and so on. Still, tax evasion is prevalence, though Onoja & Iwarere (2015) opined that tax audit and investigation which involves the inspection and treatment carried out by tax agencies authorized by law on level of compliance of tax payers to law through the review of its financial records hashelped government in the generation of revenue, which in turn according to claims of Palil & Mustapha (2011) have positive impact on tax evasion, however Uganda presents an intriguing case of tax evasion, despite a wide range of experts agrees that the nature of Uganda’s tax system conforms to global benchmarks. The income and corporate tax rates in Uganda are 30% per annum at the highest bracket. However, in the period 2005 to 2011, tax revenues only contributed on average 12% to the GDP. This large gap between the tax paid on the overall earnings in the country and the tax expected to be paid on income-generating activity is worrying. There could be several reasons for this and many experts are questions what could be the reason for Uganda’s high tax evasion.
1.2 Statement of the problem
Over the past two decades many developing countries have implemented comprehensive reforms of their tax administrations in order to increase revenue and curb tax evasion, when investigation and auditing of tax payers in Uganda, the Government of Uganda will save over 191 billion shillings annually and reduce budget deficits and in future avoid reliance on economic aid (Mawejje and Ouma 2015).
Uganda’s tax to GDP ratio has stagnated between 12- 13 percent since 2004/5 (Ssewanyana and Kasirye 2015). Indeed, Uganda compares poorly to its regional neighbors with regard to tax revenue mobilization for instance, the corresponding tax realization rates for Kenya, and Tanzania were 16 percent of GDP respectively in 2016 (World Bank 2018). The USAID (2013) tax database shows that in 2012/13, Uganda collected 1.86 percent of GDP in income tax, which was low compared to the low-income countries average (3.30 percent). In this regard, reducing income tax evasion is an urgent issue in Uganda, as the government seeks finances to reduce the infrastructure deficit, expand access and quality of social services and reduce dependency on aid and debt (Mawejje and Ouma 2015).
URA has a number of audit and compliance programs in place to identify delinquent taxpayers and to assess these taxpayers for the underpayment amounts. While collections from these programs are tracked on a fiscal year basis, these amounts are derived from audits covering a number of tax years. information systems are not generally designed to allocate audit and enforcement collections for a particular fiscal year on a tax year basis. Despite URA being the oldest tax collection body in Africa the government of Uganda has been suffering from a widening fiscal deficit and a rising debt burden. Fiscal deficit was 8 percent of Gross Domestic Product (GDP) in 2018/19 from 6 percent in 2017/18 and net present value of debt rose to 32 percent of GDP in 2018/19 from 30 percent (GoU 2018). Fiscal deficit and debt have largely been driven by dismal tax collection and more to that URA loses averagely 191 billion shillings due to tax evasion.
Uganda revenue authority failing to achieve its targets, this is indicated by the fact that 2017/2018 URA achieved a tax deficit of 602 billion shillings, 2016/2017, tax deficit was 458 while 2015/2016, tax deficit was 404 billion shillings.
The increase in deficit experienced by the government of Uganda are as a result of lack of tax evasion, therefore there is need for Uganda to review the ways it audits business and also enact ordinance to punish tax evaders with hash punishment after carrying out investigation on the tax ability of the business. These challenges faced by URA therefore warrants examining the effects of tax audit and investigation on tax evasion control in Uganda with specific reference to Uganda revenue Authority.
1.3 General objective of the study
The general objective of the study is to examine the effects of tax audit and investigation on tax evasion control in Uganda.
1.4 Research Objectives
This study will be guided by the following research objectives;
i. To examine the influence of desk audit on Tax evasion.
ii. To investigate the influence of field audit on Tax evasion.
iii. To ascertain the impact of tax investigation on tax evasion control.
1.4.1 Research question
i. What is the influence of desk audit on Tax evasion?
ii. What is the influence of field audit on Tax evasion?
iii. What is the impact of tax investigation on tax evasion control?
1.5 Research hypotheses
This study aims at answering the following research hypotheses
H1: There is no significant relationship between desk audit and tax evasion in URA.
H2: field audit does not have significant influence on Tax evasion control.
H3: There is a relationship between tax investigation on tax evasion control.
1.6 Justification of the study
The study will be carried out because of the following reasons. Uganda revenue authority being a tax collection body is responsible to deliver the targets and enable the government to meet its expenses.
Revenue collection remains a key challenge in African and Uganda in particular (Mukunda, 2017). This is mainly on account of limited tax compliance. In the last three decades, Uganda has embarked on improvements to broaden the tax base and increasing domestic revenue mobilization. Modernizing the tax administration systems is among the initiatives (World Bank, 2018b). In comparison with regional neighbours, Uganda’s tax revenue to GDP is still below the 16 per cent Sub-Saharan average and lags behind her East African Community (EAC) neighbors too (World Bank, 2018b).
1.7 Significance of the study
The findings of the study are expected to be significant in the following ways;
This study is intended to provide policy makers, that is the Ministry of Finance Planning and Economic Development and tax law makers in parliament insights to base any possible amendments to suit the local needs. This will drive voluntary compliance among tax payers.
The Uganda Revenue Authority has so far tried several means to enforce tax compliance. This study will provide additional information to URA to understand how best to enhance tax compliance among business.
To other researchers, it is important to tell the nature of the relationship between tax administration systems and tax compliance, thus this study will provide a current reference material.
To the researcher, this study will boost the knowledge on taxation and hence be a milestone in the career growth as well as academic achievements.
1.8 Scope of the study
The scope of this study will be confined to the geographical, subject and time scope.
1.8.1 Content scope
The study will concentrate tax audit and tax evasion control.
1.8.2 The geographical scope
The study will be carried out from Uganda Revenue Authority (URA). URA is one of the subsections under the Ministry of finance, Uganda Revenue Authority is located at plot 95 Kampala road, Nakawa Industrial Area, Kampala, Uganda. URA is found in Nakawa Division of the city of Kampala, approximately 6.5 kilometers (4 miles), by road, east of the city centre, off of the Kampala-Jinja Highway.
1.8.3 Time scope
The period of data to be considered from Uganda Revenue Authority will be from 2017 to 2022 this is because, during this period, Uganda Revenue Authority adopted several strategies to enhance its tax auditing strategies.
1.9 Organization of the study
The study will describe the Background, the problem statement, objectives of the study, research questions, research hypothesis, significance of the study, scope of the study justification of the study and organization of the study.
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