TAX ADMINISTRATION AND THE ADEQUACY OF FISCAL CODES IN COMBATTING TAX ...

128 Pages·2012·7.58 MB·English

TAX ADMINISTRATION AND THE ADEQUACY OF
FISCAL CODES IN COMBATTING TAX EVASION IN
RWANDA
Hadija Murangwa Namubiru
Faculty of Law
Mc Gill University, Montreal
August 2003
A thesis submitted to the Faculty of Graduate Studies and
Research in Partial fulfillment of the requirement of the degree of
LL.M.
© Hadija M. Namubiru 2003.
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Abstract.
This thesis discusses the notion oftax evasion in Rwanda. It looks at
the role of tax administration and fiscal codes in Rwanda in the
implementation oftax anti- evasion measures in the country. The tax
administration and fiscal codes provide opportunities for the
Rwandan people to realize a tax evasion free society not only
because of the tax administration departments in place to curb tax
evasion, the types of taxes, the measures of collection, but also the
reasonable fiscal procedure process in tax payment and also in
allowing the taxpayer participation in the tax assessment process, an
essential component of co-operative taxpayer attitudes for potential
tax revenue collections to thrive.
However, this thesis scrutinizes the reality in Rwanda for the extent
to which tax administration and tax laws have gone to achieve the
goal of curbing tax evasion.
Tax administration measures and fiscal code provisions in place, can
not be said to be perfect as at times it is foreign ideas imported into
Rwanda, which must be adopted often as a conditionality to that
much needed development assistance. This in light of the persistent
institutionalized corruption existing in Rwanda, and the reality of
public participation in the tax assessment process given the Rwandan
culture of evading taxes, makes the anti- evasion pro cess inadequate
in Rwanda, thus further "watering down" the sufficiency of the tax
law and tax administration as a previously perceived us able strategy
for curbing tax evasion. The thesis argues therefore that the tax
administration and fiscal codes in curbing tax evasion are limited by
existence of these realities unless modifications are made in the
implementation ofmeasures against tax evasion in Rwanda.
Résumé.
La présente thèse traite de la problématique de l'évasion fiscale au
Rwanda. Elle examme plus particulièrement le rôle de
l'administration fiscale et des lois fiscales comme instruments de
mise en œuvre des mesures pour contrer la fraude fiscale. Ceux -ci
représentent une occasion pour le peuple rwandais d'éradiquer cette
problématique et ce, grâce aux départements administratifs mis en
place pour freiner la fraude fiscale, aux types d'impôts, aux outils de
recouvrement et aussi à une procédure fiscale diligente quant au
paiement des impôts. De plus, la possibilité donnée aux
contribuables de participer au processus de cotisation fiscale
représente une composante essentielle de la création d'un esprit de
coopération chez le contribuable. Ces éléments sont indispensables à
la mise sur pied d'un système de recouvrement d'impôt sur le revenu
efficace.
Toutefois, cette thèse offre une analyse critique de la mesure dans
laquelle le système fiscal rwandais parvient ou non à réaliser cet
objectif en réalité. Elle constate que l'administration fiscale et les
normes en la matière sont imparfaites. Souvent imposées comme
condition d'obtention de l'aide au développement et calquées sur un
modèle étranger, ces règles sont mal adaptées au contexte du pays.
De plus, la corruption institutionnalisée persistante au Rwanda, de
même que la propension culturelle dans ce pays à la fraude fiscale,
rendent encore plus inadéquates les mesures instaurées pour contrer
le phénomène. Cette thèse soutient donc que le potentiel de
l'administration fiscale et des lois fiscales comme stratégie de lutte à
l'évasion fiscale sera grandement limité par ces réalités, à moins que
des modifications ne soient 'apportées à la mise en œuvre des
mesures pour contrer la fraude fiscale au Rwanda.
Acknowledgements.
This thesis would not have been, were it not the help of many people.
Firstly, 1 am deeply grateful to my supervisor, Profe ssor Lara
Friedlander, who provided guidance, insightful comments and
excellent supervision.
Thanks also go to Mutabingwa Alloyce, Rwamasirabo Olivier, Safari
Innocent, and Ndangiza Madina, for providing me with the necessary
materials and sacrificing your time whenever 1 needed your assistance.
Special thanks go to Professor Lionel Smith, Ginette Van leynsel, Ms
Dalia Piccioni, and Clelia Borrelli for their administrative support.
Special thanks also go to Manon Lavoie who provided excellent help
but friendship as well, and Ms. Marianne Proulx, who translated my
abstract, thanks for the unfailing support throughout the research at a
time 1 needed it most.
AlI my friends at the university, knowing you was great, Simeone
Oyelade who not only provided excellent buddy service but also
friendship. Marco, Ralph, Maroushka, Aida, Al Haji, Sophina,
Daphney, Aamna, Ola, Anya, and to all friends whose names 1 haven't
mentioned but whose friendship made my stay in: Canada a very
memorable experience.
Special thanks also goes to my family in Montreal, especially to
Consolata, whose companionship made it feellike home. Having you
in Montreal gave me courage and determination through out my stay.
To my family back in Rwanda especially my husband, whose phone
calls, constant emails and letters were immense support.
Lastly, but certainly not least, all this would not have been possible if
it were not for the USAID- UQAM project that funded my studies in
Canada, and for which 1 am deeply grateful, special thanks go to
Profe ssor Jacques Desmarais.
Inspite of all the contributions mentioned above, and while all effort
has been made to ensure the accuracy of this work, the opinions
expressed in this work are mine and 1 remain solely responsible for
any errors that may be contained herein.
INTRODUCTION. ................................................................................................ 3
Background. ....................................................................................................... 4
Definition of tax evasion and the difference between tax evasion and
avoidance ........................................................................................................... 5
Hypothesis ................ '" ....................................................................................... 8
Brief comment on content of the work. ........................................................... 9
Scope of investigation and usefulness ................................ '" ......................... Il
Chapter One: The Theory of tax evasion .......................... '" ........................ 13
1.1 Introduction. ................................................................................................ 13
1.1 -The Role oftax ......................................................................................... 14
1.1.1. Raise government revenue .................................................................. 14
1.1.2. Redistribution ofi n come. .................................................................... 14
1.1.3. Economy stability. ...... ;. ....................................................................... 15
1.1.4. Protection policy and social welfare .................................................. 16
1.1.5. Pay full cost ofc onsumed goods ......................................................... 17
1.1.6. Optimum Allocation ofresources. ...................................................... 18
1.1.7. Implementing specific policies. ........................................................... 18
1.2 The causes of tax evasion. .......................................................................... 20
1.2.1. The economic structure ofa country .................................................. 21
1.2.2. Tax system ofa country. ...................................................................... 22
1.2.3. Risk theory oftax evasion ................................................................... 23
1.2.4. Social background oftax payer. ......................................................... 25
1. 2. 5. Corruption ........................................................................................... 25
1.3. Effects oftax evasion. ................................................................................ 27
1.3.1. Reduction in revenue collection .......................................................... 27
1.3.2. Increased reliance on external aid. .................................................... 28
1.3.3. Breeds tax inequity. ............................................................................. 28
1.3.4. Encourages tax non- compliance. ....................................................... 28
1.3.5. Breeds cynicism .................................................................................. 29
1.3.6. Affects the statutory system ................................................................. 30
Chapter two: The extent of tax evasion in Rwanda. ........................................ 31
2. Briefhistory of Rwandan tax system and development of tax evasion. ....... 31
2.1.1. The Pre- colonial phase. ..................................................................... 32
2.1.2. The Colonial phase. ............................................................................ 33
2.1.3. The Post colonial (Independent) phase. ........................................ 35
2.2. Present day Rwandan tax structure ............................................................ 36
2.2. 1. Central government taxes ................................................................. 36
2.2.2. Local government taxes ...................................................................... 44
2.3 Tax Administration. ..................................................................................... 48
2.3.1. Rwanda 's Revenue protection department. ........................................ 48
2.3.1.1 Anti-smuggling Unit ......................................................................... 49
1
2.3.1.2. Tax Investigations Unit .................................................................... 51
2.3.1.3. InternaI affairs division .................................................................... 51
2.3.3. Review ofR RA 's organization and structure. ..................................... 52
2.4. Methods ofTax Assessment and Collection. ............................................. 53
2.5. Methods oftax evasion. ............................................................................ 54
2.5.1 The Falsification ofgoods. .................................................................. 56
2.5.2. Excess. ................................................................................................. 58
2.5.} Under- valuation .................................................................................. 58
2.5.4 Corruption ............................................................................................ 59
2.5.5 Smuggling. ........................................................................................... 62
2.5.6 The role ofP oliticians .......................................................................... 64
2.5.7. Goods on transit and goods in Warehouses . ...................................... 65
Chapter three. The review of legislative provisions and other measures in
place to combat tax evasion ................................................................................ 67
3. Introduction ................................................................................................... 67
3. l. Procedure and search powers as a way to reduce tax evasion .................. 68
3.1.1. The right ofc ommunication, control and reminder by the jiscal
administration ............................................................................................... 68
3.2. Various forms oftax evasion and how the laws have dealt with them ..... 75
3. 2.1. Non-jiling. ........................................................................................ 75
3. 2. 2. False statements ................................................................................ 77
3.2.3. Latejiling. ......................................................................................... 77
3. 2. 4. Bribery andfraud. ............................................................................. 78
3. 2. 5. Accomplices to crimes ....................................................................... 80
3.3. Tax administration reforms as catalysts to reduce tax evasion ................. 81
3. 3.1. RRA .................................................................................................... 82
3. 3. 2. VAT ................................................................................................... 82
3.3.3. Educating the public. .......................................................................... 86
3.3.4. Harmonizing the jiscal codes into one act. ......................................... 87
3.3.5. Comprehensive Regulations. ............................................................... 89
3.3.6. Tax incentives ...................................................................................... 90
3.3.7. Special Marks ...................................................................................... 90
3.3.8. Compulsory Registration .................................................................... 91
3.3.9. Seals on imported goods ..................................................................... 91
3.4. Case Law .................................................................................................... 92
Chapter four: Recommendations and Conclusion ........................................ 103
Conclusion. ......................................................................................................... 112
BIBLIOGRAPHY ............................................................................................... 116
2
INTRODUCTION
Taxation has become an issue of worldwide concem, from the time of its
inception. This is due, in great part, of effects on the life of virtually every human
being. Taxation has gained importance not only as a tool for raising revenue to
meet the administrative costs of govemance, the provision of public services such
as medical care, education, infrastructure, security and maintenance of law and
order, but also as a tool available to planners, policy makers and implementers
aiming to regulate the economy in order to bring about desired economic
development.
This study will analyze the notion oftax evasion in Rwanda. It is through taxes that
a country can obtain substantial revenue, in order to create a proper economy that
could generate revenue; there is a necessity for an organized, efficient and
productive tax system. This research will show thàt iftax administration is properly
handled, and if thorough and effective tax anti-evasion rules are applied, more
revenue could be yielded in Rwanda.
Rwandans are just now being persuaded into the culture of paying taxes. The
taxpayers do not appreciate the tax laws. There is a lot of resistance to tax
payments. Most taxpayers evade taxes and where possible they avoid them too.
This research will attempt to show that most tax anti-evasion laws in Rwanda,
although stringent, have not been effective due to corruption in the system and a
natural resistance by society. However, with the introduction of Value Added Tax
system, (hereinafter: V AT) most tax evasion and avoidance has been curbed.
After Rwanda's realization that international aid was scanty, in a period that
Rwanda was just recovering from a civil war1 it resorted to exploiting its own
,
possible revenue sources. The govemment has opted for the value added tax as
one of the types of tax that is easier to manage, because of its broad revenue base,
l The 1994 period after genocide.
3
neutrality and efficiency. This research will attempt to show that the introduction
of the VAT as an alternative sales tax has contributed to a reduction in the
incidences of tax evasion in Rwanda, showing that proper tax administration
coupled with effective laws can lead to efficient tax anti-evasion.
The thesis will be looking at the role of taxes generally in its first chapter, the
causes oftax evasion and the effects oftax evasion. A discussion on the evolution
of tax evasion in Rwanda will be given in the second chapter. The types of taxes
in place and their contribution to alleviation of the tax evasion problem will be
discussed; the administrative measures in Rwanda that have been implemented to
curb tax evasion and the extent of their effectiveness will be seen. The third
chapter will review the tax laws in place and the extent to which the law has tried
to curb the tax evasion problem. The forth and last chapter is about
recommendations that could be applied in the Rwandan scenario to bring about
successful tax anti- evasion measures for Rwanda.
Background.
The history of taxation in Rwanda indicates that the first tax legislation was
inherited from colonial regimes.2 Examples of such tax legislations include the
Ordinance of August 1912 which established graduated tax and tax on real
3
property. The first ordinance was followed by the adoption of another ordinance
on the 15th of November 1925 which adopted and put into application the Order
issued in Belgium Congo, on Ist June 1925 which established a profit tax. The
order was amended several times and culminated in the Order of 25th March 1960
that was meant for RwandaIs development and cash in-flow.
4
2 Rwanda Revenue Authority (hereinafter: RRA), Taxes and duties in Rwanda. [hereinafter
"Taxes and duties in Rwanda] Online: http://www.rra.gov.rw/generalinfo.html(Date
accessed: 19 May 2003).
3 Ibid.
4 Ibid.
4
After independence, which was on July 1 1962, the first tax legislation passed
st
was that of June 2nd 1964, governing profit tax, which was repealed and replaced
by Law No 8/97 of 26/06/1997 on the Code of Direct Taxes on Different Profits
and Professional incomes. This law was amended from time to time, in order to
keep pace with time and the changing economic environment. An example of
other legislative instruments inc1ude the 1973 law goveming property tax, the tax
on license to carry out trade and professional activities, the law on sales tax
/tumover tax now repealed and replaced by the law No 06/2001 of 20/0112001 on
the Code of Value Added Tax (VAT). As for duties, the substantive law was
enacted on July 17th 1968, and govemed customs, a law that accompanied a
Ministerial Order of 27th July 1968 which put into application the customs law
which is still functional to date. 5 In addition, the responsibility for the
administration and accountability of taxes and duties in Rwanda was vested into
an independent body, the Rwanda Revenue Authority (hereinafter: RRA); an
organ established by the law no 15/97 of 8th November 1997.
Definition of tax evasion and the difference between tax evasion and
avoidance.
Dymond distinguishes tax evasion and tax avoidance by saying that "tax evasion
is the commission or omission of an act knowingly, with the intent to deceive, so
that the tax reported by the taxpayer is less than the tax payable under the law
..• ,,6 while tax avoidance occurs in a situation where a taxpayer has reduced the
amount oftax payable by taking maximum advantage of the provisions of the law,
inc1uding any anomalies which may exist.7
Taxpayers are mostly seen to indulge in tax avoidance where they minimize their
payments of income or other taxes in order to ensure that the transaction is in fact
what it purports to be, and cannot be attracted by existing legislation. However,
5 Ibid.
6 C. A. Dymond, et al., Income Tax Administration, Avoidance and Evasion. (Toronto:
Butterworths, 1981) at 99.
7 Ibid.
5