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Contents
1.
2.
3.
% of turnover
These taxpayers are in the regular tax regime and are a management problem
A different law of large numbers Large number of SME cases in the tax net:
Rwanda: Large taxpayers 300 Medium sized 1,200 Small sized 15,000 Informal Sector (estimated 60,000)
2.
Role of Audit
Detect and redress individual cases of non-compliance with tax law Promote voluntary compliance Focus on high-risk taxpayers Help tax administration learn about share of non-compliant taxpayers in total taxpayer base Estimate tax gap
Compliance strategy
Use full force of the law
Business
Industry
Dont want to comply, but will if we pay attention
Deterrence by detectio
Taxpayer
Sociological Economic Psychological
Try to but dont always succeed
Assist to comply
Make it eas
For those SMEs that dont want to comply but will if we pay attention provide strong deterrence through effective audit
But, given large numbers and other characteristics, risk based audit is the most appropriate method
Methods of Audit
Manual screening by local officers Auditors decide on cases: high risk of corruption Not a systematic method, hence some non-compliance can be missed Only internal data and local knowledge is used for selection Random selection Stratified sampling better representation of taxpayer strata No bias in audit selection High opportunity cost of auditing go errors Risk-based selection Identify those taxpayers who are most likely to be noncompliant Use of risk-scoring techniques and taxpayer profiling
Self-assessment
Equity honest, compliant taxpayers treated with respect, noncompliant taxpayers treated with severity
Promote
Case selection based on objective criteria, not left to the discretion of the tax official
Lower cost of tax collection interface between tax inspectors and taxpayers
Reduce
3.
Can we set up a Risk Based Audit System for SMEs in a NonComputerized Environment?
A sophisticated IT based risk-based audit system needs High level of data and IT systems capabilities
Data requirements Hardware and information technology infrastructure Data management software
The regional offices operate on Local Area Networks, that may or may not be linked to the headquarters
Tax returns are not processed online; office audit is done manually for all tax returns to check prima facie errors and omissions
The database may only have basic taxpayer information, and can not be used for developing software based applications
Select the most risky cases for detailed audit Case selection based on objective criteria Better use of resources of tax authority Lower cost of tax collection Promote a tax culture of voluntary compliance
Can all be met in a Risk Based Audit system operating in an environment without a sophisticated IT infrastructure in place
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Steps:
Set up appropriate organization arrangements Lay down objective criteria for case selection Develop audit capacities in tax inspectors Outreach programs for taxpayers
1.
Organizational Arrangements
Set up a Central Audit Committee at the top management level in the tax authority which will lay down objective selection criteria Set up an Audit Cell at each tax office mandated to analyze returns and select those that need to be audited based on objective criteria
Audit Cell to prepare a list of cases by business category; list to be approved by the head of the tax office
Make publicly known the cases finally approved for audit by prominently displaying the list on a notice board in the tax office
2. Lay down objective criteria for case selection (to be done by Central Audit Committee) Two options Criteria can be based on: Compliance characteristics of taxpayer
- behavior of taxpayer in terms of complying with the tax law
Cases with these characteristics to be taken up for audit Detailed methodology for categorizing a taxpayer as risky based on compliance characteristics to be laid down
Option 2: contd
B. For each risky business category, select two or three key benchmarks of non risky tax behavior
3.
Ability to analyze accounts and taxable transactions to determine true taxable income Analysis of financial statements Financial ratio interpretation and application Knowledge and awareness of complexity and loopholes of tax law Ability to obtain and use external information sources Knowledge of other relevant laws, e.g., corporate law, customs and VAT regulations, civil and criminal law
4.
Publicize tax law and regulations relating to risk based audit system
=>Knowledge is power: taxpayers must know they can only be audited if they do not comply with the tax law