The Value of Simplicity in Paying Taxes

By Anatoly Gaverdovskiy

Download Article in PDF

Table of Contents

Traditional Methods to Collect Past Due Taxes

When it comes to tax payments, tax authorities focus on monitoring liabilities and creating incentives and mechanisms for collecting money. The simplicity and conveniency of the fulfillment of obligations by taxpayers is one of the last concerns of the tax authorities.

Past due payments result from taxpayers who did not pay the assessed tax on time. The reasons vary. They may just miss the deadline, or have a shortage of funds, but sometimes we talk about deliberate tax evasion to realize criminal schemes, which we discussed previously in articles about the administration of VAT.

The primary incentive to pay tax on time usually is a penalty, i.e., a fine accrues for non-compliance with deadlines. Other traditional methods used to enforce past due tax payments may include freezing bank accounts, issuing collection orders, or starting bankruptcy proceedings.

Tax authorities rarely consider external factors affecting taxpayers, such as the time for money to travel from the taxpayer to the treasury (3-4 days). In most countries, they charge interest for each day of delay. That means, taxpayers cannot precisely calculate the exact amount of liability as they do not know how long payment will be in the motion. So, they can easily miss the deadline again.

Choosing the Optimal Tax Period

The short tax period affects tax collection by reducing the absolute tax paid by taxpayers. Tax authorities do not welcome such an approach since it entails an increase in the volume of audit activities and increases auditors’ workload. So, they justify long periods as a care for taxpayers to reduce their administrative burden.

But the hefty tax bill motivates the taxpayer to optimize it and often leads to insufficient working capital and funds for timely payment.

We see that a long tax period does not make life easier for taxpayers and tax authorities. Instead, it creates much greater problems.

Methods for Simplifying the Tax Payment

Tax authorities not often analyze other external factors that lead to tax arrears. Sometimes taxpayers forget payment due dates, or payment procedures may require the taxpayer to have special knowledge and perform additional actions. The complexity of the tax payment process gives rise to what called unforced tax arrears[1] , which would not exist if tax authorities paid due attention to this issue.

Tax authorities need to attribute collected tax to tax categories, budgetary levels, and regions. Thus, they try to shift to the taxpayer the responsibility to find, track, and enter the correct identifiers and codes when filling in the payment details. Taxpayers do not need this information, do not know it, or do not remember it. To fill in correct data, they often require the help of expensive advisers.

Filling in incomprehensible numbers leads to errors, creating an additional burden on technical support to find payments. Making a tax payment should not be more difficult than paying a phone bill, calling a cab, or ordering any other common service. To optimize the tax payment process, tax administration should design a “taxpayer’s journey” which will give a clear understanding of the number of steps, actions and information required to make a payment.

• Spare the taxpayer the need to fill out information that only benefits the tax authorities.
• Create a system for notifying taxpayers about tax payment due dates and tax arrears.
• Make cashless internet payments a priority. Or even ban paying taxes in cash. Engage the banking infrastructure in the tax payment process and stop accepting payments at the tax administration offices.
• Enable paying taxes with bank cards. Provide the ability to link a card to a tax invoice and apply charges automatically at the payment due date.
• Give credit institutions access to information from personal tax accounts and the occurrence of notable events.

With these guidelines, paying taxes is becoming as simple as paying for an Uber or an online purchase. In our experience, this approach can contribute significantly to minimizing the tax gap.

[1] Tax arrears—taxes due to government but not paid. OECD Glossary of Statistical Terms. URL: https://stats.oecd.org/glossary/detail.asp?ID=7318 ?