"If [people] feel that there is a good chance that they will get in trouble if they're caught for not paying taxes, then that will be a big deterrent” 

Chas Roy-Chowdhury
Taxation Dept. Head, ACCA

Chas Roy-Chowdhury is head of taxation division at the Association of Chartered Certified Accountants (ACCA) based in London, the United Kingdom.

Last week he was here to discuss with ACCA members in Ethiopia the changing tax laws in European Union countries and others.

He was also visiting countries in East Africa to discuss harmonization of taxes.

Mr. Chowdhury spoke to Bruck Shewareged on issues related to tax collections and the problems that tax authorities in countries like Ethiopia are facing. Excerpts:

You have been in the region to talk about what you call the changing tax landscape, not only in the region but also in Europe and China. Can you elaborate on the dynamics of this landscape?

The changing landscape is interesting. Changes have been going on in the last twelve months up until June 2008. We have a situation where there've been a lot of changes in countries such as the UK where the situation changes almost every month, and China which brought in a new corporation tax region starting this year.

Each day there've been minor changes. In Germany, recently there were changes. The real action though is in UK where a lot of changes were made: corporation tax rate has come down, capital gain tax has been changed, and the basic rate of taxes dropped from 22 to 20 percent. In the UK, things have been happening almost every month. It's a great dynamic environment.

What we want is stability, less tinkering, less politics within tax. It is one of the things ACCA suggested before, i.e. the idea of a "Tax Policy Committee". What that means is, in UK we have something called a Monetary Policy Committee for the Bank of England.

What we were suggesting is that there should be something like tax policy committee set up to also deal with setting tax measures. The reason why we've been getting tax changes every month is the politics behind tax. That will be one way of trying to tackle the politics, some way of having greater certainty, greater coherence and reducing complexities.

Taxation must have been a thorny issue as it remains one of the few areas where EU members have failed to harmonize their policies?

Taxation is one of the areas where each member state can set its own policy. There is meant to be harmonization of Value Added Tax (VAT). The whole of the VAT regime in the European Union comes from what is known as the Sixth Directive. The reality is that there are still very many different types of treatment for VAT purposes, i.e., different rates, different deduction rates, different cases where you tax something in one country but you don't in another country etc. The countries' tax policies are not harmonized.

But the other area which the EU is looking at is called CCCTB, i.e. Common Consolidated Corporate Tax Base. The idea was trying to produce a draft directive which will try to bring together a harmonized set of rules for companies in working out the tax base, the profits subject to tax, what you can deduct and what you can not deduct etc. So all these kinds of areas will be considered and move to try harmonize the tax base.

Countries in East Africa talk of harmonizing their tax regimes. But does it make sense to talk about harmonization while each individual country has failed to broaden its tax base, and still comes short of having an integrated approach to tax collection?

First of all, let's talk about the tax base. I think there is a lot of effort, specially in Ethiopia, just to try to do that. But the problem has to do with compliance where individuals and businesses choose not to comply, not to pay VAT or choose to pay the wrong amount of VAT. It is actually a matter of order, to have a culture where people know what tax they are meant to pay.

You also have a problem where a lot of people decide to leave for lower tax jurisdiction in the Middle East. How do you compete with zero level of tax? It is very difficult. You don't have the resources to be able to do that.

Dodging taxes has become a national pastime here. Do you think the government can limit the problem to an acceptable level?

One of the things I heard is that the Ministry of Revenue has a business plan. What they are trying to do is to bring much more ordered approach to taxation. And they will increase their personnel to try to combat fraud. It is a slow process. But it is one way to place the system.

It is also a question of resource. How much resources do you have to implement the system? How much resource or how many people can you throw at tax evaders? There are estimates of tax evasion in the UK. The estimates say there is a 5 percent tax evasion. In other English-speaking countries, it differs. For example, in Australia, the figure is something like 15 percent of their GDP. 15 percent of Australia's GDP is equal to the whole of the economy of New Zealand. Why it happens in some countries and why it doesn't in others, is beyond me to understand. It is very difficult to know.

But, clearly, if people feel that they are going to be found out, if they feel that there is a good chance that they will get in trouble if they're caught for not paying taxes, then that will be a big deterrent. In some countries, it is a national pastime not to pay tax.

If you are familiar with the tax policies of East African countries, what is their system? Do they apply VAT?

In Uganda and Kenya, they both have the VAT. But again they have a tax base problem because you have people in these countries who choose not to pay. They don't register to pay tax. They remain in the informal sector. So what do you do to bring them into the formal economy? I think that is a real mind-set change you probably need to bring about.

What's your view of the tax collection system they instituted? How do you rate them?

Well, they have a similar problem to yours in terms of tax evasion. They consider it to be a big problem. They have the same ordered approach to try to deal with tax collection. They are trying to broaden the tax base by introducing the VAT.

Again, I think it is a cultural issue where people feel they can get away with it. Why pay the tax if they see their neighbours aren't paying taxes? I think that is where the real problem is.

I've been to Pakistan. Again they have similar problems about people paying taxes.

ACCA this month issued a fair tax discussion document. It was a survey conducted in four developed economics. The result is that it seems there is a very strong correlation in what people perceive as being a fair tax regime and the level of tax. In Hong Kong and Singapore where tax levels are low, people perceive there is a fair tax system. Those jurisdictions are considered to have more transparency, less compliance problem, people understand where the taxes are going etc.

And it seems that where taxes take more as a percentage of the GDP, the perception is that it is less fair, like in the UK. The UK in the survey comes out worst in terms of perception of transparency, complexity, fairness etc.

Whom did you meet while you were here, and what did you discuss?

Well, the purpose of my visit is to discuss with our members about things that are going around the world and to inform them about harmonization methods. The EU is the biggest single market.

There is also an attempt to form a single market in East Africa formed by Kenya, Uganda, Tanzania and Rwanda. It may spread and come to countries like Ethiopia. So it is kind of giving insight into the issues we've had with the European Union in creating single market, in terms of tarrif barriers and informal tarrif barriers as well because one thing that is going on at the moment is that you've got to get rid of tarrifs in the intra-trade in
East Africa.

What is your taxation division at the ACCA tasked with?

What we do is that we interact with governments, give evidence to the House of Lords on tax measures or the budget. We help informulating policy because there is a lot of European Union interaction in terms of the domestic tax law around Europe. We talk to tax authorities around the world.

Which EU member country has the best tax policy in terms of tax collection?

I think Ireland has a 12.5 percent corporation tax which is the lowest in Europe. Ireland is considered by many international companies as a good place to set up a business. So it clearly worked very well for them.

We also have a lot of East European countries which joined the European Union during the last couple of years who have flat taxes, say around, 16 percent for income tax, the VAT, corporation tax etc. They have a flat tax regime. So a lot of lessons can be learned from these countries in terms of simplicity. And, I think, a lot can be learned from Ireland as well because they have a 12.5 percent rate corporation tax but once companies come into Ireland, there is a high level of income tax, VAT, transaction taxes such as stamp duty. It seems to work very well. Certainly, a country like Ireland is considered to be pretty good when it comes to corporation tax. But it is very difficult to find a country where you can say it is good all the way through.

Which EU country has the worst record when it comes to collecting taxes?

It is a highly sensitive point for me to say. But certainly, Italy comes to mind as a country where there is a lot of lack of compliance with tax regime, in terms of where it is considered to be quite difficult to comply with the tax regime, where there is a lot of unfairness in terms of paying the VAT. They are very slow in doing that. There are a lot of obstacles that are put in the way. There are a lot of interpretations of tax laws which they don't agree with or they can't understand. Probably, Italy is one of the concerns in the European Union.

Why do you think that countries like Ethiopia had failed to broaden their tax base? Usually they are criticized for failing to collect taxes properly.

I can give you a very blunt answer to that. Basically it has very much to do with compliance and enforcement by the tax administrations. They need to enforce that compliance.

Non-compliance is everywhere in various degrees. But what can governments do? Or what did they fail to do in order to enforce that compliance?

I think the people working for tax or fiscal authorities need to know where the evasion is going on. They need to make sure that the law is applied. You just choose not to enforce the law while knowing where the problem is.

People must be treated equally within the tax law without fear or favour. Who you know or what you know must not be considered. That's where the issue is.