Strategy& economist recommends strategy to promote tax compliance
A comprehensive strategy ranging from deterrence mechanisms to trust-building is essential to solving South Africa’s issues with tax compliance, according to economic analysts at PwC’s Strategy&. The new strategy must be entirely centred around people to be successful, according to the firm.
Tax evasion has been an issue of particular significance in South Africa recently. In July, the South African Revenue Service (SARS) began to clamp down on the problem by publicly shaming defaulters, who had failed to file their returns since the tax hikes introduced in February this year.
A lack of compliance with tax regulations is particularly damaging to South Africa, given that a large portion of its GDP is generated through corporate taxation. Nevertheless, periodic increases in tax levels combined with regular instances of corruption have reduced public faith in the taxation system.
According to Strategy& Economist Maura Feddersen, rebuilding trust in the tax structure is one of five crucial measures required to improve levels of compliance in South Africa. Federsen bases her analysis on information gathered through first hand interactions with corporate tax payers in South Africa.
The public shaming “deterrence mechanism” currently being employed by SARS is one of these measures, alongside an overall reinforcement of the social normative structure surrounding taxation. In essence, the propensity to pay tax increases if the general social norm is to pay tax.
Another measure recommended by Feddersen is an effort to make the tax structure more understandable and accessible. “Most of our conversations with corporate taxpayers suggested that it takes time to figure out SARS’ tax administration and processes. This shows that there may be complexity involved with the tax system,” she said.
Lastly, Feddersen argues for a system that is more considerate of economic conditions. South Africa has been struggling with slow economic growth for a few years now, and such a challenging environment tends to erode motivation. Paying taxes is an additional burden that most individuals are not willing to bear.
“Insights from behavioural economics can provide the framework for a better understanding of the behaviours of taxpayers and their attitudes towards taxation. Ultimately these insights can drive both voluntary compliance and the efficiency of the tax administration,” argues Feddersen.
