IMCA FINANCE & TAX CARE CONSULT

TAX JUSTICE
AND
ADVOCACY CLINIC

Adam Smith ,Justice James Lewis Mwalusanya,

Mwal Dr Julius K. Nyerere

A Focus on the Revenue Index for Effective Fiscal

Management in Tanzania

Nigeria's activist leader Ken Saro Wiwa

By Prof Handley Mpoki Mafwenga Ph.D

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 ABOUT THE AUTHOR
Prof (Dr) Handley Mpoki Mafwenga Simba is an eminent Macro-Fiscal Policy Analyst,
Legal, Advocacy and Tax expert that has actively been engaged in international
negotiation fora pertaining to Investment, Fiscal policy matters and Poverty; a Guru in
Financial Programming, Revenue Forecasting Modeling, Financial analysis, Tax audit,
Disclosure Quality Assurance and Political Diplomacy. He has an extensive pedagogical
experience in teaching as Associate Professor and Senior Research Associate of Finance
and Taxation at the Institute of Tax Administration(Center of Excellence in Taxation) at
the Tanzania Revenue Authority, the Department of Business and Economics and Faculty
of Law and Humanities at the Tumaini University Makumira College, Iringa University,
Faculty of Social Science- Department of Business studies of the Teofilo Kisanji
University (TEKU) and the Graduate Studies Department of the Institute of Finance
Management (IFM). Being a renowned Budget advocacy expert of the Government of the
URT, he has also been a Member of SADC Sub-Committee on Tax matters, SADC Trade
Negotiating Forum (TNF) on trade services under UNCTAD, and Curriculum Validation
Committee of the NACTE. He is a mentor to professionals through National Board of
Accountants and Auditors (NBAA), Natural Resources Governance Institute (Revenue
Watch) (NRGI) and Commonwealth Secretariat (COMSEC) as Resource Fellow and
Research Associate. He is a recipient of more than ten Appreciation Prizes from
International and Local Professional bodies.
Handley is one of the founders of the VAT at the Tanzania Revenue Authority (TRA),
and tax auditing in mineral sector at the Gold Audit Program (GAP) and Tanzania
Minerals Audit Agency(TMAA) with a wealth of experience in Extractive Industry in
large, medium and small scale Mining; Oil and Gas companies including exploration
Ventures. He has actively been involved in the formulation of the Income Tax Act, No
11 of 2004; Income Tax Cap, 332; Environmental Management Act, No 20 of 2004,
Mineral Policy, 2009; Mining Act, No 14 of 2010, VAT Act No 24 of 1997; VAT Cap,
148; VAT Act, No 5 of 2014; Income Tax (Transfer Pricing) Regulations (GN No 27 of
07/02/2014); Tax Administration Act No 10 of 2015; SADC Protocol on the Exchange of
Information in Mineral sector, SADC Memorandum of Understanding on the Exchange
of Information on Tax Matters, Agreements on the Avoidance of Double Taxation and
Prevention of Fiscal Evasions; Bilateral Investment on Reciprocal Protection and
Promotion of Investment; and Mineral Development Agreements(MDAs) in Tanzania as
Policy Analyst and Legal Practitioner
Handley, has made variety of vetted publications in refereed Journals, an Associate
Editor of the East African Journal of Research [EAJR] of Iringa University, the NBAA
Accountant Journal and the Journal of Teofilo Kisanji University. Handley holds a Ph.D
in Finance (with Honour) from COU (UK), Ph.D in International Economic Laws from
OUT, MSc in Finance(with Honour) from Strathclyde University (Scotland-UK), MBA
in Managerial Economics and Policy (with Honour) from ESAMI Business
School/Maastricht School of Management (the Netherlands), an LLM in Taxation (with
Honour) from the University of Dar-Es-Salaam School of Law, an LLB(with Honour)
from Tumaini University Makumira Dar-Es-Salaam College, the Postgraduate Diploma
in Tax Management from the Institute of Finance Management, and Advanced Diploma
in Tax Management (with Honour) from the Institute of Finance Management (IFM).
Handley is a Certified Tax Practitioner No 0861 and attended semester based-Master of
Finance and Accounting in Oil and Gas at the University of Dar-Es-Salaam Business
School.

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 CONTENTS
III ............................................................................................................................................................ 8
List of Abbreviations and Acronyms...................................................................................................... 8
SELECTED CASES INDEX ................................................................................................................. 9
CHAPTER ONE................................................................................................................................... 11
HISTORY OF TAXATION ................................................................................................................. 11
1.0 History of Taxation in Selected Countries ........................................................................ 11
1.1 History of Taxation in East Africa .................................................................................... 16
CHAPTER TWO .................................................................................................................................. 24
WHAT IS TAXATION? ...................................................................................................................... 24
2.1 Meaning of Taxation ......................................................................................................... 24
2.2 The Objectives of Fiscal Sovereignty ................................................................................ 31
CHAPTER THREE .............................................................................................................................. 32
KEY REASONS FOR TAXATION .................................................................................................... 32
3.1 Objectives of Taxation ............................................................................................................. 32
3.1.1 Specific Objectives ............................................................................................................... 32
3.1.2 General Objectives ............................................................................................................... 32
3.1.2.1 Raising Revenue ............................................................................................................... 33
3.1.2.2 Removal of Inequalities in Income and Wealth ............................................................... 34
3.1.2.3 Ensuring Economic Stability ............................................................................................ 36
3.1.2.4 Reduction in Regional Imbalances ................................................................................... 37
3.1.2.5 Capital Accumulation ....................................................................................................... 38
3.1.2.6 Creation of Employment Opportunities ........................................................................... 39
3.1.2.7 Preventing Harmful Consumption .................................................................................... 40
3.1.2.8 Encouragement of Exports ............................................................................................... 41
3.1.2.9 Raise representation.......................................................................................................... 41
3.2 Taxation and Governance ......................................................................................................... 45
3.3 Limits of Taxation Powers ....................................................................................................... 49
3.4 Taxation and Democracy .......................................................................................................... 51
3.5 Human Rights Concern on Taxation ........................................................................................ 53
3.5.1 Contribution of Fiscal Policy to Human Rights ................................................................... 53
3.5.2 Taxpayers rights and taxpayer protection ........................................................................... 56
CHAPTER FOUR ................................................................................................................................ 58
ANALYSIS ON THE PRINCIPLES OF GOOD TAX SYSTEM ....................................................... 58
4.1 Canons of Taxation................................................................................................................... 58
4.1.1 Canon of Equality and Ability to pay taxation ..................................................................... 59
4.1.1.1 Benefit to Pay Principle .................................................................................................... 64
4.1.1.2 The Ability to Pay Principle ............................................................................................. 66
4.1.1.2.1 Application of Ability to Pay Principle ............................................................................ 69
4.1.1.2.1.1 Progressive Tax System................................................................................................ 69
4.1.1.2.1.2 Proportional Tax System .............................................................................................. 72
4.1.1.2.1.3 The Equal Distribution Principle ................................................................................ 74
4.1.1.2.1.4 Regressive Tax Structure .............................................................................................. 77
3.1.1.1.1.1 Digressive Tax Structure .............................................................................................. 78
3.1.1.1.1.2 The Comparison between Canon of Equity and Social Justice .................................... 80
3.1.2 Canon of Certainty ............................................................................................................... 81
3.1.3 Canon of Convenience ......................................................................................................... 84
3.1.4 Canon of Economy ............................................................................................................... 86
3.2 Other Additional Canons of Taxation ...................................................................................... 87
3.2.1 Canon of Productivity........................................................................................................... 87
3.2.2 Canon of Elasticity ............................................................................................................... 88
3.2.3 Canon of Flexibility.............................................................................................................. 88
3.2.4 Canon of Simplicity.............................................................................................................. 89

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3.2.5 Canon of Expediency ........................................................................................................... 91
3.2.6 Canon of Neutrality (Efficiency) .......................................................................................... 92
3.2.7 Canon of Functional efficiency ............................................................................................ 95
3.2.8 Canon of Diversity ............................................................................................................... 96
3.2.9 Canon of Co-ordination ........................................................................................................ 97
3.2.9.1 Vertical co-ordination ...................................................................................................... 97
3.2.9.2 Horizontal co-ordination .................................................................................................. 97
3.2.10 Canon of Uniformity ............................................................................................................ 98
3.2.11 Canon of Buoyancy .............................................................................................................. 98
3.2.12 Canon of Desirability ........................................................................................................... 98
3.2.13 Canon of Taxation by Sismondi ........................................................................................... 98
3.2.14 Canon of Taxation by Mrs. Urshala Hicks ........................................................................... 98
3.2.15 Canons of Taxation by Joseph Stiglitz ................................................................................. 99
CHAPTER FIVE ................................................................................................................................ 100
TAX EVASION AND TAX AVOIDANCE ...................................................................................... 100
5.1 TAX EVASION ..................................................................................................................... 101
5.2 Definition of Tax Evasion ...................................................................................................... 101
5.3 TAX AVOIDANCE ............................................................................................................... 107
5.3.1 Definition of Tax Avoidance .............................................................................................. 107
5.3.2 Principles of Tax Avoidance .............................................................................................. 113
5.3.2.1 Postponement of taxes .................................................................................................... 114
5.3.2.2 Tax arbitrage across individuals facing different tax brackets ....................................... 114
5.3.2.3 Tax arbitrage across income streams on different tax treatment .................................... 114
5.3.3 Anti-Avoidance Doctrine ................................................................................................... 114
5.3.3.1 "Substance over Form" Doctrine .................................................................................. 116
5.3.3.2 Business purpose test doctrine .................................................................................... 117
5.3.3.3 Step Transactions doctrine .......................................................................................... 120
5.3.3.3.1 End Result Test ............................................................................................................... 124
5.3.3.3.2 Mutual Interdependence Test ......................................................................................... 124
5.3.3.3.3 Binding Commitment Test .............................................................................................. 125
5.3.3.4 Economic Substance Doctrine .................................................................................... 127
5.3.3.5 Sham Transaction Doctrine ............................................................................................ 127
5.4 DIFFERENCES BETWEEN TAX EVASION AND TAX AVOIDANCE .......................... 130
5.5 CAUSES OF TAX EVASION AND AVOIDANCE ............................................................. 142
5.5.1 High marginal tax rates and frequent changes in tax rates ................................................. 142
5.5.2 Administrative inefficiency ................................................................................................ 143
5.5.3 Multiplicity of taxes ........................................................................................................... 146
5.5.4 Low prospect of detection and punishment of tax evaders................................................. 146
5.5.5 Low tax morality: Traditional and cultural tendency to hate and evade taxes ................... 148
5.5.6 Lack of Good Governance.................................................................................................. 150
5.6 STRATEGIES AND INITIATIVES TO DEAL WITH TAX EVASION AND
AVOIDANCE .................................................................................................................................... 151
5.6.1 Legislative Control ............................................................................................................. 151
5.6.1.1 General and Specific Anti-Avoidance Rules .................................................................. 152
5.6.1.2 Review of Tax Laws ....................................................................................................... 153
5.6.1.3 Strong Investigative Powers to Tax Inspectors .............................................................. 154
5.6.1.4 Power to Seize or Remove Materials ............................................................................. 155
5.6.1.5 Application of Penalties and interest for Taxpayers ....................................................... 155
5.6.1.6 Prosecutions and Imprisonment...................................................................................... 156
5.6.1.7 Tax Amnesties ................................................................................................................ 156
5.6.1.8 Interpretative Products.................................................................................................... 157
CHAPTER SIX .................................................................................................................................. 158
PROMOTING VOLUNTARY TAX COMPLIANCE ...................................................................... 158
6.1 Meaning of Voluntary Compliance ........................................................................................ 158
6.2 Typology of Compliance Models ........................................................................................... 159

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6.2.1 Economic Models ............................................................................................................... 159
6.2.2 Uncertainty Models ............................................................................................................ 159
6.2.3 Norms of Compliance......................................................................................................... 160
6.2.4 The Inertia Model ............................................................................................................... 160
6.3 Meaning of Tax Compliance .................................................................................................. 161
6.4 Tax Non-Compliance ............................................................................................................. 163
6.5 Improving Tax Compliance .................................................................................................... 166
6.5.1 Ethics .................................................................................................................................. 168
6.5.2 Tax Rates ............................................................................................................................ 170
6.5.3 Prospect Theory .................................................................................................................. 170
6.5.4 Taxpayers Education ......................................................................................................... 172
6.5.5 Tax Administration............................................................................................................. 179
6.5.6 Procedural justice ............................................................................................................... 182
6.5.7 Tax payers attitude ............................................................................................................ 183
6.6 Indicators of Voluntary Tax Compliance ............................................................................... 184
6.7 Compliance risk management ................................................................................................ 185
6.8 Tax compliance outcomes ...................................................................................................... 185
CHAPTER SEVEN ............................................................................................................................ 187
THE EXPLORATORY ANALYSIS OF THE TAX REVENUE APPEALS MACHINERY
PERFORMANCE ON TAX REVENUE IN TANZANIA ................................................................ 187
7.1 ESTABLISHMENT OF TAX APPEALS MACHINERY..................................................... 187
7.1.1 Rationale for the Civil Appeals Rights ............................................................................... 188
7.1.2 Institutional Framework ..................................................................................................... 189
7.2 THE SUBSTANCE OF THE RIGHT TO APPEAL.............................................................. 193
7.2.1 Appeals must be adequate and effective............................................................................. 193
7.2.2 The Right to Appeal is an Opportunity Right ..................................................................... 196
7.2.3 The Appellate Process Must Be Fair .................................................................................. 197
7.2.3.1 Fair to the Individual Appellant ..................................................................................... 197
7.2.3.2 Fair between Groups of Appellants ................................................................................ 199
7.2.3.3 Fair at the Systemic Level .............................................................................................. 199
7.2.4 The Modalities of Appeal ................................................................................................... 200
7.3 METHODOLOGY ................................................................................................................. 202
7.4 EMPIRICAL FINDINGS ....................................................................................................... 203
7.4.1 Scope of Operations ........................................................................................................... 203
7.4.2 Challenges in the Appeals Process ..................................................................................... 203
7.4.2.1 Adjournment for the Scheduled Appeals......................................................................... 203
7.4.2.2 Non-reply to the Statement of Appeals ........................................................................... 205
7.4.2.3 Preliminary Objections (PO) lacking legal basis.......................................................... 205
7.4.2.4 Appointment of the Deputy Chairpersons and Resource Allocation .............................. 208
7.4.2.5 Right of Appeal at the High Court Causing Deregistration ........................................... 208
CONCLUSION ........................................................................................................................... 210
Figure 1: Lady Govida a Wife of Leofric ............................................................................................ 211
Figure 2: Lorenz Curve Illustrative Example ..................................................................................... 211
Figure 3: The Deadweight Loss from a Change in Taxable Income in Response to Taxation ........... 212
Figure 4: Institutional and Socioeconomic Factors Associated With Tax Morale Globally .............. 212
Figure 5: Factors Influencing Taxpayer Behaviour ........................................................................ 213
Figure 6: Tax Compliance Programme Logic .................................................................................... 213
Figure 7: Influences on Tax Compliance Outcomes ........................................................................... 213
Figure 8: Pecking Order Fora on the Appellant Machinery .............................................................. 214
Figure 9: Summary of Performance of the Board and Tribunal from 2002-2012 .............................. 214
Figure 10: Analysis of the Performance of the TRAT and TRAB by Tax Category (2002-2013) ..... 215
Figure 11: The Trend Analysis of the Disputable Taxes to Total Revenue (2001 2013) .................. 215
Figure 12: Trends of Revenue Index (2010/11 through 2014/15)....................................................... 216
Figure 13: The Trends of Tax Revenue to GDP Ratio (1997/98 through 2014/15)............................ 216
REFERENCES ................................................................................................................................... 218

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 I

PREFACE

The Tax Justice and Advocacy Clinic book, explains the theoretical and empirical studies
of the tax law, tax policy, tax procedures and other economics of taxation materials.
Keeping in mind students, tax practitioners, lawyers and macro-fiscal policy experts, the
book explains the tax life cycle environment, tax laws cases and associated literatures in an
analytical and illustrative manner. The historical background and meaning of Taxation,
reasons for taxation, analysis of the principles of good tax system, tax evasion and tax
avoidance, strategies and initiatives to deal with tax evasion and tax avoidance, Promotion
of Voluntary tax compliance and Dispute resolution mechanisms in Tanzania have been
traced with copious reference to judicial case-materials and other previous literatures. The
text of the book has been touched with up-dated judicial pronouncements as of the date of
publications and variety of the prevailing quotes from gurus of taxation, tax law and
economics. The commentary is fully studded with headings and sub-headings so as to
make the topic commented upon easy to understand and easy to remember. It also broadens
scope of understanding to the questions that could be asked professionally by the experts.
This book is likely established itself as an authoritative text book embodying complete
knowledge of the subjects dealt with the aforementioned scope. The materials contained
herein represent the authors researched work but does not represent ownership of the
Tanzania Revenue Authority, TRAB/TRAT, and the Treasury.

Prof (Dr) Handley Mpoki Mafwenga Simba

[Ph.D finance (COU), Ph.D International Economic Laws (OUT), MSc finance (Strathclyde), MBA M.Eco
(ESAMI/MsM), LLM taxation (UDSM), LLB (Tudarco), PGD tax mgt (IFM), AD tax mgt (IFM), ICSA (UK)]
July, 2016

6
 II

ACKNOWLEDGEMENT
I would like to thank the many people who made it possible for this book to come out.
Firstly, to IMCA Finance and Tax care Consult for accepting to be the main sponsor for the
work, without such philanthropic offer there would be nothing to write about. Secondly, I
am delighted to extend my sincere appreciation and heart-warming gratitude to the staff of
the Ministry of Finance (Policy Analysis Department), Planning Commission, Tanzania
Revenue Authority, TRAB/TRAT-Hon Bahati Ndeseruah-The Secretary in particular, and
staff of the Institute of Tax Administration (ITA) for their support and encouragement;
without their efforts and support, work of this magnitude would not have seen light of the
day.
Thirdly, to those who rejected in the much needed financial, moral and editorial support to
make a reality; this includes Dr Emmanuel Luvanda (Ph.D)-Investment Expert from
National Housing Corporation (NHC), and Anthony Mwenda-Lecturer of Tumaini
University, and Major (Rtd) Denis Mwakalindile from the Business Community; they have
been trusted advisors, role models of the highest regard, and invaluable allies; their
unwavering love and support have been the foundation for this publication for which they
can never be fully repaid.
Fourthly, I would like to thank those who were there as I have been writing this book and
were on many occasions denied my company; in particular, I am grateful to my Sons Alvin,
Cleric, Malcom, and Issack. Again, special appreciation to Bertha-my Wife for the unique
support over the entire period of this work and I hereby reaffirm her contribution and
philosophy which enabled this book to be compatible with the prevailing academic and
professional eco-system. Ultimately and mostly, I hereby extend my Appreciation to the
God Almighty who enabled my Skill-based resources, Soul, Body and Spiritual
commitments towards achieving this objective.

Prof (Dr) Handley Mpoki Mafwenga Simba,

[Ph.D finance (COU), Ph.D International Economic Laws(OUT), MSc finance (Strathclyde), MBA M.Eco
(ESAMI/MsM), LLM taxation (UDSM), LLB (Tudarco), PGD tax mgt (IFM), AD tax mgt (IFM), ICSA(UK),
FCTA(UK)]
DAR-ES-SALAAM-TANZANIA

7
 III
List of Abbreviations and Acronyms
ACD Adjournment in Contemplation of Dismissal
ATO Australia Tax Office
CJEU Court of Justice of the European Union
COMSEC Commonwealth Secretariat
COU Commonwealth Open University
CRA Canada Revenue Authority
DSM Dar-Es-Salaam
EA East Africa
EAC East African Community
EACMA East African Customs Management Act
EAHC East African High Commission
EAITM East African Income Tax Management (Act)
EITI Extractive Industries Transparency Initiatives
ESC Economic, Social and Cultural (Rights)
EU European Union
GAARs General Anti-avoidance Rules
GDP Gross Domestic Product
HMRCU Her Majesty's Revenue and Customs
HRBAD Human Rights Based Approach to Development
ICSA (UK) Institute of Chartered Secretary and Administrator (UK)
IFM Institute of Finance Management
IMF International Monetary Fund
ITA Institute of Tax Administration
ITA Income Tax Act
IRB Internal Revenue Board
IRC Inland Revenue Commissioner
IRS Internal Revenue Services
NGOs Non-Governmental Organizations
NHC National Housing Corporation
OECD Organization of European Cooperation and Development
OHCHR Office of the United Nations High Commissioner for Human Rights
PICPA Pennsylvania Institute of Certified Public Accountants
R&D Research and Development
SAARs Specific Anti Avoidance Rules
SMEs Small and Medium Enterprises
TRA Tanzania Revenue Authority
TRAB Tax Revenue Appeals Board
TRAT Tax Revenue Appeals Tribunal
TUDARCO Tumaini University Makumira Dar-Es-Salaam College
UDHR Universal Declaration of Human Rights
UDSM University of Dar-Es-Salaam
URA Uganda Revenue Authority
URT United Republic of Tanzania
US United States
VAT Value Added Tax

8
 SELECTED CASES INDEX
ACM Partnership Vs Commissioner, 157 F.3d 231 (3d Cir. 1998)
Attorney General Vs Lohay Akonaay and Joseph Lohay (1995) TLR 80 at page 96
Bazley v. Commissioner of Internal Revenue 331 U.S. 737 (1947) ]
Bonik EOOD Vs Direktor na Direktsia Case C-285/11 (2012)
Bullen Vs Wisconsin (1916), 240 US 625 at p. 630-31
Broron Technologies (Pty) Ltd Vs Commissioner General Tax Revenue Appeals
Tribunal Dar-Es Salaam [Application: DSM 7 of 2006]
Cheek Vs United States, 498 U.S. 192 (1991)
Chester Upland Dist Vs Yesavage, [653 A.2d 1319,*1325(Pa.Commw. 1994]
Clock Tower Service Station Vs Commissioner General [Customs & Excise Appeal No.
10 of 2002]
Commissioner of Internal Revenue Vs Algue Inc GR No L-28896 | Feb. 17, 1988
Commissioner General Vs. Archipelago Investment Ltd Stamp Duty Tax Appeal No 16
of 2006 [Originating from VAT Appeal No. 8 of 2005].
Commissioner of Internal Revenue Vs Gordon 391 U.S. 83 (1968)
Commissioner General TRA Vs Rahisi Store Tax Revenue Appeals Tribunal Dar-Es
Salaam [Application: DSM 32 of 2006]
Commissioner General Vs Rupesh Enterprises Ltd -Tax Revenue Appeals Tribunal
Dar-Es Salaam [Income Tax Appeal: DSM 2 of 2007]
Compania de Tabacos Vs Collector case (1927)
Del Commercial Properties, Inc. Vs Commissioner, 78 TCM 1183 (1999)
East Usambara Tea Co. Ltd Vs Commissioner General Tax Revenue Appeals Board
Tanga [VAT Tax Appeal: TNG 3 of 2007]
Erick David Massawe T/A Erick David Petrol Station Vs. Commissioner General
[Consolidated Customs & Excise Tax Appeal: Msh 12/2004 and 1/2005]
Fidahussein & Co. Ltd Vs Commissioner General [Tax Revenue Appeals Tribunal Dar-
Es Salaam [Application: DSM 1 of 2007]
FIRIN case15 C-107/13, FIRIN, [2014]
Firm of Illuri Subbaya Chetty and Sons Vs State of Adra Predesh AIR 1964 SC 322
Frank Lyon Company v. United States, 435 U.S. 561 (1978)
Giris Pty. Ltd Vs Federal Commissioner of Taxation 3 (1969) 119 CLR 365
Gregory Vs Helvering, 293 U.S. 465, 469 (1935)
Helvering Vs F. & R. Lazarus & Co., 308 U. S. 252, 255 (1939)
Holt Hauling & Warehouse Systems Vs Aronow Roofing, [309 Pa. Super. 158, 454 A.2d
1131, *1133 (1998)]
IRC Vs Duke of Westminster (1935) All E.R. 259 (HL)
Inland Revenue Commissioners Vs Burmah Oil Co Ltd; House of Lords [1982] STC 30
Knetsch Vs United States, 364 U.S. 361 (1960)
Kraft Foods Polska, Case C-588/10, [2012]
Lawson Vs Interior Tree Fruit and Vegetables Committee of Direction, [1931] S.C.R.
357,
Loughborough Vs Blake, 18 U.S. 5 Wheat 317 317 (1820)
Maize Board Vs Epol (Pty) Ltd (2009) (3) SA 110 (D)
Maks Pen EOOD v Direktor na Direktsia Case C-18/13(2014)
Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263
Mc Dowell and Company Limited Vs The Commercial Tax Officer on 17 April, 1985
Equivalent citations: 1986 AIR 649, 1985 SCR (3) 791
M/s Jandu Plumbers Limited Vs Commissioner General [VAT Tax Appeal DSM No.
15 of 2011]
M/s M & M Communications Ltd Vs Commissioner General Tax Revenue Appeals
Board Dar- Es Salaam [VAT Tax Appeal Case: DSM 15 of 2005]

9
 Mohsin Somji Vs Commissioner for customs and Excise Commissioner for Tax
Investigations Commercial case No. 287/01 HC
Mukisa Biscuits Manufacturing Company LTD Vs West End Distributors LTD (1969)
EA 696
National Health Insurance Fund Vs Commissioner General [Income Tax Appeal: DSM
25 of 2005]
Queen Vs Cao, 92 DTC 6237
Inland Revenue Commissioners Vs Burmah Oil Co Ltd. HOUSE OF LORDS.
[1982] STC 30, [1981] TR 535, 54 Tax Case 200, ([1984] Conv 296)
R. Vs Templeman, 2006 DTC 6374
Rungwe Freight Ltd Vs Commissioner General Tax Revenue Appeals Tribunal Dar-Es
Salaam [Appeal No 3 of 2006]
Rupesh Enterprises Ltd Vs Commissioner General Tax Revenue Appeals Board Dar- Es
Salaam [VAT Tax Application: DSM 2 of 2006]
Spies Vs United States, 317 U.S. 492 (1943)
Stroy trans, OJ C 86, 23.03.2013 Case C-642/11;
TAICO Ltd Vs Tanzania Revenue Authority [Misc. Civil Cause No. 108 of 2003)
[2006] TZHC 21 (24 May 2006]
Tomlin TRC Vs Duke of Westminster (1936)
Tokyo Auto Centre Ltd Vs Commissioner General Tax Revenue Appeals Board Dar- Es
Salaam [VAT Tax Appeal Case: DSM 9 of 2005]
True Vs United States. Nos C82-052 to C82-056 (603 F. Supp. 1370, 23 ERC 1753) (D.
Wyo. March 20, 1985)
United Parcel Service of America, Inc. v. Commissioner, 254 F.3d 1014 (11th Cir.
2001)
United States Vs Murdock, 290 U.S. 389, 394 (1933)
United States Vs Phellis 257 U.S. 156 (1921)
United States Vs Isham, 84 U.S. 17 Wall 496 496 (1873)
W T Ramsay Ltd -v- Inland Revenue Commissioners; HL 12 Mar 1981.
References: [1981] 1 All ER 865, [1982] AC 300, [1981] UKHL 1, [1981]

10
 CHAPTER ONE
HISTORY OF TAXATION
1.0 History of Taxation in Selected Countries

The word tax first appeared in the English language only in the 14th century. It
derives from the Latin word taxare which means to assess. However, before that,
English used the related word task, derived from Old French (Olaoye, et al, 2014).
For a while, task and tax were both in common use, the first requiring labour, the
second money. Tax then developed its meaning to imply something wearisome or
challenging. So word like duty was used to suggest a more appealing purpose
(Olaoye, et al, 2014).

In the Middle East, where the concept of taxation developed for first time, rulers
collected the money from taxation to pay for the cost needed in building public
artifacts like monuments and temples, Taxation originated there and were spread
around the world, some of the money was used to finance warfare. Taxation usually
stopped during peaceful times. When another war breaks out, tax usually brought
back again to fund war. The French and Latin of the 13th century were credited with
the first use of a word similar to Tax. The French had Taxer and the Latin used
Taxare to describe estimate, to assess, or to touch repeatedly (Sarfaraz Ahmed Bhutto
IV, 2014)

Ancient Egyptians believed their rulers were gods and trusted them with their health
and safety. These rulers, called pharaohs, were tasked with protecting the people from
foreign threats and internal conflicts as well as drought and famine to fund grain
warehouses, building projects and local armies, the pharaoh collected taxes from the
citizenry (Rosanne Tomyn, 2011). Pharaohs imposed taxes on cooking oil and they
appointed tax collectors who were known as Scribes to oversee the collection of these
taxes. To make sure every citizen paid their share of taxes, the scribes visited
households to inspect (audit) the amounts of cooking oil that was being consumed
and to make sure that substitutes were not being used to avoid paying the cooking oil
tax. Though historians credit its collapse to these burdensome levies, ancient
Egyptian society flourished in much the same way for over 3,000 years (Rosanne
Tomyn, 2011).

11
Egyptians did not have coined money, so their taxes were levied on harvests and
property. Heavy taxes were levied at least once a year and included payment in grain
and various kinds of labor. Taxes were calculated for cattle, grain and other goods --
with additional fees for merchants. The people of ancient Egypt paid taxes in the form
of labor or grain that was stored by the pharaoh in large warehouses (Rosanne
Tomyn, 2011). The pharaoh relied on taxed grain as a source of supplementation
during years of drought and bad harvest. Manual labor was also a tax requirement that
supported the Egyptian army as well as large harvest and building projects throughout
the year (Rosanne Tomyn, 2011).

In the ancient civilizations of Palestine, Egypt, Assyria, and Babylonia, individuals

property rights did not exist. The king was sole owner of everything in this domain,
including the bodies of his subjects. Thus, instead of taxing individuals to support the
government, the king could simply force them to work for him. Ancient kings earned
income in the form of food from their lands and precious metals from their mines. If
this income did not meet the king's demands, he might lead his armies into
neighboring countries to confiscate their property. In societies that operated without
money, the rulers taxed farmers by requiring that they hand over some proportion of
their crops to the state. Poll taxes were a major source of revenue in Egypt under the
Prolemaic Dynasty (Kabera Charles, 2008)

In Greece a tax referred to as Eisphora was imposed only in times of war; Eisphora is
a general word for payment, revenues, and income, including yields. Every Athenian
was required to pay this tax, which was used to pay for spears, arrows, crossbows,
shields, and armour that the soldiers required for war. This tax was considered an
emergency tax and was cancelled once the war was over. Also, if they returned
victorious from the war with riches acquired from their defeated foes, the taxes
collected were refunded to the citizens. They were also noted for charging a tax on all
residents who did not have both an Athenian mother and father (Nigeria Federal
Inland Service, 2012). The tax was referred to as Metoikion a monthly tax collected to
foreigners who did not have both an Athenian Mother and Father. Ancient Greek
Taxation was used as an emergency power. Additional resources gained from war
were used to refund tax previously collected from the people. The government of
ancient Athens, Greece, relied on publicly owned silver mines, tribute from
conquered countries, a few customs duties, and voluntary contributions from citizens

12
for revenue. It levied poll taxes only on slaves and aliens (non-citizens) and made
failure to a capital crime (Natad S. Johny, 2008).

In the Roman Empire, the Ancient Romans appointed people, known as Publicani,
who went around the markets with wicker baskets, to collect gifts that the people
were forced to offer to the Emperor Caesar(Sarfaraz Ahmed Bhutto IV, 2014). These
baskets were called Fiscus Cesares, which means Caesars treasures. These Publicani
were not very friendly in their tax collection techniques and were greatly despised by
the peasants (Sarfaraz Ahmed Bhutto IV, 2014). In Rome, the earliest taxes were
customs duties on imports and exports called Portoria. Caesar Augustus was
considered by many to be the most brilliant tax strategist of the Roman Empire
(Natad S. Johny, 2008). He instituted an inheritance tax to provide retirement funds
for the military. The tax was 5% on all inheritances except gifts to children and
spouses. At the time of Christ, Augustus Caesar ruled the Roman Empire, which
included large areas of the Middle East. In Judea, those who collected taxes were
unpopular members of society, and it appears that people criticized Jesus choice of
Saint Matthew, one of these members, as one of his disciples. With the decline of
Rome in Europe, spiritual and temporal powers were not always easy to
distinguish (Natad S. Johny, 2008).

Suffice it to say that, the Taxation is a price of Faith where religious institutions
rivaled and sometimes surpassed political ones in their material power; to secure
this, they imposed forms of taxation. For Christians it was a tithe, or a tenth of what
the faithful produced, usually paid to the Church in kind. Tithe barns for the receipt
and storage of such payments were lesser in size only to churches in villages and
towns.

The later Roman Empire, under Augustus and his successors, exacted a distinctive tax
in the form of tribute, payment in money or other form made by rulers of states or
provinces that acknowledged their submission to the Empire and thereby bought
security and at least some autonomy (in effect, then, an early form of the protection
racket). The payment of tribute to Caesar evoked great resentment because it
symbolized subjugation to Rome, as evidenced in the famous confrontation related in
the gospels of Matthew and Mark when the Pharisees first attempt to entrap Jesus by
questioning him about the payment of tribute, hoping to reveal him as a rebel and thus

13
a threat to Roman rule. But Jesus response confounds them: Render to Caesar the
things that are Caesars, and to God the things that are Gods (Mark 12:17).

Collection of taxes entailed the creation of a method of assessment and an

administrative bureaucracy. Assessment in Rome, for example, took the form of
conducting periodic censuses so that people perceived a new census as clear evidence
of a consequent new or increased tax. They rebelled against the census itself to
protest the anticipated tax. (In conducting censuses Rome divided many of its
provinces into cadastres, in which were listed separate parcels of land; their tax
categorization; the taxpayers, whether owners or lessees; and the crops being raised
changes of ownership were also noted.)

In early years of Roman republic all Roman citizens paid a poll tax. However, Roman
military victories brought in so much foreign tribute that the government exempted
citizen from this tax in the 2nd century BC, after the public wars between Rome and
Carthage. More than 100 years later, Emperor Augustus introduced land and,
inheritance taxes. Succeeding emperors raised rates and found an increasing number
of things to tax, including wheat and salt (Adama 2010)

In England, an attempt was made in 1404 to collect real taxes based on the people's
wages. However, the public refused the proposal and the method was repealed. The
first development of modern income tax occurred on 1719 in England. This tax was
used to finance warfare against France during the Napoleonic Wars. This helped
Britain and its other European allies win in 1815. After the war, the people again
demanded its repeal and so it was in 1816 (Kyereda Otabil Emmanuel, 2015). The tax
records were again burned for the second time. In the Great Britain, in the 11th
century, an Anglo-Saxon woman named Lady Godiva agreed to ride naked on a horse
through the streets of Coventry (Figure 1); if only her husband, Leofric, Earl of
Mercia, promised to reduce the high taxes he was charging the poor peasants (Diane
F. Gillespie, 2005). In 1800, the British gave birth to what later became the modern
day income tax. The tax was imposed to pay for the war with Napoleon. Sixteen
years later, opponents of the law forced it to be abolished and demanded the
destruction of all documents that made reference to the law. However, a copy was
saved in the basement of the British tax court and was later revived to become the
model of modern day tax system (Sarfaraz Ahmed Bhutto IV, 2014).

14
Other European countries like Germany, the Netherlands, Sweden, Switzerland and
others adopted the method and thus it was spread. Therefore the adoption of the
Conventional Tax System in the modern countries was mainly inherited system, and
this taxation methodology was not initially developed through economic researches to
fund the governments. In the U.S. a direct tax was placed on citizens after drafting the
Constitution in 1787. The Supreme Court supported the government's first income tax
during the Civil War in 1862. Suffice it to say that, the IRS was established in July
1862 with the passage of the Revenue Act of 1862, which established the nations
first income tax to help finance the Civil War (Bibek Adhikari and James Alm, 2015).

The Union government found financial burdens for warfare, just by using taxes based
on tariffs so the government used income tax for emergency reasons. It was then
renewed in 1864 and was achieving a good rate since it imposed heavier tax burdens
on people with a larger income than most. After the war it was repealed in 1872
(Bibek Adhikari and James Alm, 2015).

The expansion of Islam was accompanied by the Islamic Tax, the khums, or one
twentieth more modest by half than the tithe. There are direct references to it in the
Quran, which requires its use for specified purposes, such as the relief of the poor. In
India, Islamic rulers imposed a tax called jizya in the 11th century (Ahmed A.F. El-
Ashker and Rodney Wilson, 2006). The Sultanate applied a system of taxation that
was a mixture of Islamic Law as well as taxing trade in order to maintain and assist in
their presence on the coast. As a result, citizenry were taxed using the Islamic law
based taxes of zakat, jizya, sadaqa and khums in addition to customs levy, capitation
tax as well as harbour fees.

Zakat is a form of voluntary single capital tax levied only on Muslims that can never
be less than 2.5% on all savings and all cash assets idle for the year. It is used
specifically to finance among other things, poor relief, and emancipation of slavery,
assistance to individuals serving Islam. (Choudry MA and Azizur Rahman ANM
(1986); Kuran T 1995) Despite its voluntary nature, it is considered taboo not to give
this tax if one has savings and interestingly in considered a pillar of Islam as a
religion.

Sadaqa is another form of voluntary tax. It is also given for charitable purposes and is
under no control whatsoever, and is a source reliant on the charitable feelings of the

15
Muslim giving it. Jizya was a tax imposed on conquered non-Muslims in a Muslim
nation under treaties signed between the two communities as a payment in lieu of
compulsory military service. It was because compulsory military could only be
imposed on Muslims as conquest was seen as a religious war (Ahmad IA 2001).
There are however, no reports of this tax being applied on Kenyas coastline. Khums
was a tax on assets redeemed by force and was a share of the spoils or war booty. It
was considered a state asset at the disposal of the leader or war booty of the
commander in chief for his personal disposal.1

Traders were taxed by the application of a capitation tax, as well as customs. A

capitation is a head tax, tax on each individual. Capitation tax was levied on each
slave, on traders taking slaves out of the sultanate. This tax was first applied in 1722
by the then ruler of Oman on every slave exported by the French from his African
dominions. Between 1809 and 1814, it is reported that the Sultan derived 75,000
dollars worth of revenue from this tax. 20 By 1820, it is reported that this revenue
increased to between 40,000 and 50,000 dollars per annum (Gray, Sir John, 1957).
Customs was charged on all goods taken out of the Sultanate and this included cloves,
ivory and beads. The Sultans of Zanzibar, Malindi and Mombasa among others also
had their own systems of taxation that included collection of customs duties (Attiya
Waris, 2007).

1.1 History of Taxation in East Africa

Between the 16th and 18th century the Portugueses memory of their presence in East
Africa is said to be the Pillar of Vasco Da Gama in Malindi and Fort Jesus in
Mombasa on Kenyas coast. The first recorded treaty that involved a form of taxation
was in 1502. The then Sultan Ibrahim of Malindi was held against his wishes and
forced to accept defeat. While being held hostage during negotiations on Vasco da
Gammas boat, a treaty of surrender was signed with Portugal for an annual tribute of
1,500 meticals of gold (Strandes, Justus, 1989). The terms included Portuguese rights
to erect forts and build garrisons; exercise control over customs duties charged and
revenues; introduce settlers and generally exercise full rights of sovereignty. In
return, the Sultan was to receive one third of customs revenue. Similar treaties were
signed with other sultans including the Sultan of Mombasa, Zanzibar and Kilwa. All

1
Ahmad 8, Supra note above, Pejovich 75

16
of them repeatedly failed to pay the tribute despite repeated demands including the
use of violence by destruction of private property; this continued to fail to bring any
money into the coffers of the Queen of Portugal. However as was applicable to clergy
in Portugal, Christian clergy in East Africa were also exempt from all taxes including
customs duty. Thus, the only hold the Sultan of Oman maintained over the East Coast
of Africa was the imposition from as early as 1722 a capitation tax in respect of every
slave exported by the French from his African dominions (Attiya Waris, 2007).

The Portuguese were seen as notorious for attempting to violently hold and control
the East Coast during the period when it was a crucial port for the spice route to and
from India and the Far East. However, their rule was characterized by oppressive rule
not only for the native African population but also for the Arabs settled at the coast
and resulted in their eventual overthrow by the Arab settlers with the help of the
Sultanate of Oman. There was the complete failure to use equity in the creation and
levy of taxes and riots were punctuated with civil disobedience and outright tax
evasion and avoidance (Attiya Waris, 2007).

By the end of the rule of the Arabs and Portuguese along the East coast of Africa the
existing balance of taxation that was inherited by the British included a capitation tax
payable per head of slave exported and customs revenue shared equally between the
Arabs and Portuguese (Attiya Waris, 2007). The tax base was, however, limited to
traders only. In 1886, Britain and Germany settled the boundaries between German
East Africa and the British territory to be known as Rhodesia. Germany recognized
Britains claim to Zanzibar. A German company was in charge of the administration
of German East Africa, and its demand for taxes and labour obligations provoked
rebellion among local Arabs and from the Hehe and Yao tribesthe Abushiri revolt.
Germans were evicted from the coast except for strongholds at Bagamoyo and Dar es
Salaam. The Germans returned with an elite force under the German command
General von Wissman, and they captured and hanged the leader of the revoltthe
half Arab half-African trader, Abushiri (Attiya Waris, 2007).

The British originally ruled all of what is today Kenya and Uganda together forming
the East African protectorate and later the East African Colony. However, in 1890
Germany signed a treaty with the British exchanging Heligoland for British
recognition of protection of Zanzibar. On December 14th 1895, the Sultan signed over
administrative responsibility of the areas formerly under the responsibility of the

17
Imperial British East African Company to the British Government for the continued
undertaking that the Sultan would be paid an annuity of 11,000 (Attiya Waris,
2007).

The Hut Tax Regulation was enacted in 1901 which imposed a tax of one rupee,
payable in kind or through labour, upon every native hut in British East Africa. A
subsequent amendment to the law allowed the tax to be levied specifically upon the
owner of the hut. By 1910, other special provisions were added to the Native Hut and
Poll Tax Ordinance to provide for the distress of property, or three-month
imprisonment for non-payment of tax due (Attiya Waris, 2007). However, the direct
taxation of land values in Africa has a close nexus with the large-scale alienation of
land in the settler economy (H.W.O. Okoth-Ogendo, 1991). Steady settler pressure
resulted in an increase in the rate of hut tax or poll tax to 5 rupees in 1915 and again
in 1920 to 8 Rupees 16 shillings under the new currency then was introduced.
Subsequent African protests and unrest led to a reduction in the basic rate to 12
shillings, which remained unchanged for the remainder of the interwar period (Attiya
Waris, 2007).

The protectorate government in East Africa argued in early 1908 (Lord Elgin, 1908)
for preserving the means of obtaining some share of any future appreciation in the
value of the land, particularly because much of the land acquired by settlers was not
being developed. Thus, when the Crown Land Bill was presented in 1908, it became
the first legislation to propose the levying of a graduated land tax on individual
holdings as a sound basis for land policy in East Africa (Lord Elgin, 1908). The
Crown Land Bill was rejected in 1908 because of strong opposition from the settlers.
A subsequent proposal that eventually became the Crown Lands Ordinance in 1915
conceded to the settlers demands by deleting the provisions for land taxation (Attiya
Waris, 2007).

In 1913 Zanzibar was transferred from the foreign office to the colonial office and the
Governor of the East African Protectorate which 7 years later came to be known as
the Kenya protectorate. In British East Africa, the British East African Companys
hopes for substantial revenue from mining ended when the gold rush in Kakamega
was unfruitful. Thus, British colonial tax policy developed in its rule in East Africa on
the grounds of the need firstly, to prop up its own economy by creating foreign
markets and sources of raw materials for its industries and thus obtain maximum

18
gains with minimum input. This was done by initially through the Chartered company
concept (Attiya Waris, 2007).

It was only in 1927 that the fiscal barrier between the Kenya, Uganda and Tanganyika
was completely broken and a system of free transfer of imported goods was imported.
The Excise Duties Agreements Ordinance of 1931, enacted simultaneously in the
three countries, provided for the maintenance of identical rates of excise duties in
these countries. The first excise duty to be levied in Kenya and in East Africa was the
Beer Ordinance (No. 5 of 1923) was imposed on beer. During the first year of its
operation, the tax collected was only 425 (Attiya Waris, 2007). The revenue from
excise taxation became important only when sugar, tea, cigarettes and tobacco were
brought into the tax net in 1931. In 1949 the Customs and Excise Revenues
Allocation Act was enacted repealing the Ordinance (Cap 264). The Excise Tariff
Ordinance of 1954 consolidated past legislations, as amended by the various Finance
Ordinances (Attiya Waris, 2007).

Variety of policies was developed during colonisation which included the need to pay
for the costs of wars (Dowell, Stephen, 1965). Thus, the colonized world responded
by providing soldiers like the African Rifles Division of the British Army as well as
having its population taxed heavily by the colonial authority. Secondly, post-Second
World War tax policies were influenced by demands of reconstruction of the war
ravaged European economies, finally, as the engine of wealth creation and economic
prosperity (Attiya Waris, 2007).

The Customs Tariff Ordinance of 1958 brought about a complete revision of customs
rates. It introduced a consistent pattern of rates by removing various anomalies,
brought greater administrative simplicity and excluded most producers requirements.
Most of the items liable to import duty were placed into one of the following
categories: a general rate of 22% ad valorem, a general assisted rate of 11% ad
valorem (which applied to those goods, which it was felt should pay some duty, but
not at the general rate) and a protection rate at 30% ad valorem. In addition to the ad
valorem rates were certain specific rates on goods such as spirits, tobacco goods,
toilet preparations and piece goods (Attiya Waris, 2007).

19
By the 1960s, most tax systems in the Western countries were on the verge of
collapse as corporations had succeeded in perforating the tax system with the
resulting shift of tax burdens to the poor (Attiya Waris, 2007).

Taxation as understood today was introduced in East Africa by the early British
colonial administrators through the system of compulsory public works such as road
construction, building of administrative headquarters and schools, as well as forest
clearance and other similar works (URA, 2011). In 1937 there was an introduction of
the Income taxation as a war measure in Kenya. The first formal tax, the hut tax, was
introduced in 1901 as stated above, when the first common tariff arrangements were
established between Kenya and Uganda. Ugandans started paying customs duty as an
indirect tax, which involved imposition of an ad valorem import duty at a rate of 5%
on all goods entering East Africa, through the port of Mombasa and destined for
Uganda (Mafwenga, H.M, 2013; Luoga, F. D. and Makinyika, A, 2005). A similar
arrangement was subsequently made with German East Africa in Tanganyika for
goods destined for Uganda that entered East Africa through Dar-es-Salaam and Tanga
ports. This gave rise to revenue which was remitted to Uganda (Mafwenga, H.M,
2013; Luoga, F. D. and Makinyika, A, 2005). The piece of legislation of taxation was
introduced in the other East African countries of Tanganyika, Uganda and Zanzibar in
1949 with the rates, allowances and taxes being identical for all the countries (Eze O
C, 1975).

British application of tax law in the colonies resulted in high income and low returns
back into the colonial economy, Lance E. Davis and Robert A (1987) state that;

The colonial Empire provides strong evidence for the belief that
government was attuned to the interests of business and willing to divert
resources to ends that the business community would have found
profitable.
They further found that before 1885 investment in the British Empire had a rate of
return 25 percent higher than that on domestic investment, though later these two
converged. Andrew Roberts (1976) writes:

[from] ... 1930 to 1940 Britain had kept for itself 2,400,000 pounds in
taxes from the Copperbelt, while Northern Rhodesia received from Britain
only 136,000 pounds in grants for development.
Similarly, Patrick Manning (1982) estimates that;

20
 between 1905 and 1914, 50 percent of Gross Domestic Product (GDP)
in Dahomey was extracted by the French, and Crawford Young notes that
tax rates in Tunisia were four times as high as in France.41
In 1940, the Income Tax Law was introduced in Uganda, Tanganyika and Zanzibar as
an execution of a Territorial Ordinance and preserving room for the closer
supervision of income taxes. However, the Protectorate governments heavily relied
on customs duties to fund their programs, yet the indigenous Africans were not
engaging in activities that would propel the growth of the monetary economy
(Mafwenga, H.M, 2013; Luoga, F. D. and Makinyika, A, 2005)

In 1948 the four Ordinances were consolidated to form the East African High
Commission (EAHC) in order to administer and provide in Kenya, Uganda, and
Tanganyika certain inter-territorial services. Thereafter, in 1952, the consolidation of
Ordinances resulted into the East African Income Tax Management Act, 1952 with
retrospective effects from 1st January, 1951 which laid down the basic legal
provisions found in the new income tax law. The East African Income Tax
Management Act of 1952 was repealed and replaced by the East African Income Tax
Management Act of 1958. However, each territory retained its powers under the
EAHC to enact its Ordinances (Mafwenga, H.M, 2013; Luoga, F. D. and Makinyika,
A, 2005). The duties of the Commission were limited to enacting legislation for
administrative and general provisions excluding rates and allowances, which were left
to territorial governments to legislate. In practice, however these tended to be
uniform.

It should be clear to note that, in 1952 the three Ordinance governing income tax- The
Income Tax Ordinance 1940, The War Taxation (Income Tax) Ordinance 1940 and
the War Taxation (Income Tax) (amendment) Ordinance 1941 were combined to
what become known as The East African Income Tax (Management) Act 1952. In
1953 the Tea Ordinances of all three East African Countries of Kenya, Uganda and
Tanganyika were repealed. However, each government (colonial) reserved the power
to fix the rates and allowances in each country. The East African Tax department
administered the tax, which was under the East African High Commission formed in
1948. Tanganyika and Uganda joined in 1950, three years later, and the three separate
Income Tax Acts for the East African countries were enacted.

21
In 1957, the Income Tax Act was introduced to replace the Income Tax Act, 1952 i.e.
East African Income Tax Management Act, 1958 following the recommendation of
the Commission of Enquiry under the Chairmanship of Sir Eric Coates and a selected
committee appointed in 1956, its report was published in 1957 (Mafwenga, H.M,
2013; Luoga, F. D. and Makinyika, A, 2005). Income tax was mainly payable by the
Europeans and Asians but was later extended to Africans. The administration of both
income tax and customs duty was done by departments of the East African
Community (EAC) until its collapse. Under the EAC dispensation, there were
regional taxing statutes and uniform administration but the national governments (or
partner states, as they were called) retained the right to define tax rates (Mafwenga,
H.M, 2013; Luoga, F. D. and Makinyika, A, 2005).

In July, 1970 following the signing and start of the East African Community (EAC)
in 1967 the East African Income Tax Management Act, 1970 (EAITM Act, 1970
revised edition) Chapter 24 of the Law of Community came into being basically as
the revision of the EAITM, Act, 1958 on the authority of the EAC Act, No. 3 of 1968
in view of raising revenue (Mafwenga, H.M, 2013).

On part of Tanzania, the ITA No 33 of 1973 came into being in July, 1973 as a major
reform of Income tax regime in Tanzania in view of raising revenue and attaining
sovereignty in revenue administration. On 30th December, 1973 it was assented and
came into force on 1st January, 1974; and the East African Income Tax Department
was split up, each country assumed its responsibility for running its own Income Tax
Department in view of raising revenue and attaining sovereignty in revenue
administration (Mafwenga, H.M, 2013). After the breakup of the EAC, the tax
departments were transferred to the Ministries of Finance with the transfer of the
Income Tax Department in 1974; followed by the Customs Department in 1977. In
July 1977, administration of Customs was transferred to the Ministries of Finance
(Treasury) so as to ease customs control for Members of EAC and attaining
sovereignty in revenue administration (Mafwenga, H.M, 2013; Luoga, F. D. and
Makinyika, A, 2005).

On part of Uganda, the function of administering Central government taxes was

shifted from the Ministry of Finance to the Uganda Revenue Authority, a body
corporate established by an Act of Parliament in 1991, while on part of Tanzania the
function of administering Central government taxes was shifted in 1995 to the

22
Tanzania Revenue Authority through Tanzania Revenue Authority Cap 339. Suffice
it to say that, the URA was established in 1991 and TRA in 1995(URA, 2011). The
EAC was re-established in 1999 by Tanzania, Kenya and Uganda. Rwanda and
Burundi joined the EAC in 2007. The EAC in December 2004 enacted the East
African Community Customs Management Act 2004 (EAC-CMA). This Act governs
the administration of the EA Customs union, including the legal, administrative and
operations (URA, 2011).

23
 CHAPTER TWO
WHAT IS TAXATION?
2.1 Meaning of Taxation

The meaning of Taxation has been given in different ways through different
literatures; the common definition therefore could be given as follow;

Taxation is the system of compulsory contributions levied by a government

or other qualified body on people, corporations and property in order to fund
public expenditures. In that, an inherent power of the state raise income and
demand enforced contributions for public purposes.

Many economists like Adam Smith (1776), Seligman (1911), Bastable Charles F,
(1917), Taussig (1920) and Dalton (1920) hold the unanimous opinion that tax is a
compulsory payment to the government by taxpayer without 'any expectation of some
specified return. But essence of the argument is this that the taxpayer, is not entitled
to claim return of his taxes though he may receive benefits of the services which the
State provides by means of the taxes collected from him and many other like him.

This part therefore attempt to give definitions of taxation from different selected
literatures so as to impart a wide dimension in the understanding of such common
concept in economics, legal, and taxation expertise.

Almost 200 years ago, Say (1821:341) defined a tax as

The transfer of a portion of the national products from the hands of

individuals to those of government, for [the] purpose of meeting the public
consumption or expenditure
Lutz (1936:316-321) is of the opinion that the elements of a common purpose,
personal obligation and a compulsory contribution are essential to satisfy the
definition of a tax. A common purpose refers to the contributions which are made by
citizens and which governments then apply to finance general or common services to
all citizens. Personal obligation relates to the fact that the State is an association of
persons and that each of these persons is responsible for supporting the State in its
functions. Compulsory contributions must be interpreted as referring to a levy that is
imposed by a government and that does not take into account the taxpayers will or
pleasure.

24
Taxation was traditionally the primary focus of public finance economists (Singer,
1976:169). Hence, the literature in that discipline contains various definitions and
descriptions of a tax. For example, defines taxes as;

Transfers of resources from persons or economic units to the

governments which are compulsory (or legally enforceable)
(Steenekamp (2012:163)
Musgrave and Musgrave (1980:229-230) describe taxes as;

Compulsory imposts that become a form of income that a government

uses to finance public expenditure
Another definition comes from the Income Tax Office (1984)

"'tax' means the income tax payable under the ordinance and includes any
additional tax, excess profit tax, penalty, interest, fees or other charges
leviabe or payable under this ordinance" - Section 2(62) of the ITO 1984
Gildenhuys (1989:260-263) describes taxes as;

Compulsory payments to a government, where a direct quid pro quo for

the payment is absent, and the funds are used by the government to
provide collective services to the community.
Bird and Tsiopoulos (1997:38) argue that;

Taxes are mandatory levies that are not related to any specific benefit
or government service.
Jones and Rhoades-Catanach (2010:4) state that;

Taxes are compulsory and not voluntary, and they differ from a user
charge in that they do not entitle the payers to specific goods or services.
Following on from general definition of Say (1821:341), a valuable point of departure
was to refer to definitions in some commonly used and reputable dictionaries, as well
as definitions in some discipline-specific dictionaries. A tax was defined as follows
by these different dictionaries:

The Oxford dictionaries.com (n.d.:n.p.) defines a tax as;

A compulsory contribution to state revenue, levied by the government on

workers income and business profits, or added to the cost of some goods,
services, and transactions.
A Dictionary of Modern Legal Usage describes a tax as;

A tax generally supports improvements for the entire community.

(Gardner, 1995:868)
Blacks Law Dictionary defines a tax as;

25
 A monetary charge imposed by the government on persons, entities, or
property to yield public revenue (Gardner, 1999:1469)
An International Dictionary of Accounting & Taxation defines a tax as;

A charge imposed by a government body on personal and corporate

income, estates, gifts or other sources to obtain revenue for the public
good (Wanjialin, 2004:385)
The Oxford Dictionary & Thesaurus (2009:952) defines a tax as;

Money that must be paid to the state, charged as a proportion of income

and profits or added to the cost of some goods and services
A Dictionary of Accounting (Oxford, 2010:409) defines taxation as;

A levy on individual or corporate bodies by central or local government

in order to finance the expenditure of that government and also as a
means of implementing its fiscal policy; Payments for specific services
rendered to or for the payer are not regarded as taxation
A Dictionary of Law defines a tax as;

A compulsory contribution to the states funds; It is levied either directly

on a taxpayer; or indirectly through tax on purchases of goods and
servicesand through various kind of duty (Law & Martin, 2009:541)
Literature from the legal discipline other than the legal dictionaries referred to above
constitutes another important source of definitions of taxes. (Thuronyi, 2003:45)
argues that;

A tax may be defined as a required payment to government and that the

definition is both under- and over-inclusive. It is under-inclusive in the
sense that not all payments are made to government itself, for example,
some payments are made to government-controlled entities. It is over-
inclusive in the sense that not all required payments to government take
the form of a tax, for example, fines paid to government as a penalty for
illegal acts. A payment to support governments expenses can be
described as a tax. It is different from a fine or penalty, as the purpose of
tax is not to deter or punish unacceptable behaviour, but to provide
funding to government (Thuronyi, 2003:46).
Taxes should also not include payments to government where the taxpayer receives
something directly in return, for instance, a transfer fee on property paid in return for
the registration of the property in the name of the taxpayer.

Justice Oliver Wendell Holmes, Jr in the verdict of Compania de Tabacos Vs

Collector case in 1927 gives the following definition;

Taxes are what we pay for a civilized society

26
The accurate classification of a government impost either as a tax, a levy, a charge, an
excise or a penalty is essential for the legal validity of the impost. Traditionally, the
High Court in Australia has used the Latham definition of a tax from the case of
Matthews v Chicory Marketing Board (Vic) (1938) 60 CLR 263 , to consider the legal
classification of a government impost (Morabito & Barkoczy, 1996:47; Weier,
2006:2). The Latham definition refers to a tax as;

A compulsory exaction of money by a public authority for public

purposes, enforceable by law, and is not a payment for services rendered
(Morabito & Barkoczy, 1996:47).
The Australian High Court has steered away from a definitive statement of the
characteristics that identify a tax, and opted rather to use specific factors to decide
whether a particular impost is a tax or not (Morabito & Barkoczy, 1996:43-63; Weier,
2006:2). In summary, these factors are described as follows:

Compulsion; an impost is considered to be compulsory in that the taxpayer has no

choice about whether to pay it.
Revenue-raising; the purpose of raising revenue for the government is a significant
factor to consider when deciding whether an impost is a tax or not.
Public purposes; Taxes are generally imposed to be used for the common benefit of
the general public.
Payment for services; an impost is generally not a tax when it is an impost for goods
and services rendered by a government in return for the payment.
Arbitrariness; this is an important factor when deciding whether an impost is a tax.
The liability for the tax must be the result of an impost based on
criteria that are general and clear in their application, and not the
result of an administrative decision unrelated to a test laid down by
legislation.
Judge Murphy, in the Canadian case of Lawson Vs Interior Tree Fruit and Vegetables
Committee of Direction, [1931] S.C.R. 357, said:

That they are taxes, I have no doubt. In the first place they are
enforceable by law. Then they are imposed under the authority of the
legislature. They are imposed by a public body. The levy is also made
for a public purpose.
The judges words strengthen the notion that a tax is a compulsory impost with the
purpose of providing benefits to the public.

In a South African case, Maize Board Vs Epol (Pty) Ltd 2009 (3) SA 110 (D), the
Maize Board wanted to recover levies from Epol (Pty) Ltd. The levies in question
entailed a general and a special levy imposed in terms of the now repealed Marketing

27
Act (59 of 1968). The Court had to decide whether the levies constituted a tax or not.
Judge Tshabalala concluded that;

The levies in issue did not satisfy the requirements of a tax, as they were
not imposed on the public as a whole, nor on a substantial portion of the
public. Nor was the collected revenue used for public benefits, nor were
the levies intended to raise public revenue they were not used to support
government activities in general.
(Nwosu, 2000), Anyanwu (1993) and Nwezeaku (2005) stated that;

Taxation is the compulsory transfer or payment (or occasionally of

goods and services) from private individuals, institutions or groups to the
government. (Nwosu, (2000), Anyanwu (1993) and Nwezeaku (2005))
According to Appah (2004);

Taxation is a compulsory levy imposed on a subject or upon his property

by the government to provide security, social amenities and create
conditions for the economic well-being of the society. (Appah, 2004)
The South African government literature also contains various definitions and
descriptions of a tax. The main definition of taxes in the national accounts describes
taxes as;

Compulsory, unrequited revenue collected by the government under

statutory provisions. It is unrequited in the sense that the taxpayer does
not receive anything directly in return from the government for paying the
tax (National Treasury, 2009c:38-39).
This definition is similar to the definition of a tax in the System of National Accounts
(2009:143), where taxes are defined as;

Compulsory, unrequited payments, in cash or in kind, made by

institutional units to government units
Bhartia (2009) argues that;

A tax is a compulsory levy payable by an economic unit to the

government without any corresponding entitlement to receive a definite
and direct quid pro quo from the government. Taxation, in a simple
language is a compulsory non-quid-pro-quo withdrawal of resources from
the private sector of the economy (Bhartia, 2009)
Similarly Jhingan (2004b), Nzotta (2007), Ola (2001), Osiegbu et al. (2010), Bhartia
(2009), Anyafo (1996) and Musgrave and Musgrave (2004), defined taxation as
follows:

A compulsory contribution imposed by a public authority, irrespective of

the exact amount of service rendered to the taxpayer in return. a
compulsory contribution from a person to the government to defray the

28
 expenses incurred in the common interest of all, without references to special
benefits conferred.
Tax can be defined to refer to its source whereby Tax is a monetary charge imposed
by the government on persons, entities, transactions or property to yield public
revenue. Where payment is not monetary, a more wide embracing definition has been
adopted as:

Taxes are the enforced proportional contributions from persons and property
levied by the State by virtue of its sovereignty for the support of government
and for all public needs (Thomas. M. Cooley, 2013).
In the OECD classification, the term taxes is confined to compulsory, unrequited
payments to general government. Taxes are unrequited in the sense that benefits
provided by government to taxpayers are not normally in proportion to their payments
(OECD, 2011). Taxation is defined in many ways commonly heard definitions apart
from the above definitions include;

(1) It is the process by which the sovereign through its law making body
raises revenues and, use to defray expenses of the government and (2) It is
a means of government in increasing its revenue under the authority of the
law, purposely used to promote welfare and protection of its citizen (Allan
de Villa John, 2013)
From these definitions, it is a widely held view that taxation is a sovereign right of the
state used to transfer resources from private to public use in order to achieve the
economic and political goals of society by using the tax legislation passed by the
Parliament represented by members elected by citizen who confer sovereign powers
to the State to collect taxes. The concept of tax sovereignty concerns both the ability
of a government to decide which taxes it should raise and the direct access to
taxation.

Leroy P. Beaulieu (1906) defines taxation as follows;

"A tax is purely and simply a contribution, whether direct or masked which
the public authorities impose upon the inhabitants or goods for the purpose
of defraying government expenditure." - Leroy Beaulieu (1906)
Dalton Hugh (1971) defines taxation as follows;

"A tax is a compulsory contribution imposed by a public authority

irrespective of the exact amount of service rendered to the tax payer in return
and not imposed as penalty for any legal offense." Dalton ()
P. E. Taylor ()

29
 "Taxes are compulsory payment to government without expectation of direct
return in benefit to the tax payer." - P. E. Taylor ()
Nicholas, T (2003) defines tax as follows;

A tax may be defined as any leakage from the circular flow of income into
the public sector, excepting loan transactions and direct payments for
publicly produced goods and services up to the cost of producing them. It is
in effect a contribution designed to reduce private expenditure in favor
public expenditure to enable the government to obtain funds in order to
provide social and merit goods and services, redistribute income, clear
market imperfections and stabilize the economy
Ray M. Sommerfeld, H. M. Anderson and H. R. Brock (1980) define tax as;

A tax can be defined meaningfully as any non-penal yet compulsory

transfer of resources from the private to the public sector, levied on the basis
of predetermined criteria and without reference to specific benefit received,
in order to accomplish some of nations economic and social objectives
We have to know at this juncture what it means by the term Compulsory. This term
as used in the definitions refer to the compulsory nature of a tax. The term
Compulsory is defined in the Oxford Dictionary and Thesaurus (2009:179) to
mean as required by law or a rule. Therefore the term Compulsory, in the
context of the definitions of a tax from the literature, must be read as originating from
legislation, the very essence of a tax.

The Australian High Court, cited by Morabito and Barkoczy (1996:43-63) and Weier
(2006:2), has indicated that the term compulsory can be interpreted to mean that;

A taxpayer has no choice about whether to pay an impost or not. It is

nevertheless possible to argue that in some instances a taxpayer does indeed
have a choice about paying the impost or not.
Another component in the definitions relates to the Raise revenue. This indicates
that the purpose of a tax is to raise revenue for government which is intended to fund
general expenditure in the provision of public goods and services.

In the case of Mr. Mohsin Somji vs Commissioner for customs and Excise
Commissioner for Tax Investigations Commercial case No. 287/01 HC at Dar-Es-
Salaam Justice Harold Nsekela argues inter alia that;

Under section 3 of the Act Tanzania Revenue Authority Act, 1995

revenue means taxes, duties, fees, levies, fines or other monies imposed by
or collected under the law or the specified provisions of the laws set out in
the First Schedule to the Tanzania Revenue Authority Act, 1995.

30
If however, revenue cannot fund expenditure the meaning of tax override the tax
justice; ultimately, we could be indebted to know what it means by the term Public
benefits as used in the definitions. Basically, this indicates that the government, in
return for the tax that the State imposes, would likely be obliged to provide public
goods and services to the shared benefit of the public.

2.2 The Objectives of Fiscal Sovereignty

The objectives of Fiscal sovereignty are: (1) to enable each level of government and
each government within a level, to finance its own budget independently and
according to its own criteria. This includes the capacity of financing public services in
response to the preferences of their own electorate (the "choice" model) as well as
those expenses which correspond to minimum standard (merit) goods and services set
by a higher level of government (the "agency" model), net of conditional grants and
(2) To decide redistributive policies: first in selecting ability-to-pay or benefit
taxation; second, in choosing the magnitude of redistribution, for example, through
the tax rate schedules or the amounts of exemptions and deductions on the income
tax. Taxation may have other definitions such as;

(1)the collection of the share of the dividend and organizational income by

a government under the authority of the law and (2) the inherent power of
the state to impose and demand contribution upon persons, property or rights
for the purpose of generating revenue for public purposes (Dafflon
Bernard, 1999)
In the same vein, these two definitions uphold that, one of the most flexible ways to
raise per capita incomes and to support increases in real GDP growth rates is through
taxation (Kayaga Lisa, 2007). Taxation emerges as one of the most effective domestic
tools that governments have direct control over to develop the resources needed to
meet their social, economic, and political goals. Developing countries would like to
increase their tax-to-GDP ratios in order to reduce budget deficits, improve the
services they provide, and optimize the effectiveness of their tax structures (Kayaga
Lisa, 2007).

31
 CHAPTER THREE
KEY REASONS FOR TAXATION
The Classical economic were in view that the only objective of taxation was to raise
government revenue. But with the changes in circumstances and ideologies, the aim
of taxes has also been changed. These days apart from the object of raising public
revenue, taxes is levied to affect consumption, production and distribution with a
view to ensuring the social welfare through the economic development of a country
(Suresh Vadde, 2011).

3.1 Objectives of Taxation

Government levies and collects taxes for various objectives. These objectives may be
specific or general.

3.1.1 Specific Objectives

The basic purposes of levying taxes are of four fold: (1) To support the operation of
that government itself; (2) To influence the macro economic performance of the
economy, the government's strategy for doing this is called its fiscal policy; (3) To
carry out the functions of the government such as national defence and providing
government services; and (4) redistribute resources between individuals or classes in
the population. Historically the nobility were supported by taxes on the poor modern
social security systems and intended to support the poor by taxes on the rich; and
modify patterns of consumption or employment within an economy by making some
classes of transaction more or less attractive (Adama, 2010).

3.1.2 General Objectives

Taxes are compulsory payments to the Government by the taxpayers. In the

beginning, Government imposed taxes for three basic purposes viz., to cover the cost
of administration, maintaining law and order in the country and for defence. But, in
modern days, there has been a change in the Governments expenditure pattern.
Today, the Government is in the position to restore social justice in the society by
way of providing various social services like education, employment, pension, public
health, housing, sanitation and the development of weaker sections of the society.
Besides the above, the Government announces heavy subsidies for agriculture and
industry. For example, subsidies to fertilizing industries; Thus, Government requires

32
more amount of revenue than before. Non-tax revenues are not sufficient to meet the
entire expenditures. Hence, Government imposes taxes of various types.

3.1.2.1 Raising Revenue

Traditionally, the primary purpose of a tax was to pay for goods and services
provided by the government. The financing function of taxes remains important
although taxes have other purposes today. Taxes are the main source of revenue or
income for governments and provide the chief means of covering recurrent or
development expenditures (Adama, 2010).

The major issue involving the financing function of taxes is their effect on the
efficient use of scarce resources, whereby taxes divert resources away from
alternative uses; these uses may be a source of lesser benefits than the uses to which
these resources are put in the public sector (Adama, 2010). However, if taxes divert
resources away from their best alternative use, they are a source of allocative
inefficiency. The efficient distribution of resources to the public sector via taxes
requires that benefits derived from government spending have a value equal to or
greater than the alternative uses these resources would have in the private sector of
the economy (Adama, 2010).

In modern times, the aim of public finance is not merely to raise sufficient financial
resources for meeting administrative expense, for maintenance of law and order and
to protect the country from foreign aggression. Now the main object is to ensure the
social welfare. The increase in the collection of tax increases the government revenue.
It is safer for the government to avoid borrowings by increasing tax revenue
(Libabatu Samaila Garba, 2014).

The basic purpose of taxation is raising revenue, to render various economic and
social activities; in that, Government requires large amount of revenue. To meet this
enormous expenditure, Government imposes various types of taxes in addition to the
non-tax revenue (Mutua M. John, 2012).. Governments provide a variety of services
to their citizens, including education, health care, water, security, roads, and social
security (for example, care for the elderly), among others (Mutua M. John, 2012).
That is to finance Government re-current and development expenditure, i.e. paying
salaries for civil servants and funding long term projects such as construction of
schools, hospitals and roads. In order to provide these goods and services,

33
governments, collectively, use taxes and other sources of revenue as stated earlier
(Mutua M. John, 2012). It is recognized that government expenditures contribute to
economic growth, while taxes retard growth. Some goods and services provided by
government, such as a legal system, enforcement of property rights and contracts, a
set of measures and standards, an infrastructure, the provision of national defense,
public health, and, perhaps, free or subsidized education raise the productivity of
inputs in the private sector (Scully Gerald, Patrick J. Caragata, 2012) .

It should bear in mind that, governments in both developed and developing countries
collect taxes to fund public services. In that, Marina et al. (2002) argue that,

Taxation is the only known practical manner for collecting resources in

order to finance public expenditure for goods and services consumed by any
citizenry.
The tax revenue is generated by imposing: Direct Taxes such as personal income tax,
corporate tax, etc., and Indirect Taxes such as customs duty, excise duty, etc.

3.1.2.2 Removal of Inequalities in Income and Wealth

In the financing function, the diversion of resources by taxes from the private sector
is done under the presumption that resources are used efficiently in the private sector.
Thus, the primary concern is to divert resources in a manner that does not interfere
the least, with the allocation of resources in the private sector. If resources are not
efficiently allocated in the private sector, taxes can be purposely used to have non-
neutral effects, that is, taxes can be used to change the allocation of resources
(Diewert W. Erwin, and Fred Thompson, 1998)

The imposition of heavy duties on non-essential and luxury goods discourages the
producers of such goods. The resources utilized for the production of these goods
may be diverted into the production of other essential goods for which various tax
concessions are given. This is called as Beneficial diversion. Suffice it to say that, the
imposition of tax leads to diversion of resources from the taxed to the non-taxed
sector (Merima Nasser et al, 2014). The revenue is allocated on various productive
sectors in the country with a view to increasing the overall growth of the country2.
Tax revenues may be used to encourage development activities in the less

2
http://hubpages.com/education/Role-of-Tax-in-the-Economic-Development-of-a-Country Role of
Tax in the Economic Development of a Country (2011)

34
developments areas of the country where normal investors are not willing to invest
(Libabatu Samaila Garba, 2014).

In order to ensure economic goals through the ability of the taxation system to
influence the allocation of resources, taxation has to do the following;

a) transferring resources from the private sector to the government to finance

the public investment program;
b) The direction of private investment into desired channels through such
measures as regulation of tax rates and the grant of tax incentives etc. This
includes investment incentives to attract foreign direct investment (FDI) into
the country;
c) Influencing relative factor prices for enhanced use of labour and
economising the use of capital and foreign exchange.
The welfare state aims at the removal of inequalities in income and wealth. By
framing suitable tax policy, this end can be achieved. It is stressed in the Canon of
Equality (Merima Nasser et al, 2014). In Tanzania, the progressive taxation on
income and wealth and heavier excise and customs duties, and taxes on luxurious
goods are the suitable examples in this regard. The revenue raised is then used to
provide social services for the benefit of the society.

Suffice it to say that, taxation follows the principle of equity. The direct taxes are
progressive in nature. Also certain indirect taxes, such as taxes on luxury goods are
also progressive in nature (Adama, 2010). This means the rich class has to bear the
higher incidence of taxes, whereas, the lower income group is either exempted from
tax (direct taxes) or has to pay lower rate of duty (indirect taxes) on goods consumed
by the masses. Thus, taxation helps to reduce inequalities of income and wealth
(Adama, 2010).

The redistribution function of taxes raises the question of the appropriate way of
distributing taxes among taxpayers. Taxes and tax rates can be selected in a manner
that alters the pattern of income among taxpayers. Taxes can shift the pattern of
income away from certain income groups and towards others. For example,
progressive income tax rates take a higher per cent of income for higher incomes than
for lower; thus, they tend to reduce the after tax income of higher income groups
more than they reduce the after tax income of lower income groups (Adama, 2010).
Progressive income tax rates, then would be expected to shift the after tax income
pattern away from higher income groups to lower income groups. This effect,
however, can be offset in part or in whole by tax deductions, credits, and the like

35
which higher income groups can take advantage of in order to minimize their tax
payments. Moreover, by way of giving various tax concessions to certain essential
goods, the Government enhances the standard of living of people. This is supported
by the quote of Fran Lebowitz which says

If you are truly serious about preparing your child for the future, dont
teach him to subtract teach him to deduct. (Lebowitz Fran, 1981)
3.1.2.3 Ensuring Economic Stability

Taxation affects the general level of consumption and production. Hence, it can be
used as an effective tool for achieving economic stability. That is, by means of
taxation the effects of trade cycle i.e. inflation and deflation can be controlled. During
the period of boom or inflation, the excess purchasing power in the hands of people
leads to rise in the price level (Merima Nasser et al, 2014). Raising the existing tax
rates or imposing additional taxes can remove such excess purchasing power. Then
the abnormal demand will be reduced and the economic stability can be achieved. At
the same time, by providing grants, tax exemptions and concessions, production can
be encouraged thereby inflation is controlled. Suffice it to say that, taxation can be
used to regulate demand and supply in the economy in times of inflation (Adama,
2010).

Likewise, during the period of depression or deflation, the role of tax policy in the
economy is important. Reduction in the existing tax rates and removal of certain
taxes, consumption can be induced which in turn results in increasing demand
(Adama, 2010). This encourages business activities, and the economic growth can be
achieved. Thus, through properly devised tax system, the economic stability can be
achieved by controlling the effects of trade cycle. Suffice it to say that, Tax policy
may be used to handle critical economic situation like depression and inflation. In
depression, tax is set to increase the consumption and reduce the savings to increase
the aggregate demand and vice versa. Thus the tax policy may be used to strengthen
incentives to savings and investment.

The stabilization function of taxes view taxes as a variable that can be altered to
direct the economy toward economic stability; that is, full employment and a stable
price level. An increase in taxes normally reduces private consumption and saving
therefore reducing private spending. A decrease in taxes increases private
consumption and saving and therefore has the opposite effect on private spending.

36
Thus, taxes can play an important role in changing the level of private demand. When
the economy is near or at full employment and is experiencing inflation, tax rates can
be increased to reduce inflationary pressures. When the economy is experiencing
declining real output and rising unemployment, tax rates can be cut in order to
increase private spending.

Taxes, then, can be viewed as a fiscal policy variable to be changed depending upon
overall economic conditions. This role places taxes in quite a different perspective
than the role in which they are traditionally seen simply as a method of finance.
During periods of economic expansion, tax collections tend to automatically rise
because of the growth in tax bases such as sales and income. This automatic growth
in taxes tends to slow down the expansion. During periods of economic contraction,
tax collections automatically decline because of the decline in sales and income in the
economy (Adama, 2010). Therefore, even if tax rates are not changed during the ups
and downs in the economy, tax collections automatically change in a way that tends
to stabilize the economy (Adama, 2010).

There are even some taxes that can more directly stimulate the economy. An increase
in the inheritance tax may induce some of the wealthy to consume now, and this will
stimulate the economy (Monkam Nara, et al 2015; Stiglitz E. Joseph, 2014). The use
of tax instruments to enhance economic stability is important in developing countries
because this enables them to ensure elasticity with respect to changes in the value of
money and income levels. If tax yields rise when national income rises, governments
have less need to rely on deficit financing to maintain and expand the level of public-
sector activity in a growing economy (Monkam Nara, et al 2015).

3.1.2.4 Reduction in Regional Imbalances

Reduction in regional disparities is a major concern for governments in most

countries. Large regional inequalities represent serious threats to the economic and
political stability of a country, and in extreme cases can lead to demands for drastic
redistribution policies by the poorest regions even to calls for separation by richer
regions hoping to avoid significant redistribution of their wealth or poorer regions
hoping to do better in an alternative dispensation (Raja Shankar and Shah Anwar
(2008); Justino Patricia, (2004)). Therefore, there is a need for redistributive transfers
from the richer to the poorer regions

37
It is normal that certain parts of the country are well developed, whereas some other
parts are in backward conditions. To remove these imbalances, the Government can
use tax measures. By way of announcing various tax exemptions and concessions to
those particular backward regions, the economic activities in those areas can be
induced and accelerated (Adama, 2010). It encourages development of local
industries and protects them against foreign competition with a view to providing
employment and saving foreign exchange by imposing high duties on competing
imports. Likewise, it encourages export of goods and services by reducing or
removing tax on the export in order to make them more competitive in the world
market (Adama, 2010).

In the same vein, taxation plays an important role in regional development; Tax
incentives such as tax holiday for setting up industries in backward regions, which
induces business firms to set up industries in such regions. Moreover, Tax revenue
collected by government is also utilised for development of infrastructure in
backward regions.

3.1.2.5 Capital Accumulation

Tax concessions or rebates given for savings or investment in provident funds, life
insurance, unit trusts, housing banks, post offices banks, investment in shares and
debentures of certain companies etc. lead to large amount of capital accumulation
which is essential for the promotion of industrial development3.

Since developing countries has mixed economy, care has also to be taken to promote
capital formation and investment both in the private and public sectors. 4 Taxation
policy is to be directed to raising the ratio of savings to national income
(Waidyasekera D. D. M, 2007). Therefore, taxation increases the level of savings and
capital formation in the private sector partly for borrowing by the government and
partly for enhancing investment resources within the private sector for economic
development (Waidyasekera D. D. M, 2007).

3
http://hubpages.com/education/Role-of-Tax-in-the-Economic-Development-of-a-Country Role of
Tax in the Economic Development of a Country (2011)
4
http://hubpages.com/education/Role-of-Tax-in-the-Economic-Development-of-a-Country Role of
Tax in the Economic Development of a Country (2011)

38
3.1.2.6 Creation of Employment Opportunities

More employment opportunities can be created by giving tax concessions or

exemptions to small entrepreneurs and to the industries adopting labour-intensive
techniques. In this way, unemployment problem can be solved to certain extent. In
that regard, introducing (or expanding) work-contingent (in-work) tax credits
targeted at low-income workers can increase work incentives for low-income
workers; and reducing employer social security contributions or payroll taxes for low-
skilled youth, long-term unemployed, and older workers will reduce the cost of hiring
them to employers, increasing labour demand (OECD, 2010).

Taxes on labour such as personal income taxes and employers' and employees' social
contributions can have adverse effects on labour utilisation by affecting both labour
demand and supply (OECD, 2010). In particular, to the extent that taxes and social
contributions translate into higher labour costs, as wage earners succeed in shifting
the tax burden onto employers, they can result in lower labour demand (OECD,
2010). By contrast, if taxes are reflected in lower take-home pay, they can influence
the decision of whether to enter the labour market and/or how much labour to supply
by those in employment. This negative effect on labour supply is amplified when the
perceived benefit of paying taxes and social contributions is low, like for example
when public spending is felt to be inefficient and the social protection system
inadequate. Depending on whether the income or the substitution effect prevails, a
change in the combination of taxes and social benefits could result in higher or lower
labour supply.

Overall, it can be argued that a relatively high tax burden on labour may contribute to
unsatisfactory employment levels. In this context, revenue-neutral tax reforms that
shift the tax burden away from labour to other tax bases can be an important element
to help improve labour market outcomes and foster growth. The implicit tax rate on
labour is a summary measure approximating the ex-post average effective tax burden
on labour income in the economy. As such, it does not allow disentangling cyclical,
structural and policy elements and can hide important variations in effective tax rates
across different household types or at different wage levels. At the micro-economic
level, a useful measure of the tax burden on labour is the tax wedge, i.e., the
difference between the labour costs to the employer and the corresponding net take-
home pay of the employee (Bardone Laura, 2010).

39
3.1.2.7 Preventing Harmful Consumption

Taxation protects society from undesirable and harmful consumption. By way of

imposing heavy excise duties on the commodities like liquors, cigars etc., the
consumption of such articles are reduced to a considerable extent. Suffice it to say
that, taxation generates social welfare (Sijbren Cnossen, 2003; Mafwenga, H.M
2006). The social welfare is generated due to certain undesirable products like
alcoholic products, tobacco products and such other products are heavily taxed, which
restricts their consumption, which in turn facilitates social welfare. A part of the tax
revenue is utilised for social development activities, such as health, education and
family welfare, which also improve social welfare as well as social order in the
society (Sijbren Cnossen et al, 2003; Mafwenga, H.M 2006)..

A tax on pollution (carbon emissions) has even more benefits. It encourages firms to
make carbon-reducing investments, to retro-fit their firms to reflect the true costs of
the pollution that they generate (Sijbren Cnossen et al, 2003; Mafwenga, H.M 2006).
A tax on pollution has a triple dividend because it leads to a better environment which
can itself lead to stronger economic performance and it raises revenue, even as it
reduces the bad externalities spilling over on the rest of us. Moreover, it incentivizes
firms to retro-fit, thus encouraging investment that leads to higher output and
employment. The argument of revenue generation from goods with external costs is
supported by the quote of Thomas S. Foley which says

If you dont drink, smoke, or drive a car, youre a tax evader. (Thomas S.
Foley)5
Consumption taxes are often used to encourage citizens to reduce or avoid
undesirable sorts of consumption. However, taxing consumption is often said to be
anti-egalitarian, or regressive: Members of low-income groups have less disposable
income than better- off citizens. But they pay the same amount of consumption tax
per unit of consumption. This means that the real burden that consumption taxes
impose on citizens tends to increase as citizens become poorer. In this way,
consumption tax apparently discriminates against the badly-off. So, from an
egalitarian perspective, consumption tax might be inferior to tax bases that can be
made progressive, such as income tax (Erich Kirchler, et al. 2013)

5
Quote from The Quotation Page, an internet website: www.quotationspage.com

40
Most views about justice allow that society should engage in some paternalistic
policies when public health is at stake, particularly the health of the badly-off. And it
is hard to realise these goals without some use of taxation remains a more benign and
accepted form of coercion. So, it is worth trying to devise a way of making
consumption tax more egalitarian (Erich Kirchler, et al. 2013)

3.1.2.8 Encouragement of Exports

Now-a-days export oriented industries are encouraged by way of providing various

exemptions like 100% relief from income tax, free trade zones etc. It results in the
large earnings of foreign exchange (Merima Nasser et al, 2014).

We could say that, taxation encourages exports and restricts imports. Generally,
developing countries and even the developed countries do not impose taxes on export
items. For instance, in Tanzania, exports are exempted from excise duty, VAT is zero
rated, customs duty and other duties are also exempted. However, there is customs
duty on imported goods. Therefore, taxation helps to: Earn foreign exchange through
the promotion of exports. For example; VAT regimes, as implemented around the
world, are commonly thought to promote exports and are usually destination-based in
their treatment of trade flows taxable at a zero rate; hence reducing costs on export
(Slemrod Joel, 2011).

Crucial to the theorem is the so-called trade-balance condition, which holds that the
value of what a country sells on world markets must equal what it buys. Not every
year, but over the long run, in equilibrium, this condition will hold true. Of course,
the trade-balance condition calls into question why one might want to have tax or
trade policies that favor exports. Even if successful those policies would, in the long
run, increase the value of imports as much as exports (Slemrod Joel, 2011).

3.1.2.9 Raise representation

Taxation raise representation within the democratic process because it has been found
that only when an electorate and a government are bound by the common interest of
tax does democratic accountability really work (Murphy Richard, 2012).

There are 5 Rs for raising tax which are (1) Raise revenue; (2) Reprice goods and
services considered to be incorrectly priced by the market such as tobacco, alcohol,
carbon emissions etc. and by providing tax reliefs e.g. for childcare; (3) Redistribute

41
income and wealth; (4) Raise representation within the democratic process because it
has been found that only when an electorate and a government are bound by the
common interest of tax does democratic accountability really work; and finally to
facilitate: and (50 Reorganization of the economy through fiscal policy (Murphy
Richard, 2012). If tax justice is to prevail taxes must be set taking all these
considerations into account. But motive is not enough, of course. The tax system has
also to be efficient. There are 10 Cs to this. An efficient tax system is:

1. Comprehensive in other words, it is broad based;

2. Complete with as few loopholes as possible;
3. Comprehensible it is as certain as is reasonably possible;
4. Compassionate it takes into account the capacity to pay;
5. Compact it is written as straightforwardly as possible;
6. Compliant with human rights;
7. Compensatory it is perceived as fair and redistributes income and wealth
as necessary to achieve this aim;
8. Complementary to social objectives;
9. Computable the liability can be calculated with reasonable accuracy;
All of which facilitate the chance that it will be:
10. Competently managed.
In combination these are key attributes of a good tax system (Murphy Richard,
2012).

The famous catchphrase no taxation without representation, which symbolizes the

beginning of U.S. independence, has a substantial legal, constitutional, and even
economic, significance in our times (Edrey Yoseph, 2007). In a liberal society, no
person is asked to pay any payment without consent. Any tax in a democracy may be
levied only by an act of the legislature, which is elected by the people to serve as the
publics agents, means that the tax is the product of a collective consent to pay the
price for public goods and services offered by the elected government (Edrey Yoseph,
2007). Based on the notion of a Social Contract, people are willing to enter into the
social contract and obey the sovereign only if its acts and actions improve their lives
and enhance their welfare. Consequently, under each tax law, there is an underlying
assumption that all taxpayers accept the tax (Edrey Yoseph, 2007). However, the
quality of a tax, its merits and its purpose must be studied to accept the assumption
that a given tax is based on reasonable consent. Taxes are the price for goods and
services we purchase from the government. As Justice Holmes put it so beautifully,

I like to pay taxes. They are the price we pay for civilized society (Edrey
Yoseph, 2007)

42
Are governments forced to democratize by their need for greater tax revenue? There
are good reasons to believe this was true in the past: representative government first
came about in early modern Europe when monarchs in England, France, Spain and
Austro-Hungary were compelled to relinquish some of their authority to
parliamentary institutions, in exchange for the ability to raise new taxes. The rebellion
of the American colonies against King George III was sparked by his governments
efforts to impose new taxes in the 1760s (Michael L. Ross, 2004).

Suffice it to say that, in 1765, the British parliament attempted to place a stamp tax on
the American colonies. It was not an unreasonable move. The colonies were
expensive for the Crown to defend, and its residents enjoyed a relatively light tax
burden (Michael L. Ross, 2004). Of the many possible ways for the Crown to tax its
American subjects, a stamp tax was relatively judicious; indeed, a similar tax had
been in effect in England since 1694. Yet the colonists responded to the Stamp Act
with a level of antipathy that parliament had scarcely anticipated. In the course of
their campaign to get the tax repealed, the colonists also emerged as champions for a
new right whose roots they found in the British experience: the right of peoples to
be taxed only by their own representatives (Michael L. Ross, 2004).

The view that taxation tends to produce more representative government is based on a
common interpretation of political development in early modern Europe and colonial
America. This interpretation has deeply influenced a generation of political scientists,
sociologists and economic historians including Bates Robert and Ronald Lien
(1985) and Levi Margaret (1988), who argue that if societal actors are relatively
strong, state makers may be forced to concede rights to societal representatives.
Buchanan James (1977), Mann Michael (1980), Moore Barrington Jr (1966), North
Douglass (1990), Organski Kenneth (1965), Olson Mancur (1993), Skocpol Theda
(1979) and Tilly Charles (1992) whose theories of state-building, taxation and
representative government have, in turn, shaped the way many other scholars view
the non-Western states (Bentzen Jeanet, et al 2014).

The taxation leads to representation argument has also been used to explain the
problems of resource-rich authoritarian governments outside the Middle East,
including the Republic of Congo, Democratic Republic of Congo, Gabon and
Indonesia (Michael L. Ross, 2004). However, the claim that taxation leads to
representation also contains a critical ambiguity: it is not clear whether democracy is

43
linked to a higher absolute tax burden, or a higher tax burden relative to the services
the government provides (Michael L. Ross, 2004).. The issue may seem trivial, but
each view implies a different causal model and must be tested in a different way. We
can conclude at this end that, the more a state earns its income through tax collection,
the more it needs to enter into reciprocal arrangements with its citizens about
provision of services and representation in exchange for tax contributions (Michael L.
Ross, 2004)..

Joseph Schumpeter (1954) suggested that from the fourteenth to the sixteenth
centuries, the rising cost of war in the Austrian principalities had forced princes into
debt, which sent them begging to the estates; in exchange for new taxes, the estates
eventually received greater accountability from the princes, and influence over how
their money was spent. For Schumpeter, this was the dawn of the modern state in
Central Europe; it was also a critical step towards the incorporation of representative
institutions into government.

According to William Stubbs (1896), The admission of the right of parliament to

legislate, to enquire into abuses, and to share in the guidance of national policy, was
practically purchased by the money granted to Edward I and Edward III. (Bernard
Bailyn, et al, 1977) argue that in the 1760s, the British government successively
adopted three measures that would impose new taxes on the American colonies, to
help pay for the debts incurred by the Seven Years War: the Sugar Act, the Stamp Act
and the New Townshend levies. These measures provoked an unprecedented level of
organized resistance in the colonies, producing petitions, boycotts, riots, assemblies
of outraged citizens, the formation of anti-tax militias and appeals from the colonial
legislatures.

The colonists themselves later joined by most historians believed these acts
helped produce the rebellion of 1776, which eventually led to both independence and
a government with strong representative institutions. Ironically, in 1820 the US
Supreme Court ruled in Loughborough Vs Blake, 18 U.S. 5 Wheat 317 317 (1820)
inter alia that;

The federal government had the right to impose taxes on US territories

that had no representation in Congress.

44
3.2 Taxation and Governance

Historically, the bargaining process between citizens and states over taxing and
spending led to the creation of a virtual fiscal social contract that was crucial to the
emergence of representative government and democracy and a path to better
governance in Western Europe and the United States. This would create incentives
for governments to put in place strong bureaucracies capable of collecting and
administering taxes effectively as well as information systems enabling bureaucracies
to carry these functions efficiently. Additionally, strong incentives to generate more
revenues would compel states to foster economic growth that results in the well-
being; Moore (2008) called it an institutionalized influence over public policy. of
life and prosperity of their citizens. Concurrently, taxpayers in Parliaments would
implement structures to oversee revenue-raising and hold states accountable for the
use of tax revenues (OECD 2008).

Specifically, in that fiscal social contract, citizens would willingly accept to pay
their tax obligations in exchange of rights to be represented in decision-making
processes about how tax revenues are raised and spent, accountability, and effective
provision of public goods and services.

It should be noted that, in 17th to 19th Century Europe rulers needed revenue to fund
inter-state wars. This gave them strong incentives to nurture broad-based economic
growth and develop effective bureaucracies to assess, collect and manage tax
revenues. The effect was both to increase state capacity and prompt citizens to
organize to resist or negotiate tax demands and press for more say in the way state
revenue was used which in turn increased the accountability (Moore, 2007).

Brewer (1989) showed exactly how the need to collect tax led to the expansion of
state capacity in early modern Britain, as the King began developing a Weberian
bureaucracy in order to collect excise taxes (Brewer, 1989). This expansion of power
increasingly brought the state into conflict with citizens, who demanded concessions,
in the form of representation and services, in return for taxation. They wanted a say in
how their money was spent and how this emerging bureaucratic power related to
them. The link from taxation to representation has been clearly theoretically explored
through these historical processes, and neatly summed up in the demands of

45
American revolutionaries that there be No Taxation without Representation (Ziari-Reza,
2013).

Historically, bargaining between governments and taxpayers has played a central role
in state building and the emergence of democratic governance. When governments
depend on a large number of taxpayers for revenue they have incentives to promote
broad prosperity, and to develop bureaucracies capable of collecting and
administering taxes effectively. This makes governments more responsive to their
citizens and helps build state capacity (OECD, 2009). Bargaining with citizens over
tax makes governments more accountable, as taxpayers mobilise to resist or negotiate
tax demands, monitor how tax is collected and used, and insist on having a greater
say in public policy in exchange for compliance with tax demands. As tax compliance
increases, state capacity improves and the taxation process becomes more efficient
and predictable. Better public policy results from debate and negotiation with citizens
(OECD, 2009).

Bargaining over the tax eventually led to the creation of a social contract. Citizens
complied with tax demands in return for less arbitrary taxation more influence over
public policy and more scrutiny by representative institutions over public finances.
Lack of bargaining with citizens over tax can lead to governance problems. States
with abundant natural resources for export have limited incentives to create
institutions to collect or administer tax or to provide vital services in poorer, more
remote areas. However, the process of bargaining between the government and
citizens over taxation and public spending remains central to the creation of capable,
accountable, and responsive States. For example;

In Ghana, government attempts to introduce VAT in 1995 led to mass protests

and bargaining with the government, in which protesters demanded increased
accountability, democracy, and political openness;
In Argentina, provincial governments that depend on broad-taxation of
citizens have historically been the most democratic. In provinces that relied on
Central government finds or oil revenue, local politicians were better able to
buy off or suppress democratic opposition.

Tax reform could improve governance it results in a large number of citizens being
taxed more fairly, predictably, and transparently. Reducing the scope for private deals
would encourage taxpayers to organize around common demands for improved public
services and accountability.

46
Additionally, strong incentives to generate more revenues would compel states to
foster broad-based economic growth that results in the well-being; the quality Moore
(2008) called it an institutionalized influence over public policy. of life and
prosperity of their citizens. Concurrently, taxpayers in Parliaments would implement
structures to oversee revenue-raising and hold states accountable for the use of tax
revenues (OECD 2008).

1. Taxation or absence of tax impacts on the quality of Governance through

two main channels (1) degree of dependence of governments on general
taxation for their financial resources. The dependence of governments on
general taxation has positive effects on the quality of governance. However,
we cannot assume that, because governments are fully dependent on
taxation for revenues will be capable, accountable or responsive. They may
levy taxes coercively and thereby damage state-society relations and
reinforce poor governance.
2. State elites are the financially independent of the citizen-taxpayers. This
changes the political incentives that they face, and the ways in which they
seek to obtain, use and retain power. The debate about tax policy mostly in
addressed to some aspect of three big questions namely;
i) how much money should government gather as tax? In that, tax
policy should yield enough money to meet public spending needs
and contribute to the fiscal stability;
ii) how should the tax burden be distributed among actual or potential
taxpayers? In that, this issue may be argued either in terms of
fairness in burdensharing, or in terms of the potential instrumental
advantages of using tax policy to help achieve other public policy
goals; We should know that the quote of John F. Kennedy tells us
that innocent taxpayers are the ones who face heavier tax burden, as
it asserts that
To the extent that some people are dishonest or careless in their
dealings with the government, the majority is forced to carry a
heavier tax burden. (John F. Kennedy, 1961);
iii) How can the potential adverse economic costs of taxation be
contained or minimized?
There is some strong consistent connection between the ways in which governments
are financed and the ways in which govern. This is the foundation to the mainstream
Anglo-American interpretation of the emergence of Representative government and
Democracy in Britain and the United States (Moore, 2007).

There is also a more theoretical tradition of academic work that links long term
changes in society and the governance to changes in the ways in which states obtain
the resources they need to govern (Moore, 2007). Charles Tilleys (1992) argue that,
where instead of simply taxing coercively, rules were motivated to bargain over
taxation, state financing and public policy with the people who controlled large

47
amounts of capital, states tended to become more capable especially in war and more
accountable and responsive to citizens.

It was on the basis of these kinds of evidence that some authors began to make strong
claims about the centrality of the tax relationship to governance with more or less
emphasis on the motion that higher levels of taxation would bring forth more
capability, accountability or responsiveness on the part of the government (Moore,
2007). In contemporary developments debates, the term Governance is used variously
to refer to; Outcomes (the effective provisions of collective goods) and to the political
processes that generate these outcomes; the manner in which states elites acquire and
use their power and authority (Fakile Adeniran Samuel, 2009)

In contemporary developing countries, we can usefully think of good governance as

having three main operational dimensions, which tend to complement and reinforce
one another;

1. The Responsiveness of States to citizens i.e. an orientation to meeting

citizens needs;
2. The Accountability of States to citizens where this implies the existence
of institutionalized mechanisms of which electoral democracy is the
most important and most through going through which State elites
both answer to citizens for the ways in which they employ their
authority and may be rewarded or sanctioned by extensions or
curtailments of that authority;
3. The capability of States to determine and respond to citizens needs and
wants, which in turn has two complementary dimensions; the political
capability to determine needs and to frame and nurture bargaining and
compromise among competing interest and the organizational or
bureaucratic capacity to settle a sensible policies to deliver public
services and to enforce the authority of the State. (Moore, 2007).
The second set of reasons for the relative complexity of the taxation-governance
connection is that has several dimensions; 1) from where do governments get their
revenue? 2) How much of their incomes do citizens pay in taxes? 3) How and what is
taxed?; and 4) how are taxes assessed and collected? (Moore, 2007)

Many authors have argued for a positive relationship between tax and democracy as
they have seen tax as a function of state-society relations. As democracy alters state-
society relations, and taxation is a function of this relationship, it is hypothesized that
democracy should have an effect on tax outcomes (Darcy Michelle, 2012). Since the
changes wrought on state-society relations by democracy are positive opening
political space for opposition, giving citizens more voice, creating mechanisms of

48
accountability, and placing constraints on rulers - its impact on taxation should also
be positive. It should, as Levi (1988) argues, reduce the transaction costs of taxing by
making compliance quasi voluntary and by building tax morale (Levi, 1988;
Pommerehne, Hart & Frey 1994). Citizens should be more willing to enter into a
fiscal contract with the state, as they have more control over its actions and greater
belief in its legitimacy (Levi, Sacks & Tyler, 2009).

A growing trend in Africa is taxation and good governance are being linked due to
the realisation that the tax system may contribute to improved governance through
three channels: (i) Common interest processes which ensure that governments have
stronger incentives to promote economic growth since they are dependent on taxes
and therefore on the prosperity of taxpayers. (ii) State capacity processes which
require states to develop a complex bureaucratic apparatus for tax collection because
of their dependence on taxes, particularly, direct ones. This is likely to lead to broader
improvements in public administration. (iii) Taxation may engage taxpayer-citizens
collectively in politics and lead them to make claims on the government for
reciprocity and accountability, either through short-term conflicts or long-term
increases in political engagement. Governments are therefore compelled to respond to
these citizen demands in order to enhance tax compliance and sustain state revenues.

The outcome of linking taxation to good governance in Africa has led to the on-going
debate on: (i) the appropriate linkage between taxes paid and services provided to
citizens; (ii) strengthening partnerships between tax authorities and civil society; and
(iii) fighting fiscal corruption in tax administration a phenomenon which is
pervasive in many countries to establish legitimacy (Logan Wort, 2012)

3.3 Limits of Taxation Powers

The power of taxation is subject to Constitutional and Inherent Limitations.

Constitutional limitations are those provided for in the Constitution or implied from
its provisions while Inherent limitations are restrictions to the powers to tax attached
to its nature. Under Section 138 of the Constitution of the URT 1977 provides that;

No tax of any kind shall be imposed save in accordance with the law enacted
by Parliament or pursuant to a Procedure lawfully prescribed and having the
force of law by virtue of a law enacted by Parliament (URT, 1977)
Limiting the power to tax, as well as the power of the tax authority is not inimical to
government interests in collecting taxes; it is often the case that taxing authorities

49
operate outside the Constitutional and Administrative law because of perceived vital
government interests in imposing and collecting taxes. However, when viewed from
the perspective of Constitutionalism, it emerges that constraining the powers of
taxation does not undermine the vital interests of a government in taxing its people.
On the contrary, limiting taxing powers constitutionally enhances trust in the
Constitutionality of taxation and encourages taxpayers to voluntarily pay their taxes
(see also Ongwamuhana Kibuta, 2011; Jensen Erik M, 2006).

The public assumption is that, when taxing powers are subject to Constitutional
limitations, legitimacy of taxation is achieved and the justification for tax compliance
is entrenched. The proposition here is that, limiting the powers of tax collection is the
long-run, in the best interest of the States, because it encourages Voluntary tax
compliance (see also Ongwamuhana Kibuta, 2011; Jensen Erik M, 2006).
Constitutional limitation of taxing powers also plays another important role in tax
administration. It helps provide a better guarantee for taxpayers rights which is
another motivation for Voluntary tax compliance. Taxpayers rights and the power to
tax are not opposite forces, they are complementary features. When the power to tax
is exercised within the Constitutional and legal limitations, good governance is
achieved and with it, the legitimacy of taxation (see also Ongwamuhana Kibuta,
2011; Jensen Erik M, 2006).

Good governance requires responsible use of tax revenue. Governments are not
usually limited in their use of tax money. They may tax revenues for finance public
needs, or they may give part of the revenue to citizens in welfare payments. However,
one needs to distinguish sharply between the need for taxing power and the manner of
exercise of the power to tax; (Jensen Erik M, 2006).

The power to tax per se, does not carry with it any obligations to use the tax revenues
raised in any particular way. The power to tax does not logically imply rational
spending (Jensen, M. Erik 2006). The power to tax is simply the power to take. If the
government wishes to obtain a particular price of property, it is of no relevance
whether it does so simply by direct appropriation, or by purchase, or by taxation.
Both the Government and the owner are in an identical position after government
action, irrespective of the precise details of the means of appropriation. The
government takes and the person loses. Therefore, if any distinction between taking

50
and taxing is to be sustained, the tax alternative must involve certain additional
requirements not present with direct appropriation (Jensen M. Erik, 2006).

Responsible use of taxation revenues as a feature of good governance helps to create

and maintain public confidence in the government. Control of expenditure has two
aspects to it. The first is accountability i.e. the need to fully account for all tax
revenues collected and expended by government. The second is responsible spending.
The way the government expands public funds has a considerable impact on
taxpayers compliance with taxes. Unwise spending of public funds fuels non-
compliance with taxation. There is a maxim of wisdom of Hindu from Mahabharata
which says that;

The ruler must act like a bee which collects honey without causing pain to the
plant
This maxim cannot be ignored (Gordon K. Richard (1996); Kabera Charles, (2008);
Ongwamuhana Kibuta, (2011); Bird, R.M (1991); Victor Thuronyi (1996)) and Jean
Baptiste Colbert concludes that;

The art of taxation consists in so plucking the goose to obtain the largest
amount of feathers, with the least possible amount of hissing. (Willian J.
Craig, 2000)
3.4 Taxation and Democracy

From the fiscal point of view, the State collects taxes and allocates them in order to
fulfil the three Musgravian functions in economy namely; Allocation, Distribution
and Stabilization. In this context, the power to tax is very important in a democracy.

Democracy has a lot of definitions. According to Vanhanen (2003), a simplistic

definition of democracy means free popular elections to fill positions of power, while
Welzel (2007) defines democracy by Constitutional constraints on the power of the
State and by the popular control over it. All autocracy is the opposite concept of the
democracy; a government in which one person or a few persons have in principle
quasi-unlimited authority over the others.

It should bear in mind that, there are three different views of tax fairness; 1) Everyone
pays the same amount e.g. a poll tax; 2) Everyone pays the same percentage on their
income e.g. flat tax; and 3) Everyone should have the same tax burden make the same
sacrifice e.g. a progressive tax. We should hold that, Taxing is the function of State-
building and as a function of State society relations. In a developing world context,

51
where States are generally weak and the tax net small, citizens have few incentives to
voluntarily comply, as free-riding is easy and the services received in return are poor.
As this is the case, the State must first acquire the coercive capacity to force everyone
to pay before it can convince them to do so consensually; hence, democracy which
gives citizens a greater capacity to resists these processes may have an important
impact on taxation. Hence, democracy reduces the ability of the State to coerce and
that this has implications for hoe it can tax (Darcy Michelle, 2012).

There is one direction of causality that from taxation to democracy. Tilly (1992)
traced the origin of the revenue imperative and the development of the State, to the
need to go to war (Tilly, 1992). Rulers needing revenue to fight had to raise tax which
necessitates the construction of the extractive infrastructure of the State. Hence, the
limit from taxation to representation has been clearly theoretically explored through
these historical processes and neatly summed up in these demands of American
revolutionaries that, there be No Taxation without Representation. This is supported by
the Quote of Mwalimu Julius Nyerere which says;

"If real development is to take place, the people have to be involved." (Julius
Kambarage Nyerere, 1973)
As democracy alters State-society relations and taxation is a function of this
relationship, hence democracy should have an effect on tax outcomes. Levi (1988)
argues that, reduce the transaction costs of taxing by making compliance quasi
voluntary and by building tax morale. Citizens should be more willing to enter into a
fiscal contract with the State as they have more control over its actions and greater
belief in its legitimacy. Hence, increase taxation is always the outcome of democratic
bargaining (Darcy Michelle, 2012).

As taxation in developing countries is primarily a function of State-building and

many aspects of State-building are inherently coercive, democracy gives citizens the
ability to resist, forcing States into lower intensity State-building activities in the least
politically divisive areas. In the context of taxation, this means that it constrains the
ability of the revenue authority to widen the tax net and consolidate its ability to
coerce focusing their attention instead on the least visible forms of taxation.
Democracy tries to maximize taxation with minimal State-building while autocracies
can maximize taxation with maximum State-building.

52
The more taxpayers can participate in political decision making by popular rights, the
more the tax contract is based on trust and the higher is tax morale. Taxpayers are
treated as citizens with extensive rights and obligations (Frey, 2003). They are in
the position to better monitor and control politicians via referenda. Furthermore, they
can set rules via initiative and are thus able to renegotiate the tax contract with the
government influencing, e.g., the tax laws and the tax rates, which enhances civic
virtue. Thus, the possibility for taxpayers to vote on fiscal issues positively influences
tax morale. Being involved in the political decision process enhances taxpayers sense
of civic duty (Feld and Frey, 2002a) and thus tax morale. The instrument of direct
democracy helps spend taxes according to their preferences, the motivation to
contribute paying their taxes increases.

3.5 Human Rights Concern on Taxation

3.5.1 Contribution of Fiscal Policy to Human Rights

The late Justice James Mwalusanya, one of the most proactive Tanzanian judges with
regard to human rights cases, has highlighted the difficulties of invoking international
human rights instruments and foreign case law by asserting that the problem is
Tanzanias adherence to the common law (dualist) system where international treaties
are not part of the laws of the land. Though this constraint exists, justice Mwalusanya
has himself, through his judgments, shown that international law has a role to play in
Tanzanian human rights jurisprudence. This also captures tax justice as
accommodated in the Constitutional rights, tax legislations and Taxpayers Charter.

We should know at this juncture that, the most important obligations of governments
include Respecting, Protecting and Ensuring human rights among them the economic,
social and cultural rights (ESC rights) (Wolfgang Obenland, 2013) . Hence, it is
necessary to examine what impacts fiscal policy has on complying with and realizing
these rights.

Fiscal policy can generally make a threefold contribution to realizing human rights. It
can raise revenue to finance public goods and services required for the realization of
human rights; it can contribute to a redistribution of income and assets from the
richer to the poor strata of society, thus promoting the realization of their human
rights; and with certain goods and services it can contribute to an internalization of
their ecological and social costs and thus counteract conduit detrimental to human

53
rights (Wolfgang Obenland, 2013; Klaus Schilder, 2013). So far, debates on the
contribution of taxes to the realization of human rights have concentrated on their
effect in terms of revenue. A sufficient provision of public resources is indeed above
all of central importance in realizing the ESC rights (Wolfgang Obenland, 2013).

A fiscal framework that incorporates a human rights perspective takes a particularly

broad view of the rights concept, one that extends beyond the narrow traditional
approach of rights as spelt out in the international bill of rights to include a wider
spectrum of rights implicated by the design and implemental of fiscal law and policy
meant not only to protect the rights of the people but also to promote them. A right
based approach to taxation would therefore require fiscal policy makers to take into
account a member of practical elements when designing and implementing a fiscal
framework (Bagenda Emmanuel Ekiba, 2011).

In the substantive sense, the right based approach not only requires a negative
approach but also a positive approach in which the tax regime is specifically designed
to promote the rights in question. In the procedural sense, a right-based approach to
taxation entails a number of elements most notably transparency, participation and
accountability (Bagenda Emmanuel Ekiba, 2011). The fiscal framework must
particularly be open and transparent, granting all stakeholders including civil society
and the wider public access to full and timely information regarding the design and
the implementation of tax law and policy (Bagenda Emmanuel Ekiba, 2011).

As the tax codes with tax rates and exemptions that are not based on rational,
objective and well explained criteria violates the Principle of transparency and
unlikely to command legitimacy. Secondly, human rights based taxation framework
must be provision for mechanism enabling both proactive and reactive participation
by public before, during and after the design and implementation of fiscal law and
policy (Bagenda Emmanuel Ekiba, 2011). A tax code that is conceptualized and
designed in a manner that only involves policy makers while excluding civil society
and the wider public therefore cannot be said to be compliant with the Human Rights
Based Approach to Development [HRBAD] (Bagenda Emmanuel Ekiba, 2011).

Finally, human rights friendly fiscal framework must entail accountability

mechanisms enabling any aggrieved party or member of the public to articulate their
concerns regarding tax law and policy or its implementation in manner that bears

54
upon policy making. Such accountability mechanisms must be both
proactive/preventive (enabling interested parties to bring policy makers to account at
the point of design) and reactive/restitutionary (enabling justice after implementation,
particularly through quasi-judicial means (Bagenda Emmanuel Ekiba, 2011).

Fiscal and tax policies (revenue-raising and expenditure) are an essential tool for
States to meet their human rights commitments and combat poverty. As stipulated by
the International Covenant on Economic, Social and Cultural Rights (art. 2), States
must make use of their maximum available resources to realize economic, social and
cultural rights. Low levels of domestic taxation revenue, in particular, can be a major
obstacle to a States ability to meet these obligations (see also Philip Alston, (2015);
OHCHR, Righting Finance & agencies (2013); UDHR, (2013))

A fundamental insight underpinning the HRBAD is the recognition that despite

pursuing different philosophical, theoretical and conceptual approaches, the
phenomena of human rights and development are ultimately driven by the same goal
improving the socio-economic welfare of individuals and groups. The HRBAD
thus attempts to bridge some of the differences in approach by adopting a number of
conceptual tools aimed at assuaging the concerns of both economists and human
rights advocates. While the former are preoccupied with managing scarce resources to
fit unlimited demands, the latter are driven by a desire to have social and economic
goals articulated in the language of legally-enforceable entitlements often equated
with rights though the two are not always aligned. Thus under the HRBAD,
economic developments beneficiaries become rights-holders while development
practitioners are duty-bearers. In reality, however, rights holders can often be duty-
bearers as well such as regards sharing of the resource commons like rivers for the
purposes of fisheries or flood recession agriculture.

Since the 1948 United Nations Universal Declaration of Human Rights, the idea that
all individuals have certain basic human rights, or entitlements to political, social, or
economic goods (such as food, water, healthcare, education and even employment)
has become a guiding framework for social democratic political discourse, invoking
discourses of human rights, groups and individuals attempt to legitimize their cause
and to accuse their opponents of denial of rights (Bond Patrick, (2011); UDHR,
(2013)). As water is essential to human life, social conflict surrounding water is now

55
framed in the terms of the human right to water. In this culture of rights (which
critics call a culture of entitlement), social groups use rights talk as a blanket
justification for the provision of lifeline supplies of water to all, while in contrast,
governments typically dispute their exact responsibilities for water provision and
management (Bond Patrick, 2011).

3.5.2 Taxpayers rights and taxpayer protection

There is no generally accepted definition of taxpayers rights, but it is safe to say that
the rights in question are those that belong to a taxpayer or other person in whom tax
law is interested (Bogumi Brzeziski, 1990; OECD, 1990; Bogumi Brzeziiiski,
(2009: 18-19). As far as a definition of right is concerned, one might describe it as
the legal situation of a person having the ability to demand to be treated in a manner
which will improve objectively or subjectively his position in a society, economy
or law. It inevitably leads us to the conclusion that rights (to a certain degree) have
their roots in commonly shared values (Bogumi Brzeziski, 1990; OECD, 1990;
Bogumi Brzeziiiski, (2009: 18-19)).

A narrow definition of the concept of taxpayer protection means:

written or unwritten rules that are intended to protect taxpayers against

tax levying by tax authorities, which tax levying could be illegal from the
point of view of taxpayers (Bogumi Brzeziski, (1990); OECD, (1990);
Bogumi Brzeziiiski, (2009: 18-19); Raritska Viktoria, (2015)).
A wider definition of taxpayer protection involves some non-fiscal aspects of
relations between taxpayers and tax authorities. For example, being able to demand
from the tax authoritys information that is necessary for a taxpayer to make proper
decisions concerning his life and activity is widely acknowledged as a taxpayers
right. It would be difficult to say that taxpayer protection does not cover this area
(Bogumi Brzeziski, (1990); OECD, (1990); Bogumi Brzeziiiski, (2009: 18-19);
Raritska Viktoria, (2015)). The same argument can be formulated when
administrative fines are imposed on a taxpayer System (Bogumi Brzeziiiski, 2009:
18-19). One should consider them not only from the perspective of tax liability, but
also as consequences of the improper behaviour of the taxpayer. It is rather
indisputable that the taxpayer has the right not to be fined in an excessive way.
Hence, the law should protect the taxpayer against it. And this becomes a matter of
taxpayer protection.

56
Taxpayers rights must be seen as the object of protection. Strictly speaking, taxpayer
protection is the protection of his rights. Therefore, a question arises what rights
should or can be protected. The concept of taxpayers rights and their protection is
closely related to the notion of human rights. If we look to the past we discover that
the contemporary human rights movement started only after the Second World War
(Bogumi Brzeziiiski, 2009: 18-19). The rights of taxpayers became the subject of
discussion in the 4th quarter of the 20th century. So it is obvious that the concept of
human rights and their protection had a significant influence on the idea of taxpayers
rights (Bogumi Brzeziiiski, 2009: 18-19). Of course, the notion of human rights is a
much broader concept than taxpayers rights. But human rights as they are should be
taken into account as a starting point for the analysis of taxpayers rights. We should
also note at this end that, at any taxpayers rights there is taxpayers liabilities-there
must be a mirror image. This is in line with the quote of Donald C. Alexander which
says;

As a citizen, you have an obligation to the countrys tax system, but you
also have an obligation to yourself to know your rights under the law.
(Donald C. Alexander) (Yablon L. Jeffery, 2010)
The Rights of The Taxpayers Under the TRAs Taxpayers Charter
Impartial treatment: Taxpayer has a right to an impartial application of the tax laws when
determining tax liability, so as to enable the taxpayer pay the required amount of tax.
Privacy and Confidentiality: Taxpayer has a right to privacy and confidentiality for private and
business information supplied to TRA unless the law allows the exposure of such privacy and or
confidentiality.
Presumption of Honesty: The taxpayer has a right to be presumed honest unless evidence to
the contrary exists.
Objection of Tax Assessment: Taxpayer has a right to object to an assessment or any other
determination by TRA to the extent of which that right is restricted by the law.
Tax Benefits under the Tax Laws: Taxpayers have the right to plan their tax affairs so as to
obtain maximum benefit allowed under the tax laws. TRA shall apply the tax laws in a consistent
manner to all taxpayers.

57
 CHAPTER FOUR
ANALYSIS ON THE PRINCIPLES OF GOOD TAX SYSTEM
The elements of an efficient and good tax system have been proposed by many
studies. It can be traced back to as early as Smiths (1776) cannon of taxation,
which stressed on equality, certainty, convenience of payment, and economy of
collection as the main principles of tax system. Then, the Meade Report (1978)
recommended that a good tax structure should have several characteristics namely
incentives and economic efficiency; distributional effects; international aspects;
simplicity and costs of administration and compliance; flexibility and stability, and
transitional problems (Muzainah Mansor and Mahamad Tayib, 2005).

4.1 Canons of Taxation

Canons of taxation refer to the administrative aspects of a tax. They relate to the rate,
amount, method and collection of tax. In other words the characteristics or qualities
which a good tax should possess are generally described as Canon of taxation.
Considering the suitability of canon of taxation taxing regulatory authority fixes Tax
base on the different income criteria of people. In 1776 Adam Smith in his book
Wealth of nations developed four cannon of taxation which are Equity, Certainty,
Economy and Convenient. Likewise, other canons were later developed which include
Productivity, or Adequacy, Simplicity, Elasticity, Diversity, Expediency and
Functional efficiency. Adam Smith taught us that, taxes in a democratic-liberal
society should follow four basic attributes i.e. Canons or Maxims of good tax. If tax
does not contain one or more of the Canons, the assumptions regarding
reasonableness are in doubt (Smith Adam, 1776).

A clear analysis of the tax system and tax justification should be done in a
methodological, systematic and multistage way. It should begin in the Constitutional
provisions and end in the modern meaning of the four Canons which represent the
contractual relationship between the state and its members (Edrey Yoseph, 2007).
The analysis is systematic where the income tax system has a strong, sensible and
logical base. If a good tax system and the four Canons are accepted, it represents a
Solid-structure for a decision-making process to determine whether a tax violates or
infringes upon the Constitutional rights and interests (Edrey Yoseph, 2007).

58
The canons of taxation are considered criteria in classifying policy considerations but
are not considered complete in themselves. Decisions on taxation involve trade-off
and political or value judgements. There is no unique technically correct solution for
the optimal tax system only various and diverse sub-optimal tax systems each with
their own specific advantages and disadvantages (Attiya Waris, (2007).

4.1.1 Canon of Equality and Ability to pay taxation

This is a rule of taxation which is applicable only to the tax system as a whole. It is
undoubtedly ethical since it refers to the Justice of taxation. By equality we do not
mean that people should pay equal amount by way of taxes to the government but we
really mean equality of sacrifice that is people should pay taxes in proportional to
their incomes. The canon of equality states that;

There should be justice, in the form of equality, when it comes to paying

taxes. Not only does it bring social justice, it is also one of the primary
means for reaching the equal distribution of wealth in an economy.
This principle points to the Progressive taxation while it states that;

The rate or percentage of taxation should increase with the increase in

income and decrease with the decrease in income (Adam Smith, 1776)
Para 1(1) to the First Schedule of the Income Tax Act, Cap 332 stipulates for the
progressive income tax for individuals to the permanent establishment's repatriated
income for the year of income as guided by section 4(6) of Income Tax Act, Cap 332
and on the Presumptive income tax for a year of income with respect to section 4(1)
(a) for the year of income under Para 2 of the First Schedule. It is in this factual
philosophy that tax experts should remember that Inequality in taxation diminishes its
productiveness and to a large extent impairs industrial energy and so they should
view the Principle of Equality and Ability to pay in the same line as they could focus
on the Principle of Economy.

In the Rule of law context, we can argue that, violations of the rule of equal treatment
are again offences against Constitutional Liberty quite as much as absence of
Certainty. Adam Smith regarded revenue as the Index of Ability to contribute. This
Canon of taxation is also commonly known as Canon of Equity which can be
classified into Horizontal Equity and Vertical Equity (Bastable, Charles F, 1917).

On Horizontal Equity people who are in the same economic position should be taxed
the same amount of tax and bear the same tax burden under the same proportional of

59
sacrifice. Greater neutrality in tax systems is usually consistent with better horizontal
equity (OECD 2001). Hence in most cases it should not imply any conflict between
efficiency and fairness. For example, taxing all forms of saving at the same rate both
limits economic distortions and is consistent with horizontal equity. Similarly, moves
towards uniformity in the tax treatment of different forms of corporate finance and
different types of investment projects, and to the sales taxes applied to different
consumption goods, would appear to be horizontally equitable (OECD 2001).

However, ambiguities remain. For example, the large number of income tax
allowances available in most countries, while clearly non-neutral, can be seen by
some as promoting horizontal equity by taking account of the detailed financial
circumstances of households (OECD 2001). But others may perceive them as a
source of horizontal inequity because they produce differences in taxes paid between
households on the basis of differences that reflect deliberate choices, as regards
family circumstances for example, and are therefore irrelevant. Similarly, taxing
income from saving at low flat rates, as has become common in many OECD
countries, may be considered as lacking horizontal equity (OECD 2001). While this
may be true in a static sense, it may also be seen as promoting horizontal equity in a
dynamic sense, i.e. reducing discrimination between different lifetime profiles of
saving and consumption. In the contrary, Vertical Equity is where people who differ
economically should be treated differently; in that the higher income earner should be
expected to pay higher tax than the lower income earner; a good example of the
Vertical equity is Progressive tax system (OECD 2001).

Significantly, the focus of both horizontal and vertical equity is the economic well-
being of the taxpayer. Other considerations such as race, gender and intergenerational
equity may be subsumed under the umbrella of horizontal equity that is all things
being equal no distinction should be made between persons for tax purposes except
on economic grounds (Vosslamber J. Robert, 2010). Any distinction based on the
race, gender or the like provides an exception to the horizontal equity norm that
equals should be treated equally. Conversely, distinctions based on the taxpayers
levels of income which provides a surrogate for their economic well-being and also
their domestic situation which affects their level of economic commitments are
typically in view when considering the vertical equity of the income tax (Vosslamber
J. Robert, 2010).

60
Writing in the context of the ancient Athenians society; Aristotle argued that benefits
should be assigned in proportional to some characteristics of the recipients, and
posited personal merit as the basis of divisions. Aristotle (384-322 BC)6, then drew
two inferences;

Equal should be treated equally and unequal unequally. Aristotle (384-

322 BC)
This is the most fundamental principle of justiceone that has been widely accepted
since it was first defined by him more than two thousand years ago; this means
individuals should be treated the same, unless they differ in ways that are relevant to
the situation in which they are involved. Hence; these principles nearly encapsulate
the concepts of Horizontal Equity and Vertical Equity (Rawls John (1971; 2003);
Vosslamber J. Robert, (2010); Suzanne Le Mire, (2014); Manuel Velasquez et al,
(1990)). To Aristotle, equality was the measure of justice; the unjust is unequal, the
just is equal7. (Barker B. William, 2006)

In writing on taxation, Musgrave Richard (1959) reflects this Aristotelian heritage

when he gives the following criteria of equity of taxation; (1) That the index of
equality should be defined in terms of accretion; (2) That people in equal position
should be treated equally without discrimination i.e. Horizontal equity; and (3) That
people in unequal positions should be subject to moderately progressive taxation i.e.
Vertical equity. Generally, in evaluating the principle of equity, consideration should
be given to the entire range of taxes a taxpayer is subject to, rather than to just one
type of tax (Vosslamber J. Robert, 2010).

Any tax should not violate constitutional rights and interests upon the taxpayer and
the general community within the Tax life cycle. For any modern democratic
community, legislation should respect and acknowledge the fundamental right to

6
Aristotle (b. 384 d. 322 BCE), was a Greek philosopher, logician, and scientist. Along with his
teacher Plato, Aristotle is generally regarded as one of the most influential ancient thinkers in a number
of philosophical fields, including political theory. Aristotle was born in Stagira in northern Greece, and
his father was a court physician to the king of Macedon. As a young man he studied in Plato's
Academy in Athens. After Plato's death he left Athens to conduct philosophical and biological research
in Asia Minor and Lesbos, and he was then invited by King Philip II of Macedon to tutor his young
son, Alexander the Great. Soon after Alexander succeeded his father, consolidated the conquest of the
Greek city-states, and launched the invasion of the Persian Empire. Aristotle returned as a resident
alien to Athens, and was a close friend of Antipater, the Macedonian viceroy. At this time (335323
BCE) he wrote, or at least worked on, some of his major treatises, including the Politics. When
Alexander died suddenly, Aristotle had to flee from Athens because of his Macedonian connections,
and he died soon after.
7
Aristotle, Niclomachen Ethics 1131a (W.D. Ross Trans., Oxford Univ. Press 1925)

61
equal treatment under laws. Because it is in the nature of laws to classify or
discriminate, the principle of equality demands that;

Treating likes alike and treating differences differently.

Failure to treat likes alike, or treating different situations the same are both breaches
of the equal treatment principle, unless there are objective justifications demonstrated
(McCrudden Christopher and Prechal Sacha, 2009). This is also the case for tax
legislation which, like all legislation, must conform to the demand of principles of
equality. In modern thought, horizontal equity and vertical equity represent the
notion of Aristotelian formal justice used in tax law and tax policy. For constitutional
deliberation, one question is whether a tax law that does not follow the principles of
horizontal equity violates the equal protection clause (Edrey Yoseph, 2007).

Internationally, very few national courts have decided that tax laws or tax provisions
that violate the principles of horizontal equity also infringe constitutional principles
such as the non-discrimination clause, freedom of occupation and even property
rights. Professor Dieter Birk,8 from the University of Munster presents the German
experience:

The German Constitution contains not only the rule of equality before the
law; it also obliges the legislator to distribute the tax burden equally . . . .
Equality of the tax burden is only achieved if the tax bases differentiate
according to individual capacity. Equal taxation means different taxation
according to individual financial capacity (ability to pay principle)
(Edrey Yoseph, 2007).
In 1991, the German Federal Constitutional Court upheld a previous decision, and
held that the Constitution obligated the government to make taxation just and
equitable, and that withholding taxes on wages, but not on interest, violated the
constitutional right to equality (Edrey Yoseph, 2007).

The criteria for equality and differences between taxpayers are based onto two
Principles (1) the Benefit to pay principle and (2) the ability to pay principle. There is
a tendency to accept the notion that in order for tax laws to pass constitutional muster,
they must follow the principles of horizontal and vertical equity. It therefore seems

8
Dieter Birk, The Limited Impact of the Principle of Equality on Tax Law, in EQUALITY IN
EUROPE, supra note 26, at 45; see J.W. van Berge, Equality: Applying the Principle of Non-
discrimination (Article 14 ECHR, Article 26 ICCPR), in EQUALITY IN EUROPE, supra note 26, at
55 (applying the principle of non-discrimination as embodied in the European Convention on the
Protection of Human Rights and Fundamental Freedoms and the International Covenant on Civil and
Political Rights).

62
necessary to identify the criteria to apply when comparing different taxpayers, in
order to determine whether they are equal or different.

The sole purpose of the elected government is to serve the public and provide it with
a basket of public goods and services. The fact that the public elects the legislature
indicates that the public is interested in that basket. In terms of the economic aspects
of the social contract and public consent, the public expresses its consent every year.
For example, the Cabinet of the Minister must propose an annual budget and the
legislature approve or disapprove it. Without such approval, the government cannot
function (Edrey Yoseph, 2007).

Once the public approves the basket, it has to pay for it. In other words, taxes are the
price for purchasing public goods and services. If this is the case, the answer to the
question how much should be very simple according to the benefit we derive from
public goods and services the government provides. Known literature exists that
addresses the ability-to-pay justification (Edrey Yoseph, 2007).

Adam Smith (1784) proposed In Chapter 2 of Book, An Inquiry into the Nature and
Causes of the Wealth of Nations. It argues for the benefit principle, and yet Smith
connected it to ability as well:

The subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion to their respective
abilities; that is, in proportion to the revenue which they respectively enjoy
under the protection of the state. The expense of government to the
individuals of a great nation, is like the expense of a great estate, who are
all obliged in proportion to respective interests to the estate (Adam
Smith, 1784) (Yablon L. Jeffery, (2010))
Fairness is defined as the condition of being just or impartial; justice, equality,
impartiality, fair-mindedness, objectivity, even-handedness (Bemani Joseph, 2014).
The World English Dictionary describes as being free from bias, dishonesty or
injustice. Fair implies the treating of all sides alike, justly and equitably; Impartial
implies showing no more favour to one side than another; Disinterested implies a
fairness arising particularly from lack of desire to obtain a selfish advantage;
Unprejudiced means not influenced or swayed by bias, or by prejudice caused by
irrelevant considerations (Bemani Joseph, 2014). In the same vein, regarding fairness
in tax system we can refer to the quote of Martin A. Sullivan which says that;

63
 If a tax system is painted as unfair and immoral, if it is compared to
slavery, if its administrators are accused of being abusive, it is only human
nature that individuals will be more inclined to evade taxes. (Martin A.
Sullivan) (Yablon, L. Jeffery, 2010)

4.1.1.1 Benefit to Pay Principle

This Principle holds that;

The individuals should be taxed in proportional to the benefits they

receive from the government and that taxes should be paid by those people
who receive the direct benefit of the Government programs and projects
out of the taxes paid (Bon Kristoffer G. Gabay, et al 2007).

Therefore, individuals tax burden should be proportional to the amount of benefit

that the individual receives from the resource in question. The Benefit principle of
taxation is based on two ideas (1) The first and the most is that those who benefit
from services should be the ones who pay for them; and (2) Secondly people should
pay taxes in proportional to the amount of services or benefits they receives. This has
also been noted by the quote of Joel Slemrod which says;

People who profess to have high levels of trust in government to do the

right thing are significantly less likely to engage in tax noncompliance.
(Joel Slemrod)

Limitations:

1. Many government services provide the greatest benefit to those who can least
afford to pay for them (i.e welfare); many of the services are explicitly
designed to redistribute resources to the low income taxpayer than high
income taxpayer. Social welfare programs exist partially because lo-income
taxpayers cannot afford to pay for those programs themselves, so requiring
these taxpayers to pay for the programs according to the Benefit Principle
would defeat their purpose;
2. The benefits often are hard to measure. For many of the most important
functions performed by the government such as education, health care and
anti-poverty programs and police and homeland security; it can be hard to
quantify;
3. Taxing according to the Benefit Principle can lead to regressive results.
Gasoline taxes for example take a large share of income from the low-income
taxpayers than from the wealthy.
Therefore, the Benefit principle aligns business taxes with costs of government
services received by business entities. It is a Principle of Distributive Equity.
Therefore, tax is determined according to the citizens (marginal) valuation of the
goods and services provided by the public authorities. In that regard, the Benefit

64
 Principle is the Reciprocal duties of protection and support between the state and its
inhabitants.

In the case of Commissioner Vs Algue Incorporation G.R No L-28896 February 17,

19889

It was held inter alia that;

Taxes are what we pay for civilized society without taxes, the government would be
paralyzed for lack of motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of
the government. The government for its part is expected to respond in the form of
benefits intended to impose the lives of the people. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power. But even as we concede the
inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it can be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will
come to his succour. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has
not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner
was filed on time with the respondent court in accordance with Rep. Act No. 1125.

9
Commissioner of Internal Revenue vs. Algue Inc. GR No L-28896 | Feb. 17, 1988

Brief Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes
from 1958-1959, amounting to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty.
Guevara, who refused to receive it on the ground of the pending protest
Since the protest was not found on the records, a file copy from the corp was produced and given
to BIR Agent Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest and
it was only then that he accepted the warrant of distraint and levy earlier sought to be served
On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax
Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense
- payments are fictitious because most of the payees are members of the same family in
control of Algue and that there is not enough substantiation of such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of
promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by
Algue as legitimate business expenses in its income tax returns

65
And we also find that the claimed deduction by the private respondent was permitted
under the Internal Revenue Code and should therefore not have been disallowed by
the petitioner.
The importance of court can be articulated from the quote of Paul L. Caron which
says;

The tax bar is commonly referred to as a special priesthood, and it is

only slightly more tolerant than the Catholic Church in ordaining women
tax priests. (Paul L. Caron) (Yablon L. Jeffery, 2010).

This canon is based on the Benefits-received theory which proceeds on the

assumption that there is basically an exchange or contractual relationship between
tax-payers and the state. The state provides certain goods and services to the members
of the society and they contribute to the cost of these supplies in proportion to the
benefits received. In this quid pro quo set up, there is no place for issues like
equitable distribution of income and wealth. Instead, the benefits received are taken to
represent the basis for distributing the tax burden in a specific manner. This theory
overlooks the possible use of the tax policy for bringing about economic growth or
economic stabilization in the country.

4.1.1.2 The Ability to Pay Principle

This Principle holds that;

Taxes should relate with the peoples income or the ability to pay; that is
people with greater income or wealth and can afford to pay more taxes
should be taxed at a higher rate than people with less wealth; e.g.
individual income tax.

Writers like Adam Smith (1776; 1784) and Mill Stuart John, (1848; 1909) declined
the Benefit to Pay Principle of taxation while the Benefit principle was for Adam
Smith only an adjunct for the Ability to-Pay-Principle (Mill Stuart John, 1848;
1909) considered the Benefit principle of taxation to lead to a regressive taxation as
the poor are more in need of protection than the rich. According to (Mill Stuart John,
1848; 1909), this would be the reverse of the true idea of Justice. Regressive tax is a
tax where the tax rate decreases as the amount subject to taxation increases. It
imposes a greater burden (relative to resources) on the poor than on the rich; it
therefore attempts to reduce the tax incidence of people with higher-ability-to-pay as
they shift the incidence disproportionately to those with lower-ability-to-pay (Bird,
Richard M. and Barbara D. Miller, (1989); Shah, Anwar and John Whalley, (1990);

66
Felix Ndambuki, (2014)). However, the main reason to him to the Ability to-Pay-
Principle of taxation is the non-applicability of the Exclusion principle for public
goods. The Ability-to-Pay-Principle requires first rules of equitable treatment of
taxpayers and secondly an appropriate Indicator of the ability to pay. The two
equitable principles are Horizontal and Vertical equity where unequal taxpayers
should pay unequal taxes.

Uncontroversially, most would agree that a tax should be equitable. A tax that is
perceived as fair or equitable should promote voluntary compliance (Murphy
Kristina, 2004). In this regard, Allan states:

It is clearly a desired characteristic of taxes that they be fair. Apart from

the ethical desirability of equity, there is the practical need for taxes to be
acceptable to the taxpaying public. If taxes are generally believed to be
inequitable the consequences may range from widespread evasion to
revolution. (Allan M, Charles 1971)

Perspectives on equity may include;

That: all individuals should have the opportunity to participate in society

and achieve the things that they value;
That those with greater economic means should pay more (vertical equity).
It is noted however that there is little agreement about how economic means
should be measured and what degree of progressivity in a tax system is
appropriate;
Minimal opportunities for tax avoidance and minimization;
That families or individuals with the same capacity should face the same
taxation burden (horizontal equity);
The benefit theory which specifies that people should pay in accordance
with the benefit they receive from government spending; and
Inter-temporal and inter-generational equity. Inter-temporal equity
considers how the tax/transfer system affects people over their entire life not
just on an annual basis. Whereas, Inter-generational equity is concerned
with how the tax transfer decisions will affect future generations. (Nicole
Wilson-Rogers and Dale Pinto, 2009)
Feldstein, M (1976a; 1976b) argues that regarding Horizontal Equity Principle, two
people with the same utility before taxation must have the same utility after taxation;

Horizontal equity is said to occur when people in the same situation are treated in the
same manner by the tax. For example, people with the same income should be taxed
the same amount. Allan states:

67
 horizontal equity, describes the equal treatment of equal people. This
principle is unchallengeable as an ideal and is not impracticable of
operation. People of equal incomes, for example, might be required to pay
the same income taxes. All people who smoke twenty cigarettes per day
would be required to pay the same in specific tobacco taxes (Allan M,
Charles 1971)

Another attribute of horizontal equity is that the tax should apply equivalent treatment
to transactions that achieve the same economic result. That is the tax should not apply
differently to two transactions that although different in form (e.g. conducted through
a company or trust) are economically equivalent (Nicole Wilson-Rogers and Dale
Pinto, 2009). Horizontal equity is usually presented as a principle in its own right. It
is not derived from other principles. Nor is there any discussion of the relationship of
this principle with other principles and it may be inconsistent with utilitarianism. That
is to say, social welfare (as measured by the sum of utilities) is higher if individuals
who have the same tastes and the same endowments are treated differently and may
be inconsistent with the principle of Pareto optimality.

According to the Feldstein, M (1976a; 1976b) Vertical Equity Principle is a No-

reversal Principle; if person A has greater utility than person B before taxation then
person A must have greater utility than B after taxation.

There are two indicators of the ability to pay which are the;

1. The comprehensive income; where following Schanz (1896)10, Haig Robert

Murray (1921)11 and Simons C. Henry (1938)12; income is defined as
accretion to wealth, equal to consumption plus increase in net wealth during
the period. Increase in net wealth is measured by comparing net wealth
valued at market prices for the beginning of the period and the end of the
period. All assets including cash, debt claims, equity and real property are
included and all liabilities are deducted;
2. The expenditure or consumption; E/C as an indicator of ability to pay.
Expenditure as an indicator of ability to pay was proposed by Hobbes
(1651), Mill 1826), Pigou (1928) Pigou, A.C. (1932); A study of Public
Finance London Macmillan. Hence, there are several methods to compute
consumption as a tax base; the indirect method; Cash Flow Method; Wealth-

10
George van Schanz, Der Einkummensbegriff und die Einkommensteuergesetz,13 Finanz-Archiv
no. 1, 1- 87 (1896). For this reason, references are often made to the Schanz-Haig-Simons definition of
income. For a discussion of Schanz and other early German scholars on the concept of income, see
Henry C. Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal Policy,
(Chicago: University of Chicago Press, 1938) at 60-79
11
Robert Murray Haig, The Concept of Income Economic and Legal Aspects, in R.M. Haig, The
Federal Income Tax, (New York: Columbia University Press, 1921) 1-28 at p. 27.
12
Henry C. Simons, Personal Income Taxation: The Definition of Income as a Problem of Fiscal
Policy, (Chicago: University of Chicago Press, 1938) at p. 50.

68
 accrued Method; the Tax payment method; and The taxing business cash
flows cum wages method
The logic behind the ability to pay principle is that taxes are collected by the
government to finance public goods that provide benefits to all members of society;
and because taxes are a diversion of resources from the household to the government
sector, it makes sense to tax or divert incomes away from the people who actually
have the income.

This canon is based on the Socio-political theory in which Adolph Wagner (1958)
advocated that social and political objectives should be the deciding factors in
choosing taxes. Wagner (1958) did not believe in individualist approach to a
problem. He wanted that each economic problem should be looked at in its social and
political context and an appropriate solution found thereof. The society consisted of
individuals, but was more than the sum total of its individual members (Chigbu E.E.,
et al, 2011). It had an existence and entity of its own which needed preservation and
taking care of. Accordingly, a tax system should not be designed to serve individual
members of the received an equally strong support from non-socialist thinkers also
and became a part of the theory of welfare economics. The basic tenet of this theory
is that the burden of taxation should be shared by the members of society on the
principles of justice and equity and that these principles necessitates that the tax
burden is apportioned according to their relative ability to pay (Bhartia H.L 2009)

4.1.1.2.1 Application of Ability to Pay Principle

4.1.1.2.1.1 Progressive Tax System

This system impose higher rates of tax on people with higher incomes rather those
with lower income. Samuelson (1947) has been the first to give explicit conditions for
equal absolute sacrifice to yield strictly Progressive taxation; namely the elasticity of
marginal utility which is given by;

Xu '! ( X )
.(1)
u!( X )

This should be less than one (1). In this case the equal sacrifice principle has often
been invoked to justify specific types of tax schedules (Young H.P, 1986).

Therefore, without equality of sacrifice entails Progressive taxation depends to some

extent on how the term equal sacrifice is interpreted. Equal Absolute Sacrifice means

69
 that everyone forgoes the same amount of ability in paying taxes. Progressive
taxation is to distributive justice as competition is to economic efficiency (Young
H.P, 1986). So that some parties may prosper, others must lose. Redistribution and
the attendant destruction of entrenched wealth serve as societys ultimate weapons of
creative destruction Progressive taxation is the most economically efficient means
for redistributing wealth. To be sure, taxation in any form warps the economy and
invites cheating. But alternatives to progressive taxation are worse on both
dimensions. Every other legal instrument for redistribution exacts an even stiffer price
in the form of price distortions and private strategic behavior (Young H.P, 1986).

According to the defenders of Progressive taxation the ability to pay principle of tax
fairness needed to achieve redistribution. The critics of the concept come mainly from
the liberal school that considers progressively a punishment to the competitive and
the reward to the economically incapable (Cesar Augusto, Crespo, 2009). The ability
to pay principle is part of what is called Tax fairness but is not tax fairness in
itself. Ability to pay principle as a legal instrument only helps substantiate the
Principle of equality in tax law; as Robert Jackson justifies in his quote which says;

Those who have large estates and watchful lawyers will find ways of
minimizing these tax burdens. (Robert H. Jackson) (Yablon L. Jeffery,
2010)

The premise remains that those with higher incomes not only should pay more but
should pay a larger fraction of their incomes in taxes; In other words, progressivity is
reflected in an increase not only in average rates but in the marginal rates. In defining
Progressivity, if the average tax rate13 increases with income the system is
progressive if it falls, the rate is regressive. However, the progressiveness can be
defined in terms of marginal tax rate, where the change in taxes paid with respect to
change in income is called Progressivity.

Progressivity can also be justified on the basis of diminishing marginal utility of

income; the loss of utility of one additional shilling of taxes is higher for a low
income individual than a high income individual. In the absence of the tax evasion,
given quasi-linear preferences, labour supply and pre-tax income both increase with
earning ability. The linear tax schedule which is based on earnings will then work as a
redistributive scheme taking money away from people with higher earning ability and

13
The average tax rate is calculated by dividing the total income taxes paid by total income.

70
 redistributing it to people with lower earning ability. Moreover, this taxation scheme
is progressive in that, the average tax rate increases as pre-tax income increases.

It can be argued therefore that, Progressive taxation was designed to reduce income
disparity by disproportionately taxing upper incomes and then redistributing the
proceeds through the welfare. There are three social objectives of the progressive
taxation which are; (1) To redistribute the tax burden from those of lesser means to
those more affluent; (2) To provide government with the means to redistribute
income; and (3) The economic and political power of wealth requires curtailment
(curbing, reduction). Theoretically, increasing the tax share paid by the wealthy, all
other influences held constant should increase the income share after taxes of the
remaining taxpayers. The relationship should be linear with a rising slope.

In simple terms, the progressive tax system imposes a greater burden (relative to
resources) on the rich than on the poor. It attempts to reduce the tax incidence of
people with a lower-ability-to-pay as they shift the incidence dissappropriately to
those with a higher ability to pay. The result is people with more disposable income
pay a higher percentage of that income in tax than do those with less income. A very
high earner should be subject to high and rising marginal tax rate14 on earnings. A
low income earner should be encouraged to work with earnings subsidies which then
should be phased out with high implicit marginal tax rates and the capital income
should be taxed.

14
The Marginal Tax Rate is the rate of tax applied to the last shilling added to taxable income

71
A progressive tax is one where the Average tax rate rises as income raises i.e the
proportion of income taken in tax rises as a taxpayer becomes richer. For the Average
rate of tax to rise, the Marginal tax rate must also increase. The progressivity is based
on the notion of ability to pay-that people on higher gross incomes are better able to
make a bigger contribution to the financing of collective public and merit goods and
welfare state. In economics, the Lorenzo Curve is a graphical representation of the
cumulative distribution function of the empirical probability distribution of wealth as
was developed by Max O. Lorenz in 1905 representing inequality of the wealth
distribution.

Advantages of Progressive Tax Structure Disadvantages of Progressive Tax Structure

1) Ideal progressive is impossible: the main

1) Equality in sacrifice: under progressive tax
system, the rate of taxation increases as the tax drawback of progressive taxation is that it is
base increase. That is, the burden of taxation is difficult to frame an ideal progression in tax
heavy upon the rich than on the poor. rates.
2) Reducing the inequalities of income and wealth 2) They are arbitrary depending on the
3) Elastic: the government can easily raise its
revenue by increasing the rates of taxes. governments need for additional funds without
4) Stabilizing the economy: Progressive tax system taking into account the burden of people with
may be helpful in preventing the inflationary trends
in the economy as it reduces the disposable different incomes.
income and purchasing power of the people.
5) Disincentive taxation: it is argued that too
progressive a tax rate acts as a disincentive to
work.
6) Discourage saving and investment

4.1.1.2.1.2 Proportional Tax System

A proportional tax has a structure where the marginal tax rate is constant and equal to
the average tax rate. Sometimes it is called a Flat tax.

Total Taxes paid

Marginal tax rate = (2)
Value of the tax base

Total tax paid

Average Tax rate= ..(3)
Value of the tax base

72
The proportional tax structure takes the same percentage of income from everyone,
regardless of how much or how little they earn. Some believe that a proportional or
flat tax structure is fair because everyone pays the same share of income in taxes, then
everyone is treated equitably. But this view ignores the fact that taking the same share
of income from the Middle-or-low income family as from a Rich family has vastly
different consequences for each. Low income family must spend most (or all) of their
income just to achieve the basic level of comfort. Even middle income families spend
most of what they earn to sustain only a modest standard of living.

A tax on these families can cut directly into their ability to make ends meet. In
contrast, the same tax will hardly affect the life style of the wealthiest family at all.
Proportionality is a fairness criterion that takes into account the fact that each person
must pay an equal percentage according to his ability to pay. According to the
supporters of this idea, equality is synonymous with proportionality. This criterion
also starts from the idea that a tax system should be Neutral. In other words, different
economic levels should remain in the same circumstances after taxation and taxes
should be used as a tool for redistribution.

A tax system that seeks proportionality can be confiscatory when Legislatures create
a vast number of taxes and their total exceeds the amount of taxpayers need to carry
out their productive activities. In an income tax system, however, all taxpayers are
taxed at the same tax rate (a flat tax) because those with higher incomes will pay
more than taxpayers with lower incomes.

73
 Advantages of Proportional Tax Structure
It is simple in nature, it is uniformly applicable and it leaves the relative economic status
of taxpayer unchanged.
Disadvantages of Proportional Tax Structure
1. Inequitable distribution, inadequate resources, means that the tax for the rich and poor are
the same. Hence, the government cannot obtain from the richer sections of the society as
much as they can give, inelastic in nature: because the government cannot raise the rate
whenever it wants to raise the revenue.
2. Suffers from the defects of inequitable distribution of the tax burden, lack of elasticity and
inadequacy of funds for the increasing needs of the modern government. Hence, it is not
particularly and universally accepted.

4.1.1.2.1.3 The Equal Distribution Principle

This principle asserts that;

Income, wealth, and transaction should be taxed at a fixed percentage;

that is people who earn more and buy more should pay more taxes, but will
not pay a higher tax rate of taxes.

Since the theory of public finance began in the 19th century, three famous principles
of just taxation based on different normative ideas have been formulated (see, e.g.,
Musgrave, 1959, for a historical review). The equal sacrifice principle requires that
taxation should lead to the same (absolute or relative) loss of utility for everyone. In
this way, a symmetrical, and thus fair, treatment of all citizens is ensured. The Equal
Sacrifice principle, aptly described in the words of John Stuart Mill

...whatever sacrifices the government requires should be made to bear as

nearly as possible with the same pressure upon all see Mill (1844),

This principle played an important role in the distributive justice debate throughout
the nineteenth and most of the twentieth century. In that regard, the sacrifice is in
terms of total utility loss and compared in either absolute or relative terms (Carlos E.
da Costa and Thiago Pereira, 2013)

The Equal Absolute Sacrifice Principle was originally introduced by Mill (1848);
everyone should suffer the same absolute loss of utility. Ideally, everyone has their
own utility function and therefore everyone in the society is treated as if they had
same utility function. Equal Absolute Sacrifice Principle is the same as Equal
Proportionate Sacrifice in recent theory of development (Young H. Peyton, 1986;
Mario Pagliacci (2008)). In the context of the equal absolute sacrifice rule, according
to Smith (1968, p. 488) intertemporal tax equity requires that the present value of an
individual's sacrifice from tax payments is equal for all future time periods.

74
John Stuart Mill (1848) remarked;

Equality of taxation ..as a Maxim of politics, means equality of

sacrifice. (Yablon L. Jeffery, 2010)

Henry Sidgwick remarked:

The obviously equitable principle is that equal sacrifice should be

imposed on all (Yablon L. Jeffery, 2010).

Equal Sacrifice Principle in its most common form that of equal absolute sacrifice,
states that;

Everyone should give up the same amount of utility when paying income
taxes. (Yablon L. Jeffery, 2010).

When applying this principle, economists tend to assume either that everyone has the
same utility function or that there is a benevolent social planner whose welfare
function is used when calculating the sacrifices to be made by the taxpayers. Equal
Sacrifice can mean one of the three things; equal proportional, equal absolute or
equal marginal sacrifice (Riew John, 1985; Young H. Peyton, 1986)

Equal Proportional Sacrifice

This is where the proportion loss of utility as a result of taxation should be equal for
all taxpayers. Therefore, under the equal proportional sacrifice principle the tax rate
will always be proportional (Young H. Peyton, 1986). In this case under proportional
sacrifice the Present value of the utility loss associated with tax payments over life
time as a proportion of the Present value of the life time income utility is equal for all
individuals. Therefore, the rate structure consistent with the rule remains unchanged
irrespective of whether we follow the static or dynamic terms. The proportional equal
sacrifice means that a constant ratio is maintained between the utility of net income
and the utility of gross income. The tax rate is an increasing function of taxable
income and this means the tax rate grows as the taxable income grows. Therefore, the
tax rate is an increasing function of the contributors taxable income (Young H.
Peyton, 1986; Mario Pagliacci (2008)).

In the case of utility function; the same tax rate is used for all individuals with the
advantages and disadvantages resulted thereof. Therefore tax is the same for all
contributors regardless of their taxable income. Obviously, this principle of taxation

75
is unfair as it does not take into account the power to contribute of taxpayers (Young
H. Peyton, (1986); Brunner K. Johann, (1993); Mario Pagliacci (2008))

Marginal Equal Sacrifice

This means that the loss of marginal utility between the net income and gross income
is constant. Therefore, the tax rate is an increasing function of taxable income; the
greater the taxable income of contributor Y, the greater the tax due. Mathematically,
if we take the first derivative with respect to absolute change in utility of income after
paying the tax i.e U Y T then;

dU Y T Change in utility after tax

i.e. (4)
d Y T Change in income after tax

This should be equal for all the taxpayers. (Mario Pagliacci, 2008)

The absolute equal sacrifice

This concept means the loss of the utility registered by the individuals belonging to a
fiscal community; this is form the Fiscal Equity point of view. In this concept, the
ratio of tax value to obtained income is constant regardless of contributor and this
means that the fiscal system uses proportional taxation. This principle represents a
direct expression of equality before taxation. In case power to contribute changes,
contributors with lower power to contribute shall harder stand the payment of the
taxes, instead of those with higher power to contribute (Young H. Peyton, 1986;
Mario Pagliacci (2008)).

Equal absolute sacrifice means that everyone forgoes the same amount of utility in
paying taxes. In this case therefore, absolute loss of sacrifice between the rich and the
power which is defined as the absolute reduction in the total utility derived by the
individuals from their income will be the same. Therefore, the equal absolute sacrifice
principle is being satisfied; however, proportional sacrifice principle is not being
fulfilled. In order therefore to raise the same amount of tax according to equal
proportional sacrifice principle, the rich tax liability should be increased and the poor
tax liability should be reduced. The equal absolute sacrifice approach states that;

Total sacrifice should be equal for all the taxpayers. (Young H. Peyton,
(1986); Mario Pagliacci (2008))

For Example:

76
U Y U Y T A U Y U Y T B .....................U Y U Y T N .... (5)
Equal proportional sacrifice approach

Total Sacrifice
.. (6)
Total Utility of income

U Y T
In other words U Y .... (7)
U Y

This is a proportionate sacrifice which should be equal for all taxpayers

i.e
U Y U Y T A U Y U Y T B U Y U Y T N . (8)
U Y A U YB U Y N

Criticism of the Sacrifice

The main drawbacks are as follows;

1. The sacrifice undergone by a taxpayer is a psychological phenomenon as it

concerns the state of mind and it is not possible to measure a persons state of
mind. Hence, interpersonal comparisons of utility or sacrifice cannot be made
and as such it is very difficult to equalize the sacrifice of all the taxpayers;
2. The sacrifice that a taxpayer undergoes depends not only on the amount of tax
paid but also on the source and character of income earned. E.g. Earned
income will have greater utility to an individual than unearned income. But
the subjective approach does not take of these facts while measuring ability to
pay;
3. It is not possible to measure exactly the decline in the Marginal utility of
money as income increases and as such the progression involved in the rate of
taxation is all arbitrary and hence, it fails to secure equal sacrifice for all.
4. The assumption, that the income utility function for every individual has
exactly the same characteristics is untenable because all people do not
possess equal capabilities for the enjoyment of income.
Therefore, in view of the fact that hardship or sacrifice cannot be measured and
interpersonal comparison of utility are not possible; sacrifice approach are not
scientifically based.

4.1.1.2.1.4 Regressive Tax Structure

A regressive tax is a tax which takes a larger percentage of income from people
whose income is low. Often it is a fixed tax every person has to pay the same
amount of money, such as a poll tax. A poll tax is a fixed tax for each person: since
each person pays the same amount of money, it is a lower proportion for people with
higher incomes. A regressive taxes fall more heavily on the poor section of the

77
community, than on the richer section. Thus, it violates the principle of equity and
social justice.

There is a maxim which says;

The rate of tax . . . may be graduated downward with income and thus be
regressive; under this pattern a man with ten times the income of another
would pay something less than ten times the tax. It is so clear no one today
favours any tax because it is regressive. . . . A regressive tax on income is
not a serious alternative. (Walter J. Blum and Harry J. Kalven, Jr. (1952);
Murray N. Rothbard, 2001)

Advantages of Regressive Taxes

1. Encourage savings and investment as high-income earners pay less tax and
have more discretionary funds to use for investment and savings.
2. Increase net government revenue. As people have more after tax income to
use for savings and investment, these additional investments in turn generate
more taxable income and the cycle begins again - more investment, more
wealth, and ultimately more tax revenues.
3. Encourage people to earn more income because the more you make, the more
you get to keep. This incentive will produce more investment, savings, job
growth, and national GDP.

Disadvantages of Regressive System

1. It doesn't follow the ability to pay principle.

2. Under this system, principle of taxable capacity is totally ignored
3. This system increases inequalities of income and wealth in the society.

3.1.1.1.1.1 Digressive Tax Structure

It is an alternative of progressive tax marked by a steadily declining rate of increase

in the progressive tax rates, which are applied to the upper segments of the tax base.
An incremental tax rate in each additional layer of tax bracket (marginal tax rate)
decrease as the segment of the tax base increase.

78
 Tax base(Income in Birr) Tax rate (in %)
Over Birr To Birr
0 500 5
500 1500 10
1500 3000 14
3000 5000 17
5000 7500 19
7500 10500 20

Digressive tax (a tax system that grants a fixed exemption to all taxpayers) and a
graduated tax (a tax with ever increasing marginal rates) are both progressive in the
sense that higher-income taxpayers pay proportionately greater amounts. Although a
digressive tax and a graduated tax are not functional equivalents, an aggressively
digressive tax does emulate the redistributive effects of a progressively graduated tax.
Because it enables the poorest taxpayers to escape taxation altogether and imposes a
lower effective rate on poorer taxpayers relative to their richer counterparts, a
digressive tax is effectively progressive (see also Walter J. Blum and Harry J. Kalven,
Jr. (1952); Murray N. Rothbard, 2001)

If anything, digressively probably sets the least controversial normative baseline in

contemporary tax policy. Some defenders of progressive taxation favour achieving
effective progressivity through digressive taxationa proportional, or flat, tax
structure coupled with a generous demogrant to all taxpayersrather than the
graduated structure. Likewise, Jeffrey Schoenblum (1995) who bitterly condemns
progressive differentials in taxation as concessions to the expedient needs of
shifting majorities, politicians, bureaucrats, and egalitarians, they also leaves room
for a digressive rate structure to account for those at a subsistence or lower level.
(see also Walter J. Blum and Harry J. Kalven, Jr. (1952); Murray N. Rothbard, 2001)

Expert support for degressivity, if not affirmative progressivity through graduated

marginal rates, establishes an evident academic consensus against the opposite of
progressive taxation. Outright regressivity, or the practice of taxing poorer citizens at
higher rates vis--vis their wealthier counterparts, is so unthinkable that analysts
routinely dismiss regressive taxation as a plausible alternative (see also Walter J.
Blum and Harry J. Kalven, Jr. (1952); Murray N. Rothbard, 2001) In lieu of
simplicity, acceptance of degressivity and rejection of regressivity do not necessarily
imply support for progressivity. Normative convergence within tax policy has not
completely secured an academic or societal consensus in favor of progressivity. Even

79
though the notion of progressivity . . . may be intuitively appealing, the normative
case for progressivity remains] . . . uneasy. (see also Walter J. Blum and Harry J.
Kalven, Jr. (1952); Murray N. Rothbard, 2001)

3.1.1.1.1.2 The Comparison between Canon of Equity and Social Justice

It is often used as a rallying cry for many of the lefty side of the political spectrum.
Social justice is based on the concepts of human rights and equity and involves a
greater degree of economic egalitarianism through progressive taxation, income
redistribution, or even property redistribution. These policies aim to achieve what
developmental economists refer to as more equality of opportunity than may correctly
exist in some societies and to manufacture equality of outcome in cases where
incidental inequality appear in procedurally just system.

A key word here is egalitarianism while coupled with the phrases income
redistribution, property redistribution and equality of outcome says a great deal about
Social justice. Egalitarianism as a political doctrine essentially promotes the idea that
all people should have the same (equal) political, social, economic and civil rights. As
economic doctrine egalitarianism seeks to remove barriers of economic inequality by
means of redistribution of wealth. It is implemented in social welfare programs where
progressive tax policies take proportionately more money from wealthy individuals in
order to raise the standard of living for people who lack the same means. The
government takes from the rich and gives to the poor. In referring to maxims
regarding Justice in taxation;

We shall never make taxation popular, but we can make taxation fair."
(Richard Milhouse Nixon) (Yablon L. Jeffery, 2010) and One man's
loophole is another man's incentive (Richard Milhouse Nixon)
(Yablon L. Jeffery, 2010)

Taxation system lies at the heart of the social contract and constitutes a powerful
instrument to reduce inequalities Tax provides a financial asset that supports the state
treasury, which in turn benefits from the tax revenue in order to implement projects
and provide public services to citizens. Thus, the citizen would be contributing to
government expenditures, each according to his/her relative ability, through a
percentage of the income enjoyed by citizens under the auspices of the government
and its protection.

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3.1.2 Canon of Certainty

This principle asserts that;

The tax which each individual is bound to pay ought to be certain and not
arbitrary. The form of payment, the manner of payment, the quantity to be
paid ought all to be clear and plain to the contributor and to every person;
Where it is otherwise, every person subject to the tax is put more or less in
the power of the tax-gatherer, who can either aggravate the tax upon any
obnoxious contributor, or extort, by the terror of such aggravation, some
present or perquisite to himself.

Regarded from somewhat different standpoint the rule of Certainty is also known as
rule of Stability which is one that still needs enforcement. Frequently changes in the
tax system have disturbing effects due to the volatility in the financial and economic
arrangements by the taxpayer that would put in place predictability of cash flows. The
economic arrangements of the society are adjusted to the actual state of things and
reasonable expectations are formed which are disappointed by sudden and unforeseen
changes. Hence, the strong objection that businessmen feel to even beneficial tariff
changes, though the rule of Stability is of comparatively little weight in the case of
taxes on commodities.

It is in relation to this rule of stability that the popular Maxim an Old tax is no tax
finds its proper application. This conception of stability moreover, comprises the
fragment of truth wrapped up in Canards erroneous doctrine of equal diffusion. The
Canon of Certainty implies that, there should be certainty with regard to the amount
which taxpayer is called upon to pay during the financial year. If the taxpayer is
definite and certain about the amount of the tax and its time of payment, he/she can
adjust his/her income to his/her expenditure. The Government also benefit from this
Principle because it will be able to know in advance the total amount which it is going
to obtain and the time when it will be at its disposal. If there is an element of
arbitrariness in a tax, it will then encourage misuse of power and corruption.

Adam Smith (1776) in this connection remarks;

The tax which each individual is bound to pay ought to be certain and not
arbitrary. The time of payment, the manner of payment, the quantity to be
paid all ought to be clear and plain to the contributor and to every other
person

81
Tax systems that continually change (not stable) impose greater compliance costs on
those who are taxed. They lead to difficulties in making long-term plans. Lack of
stability can impact negatively on investment decisions by firms and on saving and
investment decisions by individuals. Changing capital taxes in particular can lead to a
sense of unfairness if the current structure and rates are capitalized into asset values.
For all these reasons, a stable tax system is, other things equal, preferable to an
unstable one. But this must not be an excuse for permanent inaction. There are costs
associated with change. But there are also costs associated with keeping a poorly
designed system in place. This is a book about tax reform and we are not writing it to
conclude that the virtue of keeping everything as it is outweighs the virtue of seeking
something better. As we will see later on, the scale of the welfare gains available as a
result of reform is, in some cases, very large indeed. But there is virtue in having a
clear and transparent method of making changes to the tax system, and a clear long-
term strategy for change. Certainty is valuable, and does not require stagnation. So
the process of tax reform matters as well as the content. And the failure of successive
governments in the UK and elsewhere to be clear about the long-term strategy and
direction for tax policy has been very costly.

Every tax should satisfy the Canon of Certainty and a good tax system should ensure
that the government is also certain about the amount that will be collected by way of
tax. Hence, the taxpayer should be well informed as to the time, amount and the
method of payment of tax. For example, by virtue of section 91(1) of the Income Tax
Act, Cap 332 subject to sections 92, 93, 94 and 96, every person is entitled to file the
return not later than three months after the end of each year of income a return of
income for the year of income, provision stipulate the time that gives certainty on
return filing. Likewise, Section 91 (2) provides the manner and the form on which tax
return shall be made including the amount chargeable and method thereof. The VAT
Act No 5 of 2014 stipulates that;

A taxable person shall lodge a value added tax returns in the form and manner
prescribed by the Minister on the last working day of a month after the end of
the tax period tax period to which it relates, whether or not that person has a
net amount of value added tax payable for that period
By virtue of Section 120 (1) through (3) of the EAC Customs Management Act,
2014 (R.E 2015 Bill Supplement);
1) Subject to subsection (3) and section 94, import duty shall be paid at the
rate in force at the time when the goods liable to such duty are entered
for home consumption: Provided that in the case of goods imported

82
 overland, the time of entry of such goods for home consumption shall be
deemed to be the time when the import duty on the goods is paid.
2) Subject to the provisions of the Customs laws and of section 94, export
duty shall be paid at the rate in force at the time when the goods liable
to such duty are entered for export: Provided that where any export duty
is imposed, or the rate of any existing export duty is varied, between the
time goods are entered for exportation and the time of exportation of
such goods, export duty shall be paid at the rate in force at the time of
exportation of the goods.
3) Where goods are entered in accordance with section 34 before the
arrival at the port of discharge of the aircraft or vessel in which such
goods are imported, the import duty upon the goods shall be paid at the
rate in force at the time of arrival of such aircraft or vessel at such port
of discharge.
The primary motive behind demands for certainty [in tax laws] is not to assure proper
reporting of transactions in the ordinary course of business. This is in line with the
quote of Martin J. McMahon Jr which says;

The primary motive behind demands for certainty is to know with

precision the extent to which the taxpayer can engage in tax motivating
planning in the vernacular, How close to the line can I get? (Martin
J. McMahon Jr) (Yablon L. Jeffery, 2010).

Taxpayers should be able to determine their tax liabilities with reasonable certainty
based on the nature of their transactions. If the transactions subject to tax are easy to
identify and value, the principle of certainty is more likely to be attained. On the other
hand, if the tax base is dependent on subjective valuations or transactions that are
difficult to categorize, the principle of certainty might not be attained. In addition,
how the taxes are paid and when the taxes are due should be spelled out in the
applicable laws, as well as in the tax forms and instructions (PICPA, 2002).

Certainty is important to a tax system because it helps to improve compliance with

the rules and to increase respect for the system. Certainty generally comes from clear
statutes as well as timely and understandable administrative guidance that is readily
available to taxpayers (PICPA, 2002). A predictable tax system is essential for
business planning among other reasons. Business entities prefer to plan costs well
ahead in advance and this includes tax liabilities. In this regard, a predictable tax
system makes business planning easy. A predictable tax system is an important
ingredient in enticing investment in an economy. Although a tax system changes
overtime due to alterations in the local economy, these changes in the tax system
should be timely and inclusive (PICPA, 2002).

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The principle of certainty is closely related to the principle of simplicity. The more
complex the tax rules and system, the greater likelihood that the certainty principle
will be compromised; the outcome of this certainty is therefore: certainty of effective
incidence; certainty of liability; and certainty of revenue to the treasury. As it is for
the Convenience principle, this maxim has not been widely discussed in the
economics literature, perhaps because they are self-evidently desirable. However, the
ideas contained in them are frequently incorporated in statements of taxpayers rights
(PICPA, 2002).

Simplicity is not necessarily synonymous with certainty therefore; adherence to the

Rule of Law (which includes certainty) should be included as a fundamental design
principle or criteria against which to evaluate a tax or tax reform measure. However,
these principles represent characteristics that an effective tax or tax reform should
display. However, a tax does not need to possess these characteristics in order for it to
be constitutionally valid. The criteria for an impost to be a constitutionally valid tax is
contained in Matthews Vs Chicory Marketing Board (Vic) (1930) 60 CLR 263, this
case asserts that;

In order for an impost to be a tax it must be: A compulsory exaction of

money by a public authority for Public Purposes, enforceable by law and
not a payment for services
In Giris Pty. Ltd v Federal Commissioner of Taxation 3 (1969) 119 CLR 365 the
High Court commented on the utility of Adam Smiths canons of taxation when
considering the constitutional validity of section 99A of the Income Tax Assessment
Act (Cth) (ITAA 1936). The High Court stated:

Yet anyone remembering the record of Adam Smith's four "canons" of

taxation must be beset by misgivings and regrets that Parliament forgot it
However, Adam Smith's canon is a political principle, not a Rule of Law. It
states a characteristic which it is generally considered that a tax should
have, not a characteristic which is of the essence of a tax. Parliament may
seem to have acted in defiance of a recognized principle of taxation, but that
does not of itself mean that the law which it has made is not a law with
respect to taxation (Emphasis added)
3.1.3 Canon of Convenience

This Principle includes the selection of suitable objects for taxation i.e. what should
be subject to taxation and the choice of convenient periods for requiring payments.
This rule of convenience is but the expression in a special form of the general

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principle that the public power should as far as possible adjusts its proceedings to the
habits of the community and avoid any efforts at directing the conduct of the citizens
in order to facilitate its own operations. Adam Smith argues that;

Every tax ought to be levied at the time, or in the manner, in which it is

most likely to be convenient for the contributor to pay it. (Yablon L.
Jeffery, 2010)

The sacrifices that inconvenient methods of fiscal administration impose may indeed
be treated as violations of both economy and equity. By this Canon, Adam Smith
(1776) means that the tax should be levied at the time and the manner which is most
convenient for the contributor to pay it. However, there is at first sight a probability
of conflict between the several Canons. A Productive tax may be inconvenient as a
convenient one may be unjust, and how it may be asked, is a situation of the difficulty
to be reached? The plain answer is, by the surrender of the less important rule. The
successful administration of the state is the final object and therefore convenience or
even equity may have to yield to Productiveness. But though opposition is possible,
agreement is on the whole the ordinary case. Economy increases Productiveness but
so do Certainty.

Convenience of payment is important in helping to ensure compliance with the tax

system. The more difficult a tax is to pay the more likely that it will not be paid.
Typical payment mechanisms include withholding (such as the withholding of
income taxes from employee pay checks) and periodic payments of estimated tax
liability. The appropriate payment mechanism should depend on the amount of the
liability and ease of collection (PICPA, 2002).

The convenience requirement contains two major components. The first relates to the
constitutional concept of Human Dignity, a core principle in many modern
constitutions and tax that drives a person into poverty violates this constitutional
concept (Edrey Yoseph, 2007). Thus, the government should not tax non-
discretionary consumptionthat which is necessary for a minimum standard of
living. Generally, income tax systems throughout the world allow a minimum amount
of income free of tax (Edrey Yoseph, 2007).

Another aspect of the convenience requirement involves timing and the availability of
funds to pay taxes (Edrey Yoseph, 2007). The practical meaning of this convenience
criterion is that a person without a liquid means of payment should not be required to

85
pay taxes. This rule has dual aspects: (1) the realization requirement, which is a
substantive rule derived from the canon of certainty; and (2) the availability of a
means for payment. Hence, mere appreciation of property before its sale should not
be taxable, since it may force taxpayers to sell property unwillingly or under pressure.
In some cases, even when income is realized, a taxpayer receives income in kind
instead of cash. A sensible tax system should allow a taxpayer to defer tax payments
(plus reasonable interest) until the asset received is sold. As it is for the certainty
principle, this maxim has not been widely discussed in the economics literature,
perhaps because they are self-evidently desirable. However, the ideas contained in
them are frequently incorporated in statements of taxpayers rights (Edrey Yoseph,
2007).

3.1.4 Canon of Economy

This Principle implies that;

The expenses of collection of taxes i.e Compliance and administrative

costs should not be excessive. They should be kept as little as possible,
consistent with administrative efficiency.

If the government appoints highly salaried staff and absorbs major portion of the
yield, the tax will be considered uneconomical. Tax will also be regarded as
uneconomical if it checks the growth of capital or causes it to immigrate to other
countries.

In other words of Adam Smith (1776);

Every tax is to be contrived as both to take out and keep out of the pockets
of the people as little as possible over the above what it brings into the
public treasury of the state (Yablon L. Jeffery, 2010)

This Principle therefore, holds that there should be economy in tax administration.
The cost of tax collection should be lower than the amount of tax collected. It may
not serve any purpose if the taxes imposed are wide spread but are difficult to
administer (Bird and Zolt, 2003). Therefore, it would make no sense to impose certain
taxes if it is difficult to administer. An analysis of this Canon indicates that Adam
Smith was basically concerned with the ways in which economy should increase its
productive capacity and thereby achieve a higher rate of economic growth and at the
same time be considered the convenience of the taxpayer and economy in tax
collection.

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The costs to collect a tax should be kept to a minimum. These costs include the
administrative cost to the government that is influenced by the number of revenue
officers necessary to administer the tax. There are also compliance costs incurred by
taxpayers to consider (Bird and Zolt, 203). This principle is also closely related to the
principle of simplicity. The more complex a tax, the greater the costs for the
government to administer it and the greater the compliance costs for taxpayers to
determine their tax liability and report it; The appropriate payment mechanism should
depend on the amount of the liability and ease of collection (PICPA, 2002).

Researchers suggested that the effectiveness of tax systems does not rely solely on
high taxpayer compliance but also on the efficiency and productivity of the
administrative systems supporting that tax (Tayib, (1998); Mustafa, (1996); Jackson,
(1994); Kelly and Oldman, (1973)).

3.2 Other Additional Canons of Taxation

In view of the wide spread recognition of many other objectives of the economic
philosophy of the government and modern state, some additional principles have also
been suggested by some other authors. As the time changed, governance expanded
and became much more complex than what it was at the Adam Smith's time. Soon a
need was felt by modern economists to expand Smith's principles of taxation and as a
response they put forward some additional modern canons of taxation.

3.2.1 Canon of Productivity

The Canon of Productivity indicates that a tax when levied should produce sufficient
revenue to the government. If a few taxes imposed yield a sufficient fund for the
state, then they should be preferred over a large number of small taxes which produce
less revenue and are expensive in collection. This Canon is also known as the Canon
of Fiscal adequacy. The tax system should be able to yield enough revenue for the
treasury and the government should have no need to resort to deficit financing. Kelly
and Oldman (1973) defined an efficient tax administrative system as a system that
involves an effort to achieve the maximum outputs, with regards to revenue income,
equity and other goals of the tax, with limited human and material resource inputs
available to the tax gathering system. Productivity, on the other hand is defined as the
rate at which goods are produced, or the amount of goods produced by each worker
(BBC English Dictionary, 1993). Therefore, the productivity of the tax administrative

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system is more focused on the productivity of the tax authority personnel, which is
not included in the scope of this study.

Therefore, the government should be able to function with the revenue raised from
the people by means of taxes which should adequately cover the government
expenditure so that the government should not be forced to resort to deficit financing.
The tax policy makers should avoid the nuisance taxes and multiple taxes are not
productive in tax system.

3.2.2 Canon of Elasticity

According to Bastable, Charles F, (1917), every tax imposed by the government

should be elastic in nature. In other words, the income from tax should be capable of
increasing or decreasing according to the requirement of the country. For example, if
the government needs more income at time of crisis, the tax should be capable of
yielding more income through increase in its rate.

Therefore, the tax system should be flexible so that it is possible for the authority to
revise the rates and system with the least in convenience in order to increase or
decrease the revenue (Bird, Richard Miller and Casanegra de Jantscher, Milka, 1992).
Tax should be elastic in the sense that it can be used in much variety of dimensions of
increasing revenue. E.g. Increase revenue of income tax by increasing tax base or
reduce the tax rate to get more revenue. The Tax system should be elastic is a further
canon the observance of which is very desirable. It may indeed, be regarded as the
agency for realising at once productivity and economy. Direct taxes are flexible and
thus satisfy the canon of elasticity. The government can increase or decrease the rates
of direct taxes according to the requirements of the economy. In case of war, natural
calamities, or emergency, the state can raise the rates of these taxes in order to have
larger tax revenue. During a depression, it can reduce their rates considerably.

Elastic tax occurs if the rate of changes in tax is more than the rate of changes in the
tax base, the tax is known as elastic tax whereby inelastic tax occurs if the rate of
changes in tax is less than the rate of changes in the tax base.

3.2.3 Canon of Flexibility

Tax laws should be subject to revision. It should be easily possible for the authorities
to revise the tax structure both with respect to its coverage and rates, to suit the
changing requirements of the economy with changing time and conditions the tax
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system needs to be changed without much difficult. The tax system must be flexible
and not rigid. There is a difference between flexibility and elasticity. Flexibility
means that there should be no rigidity in the tax system so that it can be quickly
adjusted to new conditions; and elasticity means that the revenues can be increased.
The presence of flexibility is a condition of elasticity. A tax system cannot be altered
without bringing about a revolution or without much flexibility in the tax system.

3.2.4 Canon of Simplicity

The tax law should be simple so that taxpayers understand the rules and can comply
with them correctly and in a cost-efficient manner. Simplicity in the tax system is
important both to taxpayers and to those who administer the various taxes. Complex
rules lead to errors and disrespect for the system that can reduce compliance.
Simplicity is important both to improve the compliance process and to enable
taxpayers to better understand the tax consequences of transactions in which they
engage in or plan to engage (PICPA, 2002; Bird, Richard Miller and Casanegra de
Jantscher, Milka, 1992)).

Ironically, simplicity (sometimes referred to as administrative efficiency) (Robin

Woellner et al, 2009) is perhaps the most difficult of the criteria to define and,
consequently, it has been attributed numerous and disparate meanings. The Asprey
Report states that;

Simplicity involves a complex of ideas.15

Binh Tran-Nam states:

If there were ever to be agreement between tax academics, it must be that

tax simplicityis itself a complicated notion. (Binh Tran-Nam, 2000)

The difficulty in defining simplicity arises because simplicity is a subjective concept.

For example, a taxation practitioner with several years of experience may find a
particular tax very simple to apply, relative to a taxpayer with no specialised
knowledge of the taxation law. Simplicity is defined very broadly in the Asprey
Report:

.. A tax will be called simple, relative to others, if for each dollar raised
by it the cost of official administration is small, and if the compliance

15
Asprey Report, above n 21, 3.19

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 costs, the costs in money and effort of all kinds to the taxpayer, are also
small.16

Based on the Asprey Report and for the purposes of this article, simplicity will be
viewed in the context of compliance and administration (also known as administrative
efficiency). The first element is taken to be satisfied if a taxpayer (or their adviser)
can understand and apply the tax with minimal compliance costs. The meaning of
compliance costs is based on the definition assigned to it in the Report on the Review
of Aspects of Income Tax Self-Assessment (Report on the Review of Aspects of
Income Tax Self-Assessment, 2004) and includes direct financial costs, opportunity
costs and non-financial compliance costs. Direct financial costs include the costs to
the taxpayer of engaging tax experts for managing their tax affairs. Opportunity costs
include the time spent by the taxpayer complying with their tax obligations that may
have been spent doing other activities (such as leisure or work). Non-financial
compliance costs include any mental stress that may result from uncertainty placed on
the taxpayer about whether they have discharged their tax obligations (Nicole
Wilson-Rogers and Dale Pinto, 2009).

The second element provides that in order for a tax to be simple it must have minimal
administration costs. Administration costs include the costs of tax policy planning,
resolving taxation disputes (including taxation litigation), and the costs of
administering the law including taxpayer education, rulings, circulars and the
provision of other types of ATO information. One factor that can affect simplicity is
the number of taxpayers affected by a taxation measure (Nicole Wilson-Rogers and
Dale Pinto, 2009). For example the fewer taxpayers from which the tax is collected
the simpler the tax. The Asprey Report states that:

The sheikhdom that can raise all the revenues it requires (and maybe
much more) from a single tax on a single oil company has what is
unquestionably the simplest tax of all.17

The tax system should not be complicated, that makes it difficult to understand and
administer and results in problems of interpretation and disputes. This Canon of
Simplicity implies that the tax system should be fairly, simple, plain and intelligible
to the taxpayer. If it is complicated and difficult to understand, then it will lead to
oppression and corruption. Hence, this norm suggests that tax rate and the tax systems
16
Asprey Report, above n 21, 3.20
17
Asprey Report, above n 21, 3.22

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ought to be simple, plain and intelligible to the common understanding. However,
Simplicity is not the same as brevity for example; Definition of trade as it would
mean repetitive buying and selling in lieu of trade; the taxpayer, however, may
declare not to be repetitive for the sake of avoiding paying tax (Bird, Richard Miller
and Casanegra de Jantscher, Milka, 1992).

When a tax system is simplified, this reduces the number of errors, improves
compliance and increases respect for the system. The less complex a system is, the
more transparent it becomes, and the better taxpayers are able to anticipate the tax
consequences of their economic choices. Tax system is made complex if it has many
tax exemptions such as tax credits, tax breaks, and tax holidays, among others. The
complexity is likely to increase the cost of collection and administration. Achieving
simplicity in a tax system does not stop with legislation but extends to tax
administration. It would greatly require the continuous transformation or
modernization of Revenue administration (Bird, Richard Miller and Casanegra de
Jantscher, Milka, 1992).

By and larger it is the responsibility of each Revenue Agency to not only collect
revenue but to ensure that revenue is collected efficiently and does not burden
taxpayers. Consequently, it is necessary that Revenue Agencies strive to transform
and become efficient. This would involve having the best latest technology/software
programmes that makes it easy to administer taxes. The simplicity criterion means
that tax rules should be understandable, accessible, and uncomplicated. This canon is
essential if corruption or oppression is to be avoided.

Simplicity is a general term that encompasses the following:

Comprehensibility The tax system should be understandable to the people to
whom it applies.
Certainty The application of the tax system to particular transactions
should be determinable, predictable, and reasonably certain.
Administrative Taxpayers should not have to devote undue time or incur
convenience: undue costs in complying with the tax system.
Difficult to avoid The tax system should offer minimal opportunity for
noncompliance.

3.2.5 Canon of Expediency

A tax should be determined on the ground of economic, social and political

expediency. According to this Canon, the taxpayer should not have any doubt
regarding the Rationale of tax system. For this purpose, the old taxes are considered

91
better than new taxes, as the taxpayers have been accustomed with the old taxes.
Note also that, the Old taxes are no taxes. Therefore, before imposing new taxes a
complete justification should be sought for their imposition. This Canon also covers a
message that the government should raise its revenues by raising the tax ratio of
previous taxes.

This Canon is based on the Expediency theory which asserts that every tax proposal
must pass the test of practicability. It must be the only consideration weighing with
the authorities in choosing a tax proposal. Economic and social objectives of the state
as also the effects of a tax system should be treated as irrelevant. This proposition has
a truth in it, since it is useless to have a tax which cannot be levied and collected
efficiently. There are pressures from economic, social and political groups. Every
group tries to protect and promote its own interests and authorities are often forced to
reshape tax structure to accommodate these pressures. In addition, the administrative
set up may not be efficient to collect the tax at a reasonable cost of collection.
Taxation provides a powerful set of policy tools to the authorities and should be
effectively used for remedying economic and social ills of the society such as income
inequalities, regional disparities, unemployment, and cyclical fluctuations and so on.
The principle concentrates on: economy of expediency, social expediency, and
political expediency. The principle states that tax determination and administration
should not give room for any criticism.

3.2.6 Canon of Neutrality (Efficiency)

The other similar term for neutrality is efficiency. This principle answers the question
of whether the tax system interferes with the investment and spending decisions of
individuals and businesses. Marina et al. (2002) states that:

The objective of a good tax system is to distort or alter as little as possible

the economic decisions of persons and firms as compared with the
decisions they would have made if the taxes were not collected at all (an
entirely hypothetical condition). The less a tax affects the decisions of
enterprises about production, or the decisions of consumers about
purchasing, the more we say it is efficient. But how can a high degree of
tax efficiency be ensured in practice? This is achieved in the following
ways:

o expanding the taxable base by abolishing tax exemptions and

tax incentives for individual taxpayers;
o reducing the number of tax rates; and

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 o Lowering the tax rate levels.
A key aspect of efficiency is neutrality which is said to exist where taxes minimize
distortions to economic activities and do not impede genuine commercial
transactions. The US Department of Treasury states:

An ideal tax system would, however, interfere with private decisions as

little as possible. That is, it would not unnecessarily distort choices about
how income is earned and how it is spent. It would not unduly favor leisure
over work or consumption over saving and investment. It would not
needlessly cause business firms to modify their production techniques or
their decisions on how to finance their activities. A neutral tax policy would
not induce business to acquire other firms or to be acquired by them merely
for tax considerations. It would not discourage risk-taking or the formation
of new businesses (Department of Treasury, 1984)

Similarly Allan defines neutrality to be in existence where:

The tax avoids distorting the workings of the market mechanism.

A tax should no encourage inefficient allocation of resources by being so extreme that

taxpayer makes counterproductive economic decisions. Therefore, the effect of the
tax law on the taxpayers decisions as to how to carry out a particular transaction or
whether to engage in a transaction should be kept to a minimum. Taxpayers should
not be unduly encouraged or discouraged from engaging in certain activities due to
the tax law. The primary objective of the tax system is to raise revenue and not
change behaviour (Nicole Wilson-Rogers and Dale Pinto, 2009).

The effect of the tax law on a taxpayers decisions as to how to carry out a particular
transaction or whether to engage in a transaction should be kept to a minimum. The
effect of the tax law on business and personal decisions should be kept to a minimum.
That is, taxpayers should not be unduly encouraged or discouraged from engaging in
certain activities or taking certain courses of action primarily due to the effect of the
tax law on the activity or action. The primary purpose of a tax is to raise revenue for
governmental activities, rather than to influence business and personal decisions
(PICPA, 2002).

Applying Smiths Canons to any particular tax is largely a subjective undertaking.

Yet, if one attempts to evaluate the principal taxes that is, property tax, income tax,
and sales tax against Smiths Canons, one will quickly find that there is no such
thing as a perfect tax. The property tax, for instance, scores fairly low on

93
convenience and efficiency, but fairly high on certainty. The income tax scores fairly
high on equality, but is costly to administer and is so complicated that it leaves much
to be desired on certainty. A sales tax scores high on convenience, certainty, and
efficiency, but poorly on equality. Because there is no perfect tax, an argument can
be made that the best tax system is one that uses all three major types of taxes in
small doses. By combining all three major types, it is possible to offset the
weaknesses of each with the strengths of the others. In the final analysis, however,
the standard for judging a tax is often political. In a democracy, when revenue must
be raised, the tax selected is often based upon plucking the goose that squawks the
least. Some have called this political test the other canon.

A neutral tax will contribute to efficiency by ensuring that optimal allocation of the
means of production is achieved. A distortion, and the corresponding deadweight
loss, will occur when changes in price trigger different changes in supply and demand
than would occur in the absence of tax. In this sense, neutrality also entails that the
tax system raises revenue while minimising discrimination in favour of, or against,
any particular economic choice

Suffice it to say that, a neutral tax system is one that treats similar activities in similar
ways. For example, a system that taxes all consumption the same would achieve
neutrality over choices that people make about what to consume. A system that treats
all income the same achieves neutrality over the form in which income is received. A
system that taxes all forms of savings the same achieves neutrality over the form in
which savings occur. A system that imposes the same present value of tax on
consumption now and consumption in the future will be neutral with respect to the
decision over whether to save or consume out of current income.

So a neutral system minimizes distortions over peoples choices and behaviour. In

general, it therefore minimizes welfare loss. In a non-neutral tax system, people and
firms have an incentive to devote socially wasteful effort to reducing their tax
payments by changing the form or substance of their activities. But the promotion of
neutrality in the tax system is not always an appropriate end for policy. However,
there are times when a lack of neutrality is valuable. We do not want to be neutral
towards environmental badswe want to tax them more than other things. There is
likely to be a case for offering tax relief for corporate research and development
activity. There are strong and respectable arguments for treating some forms of

94
consumption particularly those, such as childcare, that are complementary to
workmore leniently than others. The same is true of some forms of savings. We do
not, in the end, believe that pension savings should be taxed in exactly the same way
as other savings.

Very often, greater neutrality leads to both greater simplicity and greater fairness.
Achieving it requires a holistic view of the tax system which recognizes the
interdependencies between different parts of the tax system personal and corporate
taxes, taxation of dividends and earnings, taxation of debt and equity. In particular, it
requires a consistent understanding of what it is we are trying to taxthe tax base.

3.2.7 Canon of Functional efficiency

A tax policy and system of a country should be effective and efficient so that it can
generate sufficient revenue for the government in order to ensure the economic
development of the country (Bird, Richard Miller and Casanegra de Jantscher, Milka,
1992). The system should be able to reduce the harassment and tax avoidance. The
tax reform should not impede or reduce an economys productive capacity. In
general, a tax system should not favour one industry at the expense of others.

Tax design is shaped by the need to raise revenues and by considerations of

efficiency, equity and enforceability. If the only concern were to minimise efficiency
losses associated with taxation, taxes generally should be designed so as to leave
economic behaviour unaffected. Specifically, taxes should be lump sums or relate to
tax bases that cannot be influenced by taxpayers, such as natural resources and
undeveloped land. While such a tax system would avoid distortions in economic
behaviour, it would be highly unlikely to yield sufficient revenues to fund socially
useful expenditure without producing substantial inequity.

A more useful guideline is that the tax system should be as neutral a possible, i.e.
minimise discrimination in favour of or against any particular economic choices. In
practice, this points to building tax systems substantially around broad income and
expenditure bases and minimising differences in tax rates that can be applied. As a
rule of thumb, in the absence of compelling considerations to the contrary (see
below), improvements in efficiency can be achieved by: i) broadening tax bases by
eliminating exemptions and special regimes; ii) flattening rate structures; and iii)
integrating or aligning different tax rate structures to avoid arbitrage opportunities.

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However, neutrality need not be an overriding consideration; other factors that can
usefully be taken into account are:

Governments may find scope for levering the revenue-raising potential of

tax systems by taxing some items more heavily than others. For example,
under some circumstances it can be efficient to tax most heavily those items
that are comparatively price-inelastic.
It may be desirable to use the tax system to enhance welfare by correcting
market failure. This may involve taxing bads, such as alcohol, tobacco
and polluting substances such as fossil fuels. Where demand for such goods
is inelastic there may be revenue benefits which allow distorting taxes
elsewhere to be lowered. While market failures could also justify tax reliefs
for activities whose social return is high (e.g. R&D and training), the
advantages need to be weighed against the need for higher distorting taxes
elsewhere.
Allowing taxes to differ across local jurisdictions permits the supply of local
public goods and services to be aligned with the particular, but differing,
preferences and circumstances of their constituents although there are
different views across countries as to which taxes could usefully be
decentralised.
Tax systems influence income distribution and may have a role to play in
the pursuit of equity goals. The resulting loss in neutrality, e.g. due to
progressive taxation, may involve efficiency losses but may also contribute
to the perceived fairness of the system.
The cost of compliance with the tax code needs to be kept low, requiring tax
rules to be clear and avoid unnecessary complexity. While the neutrality
principle is often consistent with simplicity, there are cases where departures
from the neutrality principle enhance simplicity, for example by exempting
income that is difficult to assess such as fringe benefits or imputed rentals.
3.2.8 Canon of Diversity

A tax system should not be based on a single tax or only a few taxes; there should be
a large variety of taxes so that all citizens who can afford to contribute to the state
revenue should be made to do so. There should be a wide admixture of direct and
indirect taxes.

This Canon, therefore entails that, the government should collect taxes from different
sources rather than concentrating on a single source of tax. It is not advisable for the
government to depend upon a single source of tax; it may result in inequity to the
certain section of the society. Uncertainty for the government to raise funds may
result from absence of this Canon. If the tax revenue comes from diversified source,
then any reduction in tax revenue on account of any one cause is bound to be small.
Therefore, the tax system should include a large number of taxes which are
economical. The government should collect revenue from its citizens by levying

96
direct and indirect taxes. Variety in taxation is desirable from the point of view of
equity, yield and stability.

Indirect taxes satisfy the canon of diversity. They can be levied on a variety of
commodities and services. So the government can be sure of continuous and
sufficient revenue, even if it is required to reduce the rates of taxes on certain
commodities due to the fall in their demand. This canon is closely related to that of
productivity. The canon of elasticity requires that the government should be able to
raise the rates of taxes when it is in need of more revenue. In other Words, taxes
should be elastic. The best example is excise duties. They can be levied on any
number of commodities and their rates can be increased every year in order to raise
more revenue. But care has to be taken that the rates of excise duties should not be so
raised that they may encourage inflationary pressures in the economy.

3.2.9 Canon of Co-ordination

In a federal set up like Ethiopia, Federal and State Governments levy taxes. So, there
should be a proper co-ordination between different taxes imposed by various
authorities. Otherwise, it will affect the people adversely.

3.2.9.1 Vertical co-ordination

Vertical co-ordination concerns the assignment of tax authority to the various levels
of government. It should be clear which jurisdiction is entitled to tax which items
from which taxpayer. Attention must be given to the geographical distribution of tax
yield. A good tax under sub central authorities should have a tax base that is widely
and evenly distributed throughout the country (King D, (1984); Dafflon Bernard and
Tth Krisztina, (2005))

3.2.9.2 Horizontal co-ordination

Horizontal co-ordination serves to apportion tax competencies and the tax yields
among the jurisdictions at the same level where the tax base has its origin King D,
(1984); Dafflon Bernard and Tth Krisztina, (2005)) Two objectives have been
pursued: avoidance of double taxation, and, preventing that taxpayers with taxable
activities in more than one jurisdiction avoid the progressiveness of the tax rate
schedules through geographical splitting of the tax base. Horizontal coordination
applies itself along the following general guidelines:

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 1. income (profits) taxes are entirely paid in the country of residence;
2. income obtained in other jurisdictions is assessed according to the rules of
the jurisdiction of residence;
3. taxation of income obtained in more than one jurisdiction cannot be higher
than taxation of the same total income acquired in the jurisdiction of
residence alone;
4. immovable property is taxed in the jurisdiction where it exists;
5. when corporate or independent business takes place in several
jurisdictions, the tax yields are distributed between those jurisdictions
according to financially measurable components of the activity (for
example: turnover, the volume of sales, total insurance premiums for
insurance companies (Dafflon, 1986, pp. 32-36).
3.2.10 Canon of Uniformity

The canon of uniformity was developed by Conard and Nitty ( ) implies that there
should be uniformity in tax system. The method of imposing all taxes should be one
and the same, and the determination of rates should be done keeping in view the
general objective.

3.2.11 Canon of Buoyancy

According to this Canon, the tax revenue should have an inherent tendency to
increase along with an increase in national income even if the rates and coverage of
taxes are not revised.

3.2.12 Canon of Desirability

This Canon implies that, there must be some justification for imposing a tax and this
justification should be clearly understood, failing which, people may treat it as an
unnecessary burden on them. This Canon is of vital importance, particularly in
democratic countries.

3.2.13 Canon of Taxation by Sismondi

The name of Sismondi will always remain alive in the history of economic thoughts.
He has given the following Canons of taxation;

(a) Tax should not be imposed on essential and convenient commodity

(b) The amount of tax should be sufficient and should not lead to shifting
(c) The tax should be imposed in such a way that the payment is made from
income and not from capital

3.2.14 Canon of Taxation by Mrs. Urshala Hicks

Mrs. Hicks has given the following Canons of taxation;

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 (a) There must be uniformity and discrimination in taxation
(b) Taxation should be utilized for development of public utility services
(c) Taxation should be based on the capacity of paying taxes. Those who have more
income, should be taxed at a higher rate

3.2.15 Canons of Taxation by Joseph Stiglitz

Despite the fact that there are no specifics on which of these principles are most
important, Joseph Stiglitz, summarised the characteristics of a good tax system as
consisting mandatorily of a combination of the following principles. First, Economic
efficiency, the tax should allow for efficient allocation of resources. Secondly,
Administrative simplicity, the tax should be easy and inexpensive to administer.
Thirdly, Flexibility, the tax system should respond easily to changes in economic
conditions. Fourthly, Transparency, the tax burden18 should be easily ascertainable
and be politically tailored to what society considers desirable. Finally, Fairness, the
tax system should be fair in its treatment of different individuals.

18
Tax burden - refers to the amount of tax borne by an individual or a business. Tax burdens vary depending
on a number of factors including income level, jurisdiction and current tax rates. It is worth noting that tax
burden may not be the same as the tax actually paid because of the possibility of passing a tax on. This
distinction helps explain who has the legal liability of a tax-who has the statutory burden and who actually
bears the ultimate burden of the tax-who as the tax burden i.e. bears the economic incidence of the tax

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 CHAPTER FIVE
TAX EVASION AND TAX AVOIDANCE
The tax evasion and avoidance undermines the integrity, equity ad efficiency of a tax
system. The question arises as to why opportunities for tax evasion and avoidance
expanding? The answer could be due to the growth of self-employment and
increasing globalization of businesses including the increased liability of capital and
rise of e-commerce (Mafwenga, H, 2013; COMSEC,). The cost of tax evasion and
avoidance may be high in terms of revenue loss and ability to provide public goods
but in the costs to recover revenue or deter tax evasion and avoidance activities as
well. The tax evasion and avoidance has Flow-on-effects on public expenditure;
this can be viewed as a public expenditure cost.

The underground economy operation is closely related to tax evasion and avoidance.
The underground economy impacts negatively on the following;

1. Governments ability to provide goods and services (Ability to pay principle

as a guiding rule because taxation is a quod pro quo payment)
2. Increases unfair competition by forcing legitimate businesses out of the
market (fairness principle as a guiding rule because tax justice must prevail
in tax system)
3. Provides a haven for criminal activity (here innocent taxpayers may fell to
have been treated unfairly than would be tax defaulters)
4. Distorts the quality of macroeconomic statistics that policy makers rely on to
gauge their macro-economic policies
This is in line with the quote of David Brinkley which says;

The American people as taxpayers have begun in wholesale numbers to

cheat, out of resentment of a tax system they think is unfair, too
complicated and wasteful of their money. The so-called underground
economy is growing rapidlypeople working for cash only, reporting
nothing, paying nothing. (David Brinkley) (Yablon L. Jeffery, 2010)

In this regard, underground economy is not only basically on the poor but also on the
rich as advocated in the quote by David Cay Johnston which says;

Just as there is an underground economy of gardeners and handymen

and petty merchants who get paid in cash and pay little or no tax, there is
also an underground economy among the super-rich that lets them
understate their true income and overstate their tax deductions. (David
Cay Johnston) (Yablon L. Jeffery, 2010)

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5.1 TAX EVASION

5.2 Definition of Tax Evasion

Tax evasion is an illegal practice whereby someone using unlawful means purposely
reduces his or her tax liabilities. This arrangement is exposed to criminal punishment
and fines, and is considered tax fraud. It used to be said that there were two things
that were unavoidable: death and taxes.

Zoe and John Pebble (2012, p. 702) assert that:

Tax evasion is illegal. It consists in the willful violation or circumvention

of applicable tax laws in order to minimize tax liability. Tax evasion
generally involves either deliberate under-reporting or non-reporting of
receipts, or false claims to deductions. This conduct is legally
straightforward to identify; a taxpayer has committed tax evasion only if he
or she has breached a relevant law. Indeed, evasion ordinarily involves
criminal fraud. (Yablon L. Jeffery, 2010)

Tax evasion is illegal. It consists in the willful violation or circumvention of

applicable tax laws in order to minimize tax liability. Tax evasion generally involves
either deliberate under-reporting or non-reporting of receipts, or false claims to
deductions. This conduct is legally straightforward to identify; a taxpayer has
committed tax evasion only if he or she has breached a relevant law. Indeed, evasion
ordinarily involves criminal fraud. As pointed out by quotes of Mark Everson and
Martin A. Sullivan which says;

Tax evasion often goes hand-in-hand with kick-backs and other crimes
motivated by greed (Mark Everson); and Tax evasion is closely related
to money laundering . . . . Tax evasion is a natural by-product of crime, and
so criminals are near-automatic tax evaders. (Martin A. Sullivan)
(Yablon L. Jeffery, 2010)

There is a discussion concerning whether ignorance of the law is an excuse to tax

crimes. As a general rule, ignorance of law is not a valid defence, but with respect to
tax evasion, as assertion by Mark Winnings commenting on the Cheek Vs United
States, 498 U.S. 192 (1991), a United States Supreme Court case in which the Court
reversed the conviction of John L. Cheek, a tax protester, for willful failure to file tax
returns and tax evasion, said;

To consider a felony anyone should be conscious of this duty and that the
defendant voluntarily and intentionally violated that duty.

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In Cheek Vs United States, 498 U.S. 192 (1991), the Supreme Court made it clear
that;

The traditional maxim "ignorance of the law is no defence" does not

apply to tax crimes; A taxpayer may behave outrageously, even to the point
of not paying any taxes, without criminal penalty, as long as the taxpayer
subjectively believes he is obeying the law.

The brief facts was that, Defendant Cheek was convicted under a provision of the
Federal Tax Code that makes it a felony to willfully attempt in any manner to evade
or defeat any tax imposed by this title or payment thereof for failing to file a tax
return. Defendant argued that he had acted on information he received from a group
opposing the institution of taxation and based on this information he believed that he
did not owe any taxes. It was held that;

1. A genuine, good faith belief that one is not violating the Federal tax law
based on a misunderstanding caused by the complexity of the tax law (e.g.,
the complexity of the statute itself) is a defence to a charge of "willfulness",
even though that belief is irrational or unreasonable.
2. A belief that the Federal income tax is invalid or unconstitutional is not a
misunderstanding caused by the complexity of the tax law, and is not a
defence to a charge of "willfulness", even if that belief is genuine and is held
in good faith
Tax evasion, or attempted evasion, is an attempt to evade or defeat tax (or the
payment of tax) in any manner, the existence of a tax deficiency (or tax due and
owing in an evasion of payment case), an affirmative act of fraud, and willfulness.
The difference between willful failure to pay a tax when due and willful attempt to
defeat and evade one, is not necessarily easy to detect or define. The word willfully
connotes a voluntary, intentional violation of a known legal duty.

Tax evasion in general refers to illegal practices to escape from taxation. To this end,
taxable income, profits liable to tax or other taxable activities are concealed, the
amount and/or the source of income are misrepresented, or tax reducing factors such
as deductions, exemptions or credits are deliberately overstated (see Alm and
Vazquez, 2001 and Chiumya, 2006). Essentially, tax evasion amounts to using illegal
means to reduce tax liability. These illegal means could include non-disclosure of
income, falsification of accounts books and claiming deductions for expenditure that
was not actually incurred. Tax evasion is an offence and a taxpayer who is found
guilty will be subject to severe penalties.

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Oliver Wendell Holmes in the case of Bullen v. Wisconsin (1916), 240 US. 625 at p.
630-31 who wrote:

When the law draws a line, a case is on one side of it or the other, and if on the
safe side is none the worse legally that a party has availed himself to the full of
what the law permits. When an act is condemned as evasion, what is meant is
that it is on the wrong side of the line ...
Thus, the distinguishing characteristic of evasion is illegality. In this case Justice
said:

"We do not speak of evasion, because, when the law draws a line, a case is on
one side of it or the other, and if on the safe side is none the worse legally that a
party has availed himself to the full of what the law permits. When an act is
condemned as an evasion, what is meant is that it is on the wrong side of the line
indicated by the policy if not by the mere letter of the law
In tax evasion cases, the Government has the burden of proving the crime charged
beyond a reasonable doubt; thus it must prove a wilful attempt in any manner to
evade or defeat the tax or its payment. It should be noted at the outset the offense is
complete when the return is filed this is because a fraudulent return is regarded as an
attempt to evade this also would include wilfully failing to pay the tax shown to be
due on a return that is filed.

In the Queen v. Cao, 92 DTC 6237 the Crown alleged that the taxpayer, who was a
recent immigrant from Malaysia and employed as a housekeeper, failed to disclose
certain income he had earned. The Crown claimed that the taxpayer had earned
income from charging fees for the service of delivering monies to persons in
Vietnam, and it was this income that the taxpayer wilfully omitted from three
consecutive tax returns. The Crown further claimed that during the Minister's
investigation, the taxpayer was not forthcoming with information and gave a number
of conflicting explanations for his actions. The taxpayer, in his defence, claimed that
he did not operate such a business, rather it was his sister in Paris who did and he was
simply helping her for no remuneration. The taxpayer attacked the Minister's
estimation of his income, providing corroborated testimonial evidence indicating that
his wealth, which the Minister claimed was attributed to income the taxpayer had
earned, was actually attributed to the rather substantial family fortune his father had
amassed. He also asserted that he gave the Minister conflicting explanations, as the (i)
taxpayer's history of dealings with a totalitarian regime made him extremely

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vulnerable to intimidation by the Minister and (ii) the taxpayer was a relatively
unsophisticated man who kept very poor business records.

It was held that;

The taxpayer was not guilty of tax evasion. because the Crown failed to prove,
beyond a reasonable doubt, that the taxpayer's wealth was actually attributed to
unreported income; and even if the taxpayer had actually earned such income,
the evidence indicated that the taxpayer did not have the intent to evade taxes as
he lacked fluency in English, his previous experiences with a totalitarian regime
led him to say things he thought the Minister wanted to hear, and he was an
unsophisticated man with limited business knowledge.
Regarding underpayment of tax, The Government must establish that there was a
deficiency in taxes for each of the prosecution years involved. In tax evasion cases,
underpayment is the corpus delicti which must be established, and there are several
ways in which the Government may meet this burden. The easiest is to show an
omission of specific items of income. However, there are other methods of proof
available in the absence of specific items which, while more burdensome of
investigation, are nevertheless effective.

Currently, the best known and most used of these indirect methods of establishing tax
deficiencies is the "net worth" method. The use of this device involves establishing
the total net value of a taxpayer's assets at the beginning of a given year, proving an
increase at the end of the year, adding to the difference the non-deductible
expenditures of the taxpayer, and comparing the result with reported income. When
non-income items are eliminated, the difference is unreported income.

Another device is the "bank-deposit" method, by which deposits to all bank accounts
are compared with reported gross income, with other appropriate adjustments. Still
another indirect approach is to add claimed deductions to non-deductible
expenditures, compare the total with reported income, and thus show either
unreported income or falsified deductions. Variations on this approach are the "living
expense" method, by which total living expenses plus savings are compared with
reported income, or a method by which total expenditures are added to decreases in
net worth and equated with reported income. Lastly, "the percentage of mark-up"
method applies a standard percentage of mark-up to the sale of inventory items and
compares it to the mark-up reported, to prove that the difference is unreported
income.

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Having established the deficiency, the Government must further prove that it was
willfully incurred. The simplest way to achieve this is by extrajudicial admissions or
confessions which best serve to indicate the taxpayer's mental state. These, of course,
are admissible, subject to their being corroborated by direct substantiation of the
facts admitted or by independent evidence, such as net worth or bank deposit
computations, tending to show understatement of income for the prosecution years.

In United States v. Murdock, 290 U.S. 389, 394 (1933) the Supreme Court said of
willfulness

"The word often denotes an act which is intentional, or knowing, or voluntary, as

distinguished from accidental. But, when used in a criminal statute it generally
means an act done with a bad purpose ...; without justifiable excuse ...;
stubbornly, obstinately, perversely... The word is also employed to characterize a
thing done without ground for believing it is lawful.. . , or conduct marked by
careless disregard whether or not one has the right so to act ......
Ten years later, in the famous case of Spies v. United States, 317 U.S. 492 (1943)
"willful" was a word of many meanings, the construction of which was frequently
influenced by its context, the Court said:

.... By way of illustration, and not by way of limitation, we would think

affirmative willful attempt may be inferred from conduct such as keeping a
double set of books, making false entries or alterations, or false invoices or
documents, destruction of books or records, concealment of assets or covering
up sources of income, handling of one's affairs to avoid making the records usual
in transactions of the kind, and any conduct, the likely effect of which would be
to mislead or to conceal." '
One of the most onerous obligations of a judge presiding over a criminal tax case is
instructing a jury on the question of willfulness. The language of the foregoing cases
has frequently been relied upon, particularly with reference to "bad purpose" as an
element of willfulness. Recently, however, there has been a noticeable tendency in
the Ninth Circuit to condemn an umbrella approach of this kind. There the trend
seems to require the court to associate the specific facts of the case with intent to
evade or defeat the tax, the precise statutory language, and to develop its charge on
willfulness in this way rather than on the basis of the generality, "bad purpose (Joseph
H. Murphy, 1958).

In the case of R. v. Templeman, 2006 DTC 6374 the taxpayer was a very successful
and busy real estate broker who was formally an employee at a real estate broker and
became self-employed as an independent contractor providing services to the same

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real estate broker. He was selected for an audit for the 1998 and 1999 taxation years.
Civil penalties were recommended and his file was later referred for investigation by
the CRA. As a result of this investigation, the taxpayer was charged with tax evasion
for the 1997, 1998 and 1999 taxation years. The taxpayers returns were prepared by
professionals however they used the figures and documents that had been provided to
them by the taxpayer. These included thousands of receipts and invoices for personal
and business expenses, which had been sorted and categorized by the taxpayers
assistant. The CRA auditors did not agree with all of the expenses claimed and these
deductions were disallowed. The taxpayer was charged with tax evasion.

The taxpayer in his defence argued that: (i) he relied upon his assistant to recognize
and sort the business expenses into appropriate categories, since she was familiar with
the business; (ii) the taxpayer did not ask his assistant to claim personal items as
business expenses, but instead had provided her with the expense categories given to
him by his accountants; (iii) the confusion arose because the tax years under
investigation were the years he went from being an employee, who did not need to
keep track of expenses, to being an independent salesman where such records were
needed; (iv) the task of organizing the receipts was enormous and many personal
receipts were likely to have been included accidentally; and (v) that items identified
by the CRA auditors as personal could have also been business expenses. The
taxpayer claimed that he may have been careless or negligent but this did not amount
to criminal intent. The CRA claimed the taxpayer: (i) knowingly permitted personal
expenses to be included as business expenses, reducing his taxable income and
leading to the evasion of taxes; and (ii) was wilfully blind to the inclusion of these
personal expenses and should be held criminally responsible.

The Court held that;

The taxpayer was not guilty of tax evasion. He was not wilfully blind and did
not knowingly include personal expenses as business deductions. His assistant
was responsible for sorting the thousands of receipts. The Court held that the
taxpayer was engaged in a busy and high volume real estate practice, and it was
not unreasonable for the very busy taxpayer to rely upon his assistant, given his
focus on the sales and not the administrative aspect of the business. The Crown
had not discharged its evidentiary burden of proving the elements of the offence
beyond a reasonable doubt.

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5.3 TAX AVOIDANCE

5.3.1 Definition of Tax Avoidance

Tax Avoidance, connotes an act within the law whereby income, which would
otherwise be taxed at a rate applicable to the taxpayer who but for that act would have
derived it is distributed to another person or between a number of other persons who
do not provide a bona fide and fully adequate consideration; in the result the total tax
payable in respect of that income is less than it would have been had no part of the
income had been distributed and the whole been taxed as the income of that taxpayer.

Avoidance transactions rely on specific provisions or rules in tax law to gain tax
advantages unintended by law makers. Often such transactions will display one or
more of the hallmarks of tax avoidance, including arrangements that are artificial,
lack business reality or risk, are circular, or exploit legislations loopholes. This is in
line with the quote of Lord Denning which asserts that;

The avoidance of tax may be lawful, but it is not yet a virtue. (Lord Denning)
(Yablon L. Jeffery, 2010) and the quote of Al Capone which says that;
A good lawyer with a briefcase can steal more than ten men with machine
guns (Al Capone) (Yablon L. Jeffery, 2010)

In defining the Tax Avoidance, IRS had the following quote;

Avoidance of taxes is not a criminal offense. Any attempt to reduce, avoid,

minimize, or alleviate taxes by legitimate means is permissible. The distinction
between evasion and avoidance is fine yet definite. One who avoids tax does not
conceal or misrepresent. He shapes events to reduce or eliminate tax liability
and upon the happening of the events, makes a complete disclosure. Evasion, on
the other hand, involves deceit, subterfuge, camouflage, concealment, some
attempt to color or obscure events, or making things seem other than what they
are. (Internal Revenue Service)
Tax avoidance falls between tax evasion and mitigation on the scale of tax
minimising behaviour. The aim being to maximize profit that would consequently
expand the scope of portfolio value chain; therefore, it is not illegal to avoid tax thats
why Kerry Packer quote asserts that;

Anybody who does not minimise his tax wants his head read. [I.e. should go to
a psychiatrist.] (Kerry Packer) (Yablon L. Jeffery, 2010)

Avoidance does not have a limited, uncontroversial and definite meaning. A good
start is from Blacks Legal Dictionary where avoidance is defined as;

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 The act of taking advantage of legally available tax-planning opportunities
in order to minimize ones tax liability (Blacks Legal Dictionary)

Unlike evasion, avoidance is not criminal, and is often said to be legal. Avoidance
exploits the tax law to use it in a way unintended by parliament by following its black
letter requirements but not its spirit. Put simply:

The hallmark of tax avoidance is that the taxpayer reduces his liability to tax
without incurring the economic consequences that Parliament intended to be
suffered by any taxpayer qualifying for such reduction in his tax liability.

This is in line with the maxim of Morton I. Greenberg which says that;

It is axiomatic that taxpayers lawfully may arrange their affairs to keep taxes
as low as possible. Nevertheless, at the same time the law imposes certain
threshold duties which a taxpayer may not shirk simply by manipulating figures
or manoeuvring assets to conceal their real character. (Morton I. Greenberg)
(Yablon L. Jeffery, 2010)

Between tax planning and tax evasion lies tax avoidance, which has come to be
understood in many countries as practices designed to gain a tax advantage by
contravening the intention but not the letter of the legislation; this draws a boundary
with tax planning, which is consistent with or at least neutral with respect to the
intention of the legislation.

Technical definition of the term tax avoidance has become confused by its frequent
use in public discourse to refer to practices that are not illegal but are perceived to be
unethical. Many of the examples that have generated debate around the tax practices
of multinational companies may not have been tax avoidance in the technical sense.
Finding a suitable categorisation and terminology for such activities is important to an
informed political debate. Devereux, Freedman, and Vela (2012) suggest three such
categories:

1. Ineffective avoidance, which can be prevented through the courts, provided it

is discovered and action is taken.
2. Effective avoidance, which cannot be prevented in this way because it results
from a defect in the legislation or other failure in the way the legislation is
written.
3. Using legislation or the international tax system to ones advantage in a
manner which may result in a very low tax bill, but is not tax avoidance as
such.

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The last category includes aggressive tax planning, a term that is often used to
express the sense that an activity pushes an ethical boundary and should be addressed
through changes to legislation. European Parliament states that;

Aggressive tax planning consists in taking advantage of the technicalities of a

tax system or of mismatches between two or more tax systems for the purpose of
reducing tax liability. (Edvinas Lenkauskas, 2014)
The tax law literature provides that aggressive tax planning violates a social contract
between tax authority and citizens, and, accordingly, is unacceptable. This means that
aggressive tax planning schemes, which are carrying on by the MNEs; create a
negative public opinion about these MNEs due to the fact that it reduces public
revenue in the country where economic activity is actually performed. Consequently,
it reduces public welfare and tax morale. In order to describe what amount of taxes
shall be paid in the country where actual economic activity is performed, the fair
share doctrine usually is usable. The fair share is an amount of taxes which shall
be paid by the MNEs, however, this amount is very subjective and depends on
various factors, thus it is impossible to describe the concept of the fair share.
(Edvinas Lenkauskas, 2014)

Besides the fact that aggressive tax planning has exclusively the international
element and is unacceptable, there are some other features which could distinguish
this concept from tax avoidance. Firstly, one of the main distinctions is that
aggressive tax panning asserts without the abusive nature and it is not per se against
the law. This means that aggressive tax planning also can be found in situations
where a certain substance in tax planning scheme exist. However, only the fact that a
tax planning scheme has a jurisdiction in tax haven or a taxpayer uses hybrid
instruments, usually constitutes a negative public opinion about tax structure and,
therefore, could be considered as aggressive tax planning. (Edvinas Lenkauskas, 2014

Secondly, it follows that aggressive tax planning is only a common concept and
cannot be recognized by the tax authorities or the court. This means that penalties
also cannot be imposed. In contrast, aggressive tax planning is recognized by the
negative public opinion which reduces the MNEs reputation. (Edvinas Lenkauskas,
2014)

In 1997, Lord Templeman said:

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 Tax avoidance reduces the incidence of tax borne by an individual taxpayer
contrary to the intentions of Parliament. the central idea is that you have
arranged your affairs so as not to pay the tax which you ought to have paid
presumably because Parliament intended you to pay it. So Lord Templeman says
that it reduces your tax contrary to the intention of Parliament. (Yablon L.
Jeffery, 2010).

But how do we know the intention of Parliament? There is only one way to know the
intention of Parliament and that is to read the statute. So avoidance of tax assumes
that you are not paying a tax which, on a fair reading of the statute, you ought to have
paid.

Lord Hoffmann attributes what the Revenue regard as tax avoidance to now
outmoded literalism on the part of judges, and to overly prescriptive drafting of
statutes on the part of the Revenue. His Lordship dismisses the idea that tax
avoidance occurs when the taxpayer receives the [] income, but structures the
transaction to fall outside the taxing statute, arguing that this approach depends
upon the assumption that Parliament imposes taxation by reference to economic and
other events in the real world. However, taxing statutes often create choices or
employ prescriptive forms to describe the real world, which can have the effect of
mis-describing the real world. It follows that tax avoidance should be a
contradiction in terms, because the assumption that Parliament intends to replicate
the real world is wrong, and what Parliament intended is only knowable through what
it has done in the statute book.

We can refer to the Quote from Lord Diplock who says;

There are few greater stimuli to human ingenuity than the prospect of avoiding
fiscal liability. Experience shows that under this stimulus human ingenuity
outreaches Parliamentary prescience. (Lord Justice Diplock) (Yablon L.
Jeffery, 2010).

Tax avoidance may be characterized as a miss-use or abuse of the law rather than a
disregard for it. It is often driven by the exploitation of structural loopholes in the law
to achieve tax outcomes that were not intended by the Parliament but also includes
manipulation of the law and a focus on form and legal effect rather than substance.

A better description suggested by William Barker is to classify avoidance as non-

criminal. Barker uses the definition of legal from Blacks law dictionary to illustrate
his point. Barker argues that;

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 When a taxpayer is not entitled to the fruits of his plan, the whole arrangement
is hardly legal in that it is hardly an activity that conforms to the law, is
according to the law, is not forbidden or discountenanced by the law, and is
good and effectual in law (Yablon L. Jeffery, 2010).

Barker submits the opposite is true, that avoidance is illegal, or not authorized by law,
contrary to the law, contrary to the principles of the law and is ineffective in law; in
the same vein Morton Greenberg argue that;

When . . . a taxpayer is presented with what would appear to be a fabulous

opportunity to avoid tax obligations, he should recognize that he proceeds at his
own peril. (Morton I. Greenberg) (Yablon L. Jeffery, 2010).
This is the same with the quote of Harry Blackmun which says;

While a taxpayer is free to organize his affairs as he chooses, nevertheless,

once having done so, he must accept the tax consequences of his choice, whether
contemplated or not, . . . and may not enjoy the benefit of some other route he
might have chosen to follow but did not. (Harry Blackmun) (Yablon L. Jeffery,
2010).
The definition of OECD is that;

Tax avoidance is generally used to describe the arrangement of a taxpayer's

affairs that is intended to reduce his tax liability and that although the
arrangement could be strictly legal it is usually in contradiction with the intent
of the law it purports to follow.
This is in line with the Quotes of Irving Loeb Goldberg which says;

A taxpayer may engineer his transactions to minimize taxes, but he cannot

make a transaction appear to be what it is not. (Irving Loeb Goldberg) (Yablon
L. Jeffery, 2010).
We can refer to the Quote of Judge Learned Hand, who served on the United States
Court of Appeals for the Second Circuit, stated in 1934 in the famous case Gregory v.
Helvering, 293 U.S. 465, 469 (1935) that:

"Any one may so arrange his affairs that his taxes shall be as low as possible; he
is not bound to choose that pattern which will best pay the Treasury; there is not
even a patriotic duty to increase one's taxes." (Learned Hand) (Yablon L.
Jeffery, 2010).
Despite the strong ruling, the opinion that had prevailed in Gregory v. Helvering, 293
U.S. 465, 469 (1935) case in Supreme Court was diverse, and was the beginning of
the discussion about tax avoidance. Since this case in the U.S., and almost at the same
time in other countries, courts, jurists and legislators have been defining the nature
and limits of tax avoidance not without considerable disagreement. But from this
long, expressive, and sometimes passionate debate, one point arises without too much

111
disagreement: the understanding that tax avoidance is a legal kind of arrangement and
that it does not violate the law.

Tax avoidance can be understood as a lawful scheme managed by an individual or by

a company to reduce its tax liability. The Oxford Dictionary defines tax avoidance as
the arrangement of ones financial affairs to minimize tax liability within the law.
This can be supported by the quote of Beverley McLachlin which says;

It is not the [Canadian] courts role to prevent taxpayers from relying on the
sophisticated structure of their transactions, arranged in such a way that the
particular provisions of the Act are met, on the basis that it would be inequitable
to those taxpayers who have not chosen to structure their transactions that way .
. . . Unless the Act provides otherwise, a taxpayer is entitled to be taxed based on
what it actually did, not based on what it could have done, and certainly not
based on what a less sophisticated taxpayer might have done. (Beverley
McLachlin) (Yablon L. Jeffery, 2010).
Likhovski Assaf (2008, p. 52) states that the starting point of the debate concerning
tax avoidance was the U. S. v. Isham, 17 Wall. 496, 506, 21 L. Ed. 728 case, in which
the Supreme Court declared:

It is said that the transaction proved upon the trial in this case is a device to
avoid the payment of a stamp duty, and that its operation is that of a fraud upon
the revenue. This may be true, and if not true in fact in this case, it may well be
true in other instances. To this objection there are two answers: 1st. That if the
device is carried out by the means of legal forms, it is subject to no legal
censure. To illustrate, the Stamp Act of 1862 imposed a duty of two cents upon a
bank-check, when drawn for an amount not less than twenty dollars. A careful
individual, having the amount of twenty dollars to pay, pays the same by handing
to his creditor two checks of ten dollars each. He thus draws checks in payment
of his debt to the amount of twenty dollars, and yet pays no stamp duty. This
practice and this system he pursues habitually and persistently. While his
operations deprive the government of the duties it might reasonably expect to
receive, it is not perceived that the practice is open to the charge of fraud. He
resorts to devices to avoid the payment of duties, but they are not illegal. He has
the legal right to split up his evidences of payment and thus to avoid the tax. The
device we are considering is of the same nature.
In this case the Supreme Court upheld the conception that activities that intend to
avoid the payment of tax are not illegal per se. The Court decided that to define a
given tax scheme as legal or not legal depends on the legality of the procedure, not
only on the result of this procedure.

This notion delineates the boundaries of tax avoidance, which is the acceptance that
this is a legal way to reduce tax payments; therefore it is a perfectly legal tax
structure. This can be cited by the quote of George Sutherland which says;

112
 The legal right of a taxpayer to decrease the amount of what otherwise would
be his taxes, or altogether avoid them, by means which the law permits, cannot
be doubted. (George Sutherland) (Yablon L. Jeffery, 2010)

Tax Avoidance is defined as an activity that:

Takes place within the legal context of the tax system that is individuals or
firms take advantage of the tax code and exploit loopholes, i.e. engage in
activities that are legal but run counter to the purpose of the tax law. Usually,
tax avoidance encompasses special activities with the sole purpose to reduce tax
liabilities. An example for tax avoidance is strategic tax planning where
financial affairs are arranged such in order to minimize tax liabilities by e.g.
using tax deductions and taking advantage of tax credits.

Hence, tax avoidance is considered as a misemployment of the law, and an abuse of

the spirit of the tax legislation. In this sense, tax avoidance exploits the loopholes in
the laws that were not expected by the legislators, regardless of the legal behavior of
the tax-avoiders. Despite the recognized legality of tax avoidance, governments of
several countries have made serious efforts against the use of these loopholes in the
laws. These efforts aim to reduce or eliminate the under tax payments, and are done
by anti-avoidance instruments. Tax avoidance is within the legal framework of the tax
law, provided that the means used to avoid taxes are real and legally effective to
accomplish the desired result. The quote of Hand asserts that;

Over and over again courts have said that there is nothing sinister in so
arranging ones affairs as to keep taxes as low as possible. Everybody does so,
rich or poor; and all do right, for nobody owes any public duty to pay more than
the law demands: taxes are enforced exactions, not voluntary contributions. To
demand more in the name of morals is mere cant. (Learned Hand) (Yablon L.
Jeffery, 2010)

Tax avoidance is not punishable in law. Where the tax authorities detect the practice,
the only solution is to amend the law in order to plug the loopholes and weaknesses in
the laws that allow the possibility of tax avoidance. It is for this reason that the
practice of tax avoidance is sometimes considered as legally allowed. However, this
does not mean that the tax authorities will allow the practice.

5.3.2 Principles of Tax Avoidance

Tax laws constantly change the opportunities for tax avoidance, but underneath, there
remain three basic principles of tax avoidance within an income tax:

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 5.3.2.1 Postponement of taxes

The present discounted value of a postponed tax should be much less than that of a
tax currently paid (Joseph E. Stiglitz, 1986).

5.3.2.2 Tax arbitrage across individuals facing different tax brackets

This may also be for the same individual facing different marginal tax rates at
different times; It is a particularly effective method of reducing tax liabilities within a
family; but differential tax rates may also induce transactions among individuals in
different brackets which substantially reduce the aggregate tax liability; the
availability of such opportunities leads to what may be referred to as "tax induced
transactions" (Joseph E. Stiglitz, 1986).

5.3.2.3 Tax arbitrage across income streams on different tax treatment

Under the income tax Act, Cap 332, long term capital gains are taxed at lower rates
than are other forms of income from capital. This provides an inducement to
"convert" the returns to capital (or to labour) into long-term capital gains (Joseph E.
Stiglitz, 1986). The most difficult examples of cross-border avoidance involve what is
referred to as cross-border tax arbitrage, defined as

Taking advantage of inconsistencies between different countries tax rules to

achieve a more favourable result than that which would have resulted from
investing in a single jurisdiction.
Consider an example where a structure is put in place to enable two different
taxpayers to take a deduction for the depreciation on an asset by virtue of one
jurisdiction giving a deduction to the economic owner of the asset and one giving a
deduction to the legal owner of the asset. In each jurisdiction, the deduction is
legitimately obtained under the relevant tax laws, but, by using two jurisdictions,
those rules in combination could be said to have been abused. The whole nature of
this type of tax avoidance, if that is what it can be called, is different from that of
domestic tax avoidance (Joseph E. Stiglitz, 1986).

5.3.3 Anti-Avoidance Doctrine

The effect of tax law doctrines are designed to reduce tax shelters, such as the
business-purpose doctrine, economic substance doctrine and others. Analysis of these
doctrines is important with regard to changes to the marginal elasticity of taxable
income. It should be noted that, as these doctrines are strengthened, the elasticity of

114
taxable income goes down (in absolute value). By reducing the marginal elasticity of
taxable income, the doctrines increase the efficiency of the tax system. Because the
doctrines cannot perfectly identify tax avoidance, however, they induce a
distortionary response by taxpayers, who may structure shelters to avoid the
doctrines. This distortionary effect reduces their efficiency. The net benefit should be
set equal on the margin to the marginal administrative cost of the doctrines. Analysis
of anti-avoidance doctrines in the Commonwealth countries usually commences with
the seminal IRC v. Duke of Westminster [1935] All ER 259 (H.L.).19 He cites the case
not only for the obvious point that the House of Lords affirmed the right of taxpayers
to arrange their affairs to minimize tax, but also for the more subtle and arguably
more influential point that the courts cannot tax on the basis of economic substance
but must respect the legal rights and obligations created by the parties:

The doctrine emerging from the Westminster case is that taxpayers and the Revenue
are bound by the legal results which the parties have achieved even though this may

19
BRIEF FACTS
The Duke executed deeds with persons then in his employ (including his gardener) in which he
covenanted to pay to them certain weekly sums for a period of seven years or the joint lives of the
parties. The deeds recited that the payments were made in recognition of past services faithfully
rendered to the Duke and that the Duke desired to make provision for the person notwithstanding that
he may continue in the Duke's service (in which event he will be entitled to remuneration in respect of
such future service) or may cease to work for the Duke. Letters of explanation (which were
acknowledged by the employees) were sent to each employee informing him that he could claim full
remuneration for future work but that it was expected in practice that he would be content with the
provision made by the deed plus such sum (if any) as might be necessary to bring the total payments
up to the level of the salary or wages he had lately been receiving. The recipients at the time the deeds
were executed were receiving fixed wages or salaries and after execution of the deeds continued in the
Duke's employment and continued to receive such sums as, with the sum payable by the deed, made up
the amount of the wages or salary payable before the deed and no more
THE ISSUE
1. If the amounts paid under the deed in respect of periods during which the persons were in the
Duke's employ were remuneration for services, they were not deductible in computing the
Duke's liability for surtax. If, on the other hand, the amounts were annual payments, they
were deductible. Thus, the issue was whether the payments under the deeds were
remuneration for services or not.
2. It was incontrovertible that the deeds were brought into existence so as to permit the Duke to
reduce his surtax liability.
THE DISPOSITION
The payments were not remuneration for services. Three of the five Lords concluded that the letter
was not a contract, only an expression of hope or anticipation and four of the five Lords concluded
that, even if it was a contract, it was nothing more than a contract that the person's remuneration for
future services will not be full remuneration but only the additional sum referred to in the letter. The
fifth Lord, in dissent, concluded that the deed and letter should be viewed together as a simply
maintaining the existing contract of service rather than radically altering it.
All of the Lords rejected the proposition that in revenue cases there is a doctrine that the court may
ignore the legal position and regard the substance of the matter. The substance is that which results
from the legal rights and obligations of the parties ascertained upon ordinary legal principles.

115
 be inconvenient for the Revenue. The court cannot disregard those facts just because
of the tax avoidance purpose which may have led the parties to create those facts in
the first place. Anti-avoidance rules normally emphasize either that transactions are
intended to achieve particular tax benefits or that the transactions lack business
purpose or effects. In Tanzania, by virtue of section 35(1) through (3) of ITA Cap 332
Tax avoidance arrangement means any arrangement (1) one of the main
purposes of which is the avoidance or reduction of liability to tax of any person for
any year of income; (2) one of the main purposes of which is prevention or
obstruction in collecting tax; or (3)where the main benefit that might be expected to
accrue from the arrangement in the three years following completion of the
arrangement is (a) An avoidance or reduction of liability to tax of any person for
any year of income; or (b) Prevention or obstruction in collecting tax. But excludes
an arrangement where it may reasonably be considered that the arrangement would
not result directly or indirectly in a misuse of the provisions of this Act or an abuse
having regard to the provisions of this Act, other than this section, read as a whole.

5.3.3.1 "Substance over Form" Doctrine

General Anti-avoidance rules are well settled principles within tax matters. Dating as
early as 1920, the Supreme Court of US treated the superiority of substance over the
form of the transaction in the United States v. Phellis 257 U.S. 156 (1921)20 the
Court went on to state:

Questions of taxation must be determined by viewing what was actually done

rather than the declared purpose of the participants Thus, regarding matters of
income tax law, the Court gives effect to matters of substance over form.
United States v. Phellis 257 U.S. 156 (1921)20 the U.S. Supreme Court treated
substance over form as appears below.

20
BRIEF FACTS
C.W. Phellis claimed for a refund of certain moneys paid by him under protest in discharge of an additional
tax assessed against him for the year 1915, based upon alleged income equivalent to the market value of
500 shares of stock of a Delaware corporation called the E.I. du Pont de Nemours & Company, received by
him as a dividend upon his 250 shares of stock of the E.I. du Pont de Nemours Powder Company, a New
Jersey corporation. (The United States appeals).
HELD:
a) The shares of the new company's common stock which passed to the old company and through it to
its stockholders as a dividend, representing its surplus, were income of the shareholders, taxable
under the Act of October 3, 1913. P. 257 U. S. 169.
b) And this although the market value of the stockholder's old shares before the dividend was the same
as that of his old and new shares after it. P. 257 U. S. 170.

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 (...) we recognize the importance of regarding matters of substance and
disregarding forms in applying the provisions of the Sixteenth Amendment and
income tax laws enacted thereunder. In a number of cases...we have under
varying conditions followed the rule.(...)
Despite occasional pre-eminence of form, in deciding federal tax cases the courts
seem to be willing to focus on substance behind the veil of form, especially when
facing self-dealing transactions.

Thirty-five years later, the Substance-over-Form principle was declared to be the

Cornerstone of sound taxation. Interpreting tax provisions can be difficult,
particularly those a practitioner has never encountered before. When interpreting tax
statutes that are in dispute, courts often rely on "canons of construction," which are
general legal principles, rather than strict rules. There are many legal canons, and
knowing when a court might use them is never certain. However, in the last century, a
doctrine used consistently to interpret tax provisions emerged, called the "substance
over form" doctrine. While not replacing canons of construction or other rules of
legal interpretation, this doctrine provides the overriding view courts have taken when
examining tax provisions. The Supreme Court, in Helvering Vs F. & R. Lazarus &
Co., 308 U. S. 252, 255 (1939), summarized the doctrine as follows:

In the field of taxation, administrators of the laws and the courts are concerned
with substance and realities, and formal written documents are not rigidly
binding. The substance over form doctrine has been shaped by the courts in
applying ancillary tests such as, Arms length Vs Self-Dealing, Business
purpose Vs Tax avoidance, and Step transaction Vs Independent treatment
when a series of interrelated transactions occur.
5.3.3.2 Business purpose test doctrine

This is frequently used to strike down corporate reorganizations where the motive is
tax avoidance however; it is not limited to these situations. The Court, tax auditor
may apply a similar test to determine if the separate entity of a corporation should be
disregarded. Generally, the taxpayer must respond by establishing or proving a

c) The new company must be regarded not as substantially identical with the old, but as a separate
entity, and its stockholders a having property rights and interests materially different from those
incident to ownership of stock in the old company. P. 257 U. S. 172.
d) The new common stock in the treasury of the old company being treasury assets representing
accumulated profits and capable of distribution, its distribution transferred to the several
stockholders new individual property which they were severally entitled to enjoy or to sell -- their
individual income. P. 257 U. S. 174.

117
 business purpose. The focus on the business purpose is on the evaluation of the non-
tax motives (Ronaldo de Melo Parreira Filho, 2014).

In United States the anti-avoidance framework is usually considered to derive from

the US Supreme Court decision in Gregory Vs Helvering in 1935, in which a new
corporation was created, dissolved and liquidated solely to the purpose of reducing
the owner tax liability. In this case, the Supreme Court applied a business purpose test
to determine whether the transaction had real meaning or was designed merely to
avoid tax payment. As a result, the Supreme Court disregarded the whole operation
done by the owner and charged the tax that he would have paid without all the
company reorganization (Ronaldo de Melo Parreira Filho, 2014).

The development of the Business Purpose Doctrine also relays on the Supreme Court
decision in Bazley v. Commissioner of Internal Revenue 331 U.S. 737-738 (1947)]21

21
Bazley v. Commissioner of Internal Revenue 331 U.S. 737-738 (1947)]
BRIEF FACTS
Pursuant to a purported plan of "reorganization" and "recapitalization" of a family corporation, all but
one share of which was owned by a taxpayer and his wife and which had an earned surplus of
$855,783, each old share of stock having a par value of $100 was exchanged for five new shares of no
par value, but a stated value of $60, and new debenture bonds having a total face value of $400,000
payable in ten years but callable at any time
ISSUES:
1. Whether the court of appeals applied the correct standard of review in determining that
petitioners underlying transaction lacked economic substance (and that petitioner was therefore
not entitled to claim a capital-loss tax deduction related to that transaction).
2. Whether the court of appeals applied the correct substantive standard in determining that
petitioners transaction lacked economic substance
HELD:
1. The transaction was not a tax free "reorganization" within the meaning of S 112(b)(3) and
112(g)(1)(E) of the Internal Revenue Code, and the taxpayer is liable for income taxes on the
full value of the debentures. Pp. 331 U. S. 742-743.
2. The same conclusion reached as to another similar transaction varying in some details,
including the fact that there was left undisturbed on the books of the corporation an earned
surplus account equal to the value of the debentures distributed in partial exchange for the old
stock. Pp. 331 U. S. 743-744.
3. It was not the purpose of the reorganization provisions of 112(b) and (g) of the Internal
Revenue Code to exempt from payment of a tax what, as a practical matter, is a realized gain.
P. 331 U. S. 740.
4. Since a "recapitalization" within the meaning of S 112(g)(1)(E) is one form of
"reorganization," nothing can be a recapitalization for this purpose unless it partakes of those
characteristics of a reorganization which underlie the purpose of Congress in postponing the
tax liability. P. 331 U. S. 741.
5. In the case of a corporation which has undistributed earnings, the creation of new corporate
obligations which are transferred to stockholders in relation to their former holdings, so as to
produce, for all practical purposes, the same result as a distribution of cash earnings of
equivalent value, cannot obtain tax immunity because cast in the form of a recapitalization
reorganization. P. 331 U. S. 742.

118
and Knetsch Vs United States, 364 U.S. 361 (1960).22 In this doctrine taxpayer must
prove that the transaction has a business reason or a commercial sense other than only
to avoid tax payments. In the same vein, J. Bruce Donaldson (1964) stated that:

() the business purpose cases represent a separate strain of substance cases.

Here usually the Court is confronted, as in the Gregory case, with a fact
situation in which all the legal forms are present to bring the transaction
technically within certain advantageous aspects of the Code structure. The
carefully prearranged form, however, covers and disguises the genuine
underlying transaction, the essential substance of which is fundamentally
different from the form. The courts read into the Code the judicial requirement
that a transaction must have some "business purpose" in order to comply with
the overriding intention of the Code provision.
To support the transaction, taxpayers must present a valid business purpose to the
transaction, demonstrating that the operation was done with real intention to improve

Page 331 U. S. 738

No. 287 The Tax Court sustained a determination of the Commissioner of Internal Revenue that a
taxpayer was liable for income tax on the full value of debentures received under a purported
"reorganization" of a family corporation. 4 T.C. 897 The Circuit Court of Appeals affirmed. 155 F.2d
237 This Court granted certiorari. 329 U.S. 701 Affirmed, p. 331 U. S. 744
No. 209 The Tax Court sustained a determination of the Commissioner of Internal Revenue that a
taxpayer was liable for income tax on certain debenture bonds received under a purported
"reorganization" of a corporation of which he owned all but a few shares. 5 T.C. 351 The Circuit Court
of Appeals affirmed. 155 F.2d 246 This Court granted certiorari. 329 U.S. 695 Affirmed, p. 331 U. S
744.
22
Knetsch Vs United States, 364 U.S. 361 (1960)
BRIEF FACTS
In 1953, a 60-year-old taxpayer purchased single-premium 30-year maturity deferred annuity savings
bonds with an aggregate face value of $4,000,000 from a life insurance company, paying only a
nominal sum in cash, giving nonrecourse notes secured by the bonds for the balance, and paying a
substantial amount as "interest" in advance on that "indebtedness." A few days later, he borrowed from
the company nearly all of the excess of the cash surrender value which the bonds would have at the
end of the first contract year over the amount of the existing "indebtedness," and again paid in advance
the "interest" on such additional "indebtedness." These borrowings and "interest" payments were
repeated in 1954 and 1955, and the bonds were surrendered and the indebtedness was cancelled in
1956.
ISSUES
The Issue was whether a transaction is sham, a transaction has a substantial business purpose, the step
transaction is applicable or the substance of transaction matches its form.
HELD:
The amounts paid as "interest" in 1953 and 1954 were not deductible from the gross income of the
taxpayer and his wife in their joint income tax returns for those years as "interest paid . . . on
indebtedness," within the meaning of S 23(b) of the Internal Revenue Code of 1939 and S163(a) of the
Internal Revenue Code of 1954. Pp. 364 U. S. 362-370.
(a) On the record in this case, it is patent that the transaction between the taxpayer and the
insurance company was a sham which created no "indebtedness" within the meaning of
those sections of the Codes. Pp. 364 U. S. 362-366.
(b) Congress did not authorize deduction of such payments by enacting S 264(a) (2) of the
Internal Revenue Code of 1954, which expressly denies a deduction for amounts paid on
indebtedness incurred to purchase or carry a single premium annuity contract, but only as to
contracts purchased after March 1, 1954. Pp. 364 U. S. 367-370.
272 F.2d 200 affirmed.

119
operational profits, to reduce costs, to restructure the operational activities, to increase
revenue, to raise capital for company business, among others. Patricia Lampreave
(2014) pointed out that;

This doctrine does not require an existence of tax avoidance purpose, just the
lack of business purpose in the transaction: It is important to note that the test
examines whether or not there is a lack of any business purpose to be carried out
by a company. The doctrine does not examine whether the purpose of a certain
arrangement is tax avoidance, but, rather, whether the arrangement is made in
the absence of an intention to develop an activity.
Other important matter is that this doctrine does not rely on the form of the
transaction. All the formal characteristics of the operation could be within the law,
but the commercial or business purpose must be demonstrated to validate the
arrangement (Ronaldo de Melo Parreira Filho, 2014).

5.3.3.3 Step Transactions doctrine

When a series of steps occurs within a reorganization, which results in a change of

ownership interest, the issue arises whether to consider each step separately, or to
consider all preceding steps as the culmination of single transaction, thereby giving
effect to the whole transaction rather than its separate parts. Step Transaction
Doctrine would be utilized only if the form differs from the substance of the
transaction. This doctrine states that for tax purposes, separated steps of a transaction
can be considered as a single one (Ronaldo de Melo Parreira Filho, 2014).

The step transaction doctrine is employed to treat formally separate steps as a single
transaction if the steps are in substance integrated, interdependent, and focused
towards a particular result. Thus, the step transaction doctrine represents something
that naturally follows the substance over form principle. The doctrine originated and
has been applied, for the most part, in corporate reorganization cases, but it is not
limited to these situations. In Del Commercial Properties, Inc. Vs Commissioner 78
TCM 1183 (1999),23 the District of Columbia Circuit stated that:

23
BRIEF FACTS
1)
(a) Petitioner is an Illinois corporation whose principal place of business is in Ontario, Canada.
It is a fourth-tier subsidiary of an affiliated group of corporations (the Affiliated Group)
whose common parent is DL Shekels Holdings Ltd. Delcom Financial, Ltd. is a second-tier
subsidiary in the Affiliated Group. Delcom Financial is a Canadian corporation that owns
100 percent of the outstanding stock of Delcom Holdings, Ltd., another Canadian
corporation. In turn, Delcom Holdings owns 100 percent of Delcom Cayman, Ltd. (a
corporation organized in the Cayman Islands), which owns 100 percent of the outstanding

120
 stock of Delcom Antilles, N.V. (a corporation organized in the Netherlands Antilles).
Delcom Antilles owns 100 percent of the outstanding stock of Del Investments Netherlands
B.V. (Del BV), a corporation organized in the Netherlands. Pet. App. 2.
(b) From 1990 through 1993, petitioner's principal business was leasing industrial real estate
that it owned in the United States. Pet. App. 2-3. In 1990, when petitioner needed funding
to refinance and improve some of its American properties, one of DL Shekels's first-tier
subsidiaries, Tridel Corporation, arranged the following financing scheme (id. at 3)
(citations omitted):
On July 18, 1990, the Royal Bank of Canada loaned $18 million (in U.S. dollars) to Delcom
Financial. That same day, Delcom Financial made two unsecured interest-bearing loans to
Delcom Holdings. One of those loans (the one directly relevant to this case) was for $14
million. Delcom Holdings then contributed about $14 million to Delcom Cayman for
common shares of stock. * * * On the same day, "Delcom Cayman contributed about $14
million to Delcom Antilles and received common shares of stock in that entity. Later on
that same date, Delcom Antilles contributed about $14 million to Del BV and received
common stock in that entity."
The following day, July 19, [petitioner] borrowed $14 million from Del BV. That same day,
[petitioner] "guaranteed repayment of a portion of amounts owed by Delcom Financial to
Royal Bank" and authorized Royal Bank to place a mortgage on its real property in the U.S.
* * * [Petitioner] also agreed to provide Royal Bank with "annual financial statements, to
insure its real property, to assign the insurance policies to Royal Bank, to defer paying
dividends to shareholders, and to use the proceeds from any sales of real property to make
payments on the $14 million Royal Bank loan."
(c) On January 1, 1991, petitioner began making payments in connection with the loan to Del
BV, which then transferred the payments either to Delcom Holdings or Delcom Financial.
These funds were then remitted to Royal Bank to pay the principal and interest on the
Bank's loan. Beginning in July 1992, however, petitioner made its loan payments directly to
Delcom Financial, and Delcom Financial then forwarded the funds to Royal Bank in
payment on the Bank's loan. Pet. App. 3-4.
2) Section 881(a) of the Internal Revenue Code requires foreign corporations to pay "a tax of
30 percent of the amount received from sources within the United States * * * as interest *
* * to the extent the amount so received is not effectively connected with the conduct of a
trade or business within the United States." 26 U.S.C. 881(a). A United States taxpayer who
makes such interest payments to a foreign corporation is required to deduct and withhold
the tax owed by the foreign corporation. 26 U.S.C. 1441, 1442. If the United States
taxpayer fails to deduct and withhold the tax, it is personally liable for the tax. 26 U.S.C.
1461.
Petitioner did not file withholding tax returns or deposit withholding taxes on any of the
interest payments it made in connection with the loan involved in this case. Petitioner
asserted that its interest payments were not subject to withholding pursuant to the United
States-Netherlands Tax Treaty as in effect in the year at issue, under which interest
payments made by United States taxpayers to Netherlands corporations were exempt from
taxes in the United States. See Supplementary Convention on Taxes on Income and Other
Taxes, Dec. 30, 1965, U.S.-Netherlands, art. VI, 17 U.S.T. 896, 901. The Internal Revenue
Service, however, took the position (i) that the interest paid by petitioner was in substance
and in fact paid to its Canadian affiliate (Delcom Financial) rather than to its Netherlands
affiliate (Del BV) and (ii) that, under the then-applicable United States-Canada Tax Treaty,
the withholding tax on interest payments to that Canadian entity as "the beneficial owner"
of the interest payments was "15 percent of the gross amount of the interest." Convention
on Taxes on Income and Capital, Sept. 26, 1980, U.S.-Can., art. XI, T.I.A.S. No. 11087.
See Pet. App. 3-4.
3) On October 30, 1997, the Commissioner of Internal Revenue therefore issued a notice of
deficiency to petitioner, asserting that petitioner owed taxes and additions to tax based on
the interest payments made between 1990 and 1993. Petitioner then commenced this action
in Tax Court to obtain a redetermination of the deficiency.

ISSUES

121
 Under the step-transaction doctrine, a particular step in a transaction is
disregarded for tax purposes if the taxpayer could have achieved its objective
more directly, but instead included the step for no other purpose than to avoid
U.S. taxes. () The Internal Revenue Service - and the courts - will ignore a step
in a series of transactions if that step does not appreciably affect [the taxpayer's]
beneficial interest except to reduce his tax.
In other words, a taxpayer might make use of the three steps, A, B and C, to achieve
some business objective, but this same objective could be reached by using just steps
A, B or C alone; by using just two of these three steps; or by applying these steps in a
different order. Simply put, the IRS and courts can disregard one or two of these

Whether, on the facts of this case, a loan nominally made to petitioner by a related Netherlands
corporation was in substance made by a related Canadian corporation, so that petitioner is liable for
a federal withholding tax on the interest paid on the loan.
HELD
Following a trial, the Tax Court found that the series of loans and stock contributions that began with
Delcom Financial and ended with petitioner "reflect a step transaction created simply to bypass U.S.
withholding tax." Pet. App. 22. The court noted that the Netherlands affiliate had no meaningful
business activities and that the lending Bank dealt directly with petitioner and "exacted guaranties
from [petitioner] and mortgages or deeds of trust on [petitioner's] U.S. real property." Id. at 23. The
court emphasized that the payments on the loan "bypassed Del Netherlands completely" and were
made by petitioner "directly to Delcom Financial." Ibid. In short, "Del Netherlands acted as a mere
shell or conduit" and "[i]n substance, [petitioner] received the $14 million loan from Delcom
Financial and made the loan payments to Delcom Financial, a Canadian corporation." Ibid. The court
therefore concluded that petitioner is liable for the unpaid withholding taxes at the rate of 15%
specified under the applicable treaty with Canada. Ibid. Furthermore, because petitioner had not
presented any "credible argument" that its failure to file a tax return or to deposit withholding taxes
was attributable to reasonable cause; the court concluded that petitioner was properly liable for
penalties in addition to the withholding taxes. Id. at 24. The court therefore entered a decision
finding petitioner liable for $1,194,573 in taxes and additions to tax. Id. at 4.
The court of appeals affirmed. Pet. App. 1-16. The court noted that, under what is known as the
"step-transaction" doctrine, a specific step in a complicated scheme may be disregarded for tax
purposes when "the taxpayer could have achieved its objective more directly, but instead included
the step for no other purpose than to avoid U.S. taxes." Id. at 6 (citing Minnesota Tea Co. v.
Helvering, 302 U.S. 609, 613 (1938)). In step-transaction cases, "the existence of formal business
activity is a given but the inquiry turns on the existence of a nontax business motive." Pet. App. 6,
quoting ASA Investerings Partnership v. Commissioner, 201 F.3d 505, 512 (D.C. Cir.), cert. denied,
531 U.S. 871 (2000). "[T]he absence of a nontax business purpose is fatal" for, while taxpayers "are
entitled to structure their transactions in such a way as to minimize tax," there must be a purpose for
the "business activity * * * other than tax avoidance," and that purpose cannot be a "facade." 201
F.3d at 512, 513; In other words, "if the sole purpose of a transaction with a foreign corporation is to
dodge U.S. taxes," that unnecessary step in the transaction cannot allow the taxpayer to escape the
taxes due. Pet. App. 7. For the step involving the foreign entity to be given a substantive role in the
determination of tax liabilities, "the transaction must have a sufficient business or economic
purpose" apart from tax avoidance. Ibid.
The court of appeals emphasized that, beginning in July 1992, it was uncontested that petitioner
made its loan payments directly to Delcom Financial. There was no evidence that petitioner paid
anything to Del BV during that period. Because the U.S.-Netherlands Tax Treaty does not apply to
direct transactions between a U.S. corporation and its Canadian affiliates, the court concluded that
petitioner "unquestionably should have withheld taxes on its payments to Delcom Financial
beginning in July 1992." Pet. App. 7.
The court of appeals also concluded that, throughout the entire relevant period, any remittances
made by petitioner to Del BV had no business purpose other than the avoidance of U.S. taxes
because the loan, in substance, was from Royal Bank through Delcom Financial to petitioner..

122
steps, or change the order of them, to fit the result in the condition described by law
that is connected with a tax duty. In the development of the Step Transaction
Doctrine, three tests were used to determine whether a Step Transaction Doctrine
should be applied or not. These tests were well described in True Vs United States.
Nos C82-052 to C82-056 (603 F. Supp. 1370, 23 ERC 1753) (D. Wyo. March 20,
1985)24. in which a judgment made about tax avoidance by the Tenth Circuit stated:

Courts have developed three tests for determining when the step transaction
doctrine should operate to collapse the individual steps of a complex transaction
into a single integrated transaction for tax purposes: (1) end result, (2)
interdependence, and (3) binding commitment. () More than one test might be
appropriate under any given set of circumstances; however, the circumstances
need only satisfy one of the tests in order for the step transaction doctrine to
operate.
In this case, the Tenth Circuit asserted that if one of the three tests were satisfied, the
Step Transaction Doctrine should be applied. This is the standard method used by
courts and by the IRS as the case may be Tax authorities to apply the doctrine,
however is important to observe that there are other decisions in which the courts and
even the Supreme Court demanded the fulfillment of two or all three tests to apply the
Step Transaction Doctrine. Therefore, in order to apply the step transaction doctrine
with certainty and uniformity, the courts have developed those three tests to
determine when and how to apply the doctrine (Ronaldo de Melo Parreira Filho,
2014).

24
`ISSUES
One of the issues was;
1. Whether civil penalties imposed under 33 U.S.C. S 1321(b)(6) are deductible. Application of
26 U.S.C. S 162(f).
2. Whether surface damage payments are a cost of construction of an oil pipeline and, therefore,
eligible for the investment tax credit.
HELD
The court holds that civil penalties assessed under S 311(b)(6) of the Federal Water Pollution Control
Act (FWPCA) for leakage of oil or hazardous substances are deductible for income tax purposes. The
court first rules that civil penalties imposed under FWPCA 311(b)(6) are tax-deductible. The test of
whether or not a civil penalty is deductible turns on whether the penalty serves purposes similar to a
criminal fine or penalty. The Supreme Court has held that taxpayers may not take deductions for fines
when the fines were assessed for punitive purposes, and Congress expressed its agreement with this
conclusion in the 1969 Tax Reform Act when it specifically disallowed deductions for fines.
Subsequent legislative history and case law have distinguished between penalties imposed under civil
statutes, but which serve the same purposes as fines imposed under a criminal statute, and penalties
imposed to encourage prompt compliance with statutory requirements. The court concludes that the
purpose behind S 311(b)(6) is remedial and compensatory in nature, rather than punitive, since the
penalty is imposed regardless of fault and proceeds are used for cleanup and administrative costs. The
court then rules that surface damage payments made by a company engaged in pipeline transportation
of crude oil are tangible property under Department of the Treasury regulations and are eligible for
investment tax credit treatment as part of the cost of constructing the pipeline.

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5.3.3.3.1 End Result Test

End Result Test is the most far reaching test under the step transaction doctrine and
looks to the end result of a series of transactions for economic substance. Separate
transactions will be consolidated into a single transaction if it appears that they are
component parts of a larger transaction intended from the outset to be employed for
the purpose of reaching a predetermined final result. In theory, the test ensures that a
given result at the end of a straight path is not made a different result because it was
reached by following a devious path.

In Gregory V. Helvering, Commissioner of Internal Revenue. No 12 Argued: Dec. 4,

5, (1934),

The Supreme Court described the step transaction doctrine in end result terms
as the assumption that a given end result should have the same tax effect,
whether achieved directly or through several intervening steps. Finally, the
Supreme Court of the United States also ruled in favour of the Commissioner
(Ronaldo de Melo Parreira Filho, 2014).
Suffice it to say that, under the End Result Test the separated events will be
considered together as one if courts or IRS as the case may be Revenue authorities
demonstrate that intent of the taxpayer using these steps was to achieve a particular
result. The subjective intent of a taxpayer is an important element of this test, which
relies on its prior intention to use more than one step to reach a specific outcome
(Ronaldo de Melo Parreira Filho, 2014).

5.3.3.3.2 Mutual Interdependence Test

The Mutual Interdependence Test focuses on the relationship between the steps,
rather than on their end result. Each step is examined separately to determine whether
it has a reasonable economic justification for standing alone, or whether its success
depends on successful completion of each of the other steps within the series. There
are numerous cases which cited or used the mutual interdependence test to apply the
step transaction doctrine (Ronaldo de Melo Parreira Filho, 2014). For example, where
an entity acts as a conduit, having no business purpose of its own and merely acting
to secure the taxpayers literal compliance with the applicable provisions of law,
mutual interdependency is almost always cited as justification for invoking the step
transaction doctrine. Conversely, intermediate transactions which add nothing to the

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 overall scope of an arrangement may escape the step transaction doctrine because of
the lack of mutual interdependency (Ronaldo de Melo Parreira Filho, 2014).

In discussing this topic, Yoram Keinan (2014) pointed out that:

The court must, therefore, examine whether the individual steps or events have
independent significance or merely have meaning as part of the larger
transaction. Accordingly, if the steps have reasoned economic justification
standing alone, then applying the mutual interdependence test is inappropriate.
By contrast, when it is unlikely that any one step would have been undertaken
except in contemplation of the other integrating actsstep transaction treatment
may be deemed appropriate.
5.3.3.3.3 Binding Commitment Test

The Binding Commitment Test is the most restrictive test for applying the step
transaction doctrine. This test was formulated by the Supreme Court in Commissioner
of Internal Revenue Vs Gordon 391 U.S. 83 (196825) it was held that;

25
BRIEF FACTS
Pacific Telephone & Telegraph Co. (Pacific), a subsidiary of American Telephone & Telegraph Co., which
owned about 90% of Pacific's stock, transferred certain of its assets to a new company, Pacific Northwest
Bell Telephone Co. (Northwest), in exchange for all Northwest's common stock, and debt paper. In 1961
Pacific distributed to its shareholders rights to purchase about 57% of Northwest's common stock at $16 a
share, which was below its market value. Pacific advised its stockholders that "it expected that within about
three years . . . the Company by one or more offerings will offer for sale the balance of such stock." It also
reported that the Internal Revenue Service had ruled that stockholders who sold rights distributed to them
would receive taxable income in the amount of the proceeds of sale, and that stockholders who exercised
rights would receive taxable income in the amount of the difference between $16 and the fair market value
per share of Northwest stock obtained. In 1963 the remaining Northwest stock was similarly offered to
Pacific stockholders through rights. Respondents in No. 760 were minority stockholders of Pacific who
received rights pursuant to the 1961 distribution; they sold four rights and exercised the balance. Petitioners
in No. 781, who also received rights in 1961, exercised them all. None of these individuals reported any
income from these transactions on their tax returns and the Commissioner of Internal Revenue asserted
deficiencies. The Tax Court upheld the taxpayers' contention that the 1961 spinoff distribution met the
requirements of 355 of the Internal Revenue Code of 1954, with the result that no gain should be
recognized on the receipt or exercise of the rights. The Tax Court held that the sale of the four rights did
result in ordinary income. No. 781 was appealed to the Court of Appeals for the Ninth Circuit, which
reversed the Tax Court and held that the difference between $16 [391 U.S. 83, 84] and fair market value
was taxable income. No. 760 was appealed to the Second Circuit, which sustained the Tax Court on this
point, but held the amount received from the sale of the rights was taxable as a capital gain rather than
income. - See more at: http://caselaw.findlaw.com/us-supreme-court/391/83.html#sthash.jDbNlpGH.dpuf

ISSUE:
Whether the actual dividend occurs at the moment when valuable rights are distributed or at the
moment when their value is realized through sale or exercise, - See more at:
http://caselaw.findlaw.com/us-supreme-court/391/83.html#sthash.jDbNlpGH.dpuf
HELD:
1. When a corporation sells corporate property to stockholders or their assignees at less than its
fair market value, thus diminishing the corporation's net worth, it is engaging in a

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 When a corporation sells corporate property to stockholders or their assignees
at less than its fair market value, thus diminishing the corporation's net worth, it
is engaging in a "distribution of property," and such a sale results in a dividend
to shareholders unless some specific exception applies
Hence, the Test permits the application of the step transaction doctrine where the
taxpayer is subject to an obligation or, a binding commitment to pursue the successive
steps in a series of transactions. The difficulty in applying the test arises since greater
certainty is required to determine whether a transaction spanning several tax years
should be consolidated.

Four general principles are necessary to be kept in mind: (1) If the substance of the
transaction agrees with its form and no alternative exists for re-characterizing the
transaction, the courts, and auditor as the case may be TRA will respect the form of
the transaction. (2) If the substance of the transaction cannot be reconciled with its
form, the courts, and auditor as the case may be TRA will not respect the form of the
transaction. (3) If the substance of the transaction agrees with its form, but the
transaction could with equal or less force be re-characterized as having another
substance, the courts, and auditor as the case may be TRA will respect the form of the
transaction; and (4) If the substance of the transaction arguably agrees with its form,
but more reasonably does not agree with its form, the courts, auditor as the case may
be TRA will not respect the form of the transaction in the face of the Tax Revenue
Authoritys challenge, unless the taxpayer has a business purpose for the form of the
transaction. If the taxpayer, rather than the Tax Revenue Authority as the case may be
tax auditor challenges the form of the transaction in this situation, the courts are not
likely to ignore the form unless the taxpayer provides strong proof to the contrary
(Ronaldo de Melo Parreira Filho, 2014).

"distribution of property," and such a sale results in a dividend to shareholders unless some
specific exception applies. Pp. 391 U. S. 88-91.
2. Section 355 of the Code does not provide an exception for the 1961 distribution. Pp. 391 U. S.
91-98
a) The 1961 distribution did not transfer "all" the Northwest stock, nor did it transfer
"control" (defined in 368(c) as 80%), within the meaning of 355(a)(1)(D). Pp. 391
U. S. 91-95.
b) For an initial transfer of less than a controlling interest to be treated as merely the first
step in the divestiture of control, it must be clearly identifiable as such at the time it is
made and there must be a binding commitment to take the later steps, which was not the
situation here. Pp. 391 U. S. 95-98.
c) Since receipt and exercise of the rights produced ordinary income, receipt and sale of
the rights also resulted in income taxable at ordinary rates. P. 391 U. S. 98.

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5.3.3.4 Economic Substance Doctrine

This is a judicially developed doctrine that has become one of the primary tools in
fighting abusive tax shelters. The doctrine permits transactions lacking in economic
substance to be disregarded for tax purposes. An abusive tax shelter is generally
defined as;

A transaction that technically complies with the Income Tax Law but results in
unreasonable tax consequences that are not intended under the Tax Law
The economic substance doctrine is one tool that the Tax Revenue Authority has for
fighting abusive tax shelters. It is a judicially developed doctrine that allows the Tax
Revenue Authority and courts to disregard transactions that were made for tax-
avoidance purposes and lack economic substance (Ronaldo de Melo Parreira Filho,
2014).

The economic substance doctrine is rooted in several Supreme Court decisions. The
first is Gregory V. Helvering, Commissioner of Internal Revenue. No 12 Argued: Dec.
4, 5, (1934), where the Court stated that;

While "the legal right of a taxpayer to decrease the amount of what otherwise
would be his taxes, or altogether avoid them, by means which the law permits,
cannot be doubted," a transaction will be disregarded for tax purposes if it was
not the thing which the statute intended."
In that case, the Court, looking at whether a stock transfer qualified as a tax-free
reorganization, disregarded the transaction because there was no "business or
corporate purpose"

Concerning this point, Patricia Lampreave (2014)26 stated that:

The economic substance doctrine has generally been applied to transactions

where a taxpayer has technically met statutory and regulatory requirements, but
has met these requirements in such a way that the specific result of the
transaction or series of transactions is unlikely to have been foreseen by
Congress or regulators. (Ronaldo de Melo Parreira Filho, 2014)
5.3.3.5 Sham Transaction Doctrine

The doctrines traditionally used by courts to deal with tax avoidance arrangements are
overlapped by each other or applied at the same time. In this sense, the Sham
Transaction Doctrine is commonly employed simultaneously with the Economic

26
Lampreave, Patricia. Retrieved July 11, 2014, from
http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2026120_code1596806.pdf?
abstractid=2026120&mi rid=1

127
Substance and Business Purpose Doctrines. In fact these two doctrines are used to
determine whether Sham Transaction occurs or not. To do so, the Economic
Substance is utilized as an objective examination and Business Purpose as a
subjective examination. Under the Sham Transaction Doctrine, a transaction can be
disregarded for tax purpose if courts or the IRS as the case may be Revenue
authorities demonstrate that the transaction presented by the taxpayer does not exist;
if this transaction occurs in a different way than declared; or if the transaction does
not have economic substance or business purpose. In all these situations, the
transaction would be disregard for the tax purpose, and authorities can impose a tax
liability as if an effective economical transaction had happened (Ronaldo de Melo
Parreira Filho, 2014).

For this reason, as pointed out by Brion D. Graber, (2013) the type of Sham
Transaction can be two-fold. In one sense, factual shams are when transactions
declared do not actually happen. An economic sham, in another sense, is when the
purpose of the transaction has no other meaning than to obtain tax benefits. In the
former, both the subjective analysis of economic substance and the objective analysis
of the business purpose of a transaction will be taken in consideration to determine
the existence of a sham transaction. In almost the same way, Marilyn A. Wethekam
(2014) by referring to United Parcel Service of America, Inc. v. Commissioner, 254
F.3d 1014 (11th Cir. 2001) Case affirmed that;

There are two kinds of sham transactionssham in fact, when a transaction

existed only in paper but never occurred, and sham in substance, when a form
presented for a transaction differs from its economic substance.
In another case of Falsetti Vs Commissioner [Dec. 42,330], 85 T.C. 332 (1985) it
was argues inter alia that;

A transaction is considered a sham in substance if it effects no real change in

each partys economic position. For example, a sale that fails to transfer
beneficial ownership of property in which the payments circulate among
various parties in ways that cancel themselves out would be considered a
sham in substance.
This doctrine, among the others previously analyzed, has its ground in court decisions
like Gregory Vs Helvering (1935), Frank Lyon Company Vs United States, 435 U.S.
561 (1978), Knetsch Vs United States, 364 U.S. 361 (1960), and more recently in
ACM Partnership Vs Commissioner, 157 F.3d 231 (3d Cir. 1998). Over the years, to
establish a practical way to apply this doctrine, courts have developed a test to

128
determine whether a transaction has economic substance or not. This test is known as
two pronged test and, as mentioned in ACM Partnership Vs Commissioner, 157
F.3d 231 (3d Cir. 1998), two factors are analyzed in its framework. These are the
subjective business motivation and the objective economic substance of the
transactions. These two factors are evaluated by applying objective and subjective
tests. The objective test focuses on the existence of practical economic effects in a
transaction other than tax benefits. This test aims to identify if a transaction had some
economic meaning, like improvement in profits, reduction in costs, or if this
transaction had as a purpose only to reduce the tax liability of the taxpayer (Ronaldo
de Melo Parreira Filho, 2014).

The subjective test looks at the motivations of taxpayers, and what is expected before
accomplishing the transaction. This test is analogous to the business purpose test, and
is also known as business purpose requirement of economic substance doctrine. As
stated in ACM Partnership Vs Commissioner, 157 F.3d 231 (3d Cir. 1998) the aim of
subjective tests is to identify the intention of taxpayers, and if it planned to carry out a
transaction rationally related to a useful nontax purpose that is plausible in light of
the taxpayer's conduct and economic situation. In the defining the, Economic
Substance Doctrine we can define as

The common law doctrine under which tax benefits under Income Taxes could
prevail with respect to a transaction are not allowable if the transaction does not
have economic substance or lacks a business purpose.

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5.4 DIFFERENCES BETWEEN TAX EVASION AND TAX
AVOIDANCE

In the tax law doctrine and legal acts there are a lot of similar concepts, such as tax
evasion, tax fraud, tax avoidance, abuse of law, circumvent of law, tax mitigation,
aggressive tax planning, tax flight, tax planning etc., which meanings are very
difficult to distinct from each other. Such a variety of similar concepts without clear
definitions leads to the legal uncertainty and ambiguity. It is important to recognize
that the principle of legal certainty is the starting point in the application of the law.
Therefore, a taxpayer must be completely sure that before entering into certain tax
mitigation schemes, his arrangements will not be treated as tax evasion, tax
avoidance, and abuse of law or aggressive tax planning.

The tax gap is the difference between the tax revenue the governments would raise in
a perfect tax system and the revenue the governments actually collected. This amount
is represented by all tax minimization arrangements. Although there are serious
difficulties in determining the range of the tax gap, some studies estimates a sum of
more than a trillion of dollars a year in developed countries.

Considering the huge amount of revenue countries had not been collecting, as
represented by the tax gap, governments of several countries have been changing
legislative, administrative and criminal procedures and rules to deal with this
question. But before handling this matter, it is imperative to specify the difference
between tax avoidance and tax evasion. Despite the same economic result of the
utilization of these schemes, which in effect is the reduction of tax liabilities and
decrease in government revenue, governmental approaches to each scheme must be
different.

Tax avoidance always occurs before the event that gives rise to the tax liability. This
specific event is done in a way to avoid the existence of a tax liability, otherwise this
would be a taxable event and would engender tax obligation. Therefore, Tax
avoidance refers to those cases where the tax payer has apparently circumvented the
law, without giving rise to a critical offence by the use of a scheme, arrangement or
devise often of a complex nature whose sole purpose is to defer, reduce or completely
avoid the tax payable under the law. In other words tax avoidance is the method of
reducing incidence of tax by taking advantage of certain loopholes in tax laws. The
avoidance of taxes is the only intellectual pursuit that carries any reward. Tax

130
avoidance is legally permissible hence, it does not matter how it would effect because
anything which law permits is in some or the way connected with the fulfilment of
some legitimate purpose or aim, so the by-products of such a purpose is not so
relevant.

Tax evasion is an illegal practice where a person, organization or corporation

intentionally avoids paying his/her/its true tax liability. Those caught evading taxes
are generally subject to criminal charges and substantial penalties. Tax evasion is the
general term for efforts by individuals, firms, trusts and other entities to evade taxes
by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting
or concealing the true state of their affairs to the tax authorities to reduce their tax
liability, and includes; in particular, dishonest tax reporting (such as declaring less
income, profits or gains than actually earned; or overstating deductions). Tax evasion
based on the legality criteria used to identify it by the presence of at least one of three
characteristics: dishonest, tax reporting, fraud, or tax dissimulation.

Dishonest tax reporting arises when individuals, firms, or other entities do not
properly inform tax authorities its income, profits or gains. The
objective of this conduct is to evade the tax liabilities and it is done by
illegal means.

Fraud is a widely used term, but specifically in this case it is related to the action of
the misrepresentation of the state of some situation by counterfeiting or
adulteration of documents, with the intention to reduce or eliminate the
tax payment.

Tax dissimulation is where the agent forges the existence of some circumstance
which in fact does not exist, or he falsifies the real affair through the
use of different issues with the same aspects but with less taxable
effects.

Tax evasion can be proved to be really dangerous. Efforts should be even made to
prevent the abuse or misuse of the legal provisions. In the case of Mc Dowell and
Company Limited vs The Commercial Tax Officer on 17 April, 1985, evil
consequences of tax avoidance are summarized as follows:

1. Substantial loss of much needed public revenue;

2. Serious disturbances caused to the economy;

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 3. Sense of injustice and inequality;
4. Ethics of transferring the burden of tax liability to the shoulders of the
guideless good citizens from those of artful dodgers.
The judicial outlook towards tax evasion clearly explains how threat full tax evasion
is for the economy. First, the Supreme Court decided that the government was wrong
to freeze the bank accounts of five suspected terrorists. Then the high court ruled that;

Thousands of Britons with offshore trusts must now pay backdated tax
demands imposed under retrospective legislation, introduced in the 2008
finance Act. While no one should condone tax evasion, these trusts were legal
forms of tax avoidance when they were set up. All things considered, it does
make one wonder who the courts regard as the real threat to society.
Based on the same assumptions, Professor John Pebble, from Victoria University of
Wellington, asserts in Zoe and John Pebble (2012, p. 711) that:

The law draws a line between tax avoidance and tax evasion. This line may
be fine, but it is supposed to be crisp, such that any set of facts will fall on one
side of it or the other. By definition, tax avoidance falls on the safe side,
whereas tax evasion is on the wrong side of the line. In practice, however, the
line can become blurred in a way that definition alone does not suggest.
The excerpt between double quotation marks is from U.S. Supreme Court case,
Bullen v. Wisconsin - 240 U.S. 625 (1916), in which Justice Oliver Wendell Holmes
delivered the opinion of the Court stating that:

We do not speak of evasion, because, when the law draws a line, a case is on
one side of it or the other, and if on the safe side is none the worse legally that a
party has availed himself to the full of what the law permits. When an act is
condemned as an evasion, what is meant is that it is on the wrong side of the line
indicated by the policy, if not by the mere letter, of the law.
Viewed as such, the attribute that differentiates tax avoidance and tax evasion is the
legality of the operation. This legality is represented in the excerpt above by a line
that separates the legal side and the illegal side. We could see one quote from William
Rehnquist which says;

There is nothing wrong with a strategy to avoid the payment of taxes. The
Internal Revenue Code doesnt prevent that. (William H. Rehnquist) (Yablon L.
Jeffery, 2010).
However, legislators seldom highlight this line, as it usually has some obscure areas
in which events are not easily located. These ambiguous cases demand strong efforts
to determine the best classification of a tax event. In these situations, tax avoidance
and tax evasion are not obviously settled.

132
In the article Tax avoidance, Evasion, and Administration, Slemrod and Yitzhaki
affirmed that:

() the distinguishing characteristic of evasion is illegality. In practice, of

course, there are many grey areas where the dividing line is not clear, and
sometimes the tax authorities may inappropriately characterize particular cases.
One can draw a further distinction within the class of legal responses to
taxation. At times we will refer to real substitution responses, or real responses
for short, as those responses which come about because the tax law changes the
relative price of different activities, and that induce taxpayers to respond by
choosing a different consumption basket.
Therefore, although the existence and the characteristics of the line which separates
tax avoidance and tax evasion is well known and established, the existence of a gray
area where events are not simply assigned brings serious problems to the tax
authorities and taxpayers alike in dealing with these specifics cases. In fact, these
cases rest on the border of the two situations, and do not reflect the majority of
situations and can be treated in separate when necessary.

The OECD and the EU law provide that tax fraud is a form of tax evasion; First of all,
looking from the OECD perspective, tax evasion is defined as;

A term that is difficult to define but which is generally used to mean illegal
arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays
less tax than he is legally obligated to pay by hiding income or information from
the tax authority.
Thus, the OECD agrees that tax evasion describes illegal arrangements where liability
to tax is hidden or ignored. On the other hand, the OECD defines a concept of tax
fraud as;

A form of deliberate evasion of tax which is generally punishable under

criminal law; the term includes situations in which deliberately false statements
are submitted, fake documents are produced, etc
It should be noted that the same definitions of tax evasion and tax fraud are also
confirmed at the EU level by the recent communication of the European Commission
Therefore, the OECD and the EU law approaches show that, in general, both tax
evasion and tax fraud describe the same illegal activities where the main purpose is a
submission of false statements to the tax authorities. Unfortunately, the definition of
tax fraud does not indicate any significant differences between these two concepts
and only states that tax fraud is a form of tax evasion.

133
The Oxford dictionary provides that; The word form means a particular way in
which a thing exists or appears.

Accordingly, a comparison between concepts of tax fraud and tax evasion shows that
tax fraud is a particular way in which tax evasion appears. For instance, this is a case
where a taxpayer uses tax fraud scheme (i.e. VAT carrousel scheme) with the purpose
to achieve tax evasion. Taking into consideration that tax fraud shall be treated as an
instrument to achieve tax evasion; this is a reason why tax fraud shall always be in the
scope of tax evasion as a form of tax evasion.

Furthermore, it is worthy to mention that tax fraud is not the only form of tax evasion.
Looking from the OECD and the EU law perspective, tax evasion can also be
achieved by hiding income or information from the tax authority. These activities do
not constitute a fraud, but also are considered as tax evasion and are punishable under
criminal law.

To sum up, despite the fact that tax evasion and tax fraud, in general, have a very
similar meanings, the OECD and the EU law provides that tax fraud and tax evasion
are two different concepts where tax fraud shall be treated as a form of tax evasion.
Therefore, in order to avoid legal uncertainty and confusions, It is suggested not to
use tax fraud and tax evasion in the same sentence or context as it is provided in the
European Parliament resolution and Communication. An analysis of the CJEUs case-
law, shows that the CJEU does not provide a definition of tax evasion or tax fraud.
However, a certain trend of using these two concepts can be found in the case-law of
the CJEU. Firstly, in FIRIN case15 C-107/13, FIRIN, [2014], Para 42 the CJEU
stated that:

European Union law cannot be relied on by individuals for abusive or

fraudulent ends. It is therefore for the national courts and judicial authorities to
refuse the right of deduction if it is shown, in the light of objective factors, that
that right is being relied on for fraudulent or abusive ends.
In other words, the CJEU provides that only the national courts have a competence to
establish a fact that whether or not a certain taxpayers behaviour could be treated as
tax fraud. This elaboration is reasonable because only the national courts have a right
to estimate all relevant facts and circumstances which are related to the fraudulent
activity. The Author believes that such reasoning shows again that the concept of tax
fraud defines fraudulent taxpayers behaviour to evade taxes.

134
Secondly, the concept of tax evasion can be found in the CJEUs case-law only where
the EU legal acts are cited or where a context requires an expression about preventing
or combating against tax evasion. For example, in Stroy trans [2013], para 46 case,
the CJEU stated that;

The prevention of tax evasion, avoidance and abuse is an objective recognized

and encouraged by Directive 2006/112.
Furthermore, in Kraft Foods Polska, [2012], para 28, case, the CJEU explained that;

Measures to prevent tax evasion or avoidance may not, in principle, derogate

from the rules relating to the taxable amount except within the limits strictly
necessary for achieving that specific aim.
Hence, these explanations once more confirm that the concept of tax evasion defines
the negative effect of the public revenue by unlawful tax non-payments. This is a
reason why the concept of tax evasion usually can be found in the names of legal acts
or public announcements which have a purpose to define a result of the taxpayers
behaviour to evade taxes.

Thus, the settled case-law of the CJEU shows that the concept of tax fraud is subject
to the national courts which are entitled to analyse taxpayers fraudulent behaviour,
while the concept of tax evasion can be found as a general concept which is usable
only to describe a negative result of taxpayers behaviour to evade taxes. Therefore,
the Author believes that the mentioned case-law is in the line with the OECD and the
EU law position which states that tax fraud is a particular taxpayers behaviour to
achieve tax evasion.

Unfortunately, it should be noted that even the CJEU confuses concepts of tax
evasion and tax fraud. In Bonik C-285/11 [2012] case, the CJEU dealt with a
situation where a Bulgarian company was charged with VAT due to insufficient
evidences of intra-Community supplies. It was stated that suppliers did not have a
sufficient quantity of goods to make supplies to Bonik and that no actual supplies had
been made from those companies to Bonik. In this case the CJEU explained that:

It is therefore for the national courts and judicial authorities to refuse the right
of deduction, if it is shown, in the light of objective factors, that that right is
being relied on for fraudulent or abusive ends. That is the position where a tax
fraud is committed by the taxable person himself. In such a case, the objective
criteria which form the basis of the concepts of supply of goods or services
effected by a taxable person acting as such and economic activity are not met

135
Hence, the CJEU once more correctly interpreted a concept of tax fraud which
describes specific situations where the court or the tax authority is willing to prove a
fraudulent activity of taxpayer. This interpretation is consistent with the settled CJEU
case-law. However, in Maks Pen C-18/13, [2014] case, the CJEU referred to Bonik
C-285/11 [2012] case and without any reasons switched the concept of tax fraud to
the concept of tax evasion. The Court explicitly said that:

While that is the position where tax evasion is committed by the taxable person
himself, the same is also true where a taxable person knew, or should have
known, that, by his acquisition, he was taking part in a transaction connected
with the evasion of VAT. He must therefore, for the purposes of Directive
2006/112, be regarded as a participant in that evasion, whether or not he profits
from the resale of the goods or the use of the services in the context of the
taxable transactions subsequently carried out by him.
One of the noticeable reasons why the CJEU has confused tax fraud and tax evasion
is that the national court, which has issued questions for the preliminary ruling in
Maks Pen C-18/13, [2014] case, incorrectly used the concept of tax evasion instead
of tax fraud. It is imperative to believe that the wording of such referrals varies not
only because of misunderstandings between concepts but also because of different
language in which they are phased

Tax evasion is a criminal matter; the main feature of tax evasion is illegal
arrangement which implies a criminal nature. A criminal matter enshrines other
essential features of tax evasion. At first, tax evasion shall assert by actual knowledge
of the wrongdoing or intentional behaviour of the taxpayer. This subjective element is
very problematic and usually is usable as a defence measure by the defendant because
all criminal cases shall be settled by the beyond reasonable doubt. It is important to
distinguish (i) intentional mistakes in tax return and (ii) real mistakes in tax return,
since incorrect information which was made by real mistakes can legally be adjusted,
while actual knowledge of wrongdoing shall always be treated as tax evasion
(criminal offence). Tax evasion should not be extended to negligent conduct which
may be a matter dealt with by administrative fines. Hence, tax evasion is a criminal
matter and, therefore, shall be dealt only in a criminal court.

Absence of an honest behaviour is not an independent feature of tax evasion;

another related feature of tax evasion is the absence of an honest belief that a person
is not liable to the certain tax. According to Philip Baker, if a taxpayer cannot show
that he has an honest belief that he is not liable to the tax, it seems prima facie to fall

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within the scope of tax fraud.28 The Author agrees with this opinion, however, some
other aspects also shall be taken into account. For instance, the criterion of honesty of
the taxpayer is very important in claiming VAT refund. In FIRIN case15 C-107/13,
FIRIN, [2014], the CJEU explained that a taxpayer, which knew or should have
known that VAT has not been paid or will not be paid by the seller and still claims
VAT deduction, is acting dishonestly and loses a right to deduction. Such situations
in the case-law are usually settled rather in administrative court than criminal courts.
It is worthy to mention that, in practice, only a fact that a person was dishonest cannot
lead to the criminal offence. Also, dishonesty has a similar meaning like the concept
of abuse of law and, therefore, shall be considered as one of the elements of tax abuse
(see Part II.B.ii). Hence, the Author believes that absence of honest behaviour is not
an independent feature of tax evasion but rather a supplementary feature.

De minimis rule is applicable; finally, the damages caused by tax evasion shall be
enough serious. For example, if a taxpayer will fail to report a very small amount of
taxable income, it would be not reasonable to treat this occasion as criminal offence.
Not surprisingly, the Criminal Code of Republic of Lithuania states that a person
who, seeking to evade payment of taxes, intentionally provides inaccurate data on the
persons income, profit or assets in tax return, shall be punished by criminal offence
only that evading payments exceed LTL 1300 (approx. EUR 375). Accordingly, this
means that de minimis rule is applicable in the matter of tax evasion.

Tax evasion occurs when someone acts against the law. Tax avoidance involves
compliance with the letter but not the spirit of the law and it is right that the
Government seek to minimise that. Tax planning is a case of acting in both the spirit
and the letter of the law. There is a distinction, although there will be occasions when
the line is a little blurred. Lord Patten asked Her Majesty's Government: Whether
they will clarify their use of the terms "tax avoidance" and "tax evasion".

These terms lack any single or universally applied legal definition and their meaning
will depend upon the context in which they are used. The term "tax evasion" refers to
reduction of tax liability by illegal means. The term "tax avoidance" is usually used to
refer to an inappropriate reduction in tax liability and was described by Lord Nolan in
1997 in the following terms:

"The hallmark of tax avoidance is that the taxpayer reduces his liability to tax
without incurring the economic consequences that Parliament intended to be

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 suffered by any taxpayer qualifying for such reduction in his tax liability." (Lord
McKenzie of Luton):
The hallmark of tax mitigation, on the other hand, is that the taxpayer takes
advantage of a fiscally attractive option afforded to him by the tax legislation,
and genuinely suffers the economic consequences that Parliament intended to be
suffered by those taking advantage of the option.
Mr Gauke argues that;

Tax avoidance is widely understood to entail taking a view of the tax treatment
of a transaction that is tenable but has tax consequences that were not intended
by the legislature. This does not prevent taxpayers organising their affairs in an
efficient manner, consistent with the intentions of the legislation.
Tackling tax avoidance is essential because the Government has to consider the
economic efficiency of tax measures as part of the tax policy-making process.

The House of Lords Economic Affairs Committee looked at this question in their
report on the Governments proposals for a general anti-abuse rule, published in
March 2013. The Committee cited Mr Gaukes distinction between avoidance and
evasion, reproduced above, but went on to quote the evidence of Ms Judith Knott
(HMRC Director, Corporation Tax International Anti-Avoidance) when she appeared
before the Committee:

What we mean by legitimate tax planning is tax planning that is very much in
line with Parliaments intentions when it passed the rules. A good example
would be putting cash into an ISA account. That is legitimate and what
Parliament intended to happen. Avoidance, on the other hand, is behaviour that
seeks to bend the tax rules in a way that Parliament did not intend. It is often
accompanied by artificial transactionstrying to seek a result that was not
intended.
The Committee observed that the definitions depend on the existence of a common
interpretation of what the original lawmakers had in mind in enacting a particular tax
statute:

The courts interpret Parliamentary intention as that revealed by the wording

and context of the legislation itself and extraneous comment or other guidance
can be taken into account only in very limited circumstances. This is a much
narrower definition of Parliamentary intention than the wider colloquial
definition which might either infer intention or take into account external
information. Consequently, in practice, a good deal of uncertainty can often
attach to the question of whether a particular arrangement constitutes tax
avoidance and, if so, whether it is to be regarded as acceptable (tax planning
or tax mitigation) or unacceptable (aggressive or abusive avoidance)
Whatever is valid in the eyes of law cannot become invalid merely because it also
results in tax being saved! Tax planning, tax efficiency and tax avoidance by

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companies is not equal to tax evasion. These are the different approaches to the same
objective that is, tax reduction. However, they have different characteristics and tax
planning is perfectly legal as the object of tax reduction is achieved by making use of
the beneficial provisions in the tax laws. On the other hand, tax avoidance is also
legal though technically satisfying the requirements of law because involves
arranging transactions within the permissible boundaries of law to secure a tax
advantage and is generally accepted as legal. The courts have attempted to provide
some distinction between unacceptable tax evasion and acceptable tax avoidance,
which is increasingly referred to as tax planning. However, there certainly exists a
grey area between legitimate tax avoidance as the case may be planning and illegal
tax avoidance and the distinction has become increasingly blurred, in view of varying
and often conflicting views of the courts. This leads to increase in uncertainty in the
tax system, which is something businesses do not want.

In that juncture, Tax planning is a part of tax compliant behaviour. It is not a part of
tax avoidance. Tax law reflects the complexity of modern life and the multitude of
choices and options available to all taxpayers when legitimately seeking to structure
their affairs. This necessary offer of options within tax legislation creates the
opportunity for choice on the part of the tax payer and means that determining the
right amount of tax (but no more) that they seek to pay does necessarily requires the
exercise of judgement on occasion.

So long as the exercise of that judgement seeks to ensure that the taxpayer makes
choices that exercise options clearly allowed by law and that they do not exploit
unintended loopholes created between laws then that process of a taxpayer choosing
how to structure their affairs is the process of tax planning, which is a legitimate,
proper and socially acceptable act. However, regarding the disadvantages of Tax
Planning, it was argued by Martin J. McMahon Jr that;

Tax-motivated behavior ought to be discouraged . . . . This is because tax

planning produces nothing of value to society. It may benefit the taxpayer whose
taxes are reduced, but the social product is not increased (Martin J. McMahon
Jr) (Yablon L. Jeffery, 2010).
As I have noted above, Tax evasion is the method of evading tax by dishonest means
like suppression, conscious violation of rules, etc. while on contrary, the prime
objectives of tax planning are: reduction of tax liability, minimisation of litigation,
productive investment, healthy growth of economy and economic stability. There is a

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very thin line of demarcation between tax avoidance and tax evasion; though both
result in avoidance of tax. The distinction between the two lies in the legality of a
transaction. Deliberate attempt to subvert the law or manipulation of records to obtain
tax relief is an illegal act and would be regarded as tax evasion and is impermissible.

The concept of parliamentary intention is not a simple or obvious one as noted in

a paper on tax avoidance published by the Oxford Centre for Business Taxation:

The aim of the courts is to construe legislation in a way that gives effect to
parliamentary intention.
Parliamentary intention in this context is a term of art, extensively debated in legal
literature and should be distinguished from a colloquial usage. Lord Nicholls has
explained:

"...the 'intention of Parliament' is an objective concept, not subjective. The

phrase is a shorthand reference to the intention which the court reasonably
imputes to Parliament in respect of the language used. It is not the subjective
intention of the minister or other persons who promoted the legislation. Nor is it
the subjective intention of the draftsman, or of individual members or even of a
majority of individual members of either House. In other words the political
and authoritative process of Parliament passing legislation produces the text of
legislation, the intention of which is found by the courts looking at the wording
of that legislation
Further to the questions of legal interpretation, the choice of words in this area has
important political consequences. Graham Aaronson QC made this point when he
gave evidence to the Lords Economic Affairs Committee in January 2013:

Avoidance is a rather unfortunate word in this context because avoidance can

be regarded as a particularly nasty thing to do or, if it is an accident, it is a very
sensible thing to doyou avoid an accident. So I would rather use words that
are less emotive when describing the intellectual process in determining whether
you should be paying a smaller amount of tax than you would otherwise pay. You
can call that tax planning because it is planning. Whether it is good planning or
bad planning, whether it is abusive planning or innocent planning, it is planning.
Tax avoidance is a very dangerous expression to use if you want to have a
serious debate because one persons avoidance is another persons perfectly
reasonable planning.
We can conclude at this end by the quote of Denis Healey that;

The difference between tax avoidance and tax evasion is the thickness of a
prison wall. (Denis Healey). In the same vein Franklin D. Roosevelt argues
that;
Tax avoidance means that you hire a $250,000-fee lawyer, and he changes the
word evasion into the word avoidance. (Franklin D. Roosevelt) (Yablon L.
Jeffery, 2010).

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This is because the motive of tax evasion and tax avoidance both is to reduce tax
liabilities or pay no tax liabilities as quoted by National Income Tax Magazine that;

Certain acts of tax escaping are clearly evasion; others are clearly avoidance;
between the two is a twilight zone in which it is extremely difficult to determine
whether a given act falls on one side of the line or the other (National Income
Tax Magazine).
In summary the difference between Tax evasion and Tax avoidance can be shown in
the matrix below;

TAX AVOIDANCE TAX EVASION

Where the payment of tax is avoided though by
complying with the provisions of law but
defeating the intension of the law is known as
tax Avoidance.
Tax Avoidance is undertaken by taking
advantage of loop holes in law
Tax Avoidance is done through not malafied
intention but complying the provision of law.
Tax Avoidance looks like a tax planning and is
done before the tax liability arises.
Where the payment of tax is avoided through illegal
means or fraud is termed as tax evasion.
Tax evasion is undertaken by employing unfair means
Tax Evasion is an unlawful way of paying tax and
defaulter may be punished.
Tax evasion is blatant fraud and is done after the tax
liability has arisen.

Verdicts have come from different courts in various jurisdictions distinguishing tax
evasion from tax avoidance or laying down the nature of these. The crux of these
decisions is that "the legal right of an individual to decrease the amount of what
would otherwise be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted. Avoidance of tax is not tax evasion and, it carries no
ignominy with it, anybody can so arrange his affairs so as to reduce the burden of tax
to minimum. This was held by the house of Lords in the Lord Tomlin TRC Vs Duke of
Westminster case. The house in that case stated that;

The citizen has the legal right to dispose of his capital and income so as to
attract upon himself the least amount of tax.

Yet in another case, the W. T. Ramsay Vs Inland revenue commissioners case, the
house laid the principle that;

The fiscal consequences of a preordained series of transactions, intended to

operate as such, are generally to be ascertained by considering the result of the
series as a whole, and not by dissecting the scheme and considering each
individual transaction separately. This case marked the significant departure of
judiciary in England in their outlook towards tax avoidance schemes.

The significance of W T Ramsay Ltd -v- Inland Revenue Commissioners; HL 12 Mar

1981. References: [1981] 1 All ER 865, [1982] AC 300, [1981] UKHL 1, [1981] as a

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turning point in the interpretation of tax laws in England and the departure from the
strings of Westminster were explained in Inland Revenue Commissioners Vs Burmah
Oil Co Ltd. HOUSE OF LORDS. [1982] STC 30, [1981] TR 535, 54 Tax Case 200,
([1984] Conv 296)

The differences between Tax Evasion and Tax Avoidance can be substantiated by the
quote of Franklin D. Roosevelt which says that;

Methods of escape or intended escape from tax liability are many. Some are
instances of avoidance which appear to have the color of legality; others are on
the borderline of legality; others are plainly contrary even to the letter of the
law. All are alike in that they are definitely contrary to the spirit of the law. All
are alike in that they represent a determined effort on the part of those who use
them to dodge the payment of taxes which Congress based on ability to pay. All
are alike in that failure to pay results in shifting the tax load to the shoulders of
others less able to pay, and in mulcting the Treasury of the Governments just
due. (Franklin D. Roosevelt) (Yablon L. Jeffery, 2010).

5.5 CAUSES OF TAX EVASION AND AVOIDANCE

Any attempt to avoid or evade tax may be caused by any one or combination of the
following factors:

5.5.1 High marginal tax rates and frequent changes in tax rates

The high tax rates such as sales tax and import duty, withholding tax etc. causes tax
evasion and avoidance because taxpayers may consider distribution of their incomes
unfair and may attempt to make a unilateral adjustment for equity by non-compliance
through tax evasion. This is an administrative and regulatory factor; the bigger the
difference between total cost of labour in official economy and the after tax earnings
from work for example, the greater is the incentive to avoid this difference and to
participate in the underground economy.

The incentive effects of high tax rates might cause people to do any of the following:
work fewer hours; not work at all; save less; invest less; change their occupation to
one that pays less but offers better non-taxable amenities (such as pleasant working
conditions); be less likely to take the risk of becoming an entrepreneur; take labour
compensation as non-taxable fringe benefits instead of as taxable cash wages; engage
in more legal tax avoidance (e.g., taking advantage of loopholes in the tax law,
choosing tax deductible forms of consumption over taxable forms, etc.); switch to an

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occupation where tax evasion is easier; move to the informal sector; or otherwise
engage in more tax evasion.

When tax rates go up, people report less taxable income because they are engaging in
more tax evasion this could be a source of deadweight loss from taxation. Evading
taxes involves some costs to the taxpayer. A dead weight loss is the Loss associated
with quantities of output that are greater than or less than the efficient level, as can
result from market intervention such as taxes, or from externalities such as pollution.
The marginal cost curve in Figure 3 can be thought of more generally as the supply
curve for taxable income. The more elastic is this supply curve, the larger is the
deadweight loss from taxation.

Feldstein (1995) found that during the 1980s, taxable incomes of the rich went up
much more than did the taxable incomes of the middle class, while marginal tax rates
for the rich were reduced much more than were tax rates for the middle class. This
could suggest a large elasticity of taxable income with respect to marginal tax rates,
but it might also be explained by all sorts of other factors that were causing incomes
to change differently over time at different points in the income distribution, such as
globalization, skill-biased technical change, or developments in financial markets (for
example, a stock market boom has a big impact on pay of top executives because
much of their pay comes in the form of stock options). Nor did either party argue that
lower tax rates would create prosperity at the top that would trickle down to others.
President Calvin Coolidge was in fact quite explicit that the primary purpose of
lowering tax rates was for the government to collect more tax revenues:

The first object of taxation is to secure revenue. When the taxation of large
incomes is approached with this in view, the problem is to find a rate which will
produce the largest returns. Experience does not show that the higher rate
produces the larger revenue. . . . I agree perfectly with those who wish to relieve
the small taxpayer by getting the largest possible contribution from the people
with large incomes. But if the rates on large incomes are so high that they
disappear, the small taxpayer will be left to bear the entire burden

5.5.2 Administrative inefficiency

Four main causes of poor tax administration include; Lack of taxpaying culture
among taxpayers which partly may be caused by a tax system perceived as unfair,
Relatively high rates and a complex and partly incoherent set of rules, especially for
customs and corporate taxes, resulted in large potential rewards for taxpayers willing

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to bribe to cut their own tax burden and/or speed up customs clearance of their goods;
Low wage levels where there might be poor salaries at the tax administration
compared to the private sector invited corruption; Poor working conditions and little
encouragement for staff to exercise initiative which may involves lack of technical
equipment and poor office facilities and unclear criteria for recruitment, promotion
and rewards of staff and management; and Low probability of detection and
punishment for corruption; in that, we could see weak management, with poor
information, auditing and supervision of staff, internal auditing and monitoring
functions to be non-operative and ineffective.

Financial constraints, inadequate working tools and lack of staff motivation do not
encourage tax compliance. Income may go untaxed and tax collection is delayed for
various reasons. Inadequate training and experience of tax administrators coupled
with lack of exposure to business practices may limit tax officials ability to expose
complex international and intercom any tax avoidance schemes and check on stock
manipulations or proper accounting in long term contracts. Tax administration should
be effective in the sense of ensuring high compliance by taxpayers, and efficient in
the sense that administrative costs are low relative to revenue collected. Good tax
administration requires strong technical capacity by the administrative agency but
also a well-designed tax. The strength of administration comes from the
administrators ability to monitor and enhance tax compliance, and ensure higher
revenues by reducing opportunities for tax evasion and tax avoidance.

The rationale for monitoring tax compliance derives from the primary goal of tax
administration which is to collect the taxes and duties payable in accordance with
the law and to do this in such manner that will sustain confidence in the tax system
and its administration. The actions of taxpayers, whether due to ignorance,
carelessness, recklessness, or deliberate evasion as well as weaknesses in a tax
administration it means that instances of failure to comply with the law are inevitable.

The efficiency of a tax system is not determined only by appropriate legal regulation
but also by the efficiency and integrity of the tax administration (Kaldor's, 1980). The
tax administration and bodies which produce political decisions have to foresee the
attempts to evade taxes and have to design a tax system that will not question the
loyalty of its citizens. The next very important issue is the efficiency of tax
administration. Effective tax administration in a market economy is based on

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voluntary compliance by a large number of decentralized taxpayers. Most transition
economies have only recently started to address compliance issues and build up a
modern tax administration with better overall revenue performance. A first step is
restructuring how the work is organized. In transitional countries, tax administration
can be organized respecting the functional principle (collecting, recording, auditing,
and enforcement) according to: a) the type of taxpayers, or b) the type of taxes, or c)
type of enterprises in economy.

The effectiveness of tax systems does not rely solely on high taxpayer compliance but
also on the efficiency and productivity of the administrative systems supporting that
tax. Kelly and Oldman (1973) defined an efficient tax administrative system as a
system that involves an effort to achieve the maximum outputs, with regards to
revenue income, equity and other goals of the tax, with limited human and material
resource inputs available to the tax gathering system.

Administrations face major problems: a large proportion of the economy is at a

subsistence level; many taxpayers do not keep records, and even where records are
kept, they are not necessarily reliable. Taxpayer cooperation is also low because of
chronic shortages of trained officials, traditions of corruption, and lack of visible
improvements in government services. As a consequence, countries often develop tax
systems that exploit whatever obvious revenue-generating options they have rather
than develop modern and efficient tax systems that create wide tax bases from which
to draw revenue. Hence many developing countries often end up with too many small
tax sources, too heavy a reliance on foreign trade taxes, and a relatively small use of
personal income taxes.

As outlined in 1989, the IMF concluded that effective tax administration depends on
the existence of these factors (IMF, Fiscal Affairs Department, 1989):

The existence of a predominantly money economy;

A high standard of literacy; although literacy is not a necessary condition for
taxation, the lack of a literate population reduces the options for policy
makers;
Prevalence of honest and reliable accounting; lack of reliable accounting
constrains the types of taxes that can be effectively employed;
A large degree of voluntary compliance on the part of taxpayers; modern
taxation involving self-assessment depends heavily on voluntary co-operation
by taxpayers;
A political system not dominated by wealthy groups acting arbitrarily in their
own self-interest.
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Some of the strategies that have been suggested to deal with the problems are: use of
withholding taxes; increased reliance on indirect taxes; use of presumptive taxes; and
increased computerization of the tax system.

5.5.3 Multiplicity of taxes

Multiplicity of taxes are difficult to comply with correctly due to lack of knowledge
of the detailed provisions of all the tax laws, too many due dates and too much return
to complete, accounting staff shortages and different complexities in the laws etc.

According to Izedonmi (2010) multiple taxation, is said to occur when the same
income is subjected to more than one tax treatment. Double taxation and triple
taxation are common examples of multiple tax practices. The main issue here is that
the same income or money is taxed more than once. If it taxed twice then it is double
taxation phenomenon. When it is taxed thrice, it becomes triple taxation. Multiple-
taxation is a phenomenon which describes an income that is subjected to tax more
than once often by two or more different authorities in a way that may be unfair or
illegal. Illegality and unfairness distinguish multiple-taxation from double taxation.
The former often have the characteristics of being unfair and also illegal. Multiplicity
of taxes connotes paying similar taxes on the same or substantially similar tax base.
Multiple taxes should be distinguished from numerous taxes which mean many but
different taxes on different tax bases. Issues in respect of paying taxes more than one
occasion in respect of profits from the same business in the same period are classified
as multiple taxations which could be counterproductive if it is excessively applied.

5.5.4 Low prospect of detection and punishment of tax evaders

The more tax evaders a person know who are not caught and punished, the more
likely he will also join the band wagon of tax evaders (induced evasion). Where tax
evaders are caught the penalty should be sufficiently deterrent. That is why a selective
prosecution policy is necessary. Deterrence factor is one of the factors that would
influence compliance in taxation; this factor is based on the concept that the risk of
detection and punishment will improve compliance behaviour as outlined by the
quote of Richard M. Nixon which says;

Make sure you pay your taxes; otherwise you can get in a lot of trouble.
(Richard M. Nixon) (Yablon L. Jeffery, 2010) this quote could be addressing the
same message that; Impose heavy sanctions and penalty so that Israel will fear
and pay taxes.

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Under this approach citizens pay their taxes out of fear that the government will catch
and penalize them (Lavoie 2008). The aim of deterrence is therefore mainly to
prevent tax evasion but the concept also includes the idea that the punishment of an
evader will discourage future evasion.

The standard model of deterrence was first formulated by Allingham and Sandmo
(1972), who adapted Beckers (1968) model of the economics of crime. The model is
based on an assumption that taxpayers are economical rational and act to maximise
their self-interest. This model has been widely criticised mainly because in reality
taxpayers are more compliant than the model predicts. The odds of detection and
penalties are generally so low, that according to the model it would be rational to
cheat; yet most people tend to pay their taxes (Braithwaite 2008). Valerie Braithwaite
(2009) has described deterrence as a double edged sword. Deterrence can strengthen
the moral obligation to pay tax because it points out what is the right thing to do. But
deterrence can also create resistance from the taxpayer by feelings of oppression.
Thus, deterrence can have a positive or negative effect on compliance. The question
therefore is not whether or not revenue bodies should use deterrence, but how it can
be used most effectively.

People who assess the probability of detection and the level of penalty as being low
are more inclined to evade tax than people who assess this deterrence as being
relatively greater (Grasmick & Scott, 1982; Vogel, 1974). However, evidence is not
conclusive. In other surveys the opposite has been found to be true (Spicer &
Lundstedt, 1967; Wrneryd & Walerud, 1982). When personal norms in favour of
compliance are strong, deterrence will have weak effect on compliance. Taxpayers
then comply because they think it is the right thing to do, not because they are afraid
of punishment. But when personal norms are weak, deterrence becomes more
important (Wenzel 2004). If the taxpayer is not affected by a moral obligation to pay
tax then the threat of punishment can have a positive impact on behaviour.

The opposite is true for social norms. When social norms in favour of compliance are
weak, deterrence will have weak effect on compliance, but when social norms are
strong, deterrence will have a greater impact on behaviour (Wenzel 2004). This
means that formal sanctions (deterrence) work better if there is a social cost
associated with it. Other people need to perceive the punished behaviour as wrong.

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The situation is, however, more complex when it comes to personal norms.
Deterrence can undermine a personal norm in favour of compliance if the external
pressure on the individual is perceived to be controlling. This effect is referred to as
crowding out(Bohnet, Frey & Huck, 2001; Frey, 2003). Interventions are perceived
to be controlling if they are too intrusive or hard, leaving no room for the individual
to make a choice. If a person wants to comply and at the same time feels forced to
comply, the willingness to comply can be reduced. But an intervention can also be
controlling by not recognising the individuals own good intentions. In that case self-
esteem can suffer and the individual can react by reducing his motivation.

Besides crowding out there can also be a crowding-in effect when interventions
are not perceived as controlling but as supportive. Deterrence can provide incentives
that crowd-in a persons own personal motivation. This will be the case if the
individual perceive the interventions to be supportive instead of controlling. In that
case self-esteem is fostered because the individuals own conviction is recognised and
the individual reacts by strengthening his motivation. It is clear that deterrence is an
important driver for behaviour. But the effect of deterrence differs between
individuals and contexts and thus needs to be used in the right way in order to work
effectively. Deterrence could in this respect be most effective as a tool for supporting
existing social norms in favour of compliance. Likewise, deficiencies in the legal
structure of the tax laws that is (poor draftsmanship and complexity allow tax
avoidance.

5.5.5 Low tax morality: Traditional and cultural tendency to hate and evade
taxes
In Tanzania tax evasion seems to generate some sense of cheap heroism to the
evaders. The practice is generally not seen by the society as a stigma. In a general
way, it can be argued that positive actions by the state are intended to increase
taxpayers positive attitudes and commitment to the tax system and tax-payment and
thus compliant behaviour (e.g., Smith, 1992; Smith and Stalans, 1991). If the state
acts trustworthily, taxpayers might be more willing to comply with the taxes. On the
other hand, perceived unfairness increases the incentive to act against the tax law as
psychological costs are reduced.

Frey and Feld (2002) argue that tax morale is supported or even raised when tax
officials treat taxpayers with respect and on the other hand is reduced when the

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administration considers taxpayers as individuals who have to be forced to pay the
taxes:

The feeling of being controlled in a negative way, and being suspected of tax
cheating, tends to crowd out the intrinsic motivation to act as an honourable
taxpayer and, as a consequence, tax morale will fall. In contrast, if the tax
official makes an effort to find out the reason for the error by contacting the
taxpayer in an informal way (e.g. by phoning him or her), the taxpayer will
appreciate this respectful treatment and tax morale will be upheld

There are two respectful treatments (i) transparent and clear procedure by the tax
administration, and (ii) as a direct personal component, how the taxpayers character
is respected by tax administrators; there altogether they reduce tax evasion.

The World Values Survey provides data in Figure 4 to help build a global picture of
tax morale whereby socioeconomic and institutional factors may influence tax
morale. The socioeconomic factors included marital status, religion, gender,
educational attainment, employment status, economic status (self-reported), and
economic problems (whether the household can save and/or get by or whether it
needs to spend savings and/or borrow). Institutional factors deal more directly with
aspects of government in general, which can explain how citizens perceive how taxes
are being spent and thus affect their willingness to pay them. These factors include
support for democracy, trust in government, and preferences for redistribution (i.e.
whether taxing the rich and subsidising the poor is an essential characteristic of
democracies).

This basic information can help to develop taxpayer profiles to strengthen efforts to
increase compliance. Public support for the government, its institutions and
transparency, may help to achieve greater tax compliance than enforcement alone:

1. Citizens who perceive democracy to be the best system of government for

their country tend to think that cheating on taxes is unjustifiable.
2. Individuals who express trust in their national government display higher
tax morale than those who do not.
3. Citizens who identify fiscal redistribution to be an essential characteristic of
democracy, i.e. who think that governments should tax the rich to subsidise
the poor, also show higher tax morale than those who do not.
4. There is a strong correlation between individuals with high tax morale and
those who frown upon claiming benefits they are not entitled to.
Self-perceived economic situation, education and employment status also matter for
tax morale. Individuals who are satisfied with their financial position and do not

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report having economic problems justify tax evasion less frequently. Educational
attainment positively impacts tax morale in most studies and regions. On the other
hand, in terms of institutional factors, trust in government and satisfaction with
democracy and with public services, health and education in particular, as influencing
tax morale. Building fiscal legitimacy lies in the support of the public for the
government and this in turn can help achieve greater results in terms of fiscal revenue
more than compliance alone. The enforcement of the tax code and overall trust in the
legal system are also correlated with higher levels of tax morale (Levi and Sacks,
2009 for Africa)

For a tax policy to produce high tax morale, it needs to embed in it, a number of
parameters. First, the determination of tax policy parameters should involve public-
private dialogue, there should be adequate Intra-governmental communication to
avoid facilitation and proliferations of tax incentives, the taxpaying community
should perceive the tax system as being a fair tax system and tax laws, regulations
and rate structures should be simple. This requires that the system is as broad based as
possible. Interventions outside the tax system include linking tax and expenditures,
implementing trust building strategy and public engagement around tax and
expenditures; and creating broader citizen engagement around tax and public
expenditures. Interventions outside the tax system are essentially the remit of the
Central Government

5.5.6 Lack of Good Governance

The lack of good governance connotes wasteful manner in which the Government
departments spend the revenue and lack of clear benefits to taxpayers through
improved social services and therefore has some negative influence on tax
compliance. Debates about development finance tend to focus on which forms deliver
best for growth, development and poverty reduction. In several jurisdictions, tax has
long been neglected in development policy, seen as either too technical or too
political. And yet an effective tax system is crucial, raising revenues and addressing
inequality while playing a key role in determining and strengthening the relationship
between the state and its citizens.

Governance describes the rules that guide governments, companies and NGOs, as
well as the rules that guide their interactions with ordinary people. Governance is

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about processes how things are done rather than what is done. Making governance
more accountable is a strategic priority for Christian Aid because it is ultimately
about stewardship: the way in which those in power exercise it (or fail to exercise it)
for the greater good. It is also about the means by which poor people influence
decisions that affect their lives.

The Extractive Industries Transparency Initiative (EITI), established by URT,

requests companies and governments to voluntarily publish such payments. This
initiative is significant because it represents acceptance by the international
community of the importance of transparency for natural resource revenues, and sets
obligations on host governments, companies and governments of countries where
companies are based (i.e. rich countries).

The EITI, which aims to increase transparency in the payments by corporations to

host governments, as well as transparency over revenues received by governments,
has been celebrated globally as the vehicle through which transparency (lending to
accountability) is being realised. The EITI claims that corporations active in
developing countries may be complicit in corruption due to the criminogenic
environments in which they operate, and can access many benefits from disclosure
such as reduced reputational risks. Benefits for other participants include increased
development revenue and realisation of human rights in developing countries that are
host to mining activities.

5.6 STRATEGIES AND INITIATIVES TO DEAL WITH TAX EVASION

AND AVOIDANCE
5.6.1 Legislative Control
Legislative control has to do with the nature and design of the tax laws and the legal
provisions and specifications that can be used to help tax administrators carry out
their duties effectively and efficiently; Legislative control includes for example
Section 33 of the Income Tax Act, Cap 332 the transfer pricing and other
arrangements between associates; Section 34 of the Income Tax Act Cap 332 deals
with Income Splitting of a person with other person where Commissioner
adjustments; it stipulates that; and Section 138 of Income Tax Act, Cap 332 where
Commissioner has been given power of access to information.

The Legislative controls would require the Review of Tax laws so as to be dynamic
from the economic changes and other factors that could impact the tax revenue. In

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order to deal with Tax evasion and avoidance the Tax Laws must incorporate the
penalties and sanctions that aim at shaping the taxpayers behaviour and enhancing the
voluntary compliance. This needs to go in tandem with the Tax Amnesty (Figure 5).

5.6.1.1 General and Specific Anti-Avoidance Rules

The Fundamental purpose of GAARs and SAARs is to ensure the application of
substantive taxing or other Rules to their true extent as intended by the legislature.
GAARs seek to prevent, deter or counteract the use of unnatural legal forms to
arrange the affairs of a taxpayer that maximize or reduce the tax payable. SAARs
may be patterned after GAARs to emphasize their application in particular contexts or
may be specifically designed as mostly mechanical rules separate from the essential
elements of GAARs. For example Section 33 to Section 35 of Income Tax Act Cap
332 are Anti-Avoidance provisions.

By virtue of Section 33 of the Income Tax Act, Cap 332 the transfer pricing and other
arrangements between associates have been addressed as one of the Specific Anti-
Avoidance Rules. It stipulates that;

In any arrangement between persons who are associates, the persons shall
quantify, apportion and allocate amounts to be included or deducted in
calculating income between the persons as is necessary to reflect the total
income or tax payable that would have arisen for them if the arrangement had
been conducted at arms length. S.S(1)

Where, in the opinion of the Commissioner, a person has failed to comply with
the provisions of subsection (1), the Commissioner may make adjustments
consistent with subsection (1) and in doing so the Commissioner may -

(a) re-characterize the source and type of any income, loss, amount or
payment; or
(b) apportion and allocate expenditure, including that referred to in
section 71(2) incurred by one person in conducting a business
that benefits an associate in conducting a business to the person
and the associate based on the comparative turnovers of the
businesses.

Likewise Section 34 of the Income Tax Act Cap 332 deals with Income Splitting of a
person with other person where Commissioner adjustments; it stipulates that;

Where a person attempts to split income with another person, the

Commissioner may, by notice in writing,
(a) adjust amounts to be included or deducted in calculating the income of
each person; or

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 (b) re-characterise the source and type of any income, loss, amount or
payment, to prevent any reduction in tax payable as a result of the
splitting of income. S.S (1)
Subject to the provisions of subsection (3), a reference in subsection (1) to a
person attempting to split income includes a reference to a transfer, either
directly or indirectly, between the person and an associate of the person of-
(a) amounts to be derived or expenditure to be incurred; or
(b) an asset with the result that the transferee receives or enjoys amounts
derived from owning the asset. S.S (2)
Subsection (2) applies only where the reason or one of the reasons for the
transfer is to lower the tax payable by the person or the associate. S.S (3)
In determining under subsection (2) whether a person is seeking to split income,
the Commissioner shall consider the market value of any payment made for the
transfer. S.S (4)

5.6.1.2 Review of Tax Laws

The simplification and amendment of the laws is very important because good
compliance outcomes begin with good legislation. Law that is clear and unambiguous
with regard to the intent and interpretations provides a solid base upon which to build
administrative compliance programmes and compliance risk management. If the
taxpayers perceive the law to be unjust or inappropriate, inevitable there is an
increased risk of non-compliant behaviour. Hence, the law must be reviewed to
reduce complexity and burden on both taxpayers and the tax administration e.g. in
Tanzania in 2004 there was a review of Income Tax Act, No 33 of 1973 which was
repealed and replaced by the Income Tax Act, 2004.

It is inevitable that taxation will impose costs beyond the actual sums that are raised
and can be used to fund public spending. There are administrative costs to
government and taxpayers in running the system, and welfare losses as people change
their behaviour to reduce the tax they pay. Therefore, review of tax laws was to
design a tax system that can raise the revenue is inevitable.

For example Principles suggested by David Martin to be used to simplify the

Corporate tax are of the threefold;

1. It should be accounts based not scheduled-based; all profits should be

computed on a similar basis without having separate rules for each source,
and departures from accounting profits for tax purposes should only be
made by reference to clear principles;
2. It should be purposive; detailed rules should be abolished and be replaced
by clear statements of the underlying principles and purpose of any tax. This

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 would be supported by a system of published pre and post-transaction
rulings;
3. It should be reviewed to ensure that unlike the current piecemeal system, all
the different parts fit together coherently.
5.6.1.3 Strong Investigative Powers to Tax Inspectors
Strong powers of access to building, places, files and documents are highly important
to the efficient and effective operations of the tax inspectors. These powers
encompass the following authorities; (1) Access to buildings and documents are
found under section 138 (1) through (7) of Income Tax Act, Cap 332 which stipulates
that;

For the purposes of administering this Act, the Commissioner and every officer
who is authorized in writing by the Commissioner
(d) shall have -
(i) at all times during the day between 9am and 6pm and without
any prior notice; and
(ii) at all other times as permitted by a search warrant granted
by a district or resident magistrates court, full and free
access to any premises, place, document or other asset;
(e) may make an extract or copy, including an electronic copy, of any
document to which access is obtained under paragraph (a);
(f) may seize any document that, in the opinion of the Commissioner or
authorized officer, affords evidence that may be material in determining
the tax liability of any person under this Act; and
(g) may, where a document is not available or a copy is not provided on
request by a person having access to the document, seize an asset to
which access is obtained under paragraph (a) that the Commissioner or
authorized officer reasonably suspects contains or stores the document
in any form. S.S (1)
Under Section 139 (1) through (3) of Income Tax Cap 332 stipulates that;

The Commissioner may, by service of a notice in writing, require a person,

whether or not liable for tax under this Act
a) to produce, including by way of creation of a document, within the
time specified in the notice, any information that is described with
reasonable certainty in the notice;
b) to attend at the time and place designated in the notice for the purposes of
being examined on oath by the Commissioner or by an officer authorized
in writing by the Commissioner concerning the tax affairs of the person or
any other person; or
c) to produce at an examination of the person under paragraph (b) and for
the purposes of that examination any document in the control of the person
that is described with reasonable certainty in the notice ,. S.S (1)

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5.6.1.4 Power to Seize or Remove Materials
Often access powers are not sufficient to enable the inspectors to carry out their
duties. Hence, some tax administrations have beefed up their tax legislations to
include powers to seize or remove materials. Section 138(1)(d) of the Income Tax
Act, Cap 332 asserts that;

Where the document is not available or a copy is not provided, the

Commissioner or every officer who is authorized may seize the assets

5.6.1.5 Application of Penalties and interest for Taxpayers

This is the most traditional measure used by the Tax administrators to deal with non-
compliant taxpayers behaviour. Interest may be charged of tax owned while
Penalties can be levied for providing incorrect or false information. (Some of the
examples are hereby given and this is of the date of this publication and may be
amended)

Application of Penalties

Section 98 of ITA Cap 332 deals with Penalty for failure to maintain documents or
file Statements or returns; in that, penalty is 2.5% of the difference between income
tax payable and income tax paid or 10,000 TZS for individual or 100,000 TZS for the
corporation whichever is the higher amount. Section 101 of ITA Cap 332 deals with
Penalty for making false or misleading Statements; in that the Penalty is 50% of the
underpayment of tax or where the statement or omission is made knowingly or
recklessly the penalty is 100% of underpayment of tax when resulted if the
inaccuracy of the Statement had gone undetected. Section 102 of ITA Cap 332 deals
with Penalty for aiding or abetting, concealing or inducing another person to commit
offence; in that, the Penalty is 100% of the underpayment of tax.

Application of interest

Section 99 of ITA Cap 332 deals with interest for understating estimated tax payable
by instalment and where instalment of income tax payable is less than 80% of the
income tax payable; in that, interest is a statutory rate compounded monthly and
applied to the excess of the amount that would have been paid by way of instalments
payment over the amount of income tax paid by instalment for the Year of Income to
the start of the period. Section 100 of ITA Cap 332 deals with interest for failure to
pay tax; in that the interest is the statutory rate compounded monthly.

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Likewise, the ITA Cap 332 has he general provisions for the assessment of interest
and penalties. This is section 103 which stipulates that, the penalty and interest shall
be calculated separately in addition to any other tax imposed under the ITA Cap 332.
It should be noted at this end that, Tax compliance can be boosted if expected fines
and penalties are sufficiently high to deter tax payers from cheating (Feld & Frey,
2005).

5.6.1.6 Prosecutions and Imprisonment

Penalty structures should be escalating in nature and range from the administrative
and criminal penalties to imprisonment for the most serious of cases. The effective
application of penalties also needs to be coupled with fair and timely prosecution of
cases. In many countries, the high cost and lengthy duration of prosecutions has
minimized the deterring effect of sanctions and has actually led to negative taxpayers
perceptions.

The tax code is enforced by systems of fines and penalties in order to promote tax
compliance. Tax payers need to face certain threads of punishment if they do not
truthfully declare all their income, (Feld & Frey 2005). According to the deterrence
view, people carefully assess opportunities and risks, and disobey the law when the
anticipated fine and probability of being caught are small in relation to the profits to
be made through non-compliance. Tax payers understand a cost benefit analysis and
will comply if the benefit exceeds the cost of compliance (Allingham and Sandmo,
1972).Thus the tax payer is a utility maximiser. Additionally, Allingham and Sandmo
(1972) assert that taxpayers behavior of non-compliance depends on their belief of
the probability of being detected through an audit and the severity of legal penalties
imposed.

5.6.1.7 Tax Amnesties

Tax amnesties can be used to bring new taxpayers into the Tax net. These provide an
opportunity for people who have evaded tax in the past and who want to begin
complying with the tax law to come forward and sort out their tax affairs without the
prospects of large amounts of re-assessed tax debt. However, the long-run revenue
effects of tax amnesties may actually upset honest taxpayers and undermine tax
morale. Important point to remember is that, amnesties can also be sued when a
change in tax law highlights previous possible unintended non-compliance, For

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example, non-compliance that results from uncertain tax laws that are later clarified.
We should note the quote of Jay Adkisson which says;

Tax scams are cyclical in nature. An abusive strategy that is discovered and
then prohibited by a change in the law will eventually resurface after a few years
in a slightly modified form. (Jay D. Adkisson) (Yablon L. Jeffery, 2010).

5.6.1.8 Interpretative Products

These include rulings and determinations made by the Tax authority on the way a tax
law or tax laws apply. Essentially, Interpretative products provide certainty to the
taxpayer and enable the community to better understand the law. Hence, they play an
important role in improving voluntary compliance. In Australia for example, a system
of Private and Public rulings are available to taxpayers. These include;

Private rulings: A private ruling is a written opinion by the Commissioner about the
way a tax law or tax laws apply to a persons particular circumstances or
situations for a specified year(s) of income. Private rulings are made on
application by a taxpayer for legally binding advises on how the tax law applies
to an arrangement they have entered or propose to enter. Private rulings are
provided only to the taxpayer or taxpayers seeking the ruling no other taxpayer
can rely on the ruling for example, Section 131(1) through (2) of the Income
Tax Act Cap 332 in the case of Tanzania.
Public rulings; these provide the Commissioners interpretation of the law and deal
with priority issues that require clarification; Public rulings are issued as
either rulings or determinations. A determination is a short-form of ruling
where there is a single point issue to be determined and the answer can be
succinctly explained. A ruling deals with situations requiring comprehensive
analysis and explanation of the application of law.
Product Rulings: These are a specific purpose from of a Public ruling. They enable
the Commissioner to rule publicly on the availability of claimed tax benefits
from products. A product refers to an arrangement in which a number of
taxpayers individually enter into substantially the same transactions with a
common entity or a group of entities. Product rulings provide taxpayers with
certainty about the tax consequences of entering into a particular arrangement
provided the arrangement is carried out in accordance with details provided by
the applicant and described in te product ruling. The highest levels of
disclosure are expected of an applicant.
Class rulings: These are specific purpose from of public rulings. They have been
introduced to enable the Commissioner to provide legally binding advice in
response to q request from an entity seeking advice about the application of a
tax law to a specific class of persons in relations to a particular arrangement.
The purpose of a class ruling is to provide certainty to participants about the
way the taxation law applies to the arrangement dealt with the class rulings and
remove the need for individual participants to seek Private rulings

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 CHAPTER SIX
PROMOTING VOLUNTARY TAX COMPLIANCE
6.1 Meaning of Voluntary Compliance

Voluntary compliance means that;

Taxpayers behave in a way required by law, but without direct compulsion

from the Tanzania Revenue Authority to do so.

The modern connotation implies that voluntary compliance consists of an act done
because one wants to do it, not because one has to. In other words, a voluntary act is
an unrestricted act in the absence of a pre-existing obligation. Since one has a legal
obligation to act in accordance with the Tax Legislations, it would seem that tax
compliance is anything but voluntary in this sense.

In 12th century Western Europe, a method of learning emerged called scholasticism.

One of the most famous scholastics was the philosopher and theologian, Thomas
Aquinas who argues that;

A voluntary act originates in the will and is guided by knowledge of the end.
(Thomas Aquinas)

Certain impediments can reduce the level of voluntariness of the act such as
ignorance (but not willful blindness), human passions (strong emotions), a rational
fear of adverse consequences, and physical force. These impediments do not,
however, make an act involuntary. So in a tax compliance scenario, even if a taxpayer
complies with the tax laws out of a rational fear of the legal consequences for doing
otherwise, to a scholastic mind, this would still be an act of voluntary compliance.

According to Brown and Mazur (2003), tax compliance is multi-faceted measure and
it can be defined by considering three distinct types of compliance such as payment
compliance, filing compliance, and reporting compliance. Organization for Economic
Cooperation and Development (2001) advocates dividing compliance into categories
in considering definitions of tax compliance; These categories are administrative
compliance and technical compliance where the former refers to complying with
administrative rules of lodging and paying otherwise referred to as reporting
compliance, procedural compliance or regulatory compliance and the latter refer to
complying with technical requirements of the tax laws in calculating taxes or
provisions of the tax laws in paying the share of the tax. Tax compliance can be

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measured basing on filing of tax returns, payment of taxes due on due dates, accurate
determination of tax liability among others (Brown and Mazur, 2003)

One can better understand what the Tanzania Revenue Authority means when it says
the URT tax system is based on voluntary taxpayer compliance. It means that the tax
authority cannot, and never could, assess tax against each taxpayer directly or audit
every return. If it could, then the Tanzania Revenue Authority would say something
akin to: the URT tax system is based on direct assessment, or, the URT tax system
is based on a 100 percent return examination procedure. Since the TRA cannot
execute on either of these practices, it instead relies on individual taxpayers to
accurately assess their own tax liability on annual returns and timely pay the correct
amount due.

6.2 Typology of Compliance Models

6.2.1 Economic Models

The main goal of the rational taxpayers is to maximize their financial position and
they will continuously attempt to evade taxes whenever benefits from tax delinquency
outweigh the risk of detection and punishment. Gary Becker (1968) emphasized that,
in general, certain persons engage in illegal conduct not because their basic
motivations differ from those of honest people but because their costs and benefits
differ. The economic analysis thus concludes that since compliance decisions are
based on an assessment of costs and benefits, high probabilities of detection for
noncompliance and large penalties for discovered violators would encourage greater
compliance, hence maximizing tax revenue streams.

6.2.2 Uncertainty Models

These models are an extension of the economic model rationale. While retaining the
assumption that;

Rational taxpayers seek to maximize their financial interests, adherents to this

model point out that in the real world information about penalty provisions and
the risk of audit is imperfect. As a result, present or potential taxpayers have to
rely more on the perceived, rather than the actual, risk of detection and
penalty (Friedland, 1982; Kahneman, Slovic and Tversky, 1982)
Most taxpayers who have been audited once are more likely than those who have not
been audited to comply with their tax obligations, even though the risk of their being
audited again is no higher than before.

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6.2.3 Norms of Compliance

These are standards of taxpayer behaviour that are influenced by the tax culture.
There is reason to believe that societal reasons may account for the way taxpayers
behave. While tax evasion may be considered wrong and immoral in some societies,
it may be regarded as socially tolerable in others (Schwartz and Orleans, 1967;
Ekstrand, 1980; Warneryd and Walerud, 1982). In countries with a tradition of high
compliance with the tax law, few taxpayers would attempt tax evasion strategies.
However, empirical evidence seems to suggest that taxpayer compliance with the law
is influenced by their perceptions about whether or not other taxpayers are complying
(Van den Doel, 1978; Laver, 1981; Lewis, 1982), especially when they feel that the
taxes they pay are intended for worthy purposes (Oldman, 1965; Dean, Keenan and
Kenney, 1980)

6.2.4 The Inertia Model

Subscribers to this theory assert that after an individual routinely engages in a given
practice, he has little incentive to change. By the same token, taxpayers who have a
history of compliance with the law do not tend to evade their responsibilities. This is
not due to high risk of detection or some overarching moral imperative, but rather
because they have nurtured a habit of compliance (Spicer, 1996). The psychological
underpinnings of the inertia theory are rooted in Festingers theory of cognitive
dissonance (Festiger, 1957), which states that;

When an individual holds inconsistent beliefs or acts in a way inconsistent

with his beliefs, unpleasant feelings arise. In turn, these feelings push the
individual to change either his belief or his behaviour, so that one is consistent
with other (Melia, 1987).
The implication is that once a taxpayer begins to engage in non-compliant behaviour,
his commitment to obeying the law declines and his sense of the impropriety of the
act fades. The result is that inertia sets in and it becomes increasingly difficult for him
to change his habits (Spicer, 1986).

These theories have enormous practical implications for both policymakers and tax
administrators. Those aspects of the theories which focus on the psychological and
social determinants of compliance are very important because they challenge
normative assumptions about taxpayer behaviour, and are, therefore, central to the
design of new policy initiatives that address compliance problems directly.

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6.3 Meaning of Tax Compliance

The exact meaning of tax compliance has been defined in various ways. For example,
Andreoni, Erard, and Feinstein (1998) claimed that tax compliance should be defined
as;

Taxpayers willingness to obey tax laws in order to obtain the economy

equilibrium of a country.

Kirchler (2007) perceived a simpler definition in which tax compliance is defined as;

The most neutral term to describe taxpayers willingness to pay their taxes

A wider definition of tax compliance, Song and Yarbrough (1978) suggested that due
to the remarkable aspect of the operation of the tax system in the United States and
that it is largely based on self-assessment and voluntary compliance, tax compliance
should be defined as;

Taxpayers ability and willingness to comply with tax laws which are
determined by ethics, legal environment and other situational factors at a
particular time and place.

Similarly, tax compliance is also defined by several tax authorities as;

The ability and willingness of taxpayers to comply with tax laws, declare the
correct income in each year and pays the right amount of taxes on time
(Internal Revenue Service (IRS), 2009; Australia Tax Office (ATO), 2009;
Inland Revenue Board of Malaysia (IRB), 2009).

Alm (1991) and Jackson and Milliron (1986) defined tax compliance as;

The reporting of all incomes and payment of all taxes by fulfilling the
provisions of laws, regulations and court judgments

Another definition of tax compliance is As follows;

Persons act of filing their tax returns, declaring all taxable income
accurately, and disbursing all payable taxes within the stipulated period without
having to wait for follow-up actions from the authority (Singh, 2003).

Furthermore, tax compliance has also been segregated into two perspectives, namely
compliance in terms of administration and compliance in terms of completing
(accuracy) the tax returns (Chow, 2004; Harris, 1989). Compliance in pure
administrational terms therefore includes registering or informing tax authorities of
status as a taxpayer, submitting a tax return every year (if required) and following the

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required payment time frames (Ming Ling, Normala and Meera, 2005). In contrast,
the wider perspective of tax compliance requires a degree of honesty, adequate tax
knowledge and capability to use this knowledge, timeliness, accuracy, and adequate
records in order to complete the tax returns and associated tax documentation (Singh
and Bhupalan, 2001). In line with Singh and Bhupalan, Somasundram (2003, 2005a
and 2005b) claimed that the wider perspective of compliance becomes a major issue
in a self-assessment system since the total amount tax payable is highly dependent on
the levels of tax compliance this perspective reveals, although it is inevitable that tax
authorities will seek to influence the areas taxpayers have influence over
determining to reduce the risks of non-compliant behaviour they face otherwise e.g.
through continuously conducting tax audits of different sorts and other means such as
various compliance influencing activities including tax education.

Some authors have viewed tax compliance from a different perspective. For example,
Allingham and Sandmo (1972) described tax compliance as an issue of reporting an
actual income and also claimed that tax compliance behaviour was influenced by a
situation whereby taxpayers have to make a decision under uncertainty (see also
Clotfelter, 1983) i.e either taxpayers would enjoy tax savings due to under-reporting
income or have to pay tax on the undeclared amount at a penalty rate which is higher
than they would have paid had the income been fully declared at the correct time.

McBarnet (2001), suggested tax compliance should be perceived in three ways,

namely; a) committed compliance - taxpayers willingness to pay taxes without
complaint; b) capitulative compliance reluctantly giving in and paying taxes and c)
creative compliance engagement to reduce taxes by taking advantage of
possibilities to redefine income and deduct expenditures within the bracket of tax
laws. Spicer and Lundstedt (1976) perceived degrees of tax compliance as a special
form of gambling (which may involve likelihood of detection and penalties) (p. 295)
which requires the tax authority to understand the factors underlying taxpayers
decision to comply with tax laws (p. 295).

Some literatures like Allingham and Sandmo (1972), Spicer and Lundstedt (1976),
Lewis (1982) and Andreoni, Erard, and Feinstein (1998) therefore characterize and
explain tax compliance as the output of interrelation among variables including
perception of equity, efficiency and incidence (public finance views). Tax
enforcement aspects like penalties and the probability of detection also relate to tax

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compliance while other labour market behaviour factors including an individuals
wages and tax bracket also contribute to tax compliance (Kirchler, 2007).

Based on previous authors definitions, there are some keywords which were widely
and interchangeably used to define tax compliance. For example, the words obey,
ability and willingness (McBarnet, (2001); Andreoni et al. (1998); Kirchler
(2007); Song and Yarbrough (1978); IRS (2009); ATO (2009) and IRB (2009)).
Other keywords were also relevant in defining tax compliance i.e. reporting all
income (Alm, (1991); Jackson and Milliron, (1986), act of filing tax returns (Singh,
(2003), declare the correct income (IRS, (2009); ATO, (2009) and IRB (2009)). In
addition, some authors also included timeliness, right amount of tax (Song and
Yarbrough (1978); IRS, (2009); ATO, (2009) and IRB (2009); Ming Ling, Normala
and Meera 2005) as part of their definitions.

The wider perspective of tax compliance was also illustrated in the definition
provided by Andreoni et. al. (1998) in which they included the desired outcome as a
result of obedience to tax laws to obtain an economic equilibrium; Allingham and
Sandmo (1972) and Spicer and Lundstedt (1976) enjoy tax saving or penalty.
Singh (2003) described tax compliance as voluntary action without having to wait
for follow up actions from tax authority. Apart from these, Song and Yarbrough
(1978) included some factors of compliance in their definition i.e. determined by
ethics, legal environment and other situational factors.

Since there have been many empirical studies attempts have been made to define tax
compliance, it can be concluded that, (based on IRS, (2009); ATO, (2009) and IRB
(2009); Alm (1991); Jackson and Milliron (1986) and Kirchler (2007)), tax
compliance is defined as taxpayers willingness to comply with tax laws, declare the
correct income, claim the correct deductions, relief and rebates and pay all taxes on
time. We should note at this end the Quote of Lars P. Feld and Jean R. Tyran which
says;

The puzzle of tax compliance is why people pay taxes instead of evading them .
. . . (Lars P. Feld and Jean R. Tyran) (Yablon L. Jeffery, 2010).

6.4 Tax Non-Compliance

In contrast with tax compliance, tax non-compliance is defined as taxpayers failure

to remit a proper amount of tax, perhaps on account of the complexity or even

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contradictions in the tax legislation or tax administration procedure (Jackson and
Milliron, 1986: Kesselman, 1994: Kasipillai and Jabbar, 2003). Noncompliance is
also perceived as the failure of a taxpayer to report (correctly) the actual income,
claim deductions and rebates and remit the actual amount of tax payable to the tax
authority on time (Kirchler, 2007). Marjorie E. Kornhauser argues that;

Many tax officials and scholars believe that the biggest noncompliance issues
exist at lower income levels, especially in sole proprietorships and in the cash
economy generally. (Marjorie E. Kornhauser) (Yablon L. Jeffery, 2010).

Some studies also segmented income tax non-compliance into unintentional and
intentional behaviour (e.g. Loo 2006; Mohani, 2001; Kesselman, 1994 and Allingham
and Sandmo, 1972). Thus, in conclusion, based on Jackson and Milliron (1986):
Kesselman (1994): Kasipillai and Jabbar (2003) non-compliance is defined for the
purpose of this study as failure to comply with tax laws and/or report incorrect
income, the act of claiming incorrect deductions, relief and rebates and/or paying the
incorrect amount of tax beyond the stipulated time frame.

As the literature cited has therefore shown, tax compliance is a wide concept and can
be viewed from many perspectives, including public finance, economic, legal and
also psychological. James and Alley (2004) suggested two contrasting approaches
pertaining to tax compliance as a summary of the extremes of ways of defining this
topic.

The reasons for tax evasion and tax avoidance are the causing factors for the non-tax
compliance; in that there are two categories, the first category involves that factors
which negatively affect taxpayers compliance with the tax legislations which
contribute to a Low Tax Morale or to high costs to comply with the law. The second
category being reason for the low ability of tax administration and fiscal courts to
enforce tax liabilities which is caused by insufficiency in the administration and
collection of taxes as well as weak capacity in auditing and monitoring tax payments
which limit the possibility to detect and prosecute violations.

The low level of voluntary tax compliance is basically an indication of low tax morale
and this may be caused by the low quality of the service in return of taxes. The
Benefit to pay principle failure to provide basic public goods and services cause
citizens not be willing to pay taxes and hence, tax evasion and avoidance.

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The Tax System and perception of Fairness may also be another factor contributing t
the Low level of voluntary compliance especially when there is a high tax arte which
would likely foster the tax evasion because, the high tax rates increase the tax burden
and hence lower the disposable income of the taxpayer. This includes also the
structure of the overall tax system e.g. if the tax rate on corporate profit is relatively
low but individuals are facing a high tax rate on their personal income, they may
perceive their personal tax burden as unfair and choose to declare only a part of their
income; hence, the Fairness to pay principle in that regard does not prevail. Low
transparency and accountability of public institutions in the use of public funds
contributes to public distrust with respect to the tax system as well as the government.
This in turn increases the willingness to evade taxes. This is commonly known as lack
of good governance in fiscal management.

Lack of rule of law and fiscal jurisdiction is another factor contributing to the Non-
Voluntary compliance or low level of voluntary compliance; in that strong fiscal
courts are essential to protect taxpayers rights and safeguard them from arbitrariness.
If the legal system does not operate in accordance with the rule of law, citizens have
to fear arbitrariness, discrimination, unequal attendance in court etc. The lack of rule
of law reduces transparency of public action and fosters distrust among citizens; as a
result citizens may not be willing to finance the State through taxes and decide to
evade these liabilities. The first attribute of the Rule of Law is the requirement that
the law (in this context, the terms of the tax itself) must govern the rights of the
individual. These rights should not be determined through the exercise of broad,
discretionary powers vested in the administrative. In fact broad discretionary powers
are the antithesis of the Rule of Law. In this regard, Professor Cooper notes that:

The excessive use of discretions, and even the delegation of legislative

authority to bureaucrats, can contradict this notion since the bureaucrat may be
empowered effectively to decide what the law is (Graeme Cooper, 1997).
The Rule of Law requires taxpayers (or their advisers) to be able to ascertain from the
legislation what their rights and obligations are. In order to do this the tax must be
certain. Lord Diplock stated in Merkur Island Corpn Vs Laughton [1983] 2 AC 570
that;

Absence of clarity is destructive of the Rule of Law; it is unfair to those who

wish to preserve the Rule of Law; it encourages those who wish to undermine it

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With regard to the Canon of Economy, the danger for eroding the tax compliance
level towards low level of tax compliance of No Tax compliance at all is where there
are high compliance costs which add unnecessary costs base to taxpayer in the
compliance level which basically has the inverse relations with the efforts of the
taxpayer to maximize profits.

Lack of enforcement of tax laws also preserves room for the Non-Tax compliance or
low level of tax compliance because probably there is weal enforcement of tax laws
which generates insufficiencies in tax administration and weak capacity in detecting
and prosecuting inappropriate tax practices. Likewise, lack of sufficient capacities in
tax administration reduce the probability of detection that again influence the decision
of a taxpayer as to whether evade or not.

Finally, changes rapidly to the tax laws produce instability and low transparency of
the tax code, hence complicated tax legislation and on-going changes of the tax code
confuse tax administrators and taxpayers alike. This produces ample opportunity for
tax evasion or avoidance.

6.5 Improving Tax Compliance

Many revenue bodies have adopted both a business model that recognises the
different factors that influence taxpayers compliance and different strategies to
achieve improved voluntary compliance and a number of revenue bodies have
declared the pursuit of voluntary compliance as their main mission.

In 2008 the FTA released the Study into the Role of Tax Intermediaries which
identified that there is an opportunity to establish a more co-operative relationship
between taxpayers and revenue bodies and which facilitates high levels of voluntary
compliance. This relationship, called the enhanced relationship, requires
commercial awareness, impartiality, proportionality, openness and responsiveness by
revenue bodies and disclosure and transparency by taxpayers in their dealings with
revenue bodies.

In the context of this relationship, the disclosure expected by revenue bodies from
taxpayers includes the information that they are statutorily obliged to provide as well
as any information necessary for the revenue body to undertake a fully informed risk
assessment. This will include any transaction or position that can reasonably be
considered to carry a material degree of tax risk or unpredictability. Transparency is

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the on-going framework within which individual acts of disclosure take place. This
means that taxpayers and, where appropriate, tax intermediaries will:

1. volunteer information about tax return positions where they see potential for a
significant difference of interpretation between them and the revenue body; and
2. Provide comprehensive responses so that the revenue body can understand the
significance of issues, deploy the appropriate level of resources and reach the
right tax conclusions.
An enhanced relationship offers benefits for revenue bodies as well as taxpayers.
Benefits for revenue bodies include that they are better informed about the tax affairs
of taxpayers and are able to undertake more effective risk assessment and more
appropriate resource allocation, thereby reducing administration costs. The benefits
for taxpayers are increased and timely tax certainty, which taxpayers and their
advisers have indicated are very important in managing risks on transactions.
Taxpayers who behave transparently can expect greater certainty and an earlier
resolution of tax issues with less extensive audits and lower compliance costs.

Improving tax compliance requires long-term reform efforts, beginning with

strengthening the organization and management of the revenue agency, implementing
robust collection systems (e.g., payment and withholding systems) and building
capacity in core tax administration functions (registration, fi ling and payment
enforcement, debt collection, audit, taxpayer services, and processing of appeals).

A taxpayer compliance program is a high level plan which brings together in a single
document a description of the most significant compliance risks identified in the tax
system and sets out the broad detail of how the revenue agency intends to respond to
those risks. Successful self-assessment systems are underpinned by an administrative
approach which recognizes that voluntary compliance will be optimized through an
appropriate balance of taxpayer education and assistance, simple laws and
procedures, and risk-based verification programs:

Taxpayer education and assistance programshelp taxpayers and their advisors

understand their obligations and entitlements (taxpayers cannot
comply if they do not understand the tax laws and procedures).

Simple laws and proceduresmake it easier and less expensive for taxpayers to
comply with their obligations and access their entitlements (taxpayers

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 may not voluntarily comply if the tax system itself makes it too
difficult or too expensive for them to meet their obligations).

Risk-based verification programscreate a downside to poor compliance behavior

by detecting and deterring noncompliance through use of risk
management approaches (taxpayers are more likely to comply if they
perceive a strong chance of detection and see blatant non-compliers
being brought to account).

The purpose of a taxpayer compliance program is therefore to identify and respond to

the most significant risks in the tax system through a range of measures aimed at the
underlying causes of the non-compliant behavior. The objective is to achieve the
widest possible impact on voluntary compliance across the taxpayer population.

The URT uses a self-assessed taxing system that relies on voluntary compliance by
taxpayers. Although most taxpayers still voluntarily comply with the tax laws,
intentional noncompliance is a serious and pervasive problem. It has been estimated
that revenues lost from noncompliance in the URT may be approaching TZS ..
annually.

6.5.1 Ethics

Ethics or morals can be defined as normative systems of rules of conduct developed

to provide guidance in social or interpersonal settings (Hogan, 1973). Their function
is to regulate and moderate human affairs. The primary theoretical framework in
economics for the study of noncompliant has been deterrence theory. This framework
assumes that taxpayers rationally perform a Cost-Benefit analysis of noncompliance
taking into consideration the value of the marginal tax dollar and the risks of
sanctions (Smith and Kinsey, 1987; Carroll, 1992). Since deterrence theory emphases
cost-benefits that are based on expiated outcomes of choices, It can be considered an
outcome- processing theory (Carroll, 1987) and is consistent with the classical
expected utility theory and rational choice.

Consequently, taxpayers are expected to make compliance decisions that will

maximize their utility. Within this classical view of decision making, choices are
considered to be motivated by self-interest (Hodgson, 1988). That is, individuals are
thought to promote their own interests instead of the interests of others. Ethical values
are seen as interfering with rational behaviour and utility maximization (Etzioni,

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1988). Sociological research, however, has broadened the notion of utility to include
concern for social duty as well as self-interested goals. Individuals may be influenced
by ethical values to the extent that behaviour is based on a sense of duty, not whether
the acts provide personal gain or are enjoyable (Etzioni, 1988). Thus, in classical
deterrence models, taxpayers choose a compliance level that maximizes utility (what
is best for the taxpayer), and in sociological models, this choice also considers the
social obligations and self-image of the taxpayers as well (what is the taxpayers
duty) (Scholz, 1985).

Etzioni (1988) states that ethical values do not intrude or twist rational deliberations;
rather, ethical values render some decision making more effective and efficient.
Ethical values affect the decision process by screening or setting bounds on choice
possibilities and limiting the means available to achieve desired outcomes. To the
extent that ethical values limit choices, they reduce the cognitive effort in information
searches, the identification of alternative choices, and the selection among choices
(Carroll, 1987). Those alternatives that are not morally acceptable are unlikely to be
consciously considered or selected (Smith, 1990). In the situation where only one
choice is sanctified, the ethical values wholly make the choice. They rule out all other
possible options that may be preferable from a utility maximization viewpoint
(Etzioni, 1988).

These propositions suggest in tax compliance decisions that ethics can cause some
taxpayers to seek only legitimate avoidance plans (and ignore illegal opportunities)
even when the expected return for illegal opportunities is greater. These taxpayers are
not likely to alter their choice selection criteria, regardless of the context of the
decision (Scholz, 1985). However, each individual has a different set of ethical values
(Kohlberg, 1976). Therefore, not all taxpayers will view tax evasion with the same
sense of morality, and there are people who do not respond to morals. Hessing et al.
(1992) suggest that there are probably three groups of taxpayers: taxpayers who never
evade taxes; taxpayers who will try to evade now and then; and taxpayers who will
often try to evade. Ethical beliefs specifically regarding tax evasion (tax ethics) may
be consistently correlates with compliance behaviour. We should therefore practice
taxation without compromising the benefits ought to be realized by the future
generation as Paul Streckfus argues in his quotes that;

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 The reality is that most of us practicing tax today have long since compromised
our integrity. But if we care about future generations we need to face the fact
that tax practice turns our best and brightest into little more than well-paid tax
cheats. [I question] whether it is even possible to be a person of integrity and
still engage in a lucrative tax practice. (Paul Streckfus) (Yablon L. Jeffery,
2010).

6.5.2 Tax Rates

The idea that high marginal tax rates decrease tax compliance certainly has an
intuitive appeal. Milliron and Toy (1988) report that tax professionals believe that
reducing marginal tax rates poses the best opportunity for increasing tax compliance.
Taxpayers surveyed by Mason and Calvin (1984) indicated similar beliefs.
Nevertheless, there has been mixed findings from econometric and behavioural
research (see Roth, Scholz, and Witte (1989) for a review).

There is a direct and positive relationship between marginal tax rates and tax evasion.
Lindsey (1985), Long and Gwartney (1987), and Poterba (1987) makes similar
results, whereas Slemrod (1985) detects no relationship between marginal rates and
compliance and Dubin and Wilde (1988) estimate higher compliance at higher state
tax rates. A behavioural study by Friedland, Maital, and Rutenberg (1978) also
supports the relationship between tax rates and compliance suggested by Clotfelter. In
the same vein the quote of Stephen F. Williams which says;

A tax system of rather high rates gives a multitude of clever individuals in the
private sector powerful incentives to game the system; even the smartest drafters
of legislation and regulation cannot be expected to anticipate every device.
(Stephen F. Williams) (Yablon L. Jeffery, 2010) has to be relied upon.

The relationship between tax rates and compliance remains uncertain because of the
difficulty of separating the effects of tax rates from the effects of income level (Roth,
Scholz, and Witte, 1989). The marginal tax rate is determined by the amount of
taxable income, therefore, Clotfelters and others results can also be interpreted as
demonstrating a positive relationship between income of taxpayers and
noncompliance (Cox, 1984).

6.5.3 Prospect Theory

A rapidly growing body of literature has developed that challenges the descriptive
validity of the most basic assumptions of expected utility and other models of choice
(Casey and Scholz, 1991). Kahneman and Tversky (1979) have formulated a more

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descriptive model of choice under conditions of uncertainty, called prospect theory.
This theory diverges from the expected utility model by considering the contextual
presentation or frame of a decision as a factor influencing the choice of decision
makers. The frame of a decision includes its presentation, references points,
alternatives, outcomes, and their probabilities of occurrence. This theory brings forth
two issues. Firstly, taxpayers tend to over emphasise the audit probability, and
secondly, taxpayers are more risk averse with losses (taxes to pay) than with gains
(refunds).

To be specific, before a decision can be made, the decision maker must identify the
inputs to the decision process. Prospect theory recognizes that individuals have
limited cognitive abilities and the theory envisions an editing step in the decision
process that h/alps the decision maker simplify the process. In the editing step, the
decision maker may simplify the decision by attending to only some factors, ignoring
others and encoding aspects into meaningful forms such as gains or losses.

Most applications of prospect theory in the tax compliance research area have
examined the violation of the expected utility tenet of descript\on invariance, called
the reflection effect (gain/loss framing effect). That is the same outcome can be
edited as either a gain or a loss depending on the reference point presented in the
decision frame, and a different decision is likely depending on the frame adopted. The
decision maker focuses on changes in wealth or welfare from the reference point
(current wealth position) rather than focusing on the final wealth state. Income then is
not the only argument. of the cardinal utility function, and marginal utility is not
always positive and strictly decreasing.

Rather, prospect theory proposes that individuals will display a value (utility)
function that is concave for gains and convex for losses, with the latter being steeper
than the former. The shape of this value function suggests that individuals will be risk
averse for gain frames and risk seeking for loss frames, where risk averse is defined
as preferring a certain choice over a risky choice of equal or greater value (Kahneman
and Tversky. 1979). Other factors, such as social norms, ethics, and personal
characteristics, may affect how a decision is edited and thus affect the ultimate
decision made. Failing to consider these factors, much of the tax research examining
framing effects has produced inconsistent findings (for support, see Chang, Nichols,

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and Schultz, 1987; Schepanski and Kelsey, 1990, Casey and Scholz, 1991; for lack of
support, see Robben et al (1988); Hite et al. 1988; and Schadewald, 1989).

6.5.4 Taxpayers Education

Tax knowledge is indicated one of the important factors influencing individuals tax
attitudes. Importance of this issue stems from the fact that tax law is generally
considered as difficult, complicated and beyond ones depth. It results in negative
attitudes toward taxation and tax authorities and indulgent opinions concerning tax
avoidance and evasion. Understanding of tax systems and tax regulations may
transfer into voluntary tax compliance. This is in line with the quotes of Martin A.
Sullivan which says that;

Taxpayers who neglect paying tax on offshore income out of ignorance must be
educated. Taxpayers who do it on purpose need to be scared. (Martin A.
Sullivan) (Yablon L. Jeffery, 2010).

There are two broad approaches to the problem of tax compliance that is the one
developed from economic rationality, using the economic analysis, while the second
is concerned with behavioural issues and draws heavily on concepts and researches
from other disciplines, such as psychology and sociology (OECD, 2004). Economic
and behavioural approaches are sometimes regarded as competing explanations
(Valeria, 2004)

Peoples behaviour in a society is regulated by norms and ethical standards. It should

be noted that among different moral rules which determine human decisions,
researchers distinguished personal, social and societal norms. Personal norms consist
of personality factors, moral reasoning, values, religious beliefs, etc. A survey of
research in this area reveals that positive effect on paying tax is connected with
altruistic orientation, honesty and religious beliefs while tax evasion correlates with
Machiavellianism.

Social norms concerning tax behavior consist of common opinions about peoples
tendency to avoid or evade tax liabilities and societal acceptance of evasion. Wenzel
(2004) claims that widespread perception and acceptance of tax cheating may lead to
reduction of taxpayers honesty and tax evasion despite the coexisting belief that
everybody should honestly pay their taxes. Societal norms are connected with tax
law, tax morale and civic duty. Tax morale is defined as the aggregated attitudes of a

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group or population to comply with taxes and is related to the concept of civic duty. It
can be assumed that taxpayers with strong civic duty comply honesty with tax law
due to their internal motivation, not because of audits and the threat of fines.

Perceived fairness is another psychological factor that influences taxpayers attitudes.

Kirchler (1999) lists three areas of justice which should be analyzed: a) distributive
justice; b) procedural justice; c) retributive justice. Generally, justice considerations
are associated with assessment of effects caused by taxpayers decisions concerning
tax compliance, avoidance or evasion. This assessment is made on individual, group
and societal level. Factors taken into account in this assessment refer both to audits or
fines and the derived benefits. Braithwaite (2003) distinguishes, in turn, five
motivational postures toward taxation and tax authorities, among which two postures
reflect an overall positive orientation to tax liabilities. Commitment which reflects
beliefs about the desirability of tax system and feelings of moral obligation to act in
the interest of the collective and pay ones tax good will. The second one is
capitulation, which reflects acceptance of the tax office as the legitimate authority and
the feeling that the tax office is a benign power as long as one acts properly and
defers to its authority.

In contrast to these postures of deference, are three postures of defiance. Resistance

reflects doubts about the intentions of the tax office to behave cooperatively and
benignly towards those it dominates and provides the rhetoric for calling on taxpayers
to be watchful, to fight for their rights, and to curb tax office power. Disengagement
is also a motivational posture that communicates resistance, but here the
disenchantment is more widespread, and individuals and groups have moved beyond
seeing any point in challenging the authorities. The last one, game playing, is the
posture of those whose sights were firmly set on winning in their interactions with the
tax system.

Compliance by taxpayers with these basic obligations can also be viewed in terms of
whether such compliance is achieved voluntarily (i.e. voluntary compliance) or
corrected by verification/enforcement actions carried out by the revenue body (i.e.
enforced compliance). In a tax administration context, this distinction is highly
relevant as enforced compliance has a cost, and very often a significant one.

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Tax payer education program is one of the strategies of improving service delivery to
the taxpayers. Improving service delivery is critical to enhance voluntary tax
compliance. Lack of voluntary tax compliance compels revenue authorities to use
costly and coercive methods for tax enforcement (Fjeldstad and Ranker, 2003). Thus,
tax payer education is a tool designed to enable taxpayers to understand tax laws and
procedures. It involves training of special units within the revenue departments, for
providing education, counselling and support to the taxpayers, through different
media which include newspapers, television, radio programs, websites, seminars, and
front desk help to disseminate key information to the taxpayers. We should note that,
Tax advocacy clinic and education campaign is very important in enhancing
voluntary tax compliance; this is supported by the quote of Joel S. Newman and
Michael B. Lang which says that;

Law students who plan to practice in the tax field often take as few advocacy
courses as they can get away with. In fact, the persuasive abilities of tax lawyers
and tax accountants are probably about the same. Neither group is known for its
advocacy skills. (Joel S. Newman and Michael B. Lang) (Yablon L. Jeffery,
2010).

The education component is expected to deal with non-compliance practice among

the Small and Medium Enterprises (SMEs) (Kimingu and Kileva, 2007). The non-
compliance and may be unintentional, where the taxpayer is not aware of his/her tax
obligations or fails to fulfil his/her tax obligations due to ignorance of tax laws and
procedures or may be intentional due to the compliance attitudes (Christina, Debonah
and Gray, 2003). Tax Education to the SMEs becomes necessary when the objective
of rising tax revenue, at the changing environment; particularly from the official tax
assessment is considered (Normala, 2007).

At the same time, achieving tax compliance and improving revenue generation is not
an easy task (Allingham and Sandmo, 1972; Kimungu and Kileva, 2007). However,
this problem can be minimized through tax education. The SMEs in Mwanza are
characterized by a variety of shops, bars, boutiques, food vending (mama lishes),
transport (taxi, daladalas), restaurants, tailoring, agricultural activities such as poultry
farming and small scale fishing, small scale industries, hotels and guest houses,
provision of social services such as health and educational facilities, livestock such as
goats, sheep, cattle, pigs; bars and recreational activities. There are 1040 registered

174
number of micro enterprises in Mwanza City, 954 medium enterprises, and 665 large
enterprises (Revenue Performance Report, 2007/2008).

The department of taxpayer education in Mwanza, since the financial year 2005/2006
has conducted taxpayer sensitization programs through radio, newspapers, television,
bulletin boards, roadside banners, street announcements using mobile car with
speakers, leaflets with tax information, participations in the community activities and
the organization of taxpayer day. The Revenue Performance Report, for Mwanza
City, 2007/2008, shows that 25% of the collected revenue resulted from audit and
enforcement activities such as fines and penalties, while 75% as paid voluntarily. For
the financial year 2006/2007, 29% of the revenue collected resulted from audit and
enforcement activities, while 71% was paid voluntarily.

For the financial year, 2005/2006, 36% of revenue collected, resulted from audit and
enforcement activities, while 64% was paid voluntarily. This is a positive
development. In order to increase the voluntary tax compliance among the
entrepreneurs in the SMEs sector, and at the same time maintaining the economy
canon of taxation, tax education is continuously being provided to these entrepreneurs
in Mwanza City. Other strategies such as the use of the presumptive tax system, audit
and enforcement are also being used. There has been increase in the revenue
performance and the level of voluntary tax compliance.

Although there has been an increase in voluntary tax compliance, this could be due to
other factors. This study singled out the effect of tax education on the level of
voluntary tax compliance, while holding constant other influencing factors. The
knowledge from this study justifies the decision of using tax education as a tool of
enhancing voluntary tax compliance, among the SMEs in Tanzania.

Most of the studies in the area of tax compliance, as outlined in the empirical
literature have concentrated on how to change the taxpayer behavior towards more
compliance using a mix of strategies, such as audit, deterrent measures of penalties
and fines, as well as quality service delivery strategies. Only few studies have
concentrated on how tax compliance behavior is affected by one individual factor
holding constant other influencing factors. The results from those studies indicate that
there is a significant positive relationship between the taxpayer education and the
level of tax compliance.

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The economic approach identifies economic factors that affect the tax compliance
behavior as follows:

Financial burden: There appears to be a relationship between the amount of tax

owed and compliance behavior. For example if a business owner
has a tax liability that can easily be paid, he/she may be willing to
comply. However if the liability is large, potentially threatening the
viability of the business, the owner may avoid paying it or trying to
adjust the data reported so as to incur a smaller (but incorrect) tax
liability (ATO, 2000/2001).

The costs of compliance: Costs of compliance are the common costs a taxpayer has
to incur in complying with tax obligations for example, time taken
to complete tax returns, costs of hiring tax accountants,
psychological costs such as stress, arising as a result of uncertainty
that one is not sure that he/she has met all of the tax rules. The list is
not exhaustive. The higher the compliance costs, the higher the
chance of non-compliance (OECD, 2003).

Incentives: Giving taxpayer incentives may have a positive effect on tax compliance
(Kirchler, E. 2007). The behavioural scholars identified behavioural
factors that affect the compliance behavior which are; Individual
differences for example, gender, age, education level, moral
compass, industry, personality, circumstances and personal
assessment of risks (Australian Tax Office, 1997); Perceived
inequity Tax payers who believe the system is unfair, or who have
personal experiences of unfair treatment are less likely to comply
(Roak and Stephen, 1994); Perception of minimal risks i.e. If a
taxpayer has the opportunity not to comply, and perceives that there
is only a minimal risk of being detected he/she will take the
opportunity (Kirchler, E 2007); and Risk taking where some people
view tax avoidance/tax evasion as a game to be played on and on.
They would like to test their skills in avoiding being caught (OECD
2004).

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The compliance attitude of the taxpayer is affected by the factors from the external
environment of the taxpayer, for example, the nature of the business, industry and
economic conditions prevailing on the market such as demand and supply. These are
the factors that affect the competitive advantage hence creating a perception that non-
compliance to tax is the solution. It is also affected by internal factors, such as
sociological and psychological factors.

This suggests that the model to improve the taxpayer compliance, should target at
improving the taxpayer capability to overcome the forces from those factors as
outlined in the model above, hence creating a positive tax compliance behavior and
attitudes (Roak and Stephen, 1994). Lackson and Miliron (1986) listed the main
factors that have influence as ethics, legal sanctions, complexity of the tax laws, and
relationship with the tax authority, level and reliability of income sources, perceived
fairness of the tax system, and possibility of being audited and the level of tax rates.

The basic goal of most education programs is directed towards behavioural change.
Being the case, behavior analytical theories of change, and learning theories can best
explain how education can change the behavior of an individual (Svetna and Taumo,
2007). Change theory is used to predict behavior change, which assumes that when
the problem relating to behavior exists; there should be modifiable factors that
contribute to the problem. Some of the modifying factors are knowledge, attitudes,
intentions, interpersonal support, organizational and environmental conditions. The
theory assumes that education is fundamental, in bringing about change in the
modifiable factors, and the taxpayer education is expected to change this behavior.
Education changes the behavior of an individual by affecting the way he or she makes
decisions. It has the significant positive impact on the behavioural change of an
individual

There is a positive relationship between taxpayer education and voluntary tax

compliance (Kassipillai, et al 2003). Taxpayer education will provide the necessary
tax knowledge to comply with the tax matter and change the perceptions and attitudes
towards tax-compliance by creating more positive attitudes.

Lin and Carrol (2000), conducted a study to determine how enhanced tax knowledge
and tax attitudes, affects the compliance behavior among the taxpayers in New
Zealand. Analysing the compliance behavior of the taxpayers after acquiring the tax

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knowledge did not have significant relationship with tax compliance behavior. Rashid
and Noor (2004), conducted a study to evaluate the influence of tax knowledge on the
tax compliance behavior among the taxpayers in Malaysia. The objective of the study
was to investigate the effect of the presence of tax knowledge and understanding, on
the level of tax compliance behavior. Statistical findings, confirmed that those with
tax knowledge, had higher level of compliance than those without. The results
indicated a significant relationship between the level of tax knowledge and the level
of tax compliance.

Normala (2007), conducted a study to examine the influence of tax education, as a

procreative approach to enhance the voluntary tax compliance, among the taxpayers,
in Malaysia. There as a move from the official assessment of taxes, to self-assessment
system, in 2004. Under the self-assessment system, tax payer has to his tax liability,
pay taxes to revenue authority, later on the revenue authority conducts audit to
establish the accuracy of the declarations in returns and payment. This system
requires high voluntary tax compliance. Using questionnaires administered to the
taxpayers and the tax officials, the respondents confirm the increase in the tax
knowledge increase the level of voluntary tax compliance. The statistical findings,
confirm that there is a significant relationship between the level of tax education and
voluntary tax compliance.

Christina, Deborah and Gray (2003), Conducted a study to determine the economic
and behavioural factors affecting tax compliance among taxpayers in the United
States of America. The objective of the study was to determine the economic and
behavioural factors, affecting the tax compliance among tax payers, in the Arkansas
City tax penalty amnesty system. Arkansas City had announced an amnesty system,
whereby the non-compliant traders were waived of the penalties and fines provided
that they were ready to pay their tax liability supposed to be paid and they did not
pay. Using questionnaires administered to the participants of this amnesty program,
the respondents identified factors that made them not to pay their taxes due, within
the statutory period and not declaring the correct taxable income, as complexity of the
tax laws, ability to pay, ignorance of the tax laws, and the perceptions of high tax
rates and unfairness of the tax system. A significant portion of non-compliance was
unintentional, caused by the complexity of tax laws and ignorance, as most of the tax
payers did not understand their tax liabilities or their tax obligations. The results

178
confirmed that there was a significant positive relationship between taxpayers
knowledge of the tax matters, and the voluntary tax compliance. It is the role of tax
advisor to impart the tax knowledge and enhance skills to the taxpayers. We should
therefore, refer to the quote of Franklin L. Green which says;

A tax adviser who instils confidence and trust in his or her client or corporate
partner becomes highly valued. Indeed, the term guru is generally reserved for
two types of individuals spiritual guides for followers of Eastern religion and
tax advisers for adherents of Western capitalism. (Franklin L. Green) (Yablon
L. Jeffery, 2010).

6.5.5 Tax Administration

The goal of tax administration is to foster voluntary tax compliance (Silvani, 1992)
and hence Reduce tax gap (difference between taxes paid and owed for all taxes by
all taxpayers) and compliance gap. This can be done through assessment of potential
tax payers, identifying and registering the tax payers and provision of tax payer
services among others.

In many countries, especially in developing countries, small amounts of collected

public revenue can be explained by either incapability of the tax administration in
realization of its duty, or with some degree of corruption. On contrary, Tax
administration with a skilled and responsible staff is almost the most important
precondition for realization of "tax potential" of the state. It is generally known that
tax laws and tax policy are as good as the tax administration. In tax reforms there is a
close correlation between successful tax policy and efficient tax administration. In
other words, there is no good tax policy without efficient tax administration (Jenkins,
1992).

An inefficient tax administration weakens the willingness of the tax payers to comply
and creates room for political manipulation and in the process the government losses
revenue (Bird, 1991). The solution to poor assessment and registration method is to
employ well trained and skilled personnel who are well paid and also to employ good
equipment like computers. The basis for efficient tax administration lies in the choice
of appropriate technology and clear administrative procedures, good methods of
conducting tax payer registration and assessment and the provision of public goods.

Alm (1998) contents that some people do not pay taxes if they dislike the way the
taxes are spent, if they feel government is not providing public goods and services, if

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they do not participate in the decision making or if they feel they are treated unfairly
by the government. He later note that compliance increases with indicators of the
availability of public goods and services, and suggest that government can increase
compliance by providing goods that their citizens prefer more, by providing these
goods in a more efficient manner, or by more effectively emphasizing that taxes are
necessary for receipt of government services. Cavallo (2000) also argues that tax
payers tend to resist payment of taxes if they see no link between the taxes paid and
the services rendered by the government.

According to Alm et al (1993) if tax payers acknowledge the fact that the provision of
public goods is financed dominantly by tax revenue, they are more likely to declare
the true state of their income. McClelland, Alm and Schulze (1992) assert that
compliance occurs because some tax payers value the public goods their tax payments
finance. Positive action by the state are intended to improve tax administration will
increase tax compliance (Smith and Stalans, 1991) Russell (2010), asserted that
improving tax compliance requires long-term reform efforts, beginning with
strengthening the organization and management of the revenue agency, implementing
robust collection systems like payment and withholding systems and building
capacity in core tax administration functions such as registration, assessment, filing
and payment enforcement, debt collection, taxpayer services, and processing of
appeals.

Reform priorities to improve tax compliance differ across countries and regions,
reflecting variations in stages of development, administrative capacity, and scope of
tax abuse. One size does not fit all, so reforms need to be tailored to each countrys
circumstances. The relatively wider tax gaps and lower revenue productivity of
developing and emerging economies generally suggest potential for bigger revenue
yields from compliance improvement initiatives.

According to Bahl and Bird (2008), a key component of any tax system is the manner
in which it is administered. No tax system is better than its administration, so tax
administration is imperative in developing and maintaining a sustainable and efficient
tax system. Furthermore, the perception of the individual taxpayers about the fairness
of the tax system is recognized as an important factor that can significantly influence
their tax compliance behavior. An essential objective of tax administration is to

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ensure the maximum possible compliance by taxpayers of all types with their tax
obligations.

The IMF strongly recommends use of withholding taxes as a way to improve the
administration of the tax systems of developing countries. The idea is that the tax is
withheld by the payer and turned over to the government directly before it reaches the
taxpayer This method is effective when taxing wages, but it requires that taxpayers be
easily identifiable. However, in developing countries in which a majority of the
population operates in the informal sector, a withholding system would not reach
them.

In improving tax compliance, most developing countries rely heavily on consumption

taxes that cannot be evaded even by those in the informal sector. One of the most
popular consumption taxes is value added taxation (the VAT). The VAT uses a
principle of withholding and is in fact characterized as a form of withholding.
Value added taxation can be successfully administered by implementing a single rate
and reducing the number of exemptions. Likewise, computer technology can be used
to perform more rapidly such routine tasks as processing forms, compiling statistics,
and using available data to forecast tax revenues. Computerization of the tax
collection process enables easy detection of defaulters, and also helps to reduce
corruption by reducing personal interaction between tax officials and taxpayers that is
necessitated by inefficient manual systems. However, use of technology does not
necessarily increase revenue collections. Computer technology must be combined
with political will and effective organization if it is to yield its potential for greater
revenue.

Presumptive tax is the form of taxation refers to the use of simplified methods of
assessing complicated taxes. Presumptive assessment methods are designed as
administrative expedients, but they can also be used to promote efficiency and equity
goals. Presumptive taxes are a good way to tax hard-to-tax groups, as will be
discussed later in detail. A number of countries have adapted the Israeli tachshiv.
The tachshiv is a system of presumptive taxation that uses objective factors and
indices to estimate the income of taxpayers who do not keep records of physical
inputs; these factors include the number of employees, the different kind of services
provided, and the equipment used in the establishment. Presumptive taxes are not

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accurate, but they are preferable to totally exempting hard-to-tax groups from
complex tax systems.

6.5.6 Procedural justice

Procedural justice concerns the perceived fairness of the procedures involved in

decision-making and the perceived treatment one receives from a decision maker.
Tyler (1990) argues that peoples reactions to their personal experiences with
authorities are rooted in their evaluations of the fairness of procedures those agencies
use to exercise their authority. The neutrality, honesty, impartiality, and the use of
fact, not personal opinions, in decision-making by the Revenue Authority preserve
room for the procedural justice. Tyler and Huo (2002) suggested that procedural
justice provides people with cognitive information about how much they are valued
as a member of a particular group. Tyler argues that these cognitions play an
important meditational role between procedural justice and non-compliance. It could
be the cases of emotional reactions to injustice that go on to explain why some people
subsequently defy decisions they see to be procedurally unjust.

Tax payers who feel that are treated unfairly by the tax office during an enforcement
exercise are less likely to trust the tax office hence affect their compliance level. It
should however be noted that procedural justice theory does not suggest that penalties
should not be enforced when detected that tax payers are not compliant, it instead
suggest that penalties should be used if deemed appropriate (Murphy 2005). In a
Swiss study, Feld and Frey (2002) presented empirical evidence to suggest that actual
tax compliance increased when taxpayers were treated as trustworthy in the first
instance by tax authorities. In a study of Australian taxpayers, Wenzel (2002) also
studied the impact of justice perceptions, but this time on self-reported tax
compliance. Wenzel found that taxpayers were more compliant when they thought
that they had been treated fairly and respectfully by the Australian Taxation Office
(ATO).

The procedural justice literature specifically highlights the importance of an

authoritys trustworthiness, interpersonal respect, and neutrality in its dealings with
others (Tyler, 1989; 1994); Tayler et al (1997); Tyler & Smith, (1998). If people
believe that an authority is trying to be fair and to deal fairly with them, they trust

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the motives of that authority and develop a long-term commitment to accepting its
decisions.

6.5.7 Tax payers attitude

According to Ajzens (1991) Theory of Planned Behaviour, attitude relates to ones

own personal views about a behavior. Attitude may also be defined as positive or
negative views of an attitude object i.e. a person, behavior or event. In relation to
taxation, taxpayers attitudes may be defined as positive or negative views of tax
compliance behavior. The outcome of positive views is tax compliance and negative
view is tax non-compliance. These views may be explained by Psychology-based
theories which reveal that taxpayers attitude may be influenced by the following
factors which eventually influence taxpayers behavior.

(1) Taxpayers perceptions in the tax system (Ambrecht, 1998)

(2) commitment in paying taxes, Commitment reflects beliefs about the
desirability of the tax systems and feelings of moral obligation to act
in the interest of the collective and pay ones tax with goodwill,
(Braithwaite,2001).
Attitudes are important for both the power and the trust dimension. On the one hand,
favorable attitudes will contribute to trust in authorities and consequently will
enhance voluntary tax compliance. On the other hand, attitudes towards the
authorities will be relevant for the interpretation of the use of power as benevolent or
malicious. (Ajzen, (1991); Ajzen and Fishbein, (1975)

From the TRA perspective, the important aspect of your attitude is whether or not it is
positive, negative, or neutral. For example, if you strongly believe that doing
something (whatever the behavior might be) will lead to a desirable outcome, then
one could say that you have a positive attitude toward that behavior. Likewise, if you
strongly believe that the behavior will lead to an undesirable outcome, you are likely
to have a negative attitude about it. Attitude involves judgment of whether the
behavior is good or bad and whether the actor is in favor of or against performing it
(Leonard et al, 2004).

Attitudes affect intentions and intentions affect behavior. Attitudes are formed in a
social context by such factors as the perception in the tax system, the perceived
fairness of the tax structure, its complexity and stability, Government policies

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affecting any of these factors may influence taxpayer attitudes and hence the observed
level of taxpayer compliance.

Under the fiscal psychology approach, Cullis and Lewis (1997) believe that taxpayers
tend to operate in social environments and their actions can be moulded by their
peers. Collins et al. (1992) also confirmed a direct relationship between the
compliance behaviours of taxpayers and their peers. Taxpayers whose peers are
evaders have a tendency to be evaders themselves as they legitimise their unethical
acts with reference to their peers actions (McIntosh and Veal, 2001). Coleman and
Evans (2003) discuss the view of the cooperation between taxpayers and revenues
authorities in line with maxim by Vogel (1994), who believes that;

If taxpayers are convinced that the tax system is administered fairly and all
taxpayers contribute by law and reasonably equally, then they are prepared
to pay.
Thus perceptions of fairness in the tax system, and commitment to paying tax are
important compliance factors.

6.6 Indicators of Voluntary Tax Compliance

Tax compliance level can be identified by looking on the compliance indicators; here
one can examine the percentage of the tax revenue to the GDP (OECD, 2004). An
increased percentage of tax revenue in relation to the GDP signifies an increase in the
level of tax compliance. Public opinion indicators are the perceptions of people
towards the taxation systems and taxes (Roak and Stephen, 1994). Other compliance
indicators are; percentage of income that is reported for the taxation purposes and the
program impact indicator. Here, one may assess the impact of specific programs or
initiatives on the compliance Behavior of the target taxpayer population (ATO, 2001).

Another approach is to examine the trend, in the compliance aspects, for example
registration, and filing of the return, correct reporting of the income and expenses, as
well as the payment of the correct amount of tax. The trends should be examined or
compared on the basis of percentage, rather than additional revenue generated, by
application of the specific compliance strategy or comparing the percentage of tax
revenue collected through enforcement activities such as audit, penalties and fines, to
the total revenue collected, with that paid voluntarily (IFC, 2007). Tax compliance
level may be identified by looking on tax gap. Tax gap represents the difference

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between the actual revenue collected and the amount that would be collected if there
were 100 per cent compliance (James et al. 2001).

6.7 Compliance risk management

Compliance risk management is based on understanding the factors that shape

taxpayers compliance behaviour so that a potentially more effective set of responses
ones that deal with the underlying non-compliant behaviour rather than focussing
on treating the symptoms could be crafted and implemented.

On the left side are the determinants of taxpayers attitudes to compliance. On the
right side, the diagram (known as the Compliance Pyramid) depicts the continuum of
taxpayer attitudes towards compliance, ranging from a willingness to do the right
thing (i.e. voluntarily comply) to having decided not to comply (i.e. resist
complying), as well as the sorts of support and intervention appropriate for each
attitude. Compliance risk management has become an essential tool for revenue
bodies, assisting with both the identification and treatment of risks.

6.8 Tax compliance outcomes

Tax compliance outcomes are defined as the levels of voluntary compliance, the
levels of uncollected tax and the levels of confidence in the tax administration.
Effectiveness is defined as the extent to which the revenue bodys actions achieve
these outcomes. Outcomes are affected by both the effectiveness of the revenue
bodys actions and external factors outside the revenue bodys control.

Revenue bodies have always cared about tax compliance outcomes: collecting the
right revenues, improving taxpayers voluntary compliance, and administering the tax
system with integrity and confidence. As the world has changed, revenue bodies have
evolved to deliver these outcomes. There are three main interconnected categories of
tax compliance outcomes:

Revenue outcomes: These relate to collecting the right tax at the right time.
The focus is less on taxpayers behaviour and more on getting the right tax
result. This is often expressed as maximising tax revenues or closing the tax
gap.
Voluntary compliance outcomes: These relate to taxpayers behaviour in
complying voluntarily with tax obligations: registration, filing, reporting,
payment and any additional obligations. In essence, it is about taxpayers
being in control of their tax obligations, which covers both what tax
results and how the taxpayer got to that result.

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 Integrity outcomes: These cover both that the revenue body administers the
tax system fairly and that the community has confidence in the revenue
bodys administration of the tax system.

It is imperative for the Revenue bodies to measure tax compliance outcomes because
outcomes are what they ultimately care about: that taxpayers are paying the right tax,
that the right revenues are coming in and that the tax administration system has
integrity so people have confidence in it. Everything that the revenue bodies do is
about achieving these and other outcomes. The rationale for measuring outcomes is
simple: outcomes are what revenue bodies ultimately care about (such as improved
compliance and sustained revenues). Therefore, successful performance is measured
as improving outcomes. Measuring outputs (revenue bodies deliverables) is a
conventional way of assessing whether revenue bodies are on track to improve
outcomes (Figure 7). The tax compliance programme logic model is frequently used
to relate how revenue bodies actions deliver outputs which in turn improve outcomes
as shown in figure 2 below.

In the same vein, the effectiveness is the extent to which the revenue bodys actions
achieve these outcomes. Outcomes are affected by both the effectiveness of the
revenue bodys actions and external factors outside the revenue bodys control.

Figure 6 illustrates the difference between outcomes and effectiveness. In this

example, a revenue bodys desired outcomes are high rates of payment on time. It
therefore introduces new initiatives to influence taxpayers to pay on time. At the
operational level, it measures the effect of these interventions (shown by the blue
bar). These interventions are effective and increase the payment on time rate higher
than it would otherwise have been (the grey bar shows what the payment on time rate
would have been without the new interventions). At the strategic level, the overall
outcome (shown by the black line) fluctuates due to the revenue bodys actions and
changes in external factors, such as economic conditions. Strategic measures of the
overall outcome and operational measures of effectiveness are complementary.
Together they allow the revenue body to present a nuanced performance narrative:
the overall outcome has remained stable as the effectiveness of the new interventions
has been balanced out by more challenging external factors.

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 CHAPTER SEVEN

THE EXPLORATORY ANALYSIS OF THE TAX REVENUE

APPEALS MACHINERY PERFORMANCE ON TAX REVENUE
IN TANZANIA

7.1 ESTABLISHMENT OF TAX APPEALS MACHINERY

The unprejudiced nature of the Appeals is to resolve tax controversies, without

litigation, on a basis which is fair and impartial to both the Government and the
taxpayer in a manner that will enhance voluntary tax compliance, shape behaviour of
the taxpayer and construct public confidence in the integrity and efficiency of the
Tanzania Revenue Authority (TRA). It should bear in mind that, disputable taxes
reduce tax revenue levels in all categories of taxes as Hypothesized Mean Difference
is zero. The more the disputable taxes the more it is the scantiness revenue
generation. This would enforce the revenue authority to broaden the base as a
remedial measure for filling the fiscal gap in the budget. The performance of TRAB)/
TRAT and Court of Appeal in deciding tax cases is relatively stable indicator for total
revenue adequacy (Figure 9 and Figure 10).

In year 2000, the Government as a matter of policy decided to establish Unified Tax
Appeal Machinery under which tax disputes arising from all Revenue laws
administered by TRA have to be lodged in the same appellate authority. Prior to the
establishment of the New Unified Tax Appeals Machinery, there was the National
Tax Appeals Board established under sub-section 89 (1) of the Income Tax Law No
33 of 1973, which had jurisdiction to hear and determine only Income Tax Appeals
arising from the decisions of the Commissioner for Income Tax. Rules governing the
procedure before the Appeals Board were contained in the Income Tax (Appeals
Board) Rules, 1975 published by GN No. 218 of 1975. Appeals from the Appeals
Board lied with the Appeals Tribunal established under section 90 (1). The
Commissioner or a taxpayer under sub-section 93 (2) of the Income Tax Law No 33
of 1973 had to appeal to the Appeals Tribunal against the decision of the Appeals
Board.

The Tax Revenue Appeals Act, Cap 408 of 2002 R.E established the TRAB and the
TRAT as quasi-judicial institutions with exclusive jurisdiction to hear and determine
appeals. The TRAB and TRAT provide an independent, impartial and neutral forum

187
for hearing and resolving disputes on tax issues on a timely, cost-effective alternative
to the court system. From the taxpayer's standpoint, the advantage of bringing a
dispute to the Tax Court is that payment of the deficiencies is stayed until the case is
decided.

7.1.1 Rationale for the Civil Appeals Rights

Tax cases can be divided into two types: civil or criminal. In civil cases, the
government claims that the taxpayer made a mistake, calculation error, or acted
negligently in the preparation and filing of his or her taxes. In a criminal case, the
government accuses the taxpayer of taking intentional actions in order to avoid
having to pay the taxes owed. Criminal cases are much more serious and involve the
possibility of substantial fines as well as prison sentences. Civil cases may involve a
fine, but they do not involve the criminal justice process or potential prison time.

Where a taxpayer (hereinafter referred to as defendant) is convicted, the trial is often

not the final stage in the civil as the case may be criminal processes. A convicted
taxpayer generally has the right to appeal against, or seek review of, conviction and
sentence. Civil as the case may be criminal appeals are thus a crucially important
feature of the modern civil and criminal processes respectively. Convictions cannot
be treated as final until appeal rights have been either exhausted or waived. At the
broadest level of generality, appeals are concerned with correcting error. Mechanisms
for error correction are an important feature of developed legal systems:

Developed legal systems make provision for correcting error. Errorin the
sense of good faith differences of opinion about finding the facts or about
formulating or applying rules of lawis expected as a regular occurrence.
The primary function of the modern right of appeal is to protect against miscarriages
of justice where an innocent defendant may be wrongly convicted; in that there are
many possible reasons for such errors.

1) The fact-finder may fail to assess the evidence properly; 2) may be misled by
irrelevant, 3) prejudicial or fabricated evidence; or exculpatory evidence may not be
produced at trial, and 4) a defendant taxpayer may not have received a fair trial for a
myriad of potential reasons. Appeals therefore, provide a forum in which defendants
may have these concerns addressed.
Appeals maintain consistency in trial courts whereby appellate courts correct
anomalous applications of the law in particular cases and clarification and guidance
are given leading to greater consistency in the future application of the law; provide

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legitimacy not only to the criminal justice system as a whole but also to the civil
justice system where public confidence in the administration of justice increases
when miscarriages do not occur and when courts dispense criminal justice
consistently and fairly; and allow questions of law to be settled because they provide
a forum for ensuring the proper interpretation, development and application of law.
Appeals have been the context in which the content of taxpayers rights as defendant,
the proper application of rules of evidence, and the scope of substantive offenses and
defences have all been developed.

The Right to Appeals attains its legitimacy under Section 13 (1) and (6) of the
Constitution of the URT, 1977 where;

All persons are regarded to be equal before the law and are entitled, without
any discrimination, to protection and equality before the law and in order to
ensure such equality, the state authority shall make procedures which are
appropriate; in that, when the rights and duties of any person are being
determined by the court or any other agency, that person shall be entitled to a
fair hearing and to the right of appeal or other legal remedy against the
decision of the court or of the other agency concerned.

7.1.2 Institutional Framework

The TRAB and TRAT have been established for the main purpose of dealing with
appeals relating to the tax disputes between Tanzania Revenue Authority and the
Taxpayers, because when taxpayer is aggrieved by the decision of the Commissioner
General of the TRA has the right to file the objection to the Board (Rule 4(1) through
(5) of the TRAB Rules 2001 published by the GN NO 57 of 20/4/2001), in that, it is
asserted that;

A person who wishes to appeal to the Board shall issue to the Board a written
notice of intention to appeal within 30 days from the date of the service of the
Notice of final determination of the assessment of tax, states whether intends to
appeal against the whole or part of the tax assessed or the existence of the
liability to pay any tax, duty, fee, levy or charge and shall serve the copies of
the Notice of intention to appeal to parties to an appeal. Rule 4(1) is in line
with Section 16(1) through (3) of the Tax Revenue Appeals Act, Cap 408 and
Rule 6(1) of the TRAB Rules 2001 where the Statement of appeal shall be
lodged at the Secretary of the Board within 45 days (30 days inclusive)
following the date on which the Notice of final determination of the assessment
of tax is served on the appellant. The Secretary of the Board shall endorse the
date of receipt and the copy be served to the Commissioner General of the TRA
by virtue of Rule 6(3) of the TRAB Rules 2001.

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The Board has exclusive jurisdiction in disputes emanating from revenue laws
administered by the Tanzania Revenue Authority. This is supported by the decision of
the Court of Appeal in the case of Attorney General Vs Lohay Akonaay and Joseph
Lohay (1995) TLR 80 at page 96 which made the following pertinent observations;

courts would not normally entertain a matter for which a special

forum has been established unless the aggrieved party can satisfy the court that
no appropriate remedy is available in the special forum.

The procedures prescribed under the Tax Revenue Appeals Act do provide an
adequate remedy to the plaintiff (see: sections 12, 13, 14 and 15). In that, the
provisions of Tax Revenue Appeals Act do provide an adequate remedy when tax
disputes are referred to the Tax Revenue Appeals Board which is a special forum for
such matters. The TRAB shall, subject to section 12 of the Tax Revenue Appeals Act
have sole original jurisdiction in all proceedings of a civil nature in respect of
disputes arising from revenue laws administered by the Tanzania Revenue
Authority. By virtue of Section 3 of the Tax Revenue Appeals Act, defines the
Board as the Tax Revenue Appeal Board. It is clear on reading sections 3 and 7
together that;

The Board is a specific forum that has been designated by the Act for the
vindication of civil disputes arising from revenue laws administered by the
Tanzania Revenue authority. The Board is a special forum established for that
purpose.
The First Schedule to the Tanzania Revenue Authority Act, 1995 contains the laws
administered by the Tanzania Revenue Authority which include the Income Tax Act,
Cap 332, VAT Act, No 5 of 2014 and Customs and Excise Management Act, 2004,
among others. Under the section 3 of the Act revenue means;

Taxes, duties, fees, levies, fines or other monies imposed by or collected under
the law or the specified provisions of the laws set out in the First Schedule to
the Tanzania Revenue Authority Act, 1995.
Any person, who wishes to appeal upon dissatisfaction of the Boards decision, shall
issue a written Notice of intention to appeal within 14 days from the date of the
decision of the Board to the Registrar who shall serve copies of the Notice of
intention to appeal upon all parties to the appeal and send one copy of the Notice to
the appropriate Zonal center where the appeal shall be determined. By virtue of Rule
6(1);

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 An appeal to the Tribunal shall be instituted by lodging a Statement of
Appeal at the Registry of the TRAT within 30days from the date of the service
of the decision and proceedings of the Board and the Registrar shall issue a
14 days Notice of hearing to all parties to an appeal and serve them by way
of Summons. Likewise the appeal should be accompanied by the documents
listed under Rule 6(2)27 .
This is supported by the case of Commissioner General V. Rupesh Enterprises Ltd -
Tax Revenue Appeals Tribunal Dar Es Salaam [Income Tax Appeal: DSM 2 of
2007]28

It was held inter alia that; The jurisdiction of the Tribunal is limited to
appeals emanating from decisions made by the Board as per section 16(4) of
the Tax Revenue Appeals Act, 2000; therefore it cannot be extended to issues
not determined by the Board. The Appeal was allowed.
The TRAB and TRAT have an extensive judicial role in ensuring fair, efficient and
effective collection of taxes by the Government, because when the appeal has timely
been finally determined and properly executed the real revenue will be fairly paid to
the government. By virtue of Rule 24 (1) of the TRAT Rules 2001 published by the
GN NO 56 of 20/4/2001;

Once the appellant has not been satisfied by the decision of the TRAT will
have to appeal to the Court of Appeal which deals with the matter involving
the question of law only. The Notice of appeal shall be filed in Triplicate at
the Tribunal within 14 days and the Registrar shall forward the same to the
Court of Appeal (Rule 24(2)).
It should bear in mind that, by virtue of Article 117(3) of the Constitution of the URT,
1977 the functions of the Court of Appeal is to hear and determine every appeal
brought before it arising from the judgment or other decision of the High Court or of
a magistrate with extended jurisdiction(Figure 8). This is in line with the case of
Fidahussein & Co. Ltd V. Commissioner General [Tax Revenue Appeals Tribunal
Dar Es Salaam [Application: DSM 1 of 2007]29

It was held inter alia that; In terms of section 25 (2) of the Tax Revenue
Appeals Act 2000, an appeal against the decision of Tribunal lies to the Court

27
Rule 6(2) Documents which must be accompanied by the Appeal are (a) A certified copy of the Procedures
of the Board (b) A certified copy of the decision of the Board and (c) A copy of the notice of intention to
appeal to the Tribunal
28
Commissioner General V. Rupesh Enterprises Ltd -Tax Revenue Appeals Tribunal Dar Es Salaam [Income
Tax Appeal: DSM 2 of 2007] where one of the issues was whether Jurisdiction of the Tribunal is limited to
appeals emanating from the decisions of the Board.
29
Fidahussein & Co. Ltd V. Commissioner General [Tax Revenue Appeals Tribunal Dar Es Salaam
[Application: DSM 1 of 2007] where one of the issues was whether Application for leave to appeal to
the Court of Appeal such Application must disclose points of law. This was an application for leave to
appeal to the Court of Appeal against the decision of the Tax Revenue Appeals Tribunal.

191
 of Appeal only on matters involving questions of law. The Application was
granted (Figure 8).
In the same vein in the case of Mr. Mohsin Somji Vs Commissioner for Customs and
Excise Commissioner for Tax Investigations HC at Dar the main objection was based
on lack of jurisdiction by the Court to entertain the suit-

Nsekela, Harold J has the following in the decisions; .If it is found that this
court has in fact no jurisdiction to entertain the suit that will be the end of the
matter in this court.
He referred the in Mukisa Biscuit Manufacturing Co. Limited Vs West End
Distributor Ltd (1969) EA 696 Law J.A. at page 700 in which stated the principle in
the following words-

So far as I am aware, a preliminary objection consists of a point of law which

has been pleaded, or which arises by clear implication out of the pleadings, and
which if argued as a preliminary point may dispose of the suit. Examples are an
objection to the jurisdiction of the court, or a plea of limitation, or a submission
that the parties are bound by the contract giving rise to the suit to refer the
dispute to arbitration.

Under this provision, the court shall have jurisdiction to try all suits of a civil nature
save those which are either expressly or impliedly barred. A statute can therefore
expressly or by necessary implication bar the jurisdiction of civil courts in respect of
a particular matter. A statute may specifically provide for ousting the jurisdiction of
the civil courts. In the case of Firm of Illuri Subbaya Chetty and Sons vs State of Adra
Predesh AIR 1964 SC 322 the Court had occasion to construe section 9 of the Indian
Civil Procedure Code (1908) which is in parimateria with section 7 (1) above. The
Court stated as follows at page 324 -

In dealing with the question whether Civil Courts jurisdiction to entertain a

suit is barred or not, it is necessary to bear in mind the fact that there is a
general presumption that there must be a remedy in the ordinary civil courts to a
citizen claiming that an amount has been recovered from his illegally and that
such a remedy can be held to be barred only on very clear and unmistakable
indications to the contrary. The exclusion of the jurisdiction of civil courts to
entertain civil causes will not be assumed unless the relevant statute contains an
express provision to that effect or leads to a necessary and inevitable implication
of that nature. The mere fact that a special statute provided for certain remedies
may not by itself necessarily exclude the jurisdiction of the civil courts to deal
with a case brought before it in respect of some of the matters covered by the
statute.

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It should be noted that, parties can be able to settle their disputes out of the court of
law and upon doing so they are entitled to lodge a Deed of Settlement to the Board,
Tribunal as the case may be Court of Appeal which will issue an Order. In the case of
Ms Jandu Plumbers Limited Vs Commissioner General [VAT Tax Appeal DSM No.
15 of 2011]

The Chairman of the Board issued an Order asserting that; Upon parties herein
reaching settlement the conditions of which are contained in the Deed of
Settlement executed by the parties and filed in this Board this 14th day of
November, 2011, this matter is hereby marked as settle out of Board in
accordance with terms and conditions contained in the Deed of Settlement.

7.2 THE SUBSTANCE OF THE RIGHT TO APPEAL

7.2.1 Appeals must be adequate and effective

Paul Caron (2013) argues that both taxpayers and governments struggle to stay on top
of the various complex sources of tax law and to apply them in a myriad of different
contexts. Given the potential for confusion and disagreement, it would make sense to
have a process for taxpayers to appeal government decisions to an expert body that
can provide authoritative, reasoned and rational solutions to tax disputes. In that
regard, the appeals to be adequate and effective must be dealt by authoritative,
reasoned and rational solutions; However, Paul Caron (2013) has not shown how
such substance could enhance revenue maximization motives.

An appeal is only adequate where it allows for review of both the factual and legal
basis of conviction. The substance of convictions must be reviewable, including an
assessment of the sufficiency of the evidence presented. Appeals should be
reappraised in the sense that is suited to correcting errors and thus minimizing the risk
of wrongful convictions. Appeal must also be effective; the concern is to ensure that
appellants have the practical means to challenge their convictions. In order to pursue
an appeal, particularly one concerned with demonstrating error at first instance, it is
imperative to have access to a record of those proceedings. Section 19(a) through (b)
of the Tax Revenue Appeals Act, Cap 408 provides that;

Any person lodging an appeal shall serve a copy of all the appeal documents
on all other such persons who shall be entitled to appear on the hearing of the
appeal as if they were parties thereto and in the case of joinder party it may
order that a copy of all the appeal documents be served on such other person
who shall be entitled to appear on the hearing of the appeal as if he were a
party thereto

193
Mesiku Gloria (2011) argues that despite the efforts taken by Uganda Revenue
Authority to strengthen tax administration through institutional reforms coupled with
clear procedures of tax appeals there has been poor tax revenue collections from
domestic taxes. However, Mesiku has not shown to what extent disputable taxes
reduces revenue collection in Uganda. This paper attains to fill the gap of the
literature by showing the correlation between disputable taxes and the total revenue
collection in Tanzania. In affirming to the adequate appeals, the case of Rungwe
Freight Ltd V. Commissioner General Tax Revenue Appeals Tribunal Dar Es Salaam
[Appeal No 3 of 2006],30 The Tribunal considered the arguments made.

It was held inter alia that; In order for an aggrieved party to conduct an
appeal before the Board, the documents listed under rule 7(2)31 are
mandatory and if any one of them or more is/are missing, then the purported
appeal before the Board is incompetent. (4) Since the respondent by his own
admission did not include the decision of the Commissioner for Customs and
Excise refusing a refund in the appeal before the Board, and since the
decision of the Commissioner for Customs and Excise is one of the
enumerated documents, such omission rendered the appeal before the Board

30
Rungwe Freight Ltd V. Commissioner General Tax Revenue Appeals Tribunal Dar Es Salaam
[Appeal No 3 of 2006], case be cited where the appellant, aggrieved by the decision of the Tax
Revenue Appeals Board in Customs and Excise Tax Appeal No 13 of 2004, filed appeal no. 3 of 2006
in the Tax Revenue Appeals Tribunal challenging the said decision of the Board. On behalf of the
Respondent a notice of Preliminary Objection was filed raising three points of law, namely; that the
appeal was incompetent because no notice of intention to appeal was filed and served on the
respondent; secondly the appeal was filed out of time and thirdly, the appeal was bad in law for failure
to comply with rule 6(3) of the Tax Revenue Appeals Tribunal Rules, 2001, in that the decision of the
Commissioner General had not been attached to the statement of appeal filed with the Tribunal. Two
issues were hotly contested by the parties. The first issue was whether the appeal was filed out of time
and the second one was whether it was necessary or not for the appellant to attach the decision of the
Commissioner General to the statement of appeal. On filing the appeal out of time the appellant argued
that it received a copy of the proceedings and judgment late and appealed to the Tribunal that it was
now common practice that day of appeal start to run after receipt of a copy of judgment and
proceedings and not from the date of judgment. The failure to attach the Commissioners decision was
answered by the advocate for the appellant by saying that there is a need for judicial officers to avoid
having undue regard to procedural technicalities and appealed to the Tribunal to disregard that
requirement.
31
Rule 7(2) The Appeal shall contain the following documents (a) A copy of the notice of assessment
of tax (b) A copy of notice of objection to an assessment submitted to the Commissioner General by
the appellant (c) Copy of the final determination of assessment of tax by the Commissioner General or
any other decision by the Commissioner General being appealed against (d) A copy of a notice issued
by the Commissioner General regarding the existence of liability to pay tax, duty, fees, levy or charge
(e) where the appeal relates to the refusal by the Commissioner General to admit a notice of objection a
copy of the decision of the Commissioner General refusing to admit a notice of objection (f) when the
appeal related to (1) Refund, Drawbacks, or repayment of any tax , fee, duty , levy or charge a
Statement showing the calculations by the appellant of the amount due for refund, drawback, or
repayment of any tax, fee, duty , levy or charge (ii) Refusal of the Commissioner General to make any
refund or repayment a Copy of the decision of the Commissioner General refusing to refund; and (g)
Where the appeals relates to the decision by the Commissioner General to register or refusal to register
any trader for the purpose of VAT Act a Copy of the decision of the Commissioner General .

194
 incompetent; In other words, there was no appeal before the Board.
Preliminary objection was sustained.
In the same vein the Notice of Appeal will be deemed to be effective only if the
notice of appeal has been filed; in that regard, the case of Commissioner General V.
Archipelago Investment Ltd Stamp Duty Tax Appeal No 16 of 2006 [Originating
From VAT Appeal No. 8 of 2005].32

It was held inter alia that; (1) since the appellant failed to serve the notice
of appeal to the respondent as per section 16 (4) of the Tax Revenue Appeals
Act, Cap 408 (R.E. 2002), the appeal is incompetent before the Board (2)
Given that there are two conflicting decisions one from the Tribunal and
another one from the Court of Appeal of Tanzania, legal practice and
procedure dictate that the Tribunal is bound by the decisions of the Court of
Appeal of Tanzania and in no way the Tribunal can depart from such
decisions and (3) Notwithstanding decision in Clock Tower Service Station v.
Commissioner General [Customs & Excise Appeal No. 10 of 2002], the
Tribunal held that the appellants appeal in this case is defective as he did
not serve a notice of appeal on the respondent. The preliminary objection
was upheld and appeal struck out.
Finally, it should be noted that the assistance of counsel will often be necessary in
order to ensure that a defendant has effective access to appeal proceedings. The
particular scope of this requirement more closely aligns with the right to legal
assistance in civil proceedings generally, on which there is considerable jurisdictional
variation. It is in that regard, Section 22(3) of the Tax Revenue Appeals Act Cap 408
provides that;

Parties may appear in person at a hearing or be represented by any other

person being an advocate or any other person registered as tax consultant,
accountant or auditor and the Commissioner- General may be represented by
person duly authorized on that behalf.

32
Commissioner General V. Archipelago Investment Ltd Stamp Duty Tax Appeal No 16 of 2006
[Originating From VAT Appeal No. 8 of 2005]. The appellant Commissioner General of Tanzania
Revenue Authority being aggrieved by the decision of the Board appealed to the Tribunal. Before the
hearing began the counsel for the respondent raised a Preliminary Objection stating two grounds: first
that no notice of appeal was filed with the Board in terms of rule 4 (2) of the Tax Revenue Appeals
Tribunal Rules 2001, and secondly that a notice of appeal filed with the Tribunal was not served upon
the respondent as per section 16 (4) of the Tax Revenue Appeals Act, Cap 408 (R.E. 2002). The
counsel for the appellant on the first ground of objection provided evidence showing that the notice of
appeal was filed with the Board while on the second ground of appeal he maintained that failure to
serve a notice of appeal on the respondent is not fatal to the appeal and that such failure does not cause
any breach of justice to the respondent.
The issue regarding the Service of notice of appeal was whether or not a failure by the appellant to
serve a notice of appeal to the respondent who is the opposite party renders the appeal incompetent
and that regarding the Precedent Stare decisis Decision of the Court of Appeal whether the
Tribunal is bound by the that decision hence, the Tribunal was faced with decisions of the Court of
Appeal of Tanzania that conflicted with its own and had to decide whether or not to follow that
decisions.

195
Moorhead and Sefton (2005) found modest evidence that cases involving
unrepresented litigants took longer. In civil cases, cases involving represented
claimants against unrepresented defendants took less time than both parties were
represented. The exception was cases where there were active unrepresented
defendants, which appeared to be longer. It is the objective of this research to
investigate the work of Moorhead and Sefton if such longer or shorter period have
impacts to the revenue generation motives.

7.2.2 The Right to Appeal is an Opportunity Right

A ubiquitous feature of the right to appeal is that it is conceived of as an opportunity

right. Conceptually, opportunity rights fall between negative human rights, which
impose limitations on state action, and positive rights, which, when asserted require
positive state action, often the provision of goods or resources. Opportunity rights, in
contrast, are concerned with the establishment of institutions and proceduresfor
example, jury trials, confrontation procedures and electionsthat individuals are
entitled to access and in which they may participate. From the citizens perspective,
an opportunity right is not primarily a right to be free from state action or to receive a
benefit; it is a right that lies dormant until the citizen chooses to exercise it at the
designated time. Likewise, Cassandra Barke (2013) argues that;

A right to appeal protects both private litigants and judicial system as a whole,
and it is constitutional rights but has not shown how appellant system is
governed by fair procedures.

As an opportunity right, there is no obligation on states to ensure that convictions are

always reviewed by higher courts. The obligation is to establish an appellate system
where under Tanzanian tax system starts from the Tax Appeals Board, to Court of
Appeals through the Tribunals and such appellant system should be governed by fair
procedures, that defendants have the opportunity to access. It is the individuals
responsibility to exercise the right in accordance with the rules governing the
institution. Indeed, the European Court has held that;

A crucial component of the right is that, it must be exercisable on the

defendants, rather than a third partys initiative. Conceiving of the right to
appeal as an opportunity right is of most significance when one considers the
way in which appeal proceedings are conducted It is essential that courts
permit the appellant to participate actively in the proceedings. A procedure in

196
 which the appellant has no opportunity to identify the issues or present
submissions will be defective.
In that regard, where the Board or Tribunal has delayed to preserve room for the
appellant to access the Court, it shall not be bound on part of the appellant of the time
limit for the appeal. In the case of Commissioner General TRA V. Rahisi Store Tax
Revenue Appeals Tribunal Dar Es Salaam [Application: DSM 32 of 2006] 33

It was held inter alia that; Since the applicants failure to lodge an appeal
within the prescribed time has been occasioned by the Boards delay to supply
him with copies of the proceedings and judgment, the applicant is entitled to an
extension of time to lodge the appeal. The application was granted.

7.2.3 The Appellate Process Must Be Fair

Fairness may be considered further at three different levels. Paul H. Frankel et al

(2006) argues on fair tax appeals process including tax laws interpretation and
administration as critical element in optimal tax system. It is the objective of this
research to confirm such argument if holds in Tanzanian tax system, as fairness in
Appellate process must aim at improving voluntary compliance and enhancing tax
net.

7.2.3.1 Fair to the Individual Appellant

The appeal process must be fair to the individual appellant in that, procedural
requirements must pursue legitimate aims, and they cannot be so onerous that, by
restricting access, they impair the very essence of the right. This is a fact-specific
inquiry. However, it appears clear that demanding onerous filing fees would impair
the exercise of the appeal right. It is very unfortunate that, under Section 12(3) of the
Tax Revenue Appeals Act, 408 in pursuing the appeal process where a notice of
objection to an assessment is given, the person objecting shall, pending the final
determination of the objection to an assessment by the Commissioner General in
accordance with section 13, pay the amount of tax which is not in dispute or one third
of the assessed tax, whichever amount is greater.

33
Commissioner General TRA V. Rahisi Store Tax Revenue Appeals Tribunal Dar Es Salaam
[Application: DSM 32 of 2006] the issue was whether the appellant can institute the Application to
lodge an appeal out of time and what would be the grounds for granting application. The counsel for
the applicant argued that the applicant could not file the appeal within the statutory prescribed time
because they were served with the certified copies of proceedings and judgment two days after the last
day of filing the appeal. There was no objection from the respondent.

197
Furthermore, where an objector prefers an appeal to the Board or to the Tribunal, any
tax deposited pursuant to section 12(3) of the Tax Revenue Act, Cap 408 shall
continue to remain deposited with Commissioner General pending the final
determination of the appeal by the Board or, as the case may be, the Tribunal. In that,
the Appeal shall not be determined where the Commissioner has amended the
assessment in accordance with the objection made by the taxpayer, determine the
objection in the light of the proposed amended assessment or proposed refusal and
any submission made by the Objector, and determine the objection partially in
accordance with the submission by the objector by virtue of Section 13(a); 15(a)(b)
respectively. However, in the case of M/S M & M Communications Ltd V.
Commissioner General Tax Revenue Appeals Board Dar Es Salaam [VAT Tax
Appeal Case: DSM 15 of 2005]34

It was held inter alia that; As per the amendment of section 16 of Act 15/2000
by the Finance Act 2004, it is no longer a condition for admission of an appeal
by the Board, for the appellant to make any deposit with the Commissioner
General prior to the determination of an appeal by the Board. Appeal was
dismissed.
On the other hand, time limits for bringing an appeal undoubtedly serve the purpose
of assuring a proper administration of justice. Provided the limit itself does not
prevent a diligent appellant from lodging an appeal, it may be strictly enforced. In
respect of the tax matters, by virtue of Section 16 (1) of the Tax Revenue Appeals
Act, Cap 408;

Any person who is aggrieved by the final determination of the assessment of

tax by Commissioner General may appeal to the Board. The appeal shall be
heard by the Board upon serving the notice of appeal to the Commissioner
General within thirty days following the date on which a notice of final
determination of assessment of tax is served on the appellant; and the appeal is
lodged with the Board within forty-five days following the date on which the
notice of final determination of assessment of tax is served on the appellant by
virtue of Section 16(3) (a) (b) of the Tax Revenue Appeals Act, Cap 408.

34
M/S M & M Communications Ltd V. Commissioner General Tax Revenue Appeals Board Dar Es
Salaam [VAT Tax Appeal Case: DSM 15 of 2005] one of the issues was whether it is necessary to
make any deposit with the Commissioner General prior to the determination of an appeal by the Board.
When the appeal was called for hearing the respondent raised a Preliminary Objection on the ground
that the appellant had not deposited one third of the assessed amount. The Board disposed of the
Preliminary Objection after examining the effect of the amendment of section 16 of Act 15/2000 by the
Finance Act 2004 and went on to hear the appeal.

198
In the case of Rupesh Enterprises Ltd V. Commissioner General Tax Revenue
Appeals Board Dar Es Salaam [VAT Tax Application: DSM 2 of 2006]35

It was held inter alia that; (1) since the appellant failed to serve the notice of
intention to appeal to the respondent contrary to the mandatory requirement
under Rule 4 (5) of the Tax Revenue Appeals Board Rules 2001, the appeal is
incompetent before the Board. The Preliminary Objection was upheld and
appeal dismissed

7.2.3.2 Fair between Groups of Appellants

The Appeal process must be fair as between groups of appellants. The process cannot
discriminate between different classes of people. The appellants should be treated
equally and they have to feel respected and given equal chance of their defence36.

7.2.3.3 Fair at the Systemic Level

Likewise, the Appeal process should be considered the systemic level. Because
appellate resources are always limited, it is legitimate for a process to seek to channel
its resources into hearing arguable or meritorious appeals; frivolous or hopeless
appeals may be disposed of expeditiously, provided they still receive adequate
consideration of their merits. Indeed, it is not in the interests of justice and fairness to
allow unmeritorious appeals to prejudice the speedy resolution of those that have
sufficient substance to justify a hearing. Undoubtedly, a system that does not deal
with appeals quickly is unfair to individual appellants, who may be imprisoned for
substantial periods without the opportunity to challenge their convictions. But it is
also unfair for another reason: if an appeal is allowed, appellate delay risks
prejudicing the fairness of any retrial that is ordered. Evidence may have degraded,
and witnesses may be unavailable or their memories may have dimmed.

35
Rupesh Enterprises Ltd V. Commissioner General Tax Revenue Appeals Board Dar Es Salaam [VAT
Tax Application: DSM 2 of 2006] the issue was whether Failure to serve notice of intention to appeal
renders the appeal incompetent before the Board. This was an appeal by M/s Rupesh Enterprises Ltd
for payment of interest on delayed refunds. Before the hearing began the respondent raised a
Preliminary Objection on points of law that the appeal was incompetent for non-compliance with Rule
4 of the Tax Revenue Appeals Board Rules 2001 and in total defiance with the Boards ruling and
Order dated 21st April, 2006.
36
Barbara B. Crabb, In Defense of Direct Appeals: A Further Reply to Professor Chemerinsky, 71
AM. BANKR. L.J. 137, 138 (1997) (Americans continue to believe in the right of appeal, both as a
means of giving a second chance to be heard, albeit in limited fashion, thus providing a greater sense
of fair treatment, and for its normative function, in essence reining in the outliers among the lower
courts, with the result that litigants can expect reasonably uniform and consistent treatment within the
courts of any particular jurisdiction.).

199
7.2.4 The Modalities of Appeal

In general, appeals are heard de novo37; evidence presented at the trial may be
reassessed, and often supplemented, at second instance. By contrast, appeals in
common law jurisdictions are based on the trial record, with more deference given to
the first-instance fact-finder. The first step in the Appeal process is filing the
Statement of Appeal. All sections of the Statement of Appeal Form must be
completed and all documentation relevant to the complaint must be attached to the
Statement. Once the Appeal has been submitted, the staff member becomes an
Appellant. In the case of East Usambara Tea Co. Ltd V. Commissioner General Tax
Revenue Appeals Board Tanga [VAT Tax Appeal: TNG 3 of 2007] the issue was
whether issues not raised in the pleadings cannot be determined by the Board.

It was held inter alia that; Since the appellant did not include in his pleadings
a mention of section 13(3) of the Tax Revenue Appeals Act, 2000, this cannot be
entertained by the Board because it was not pleaded. Appeal was allowed
By virtue of Section 16(4) through (6) of the Tax Revenue Act, Cap 408;

A party who is aggrieved by the decision of the Board may appeal against the
decision to the Tribunal within thirty days from the date of the decision, and
shall serve notice to the opposite party within fifteen days following the date on
which the notice of appeal was filed to the Tribunal. The Board or Tribunal,
may extend the limit of time set under subsection or subsection of section 16 if it
is satisfied that the failure by a party to give notice of appeal, lodge an appeal
or to effect service to the opposite party was occasioned by absence from the
United Republic, sickness or other reasonable cause, subject to such terms and
conditions as to costs as it may consider just and appropriate.
In the case of Broron Technologies (Pty) Ltd V. Commissioner General Tax Revenue
Appeals Tribunal Dar Es Salaam [Application: DSM 7 of 2006]38

37
De novo standard of review describes a type of legal appeal where the appeals court looks at the case
anew, as if the earlier trial had never occurred. The case is effectively re-tried in the appellate forum
where an appellate court hears the testimony and evidence of the case all over again and makes its own
findings of fact without reference to the trial transcript or evidence presented in a lower court. Trials de
novo are uncommon due to the time and judicial resources required to try the facts of a case not only
once, but more than once.
38
Broron Technologies (Pty) Ltd V. Commissioner General Tax Revenue Appeals Tribunal Dar Es
Salaam [Application: DSM 7 of 2006] the issue was as to whether the delay by the Board to issue
written decision to the parties within the period prescribed under section 18(2) (e) and 24(1) of the Tax
Revenue Appeals Act 2000 constitutes a good reason to grant extension of time to file notice of appeal.
The Brief facts were that the applicant Broron Technologies (PTY) Ltd applied to the Tribunal for an
extension of time to give notice of appeal and file the intended appeal against the decision of the
Board. In support of his application the applicant raised three grounds: First, failure by the Board to
serve the written decision to the parties within fourteen or fifteen days made the applicant fail to file
the notice of appeal within the time prescribed by law. Secondly, such failure denied the applicant who
resides in South Africa and had no office in Tanzania an opportunity to examine the Boards decision

200
 It was held inter alia that; (1) In terms of section 16(5) of the Tax Revenue
Appeals Act 2000, the Tribunal may exercise its discretion to extend the time
limit within which to give the notice of appeal only upon being satisfied that the
applicants failure to give the notice of appeal was occasioned by his absence
from the United Republic, sickness or any other reasonable cause. (2) The
procedure governing the process of giving notice of appeal under section 16(3)
of the Tax Revenue Appeals Act 2000 and rule 4(1) of the Tax Revenue Appeals
Tribunal Rules 2001 does not require a party aggrieved by the decision of the
Board to obtain the written decision of the Board in order to issue notice of
intention to appeal; therefore the delay to get a copy of the decision of the
Board is not a reasonable cause for applicants failure to file a notice of
intension to appeal within the prescribed time limit. The Application was
dismissed with costs.
Likewise, in the case of National Health Insurance Fund V. Commissioner General
[Income Tax Appeal: DSM 25 of 2005];39

It was held inter alia that; (1) the court was satisfied that the appellants
application for recognition as a charitable organization was decided on 25th
March, 2004 against which decision the appellant never bothered to appeal; the
decision on 17th November, 2005 was just a reminder that the issue would not
come up again as the respondent was functus officio. (2) Since the appellant
lodged the notice of appeal on 16th December 2005 and the appeal on 30th
December 2005 contrary to section 16(2) (a) and (b) of the Tax Revenue
Appeals Act 2000 which requires a notice of intention to appeal to be lodged
within 30 days and an appeal within 45 days from the date the appellant
received the decision of the Commissioner General, the Board said that appeal
is time barred and therefore incompetent before the it; the Court accordingly
upheld the Preliminary Objection
It should bear in mind that, a person who wishes to appeal to the Board is entitled to
file to the Board a written notice of intention to appeal within thirty days from the
date of services of the notice of final assessment of tax or notice as to the existence of
liability to pay any tax, duty, fees, levy or charge. A copy of a notice of intension to
appeal shall be served to the Commissioner General within 30days. A notice of
intention to appeal must be made in the Form TRB 1, and shall be signed by or on
behalf of the Appellant. An appeal to the Board shall be instituted by lodging a

and determine whether they should initiate an appeal process or not. Thirdly, that the decision of the
Board was based on some serious misinterpretation and misapplication of both law and facts and
therefore the intended appeal had overwhelming chances of success. The counsel for the respondent
opposed the application by arguing that it did not disclose a good cause for extension of time.
39
National Health Insurance Fund V. Commissioner General [Income Tax Appeal: DSM 25 of 2005];
the issue was as to whether Appeals filed out of the statutory period are incompetent before the Board;
in this case, the appellant National Health Insurance Fund was appealing against the decision of the
Commissioner Generals refusal to recognize it as a charitable organization. At the start of the hearing
of the appeal the respondents counsel raised a Preliminary Objection against the appeal on ground that
it was time barred therefore incompetent before the Board.

201
statement of appeal at registry of the Board within forty five days from the date of
service of notice of the final assessment, or any decision appealed against.

In the case of Tokyo Auto Centre Ltd V. Commissioner General Tax Revenue Appeals
Board Dar Es Salaam [VAT Tax Appeal Case: DSM 9 of 2005];40

It was held inter alia that; (1) in terms of rule 15(10) of the Tax Revenue
Appeals Board Rules 2001, the Board is mandated to elect procedure to be
adopted in the hearing. (2) Execution of the decrees issued by the Board is not
automatic, the respondent the Commissioner General must have applied to the
Board for an order authorizing execution or tax recovery measures to be
initiated as per rule 21(1) of the Tax Revenue Appeals Board Rules 2001.(3)
Since the applicant was ordered by the Board to pay the respondent a
substantial sum and that it acted without any delay in filing notice of intention
to appeal to the Tribunal, the Board was satisfied that the applicant would
suffer substantial loss if the stay is not granted and that the application has
been made without unreasonable delay as per Order XXXIX rule 5(3)(a) and (b)
of the Civil Procedure Code 1966; The Application was granted

7.3 METHODOLOGY

We use the t-test using two paired samples in order to compare between disputable
tax revenue and the total revenue comprising of import duty, excise duty, VAT and
Income tax which are two dependent sets of test data so as to test as to whether the
means (i.e., averages) are different from each other and the level of significance is
0.05. This is both Qualitative and Quantitative research which is basically
confirmatory using data from 2001 to 2013. The Paired t-test formula is given by the
following expression;

D D D D D D
t Obtained (1)
SD SD SS D
n n(n 1)

Because under the Null Hypothesis D 0 in that regard our formula becomes;

40
In the case of Tokyo Auto Centre Ltd V. Commissioner General Tax Revenue Appeals Board Dar Es
Salaam [VAT Tax Appeal Case: DSM 9 of 2005]; the issues were whether regarding the procedure in
the proceedings before the Board, the Board has the mandate to elect procedure to be adopted in the
hearing and Execution of Boards decrees whether is automatic and whether Application for stay of
execution of decree constitutes grounds for granting application. This was an application for an order
to stay execution of the Boards decree brought under a certificate of urgency. Before the proceedings
began it was discovered that the respondent had threatened the applicant with enforcement by tax
collection measures without first having the decree for execution of the Boards decision. Secondly,
the Board was faced with the question as to what was the applicable procedure in entertaining the
application. The Board subsequently clarified the proper legal position. The counsel for the respondent
challenged the application by arguing that the applicant did not advance strong or sufficient grounds to
warrant the stay execution of the Boards decree.

202
 D D D
t obtained (2)
SD SD SS D
n n(n 1)

In our statistical quantitative analysis we have developed two hypotheses that;

Hypothesis 1= Disputable taxes reduces tax revenue levels in all categories of taxes
(Null Hypothesis and; Hypothesis 2= Disputable taxes do not reduce tax revenue
levels in all categories of taxes (Alternative Hypothesis). Using the regression model
we have the following expression for the disputable taxes;

Disputable Taxes = 0 1 Total tax revenue ..(3)

7.4 EMPIRICAL FINDINGS

7.4.1 Scope of Operations

From the year 2002 through 2012, the Board and the Tribunal received a number of
appeals and in that, decisions were remarkably executed41. In the same vein, the
Board and the Tribunal have still been hearing the proceedings and have further made
decisions on a number of appeals which were filed in different stages (Figure 9 and
Figure 10).

7.4.2 Challenges in the Appeals Process

In an effort to ensure that appeals are being heard and finally determined as soon as it
is practically possible; it is imperative to know that there are some challenges that
have been faced which affect the appeals to be timely determined and properly
executed. On part of the challenges, the following fivefold challenge was in place;

7.4.2.1 Adjournment for the Scheduled Appeals

An adjournment is a suspension of proceedings to another time or place by the courts

for a number of reasons and at many different points in the trial process. A motion,
trial, pre-trial conference, or any other court date can be adjourned for any number of
reasons, including unavailability of counsel or their client, a lack of time in the
courts schedule, or for procedural irregularities. If the case has been adjourned, the

41
The Board has decided 791 appeals whereas the disputable taxes amounted to TZS 536,898,874,521 and
USD 42,750,492. On part of the Tribunal a total of 314 appeals were decided whereas the disputable taxes
amounted to TZS 334,457,600,241 and USD 113,199,760 (Table 1).

203
court will give instructions on how to proceed. Sometimes, a case is adjourned sine
die42, which means it has been adjourned without another date being set. In this case,
the parties will have to schedule another date themselves if they wish the case to
continue. Other times, when a case is adjourned, it will be re-scheduled for a date at
some point in the future.

Suffice it to say that, Court adjournment can mean either if an adjournment is sine die
(final), the court has permanently concluded its business for a particular trial, hearing
or other activity; or the court is postponing the remainder of the proceedings until
another appointed date, whether the next day or months in the future. An
adjournment should not be confused with a recess, which means a short break in the
proceedings, with court resuming on the same day.

Some jurisdictions recognize the concept of "Adjournment in Contemplation of

Dismissal" (ACD), which means;

A trial, is postponed while the defendant performs some ordered prerequisite

such as community service to dismissal. If the activity is performed to the
court's satisfaction, and no further bad acts are committed, the case may be
dismissed without a plea. If the activity is not performed to the court's
satisfaction, or if the person reoffends, the trial will proceed at an appointed
time. In essence, an ACD ruling imposes a period of probation on the defendant
before the defendant goes to trial, without a plea of guilty or not guilty.
By virtue of Section 17(1) (f) of the Tax Revenue Appeals Act, Cap 408;

The Board and the Tribunal have respectively the power to adjourn the
hearing of any proceedings before it.
Likewise under Section 18(1) (a) of such law:

In every proceedings before the Board and before the Tribunal the appellant
shall appear either in person or by his duly authorised agent on the day and at
the time fixed for hearing of the appeal but if it is proved to the satisfaction of
the Board or Tribunal, as the case may be, that owing to absence of the
appellant from the United Republic, or due to sickness or any other reasonable
cause, he is prevented from attending or cause to be represented at the hearing
of the appeal on the date and the time fixed for hearing, the Board or the
Tribunal, as the case may be, may adjourn the hearing of the appeal for such
reasonable time as it may think appropriate.

42
Adjournment sine die (from the Latin "without day") means "without assigning a day for a further
meeting or hearing". To adjourn a tax court sine die is to adjourn it for an indefinite period. A tax
courts adjourns sine die when it adjourns without appointing a day on which to appear or assemble
again. It can be used in reference to members of the tribunal whose terms or mandates are coming to
an end, and it is anticipated that this particular body will not meet again in its present session, form, or
membership

204
It is in that regard, as the Board and Tribunal found appropriate have been adjourning
Cases when TRA and Taxpayers have been praying for the adjournment of the
scheduled appeals to be determined; they thus have been praying to be given more
chance to negotiate on compoundment of offence as the case may be settlements of
disputes out of the court. But later having no reach onto consensus, they appeared
before the Board and Tribunal claiming reconciliation to be of no consensus; hence,
thereby claiming the case to be re-determined for proper execution as heretofore
arranged in the jurisdiction of the Board and Tribunal. In some occasions, Advocates
of the parties (both TRA and taxpayers) have been praying for the adjournment of the
appeals on the reasons that advocates were on official excursions, advocates to be
required to attend in the courts of high jurisdictions, advocates being late comers or
not to be availed statement from their clients including among others family problems
such as death ceremonies, illness, and family caretaking relating to ailment.

7.4.2.2 Non-reply to the Statement of Appeals

The Statement of Appeal (which is a statutory requirement) and reply should be a

complete and comprehensive document and include all materials the Party wishes to
be considered and the reply should be timely made. Unfortunately, TRAs advocates
have been failing to timely reply to the Statement of Appeals, hence causing for the
adjournment of the appeals which had to be determined. It should be noted that,
Taxpayer has the burden of proving, by a preponderance of the evidence that TRA
has erred in applying or interpreting the relevant statute or facts.

7.4.2.3 Preliminary Objections (PO)43 lacking legal basis

Preliminary objections are generally a form of pleadings by lawyers; they are points
of law or fact raised at the outset of a case or lawsuit by the defence without going
into the merits of the case. In other words, preliminary objections take no account of
the validity of the claims of the claimant or plaintiff. The preliminary objections may
be taken on the basis of the following:

43
The nature of a preliminary objection necessarily affects the burden of proof. There are basically two
categories of preliminary objections: "those raising questions of fact outside the record and those
which may be determined from the facts of record."Chester Upland Dist Vs. Yesavage, [653 A.2d
1319,*1325(Pa.Commw. 1994]. If preliminary objections raise issues of fact beyond the record, the
failure of the parties to provide requisite evidence does not excuse the court from making further
inquiry. Holt Hauling& Warehouse Systems Vs. Aronow Roofing, [309 Pa. Super. 158, 454 A.2d
1131, *1133 (1998)]

205
 1) The jurisdiction of the particular court or tribunal to hear the case is lacking,
2) The suit discloses no cause of action. In other words, there is no underlying basis
or dispute for which the suit could have been initiated,
3) The suit is time-barred by limitation. For example, many types of civil suits may be
barred after a period of three years from the time the dispute or cause of action
arose. This limitation is imposed in many legal systems to avoid excessive abuse of
the system and to prevent litigants who sleep over their rights from exercising it
after considerable lapse of time. However, in some situations, courts may have the
power to condone delay for legitimate reasons,
4) The relief claimed by the claimant in the suit cannot be granted by the Court,
either because it is barred in law or the Court has no jurisdiction to grant the relief
claimed or otherwise infructuous, and 5) the doctrine of Res Sub Judice. In other
words, another suit by the same claimant against the same defendant, disclosing
the same cause of action, is pending before another court.
TRAs Advocates have always been filing the Preliminary Objections (PO) which
were lacking legal basis, hence causing for the lag-determination and proper
execution of the appeals within time frame. Moreover, it is important that in the
statement of a case, the matters at issue should be fully and accurately set out. The PO
as held and cited by Justice Rutakangwa, Msofe and Kaji was rationally defined in
the case of Mukisa Biscuits Manufacturing Company LTD v West End Distributors
LTD (1969) EA 696. At page 700

Law, J.A observed that; A Preliminary Objection consists of a point of law

which has been pleaded or which arises by clear implication out of the
pleadings, and which, if argued as a Preliminary Objection may dispose of
the suit. . A preliminary objection is in the nature of what used to be a
demurrer. It raises a pure point of law which is argued on the assumption
that all the facts pleaded by the other side are correct. It cannot be raised if
any fact has to be ascertained or what is the exercise of judicial discretion.
In the case of TAICO Ltd v Tanzania Revenue Authority [Misc. Civil Cause No. 108
of 2003) [2006] TZHC 21 (24 May 2006] 44

Judge Shangwa held inter alia that; In the light of section 18(2) of the Law
Reform (Fatal Accidents and Miscellaneous Provisions) Ordinance Cap.360,
time within which the applicant had to file his application cannot start to run
from 15/9/2003 when the Tax Revenue Appeals Board made its decision
because the decision which the applicant wants to challenge by applying for the
44
TAICO Ltd v Tanzania Revenue Authority [Misc. Civil Cause No. 108 of 2003) [2006] TZHC 21 (24
May 2006] On the 19th December 2003, the applicant TAICO LTD filed an application for leave to
apply for the prerogative orders of Certiorari, Mandamus and Prohibition against the respondent's
decision to seize his motor vehicles namely a tanker with Registration No. TZF 9351 and a trailer with
Registration No TZF 7776 together with fuel for having been found in possession of unaccustomed
fuel products contrary to the Petroleum Marking Regulations (GN 45 of 2001) read together with
section 146 of the East African Customs and Transfer Tax Management Act, 1970 and S.47 of the
Value Added Tax Act, 1997. On 12th July, 2004, learned counsel for the respondent Mr Primi filed a
notice of preliminary objection that the application is bad in law for being time barred.

206
 prerogative orders of Certiorari, Mandamus and Prohibition is not the decision
of the said Board's Chairman but the decisions of the commissioner for customs
and Excise which were made on 27/1/2003 and 28/1/2003 respectively. He
agreed with Mr Primi for the respondent that application is time barred.
Preliminary Objection was upheld and he dismissed the application with costs.
By virtue of Section 12 (2) of the Tax Revenue Appeals Act, Cap 408 a notice of
objection by the taxpayer shall contain a statement in precise form, of grounds in
respect of which the objection to an assessment is made, and shall be filed with the
Commissioner General within thirty days from the date of service of the notice of the
Assessment.

In the case of Erick David Massawe T/A Erick David Petrol Station V. Commissioner
General [Consolidated Customs & Excise Tax Appeal: Msh 12/2004 and 1/2005] 45

It was held inter alia that; (1) where there is a possibility that the Board staff
is the cause of non-service of the notices of intention to appeal, the appellant
will not be wholly responsible for such non-service, and therefore the appeal
will remain competent, non-service notwithstanding. (2) The appellants
actions of deliberately choosing the wrong forum does not constitute
reasonable ground upon which the respondent Commissioner General could
have granted him leave to file late notices of objection against the two notices
of assessments as per section 12 (5) of the Tax Revenue Appeals Act 2000.
Appeal was dismissed
It should be concluded that, understanding the nature and scope of preliminary
objections is very important for practicing lawyers; knowing how to raise a properly
formulated preliminary objection, and when to raise it, can save a lot of time and

45
Erick David Massawe T/A Erick David Petrol Station V. Commissioner General [Consolidated
Customs & Excise Tax Appeal: Msh 12/2004 and 1/2005] the issue was whether Board is partly to
blame for non-service and the appeal is competent Applications; and on the Application for extension
of time to lodge notice of objection regarding grounds for granting application as to whether pursuing
remedy in other fora may constitute a reasonable cause. The Brief facts were that, in two occasions
in 2004 the appellant was found in possession of unaccustomed petroleum products. The respondent
seized the products and closed the petrol station. The respondents officer went ahead to assess the
payable import taxes and duties and immediately served the appellant with a notice of assessment.
However, the appellant did not lodge his objections against the two assessments to the Commissioner
General, instead unsuccessfully filed civil suits in the ordinary courts of law. Later on the Appellant
lodged two late notices of objection to the respondent requesting him to exercise his discretion to
extend the time within which to lodge late notice of objection together with an application for waiver
not to deposit taxes not in dispute before determination of the notices of objection.
The respondent rejected the appellants application for extension of time because it did not disclose a
reasonable cause, hence the appeal to the Board. Before the hearing began the counsel for the
respondent raised a preliminary objection on the ground that the appeal was incompetent before the
Board for non-service of the notice of intention to appeal on the respondent which is a statutory
requirement. During the hearing of the appeal, the counsel for the appellant submitted that the
appellants failure to file the objection within the time prescribed by law was caused by the appellants
decision to take his grievances to the wrong forum. The counsel for the respondent resisted the appeal
that it did not disclose a reasonable cause as contemplated by the law.

207
costs for clients. Preliminary objections are the basic legal weapons that a defendant
can utilize without expending too much effort.

7.4.2.4 Appointment of the Deputy Chairpersons and Resource Allocation

The appointing authority delayed in appointing the Deputy Chairpersons of the Board
and that of the Tribunal. This has been reducing the speed in the determination of
appeals. Moreover, the Board and the Tribunal have faced a big problem relating to
the budget constraints which to a large extent has affected functions of the Board and
the Tribunal. It is a belief that, the Government budget is formulated and
implemented based on the priority of interventions. But it is a widely held view that
these two institutions could have been given more priority in order to ensure that their
functions are performed effectively and timely so as fair taxes demanded by the
Government through appeals could be collected after appeal decisions have been
made in line with the law. When the appeal has been timely determined and properly
executed, the legal disputes are waived and this could empower the Government to
simply collect taxes for development and improve good governance. These
achievements are met without due consideration on who has won the case or not.

The Budget constraints problems affect determination of the appeals in the following
areas; appeals especially at the regional levels are not timely determined; Members
are not full time employees of the Board and Tribunal. Hence, if they are not paid
allowances timely, it tends to be difficult to determine the appeal; the budgeted
amount for the hearing is inadequate causing for the few appeals to be determined;
lack of offices and working facilities especially lack of Chambers for hearing cause
appeals not to be determined as planned; and Failure for the employees and members
to participate trainings for capacity buildings relating to the resolving tax disputes
hindered the determination process. Likewise, The Budget constraints issue was
addressed and submitted with variety of applications for resource allocation in the
Fiscal Years 2011/2012 and 2012/2013.

7.4.2.5 Right of Appeal at the High Court Causing Deregistration

Functions of the Board and Tribunal have not been halted despite of the these
challenges and problems taking into account that determination and execution of
appeals are still in place and the fact that volume of such appeal submissions are
increasing at an increasing rate day after a day. Moreover, there are appeal
determinations that have already been under concern and that which have been

208
executed; but TRA in pursuing its rights to appeal is beholding for the possibility to
file the appeal to the High Court. By considering such dissatisfaction of the Board
and Tribunal decisions by the TRA, it is not falling within the correct vein to mention
that these appeals have not been finally determined and executed henceforth.
Ultimately, it should bear in mind that, any appeal which has been executed after
evidences and to which parties have been heard on merit; it has to be deregistered in
the Register by the Board and the Tribunal; and therefore, have not been included in
the statistics reflected herein.

When the Revenue Authority has to collect more that TZS 10billion in either of the
type of taxes onto which disputable cases could arise, the Null Hypothesis is less or
equal to TZS 10billion and the alternative Hypothesis is greater than TZS10 billion
hence, it is a one sided test. In our analysis we reject Null because P-Value of
0.001750886 is less than 0.05 (level of significance) and under two-tail we reject Null
because P-Value of 0.003501772 is less than 0.05. Therefore, at 0.05 significance
level there is sufficient sample evidence to support the claim that disputable taxes
reduces tax revenue levels in all categories of taxes (Table 1). Moreover the
disputable tax to the total revenue ratios are shown in Table 4 below, which shows
that the ratios are increasing at an increasing rate since 2001, thereby reflecting the
wide scope of tax cases to be determined; indeed this is a reflection of revenue risks.

Given the Linear Model in equation (3) above, as long as R2 is 0.6473, by having the
value of disputable revenue we can perfectly predict the value of the revenue.
However, the intercept has not been included. Eighty four percent of the variation in
the response variable is explained by the total revenue which is an explanatory
variables and the remaining twenty six percent is attributed to unknown as the
disputable taxes have no certainty that can be collected to add value to the total
revenue, because this would likely depends on the position of the winner in the case.

209
CONCLUSION

Tax is widely considered a complex subject that should be left to experts. This perception
has contributed to the huge gap in information available to the public on the issues of tax
and development, which can be filled through Advocacy. Likewise, human rights
encompass not just sociopolitical but also economic human rights. Economic human rights
include the right to food, education, health security and other basic rights: achieving these
rights is conditional on the availability of financial resources to fund them through tax
revenue. Tax is therefore a key to ensuring that Tanzania can fulfil its human rights
obligations due to availability of resources. We should note at this end that, the Financing
for Development process designed to support the Millennium Development Goals, along
with other development goals, includes statements on various ways of mobilizing revenue.
This is in line with the 2008 Doha Declaration on Financing for Development which states
that:
We will step up efforts to enhance tax revenues through modernized tax systems, more
efficient tax collection, broadening the tax base and effectively combating tax evasion. We
will undertake these efforts with an overarching view to make tax systems more pro-poor.
While each country is responsible for its tax system, it is important to support national
efforts in these areas by strengthening technical assistance and enhancing international
cooperation and participation in addressing international tax matters, including in the
area of double taxation. UN Financing for Development, Doha Declaration article 16.
Tanzania should be liable to strengthen a domestic revenue base which is a key to creating
fiscal space for her development. This is compatible with the IMF which quoted to have
been reporting that:
Tax increases incentives for public participation in the political process and creates
pressure for more accountability, better governance, and improved efficiency of
government spending. Domestic revenue mobilization can help strengthen fiscal
institutions.
Of course, this should go in tandem with the belief that, Tax Justice must define Taxation
as Voluntary Contribution to the Government, while on contrary the definitions that
advocate for the Compulsory contribution should prevail only if Tax Justice is compatible
with the sufficient revenue index which satisfies social, economic and political needs. This
will be doable to the extent that, mutual and meeting of minds regarding taxation are
executed through Tax Advocacy campaign between the Government and its citizen.

210
Figure 1: Lady Govida a Wife of Leofric

Figure 2: Lorenz Curve Illustrative Example

211
Figure 3: The Deadweight Loss from a Change in Taxable Income in Response to Taxation

Figure 4: Institutional and Socioeconomic Factors Associated With Tax Morale Globally

212
Figure 5: Factors Influencing Taxpayer Behaviour

SOURCE: Price Water House Coopers (2012)

Figure 6: Tax Compliance Programme Logic

Source: Based on Evaluating the Effectiveness of Compliance Risk Treatment Strategies (OECD,
2010a).
Figure 7: Influences on Tax Compliance Outcomes

Source: Based on Evaluating the Effectiveness of Compliance Risk Treatment Strategies (OECD,
2010a).

213
Figure 8: Pecking Order Fora on the Appellant Machinery

Figure 9: Summary of Performance of the Board and Tribunal from 2002-2012

900 1200
1105
800 791
1000
700
AMOUNT IN TZS (Billion)

871.35
600 800
BOARD
536.90
500
600
400
334.45 TRIBUNAL
300 314 400

200
155.95 200
100 113.20 TOTAL

42.75
0 0
DECIDED CASES DISPUTABLE TAXES (TZS Billion) DISPUTABLE TAXES(USDMillion)
STATUS OF TAX CASES AND DISPUTABLE TAXES

SOURCE: Tanzania Law Reports for the year 2002 through 2012

214
 Figure 10: Analysis of the Performance of the TRAT and TRAB by Tax Category (2002-2013)
20

18

16

14
Number of Tax Cases

12

10

0
Custom Custom Custom Custom Custom Custom Custom Custom
Income Income Income Income Income Income Income Income
VAT s& VAT s& VAT s& VAT s& VAT s& VAT s& VAT s& VAT s&
Tax Tax Tax Tax Tax Tax Tax Tax
Excise Excise Excise Excise Excise Excise Excise Excise
Dismissed Settled Partly granted Granted Withdrawn Struck out Pending Total
2002 0 2 1 0 0 0 0 0 0 7 2 1 1 1 1 0 0 0 0 0 0 8 5 3
2003 0 2 5 0 0 0 0 0 0 14 2 3 0 0 0 0 0 1 0 0 0 14 4 9
2004 1 2 0 0 0 0 1 0 0 1 5 1 1 4 0 0 3 0 0 0 0 4 14 1
2005 1 1 0 0 0 0 5 0 0 3 2 1 1 1 0 2 0 0 0 0 0 12 4 1
2006 1 0 1 1 0 1 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 3 1 2
2007 2 0 0 0 0 0 0 0 0 0 0 1 0 1 1 0 0 0 0 0 0 2 1 3
2008 8 1 0 2 1 0 0 0 0 3 2 3 1 1 3 0 0 0 0 0 0 11 5 6
2009 2 0 0 4 1 0 0 0 0 10 4 3 1 2 0 0 0 1 1 0 1 18 7 5
2010 0 1 2 0 0 2 0 0 0 6 3 5 3 2 0 0 0 0 0 0 0 9 6 7
2011 0 2 0 4 0 0 0 0 0 1 8 6 1 1 0 2 0 1 1 0 0 9 11 7
2012 1 0 4 0 0 4 0 0 0 0 1 2 1 0 1 1 0 0 0 0 0 3 1 8
2013 0 1 0 0 0 0 0 0 0 2 0 1 0 0 0 0 0 0 5 0 1 7 1 1
TYPE OF TAXES

SOURCE: Tanzania Law Reports for the year (2002-2013)

Figure 11: The Trend Analysis of the Disputable Taxes to Total Revenue (2001 2013)
9,000,000,000,000.00 1,200,000,000,000.00

1,117,618,438,029.00

8,500,000,000,000.00 1,000,000,000,000.00
8,418,758,000,000.00 Total Revenue

y = 3E+11x
R2 = 0.6473
8,000,000,000,000.00 800,000,000,000.00
AMOUNT OF DISPUTABLE TAXES

7,888,546,000,000.00
TRAT/TRAB
TOTAL REVENUE

7,500,000,000,000.00 600,000,000,000.00

Linear
(TRAT/TRAB)
7,108,857,000,000.00
7,000,000,000,000.00 400,000,000,000.00

236,864,804,295.66
6,500,000,000,000.00 200,000,000,000.00

87,136,314,677.35

6,000,000,000,000.00 -
Import and Excise duty VAT Income Tax
TYPE OF TAXES

215
Figure 12: Trends of Revenue Index (2010/11 through 2014/15)
12,000,000.00

10,000,000.00
TAX REVENUE (Million TZS)

8,000,000.00

6,000,000.00

4,000,000.00

2,000,000.00

0.00
Domestic Revenue Domestic Revenue Customs and Excise Large Taxpayers Dept Total Revenue
Dept (Direct Tax Dept (Indirect Tax duty Dept
Revenue) Revenue)
TYPE OF TOTAL TAX ITEMS AS PER DEPARTMENTAL COLLECTIONS
2010/11 2011/12 2012/13 2013/14 2014/15

Figure 13: The Trends of Tax Revenue to GDP Ratio (1997/98 through 2014/15)

16.00

14.00 13.8
13.20
TAX REVENUE TO GDP RATIO

12.00
12.5812.34 12.3012.62 12.45
11.7312.15
11.26 11.02
10.62 10.80
10.00 10.13
9.32 9.48
8.50
8.00 7.67
6.00 5.78

4.00

2.00

0.00

FISCAL YEAR

SOURCE: Authors Survey at the Responsible Ministry and Revenue Authority

216
Table 1: Results of the t-Test: Paired Two Sample for Means 0.05

Variable 1(Disputable Variable 2(Total Tax

Taxes) Revenue)
Mean 7.80539E+12 4.8054E+11
Variance 4.34147E+23 3.10006E+23
Observations 3 3
Pearson Correlation 0.241961003
Hypothesized Mean
Difference 0
df 2
t Stat 16.85439432
P(T<=t) one-tail 0.001750886
t Critical one-tail 2.91998558
P(T<=t) two-tail 0.003501772
t Critical two-tail 4.30265273

217
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INDEX
Abusive tax shelter
Economic substance, Business purpose
doctrine, Step transaction, Sham
Transaction ...................................... 127
Adjournment in Contemplation of Dismissal
Community service to dismissal, Plea,
Sine die ........................................ 8, 204
Ancient Egyptians
pharaos, Cooking oil, Scribes................. 11
Anglo-American interpretation
Representative government, Democracy,
human rights, tax justice .................... 47
Anglo-Saxon
Lady Govida, Leofric, Napoleonic
Wars,British tax court ........................ 14
Appeal process
fair, appellants, systemic level, justice and
fairness, .................................... 199, 200
Average tax rate
Progressive tax, Marginal tax rate,
Lorenzo Curve, Inequality of the wealth
distribution ......................................... 72
Bank-deposit" method
Reported gross income, indirect approach,
falsified deductions, living expenses,
the percentage of mark-up ............... 104
Beneficial diversion
heavy duties, luxury goods, tax
concessions, ....................................... 34
Classical economic
Consumption, Production, Distribution,
social welfare, employment ............... 32
Commission of Enquiry
Sir Eric Coates, Income Tax Act, 1957,
Uniform administration...................... 22
Complex rules
Simplicity, elasticity, flexibility,
compliance process ............................ 89
Consumption taxes
egalitarian, paternalistic, ........................ 40
Cross-border tax arbitrage
Returns to capital, tax avoidance,
Deduction for the depreciation ........ 114
Customs and Excise Revenues Allocation
Act
Ordinance Cap 264, Excise Tariff
Ordinance of 1954, Finance Ordinances,
Customs Tariff Ordinance of 1958,
Second World War ............................ 19
Deadweight loss
Neutral tax, supply and demand, optimal
allocation............................ 94, 143, 212
238
Democracy
popular elections, Constitutional
constraints, ability of the State to
conerce autocracy,ability of the State to
coer ...... 47, 51, 219, 221, 224, 228, 231,
235, 236
popular elections, Constitutional
constraints, ability of the State to
conerce autocracy,ability of the State to
coerce ........................................... 51, 52
East Africa
Vasco Da Gama, Sultan Ibrahim, tribute,
Queen of Portugal.. 8, 16, 17, 18, 19, 20,
234
East African Income Tax Management Act,
1970
Uganda, Kenya, Tanganyika, Law of
Community ......................................... 22
Economic and political stability of a country
regional inequalities, redistributive
transfers, development of local
industries, export of goods and services
............................................................ 37
Egalitarianism
political, social, economic and civil rights,
justice in taxation, barriers of economic
inequality ............................................ 80
employment opportunities
Unemployment problem, tax credit,
Personal income tax, social security
contributions, payroll taxes, labour
demand ............................................... 39
England
Napoleonic Wars, France. 14, 43, 141, 142,
236
Excise Duties Agreements Ordinance of 1931
Kenya, Uganda, Tanganyika, Sugar, Tea,
Cigarettes, Tobacco ............................ 19
Exclusive jurisdiction
TRAB, revenue levels, procedural justice
.................................................. 187, 190
Expediency theory
Test of practicability, Economic and social
objectives, cost of collection .............. 92
Extensive judicial role
TRAB, TRAT, fair, efficient, effective
collection of taxes, Notice of Appeal,
Court of Appeal ................................ 191
Financing function
efficeint use of scarce resources, allocative
inefficiency, sufficient financial
resources, enormous expenditure . 33, 34
Fiscal sovereignty
Choice Model, Minimu Standard, Agency
Model, redistributive policies ............ 31
GAARs
unnatural legal forms, Substantive taxing,
transfer pricing, ............................ 8, 152
Good tax structure
Incentives, economic efficiency,
distributional effects, international
aspects, simplicity, costs of
administration, compliance, flexibility,
stability, transitional problems ........... 58
Government budget
Priority of interventions, legal disputes,
Budget constraints, good governance
......................................................... 208
Greece
Eisphora, Spears, Arrows, Crossbows,
Shields, Amour, War, Metoikion,
Silver, Mines, Tribute .................. 12, 61
Hut Tax Regulation
Rupee, Native hut, Poll Tax Ordinance,
Direct taxation ................................... 18
Index of Ability to contribute
Rule of law, revenue, Constitutional
liberty, ................................................ 59
Inheritance tax
wealthy to consume, economic stability,
elasticity, value of money, income
levels, public sector activity......... 13, 37
Interest
Understating estimated tax payable, by
instalment, failure to pay tax, general
provisions for assessment 25, 29, 41, 42,
48, 49, 50, 62, 86, 119, 120, 121, 122,
126, 145, 147, 155, 156, 168, 173, 183
Intertemporal tax equity
Present value, Utility function, absolute
sacrifice rule,...................................... 74
Islam
Islamic tax the Khums, Jizya, Zakat,
Sadaqa, Harbour fees ......................... 15
ITA No 33 of 1973
East African Income Tax Department,
Customs control, sovereigny in revenue
administration .................................... 22
Legislative controls
Review of Tax laws, tax evasion and
avoidance, Tax Amnesty, voluntary
compliance ....................................... 151
Limiting taxing powers
Trust, taxpayers compliance,
Constitutional and Administrative law,
legitimacy of taxation, Volumtary tax
compliance ......................................... 50
239
Marginal elasticity of taxable income
Absolute value, tax avoidance, Marginal
administrative cost, Net benefit, tax
sheleters ............................................ 114
Absolute value, tax avoidance, Marginal
administrative cost, Net benefit, tax
shelters.............................................. 115
Middle East
artifacts, temples, fund war ......... 11, 13, 43
Net worth" method
Taxpayer's assets, non-deductible
expenditures, .................................... 104
Normative convergence
Progressivity, degressivity, regressive
taxation, tax policy ............................. 79
Notice of appeal
Extension of time, Serious
misinterpretation and misapplication,
failure by the Board, . 195, 198, 200, 201
Objective test
Profits, reduction in costs, tax liability . 129
OECD classification
Compulsory, unrequited payments, Income
Tax Office, Musgrave Musgrave ........ 29
Old French
taxare, task, tax, duty .............................. 11
Palestine, Egypt, Assyria, and Babylonia
Ancient Kings, Polltaxes, Farmers ......... 12
Paternalistic policies
justice, public health, egalitarian ............ 41
Penalty
failure to maintain documents, making
false or misleading statements, aiding or
abetting, concealing or inducing
commission of offence, ... 155, 156, 217,
220
Preliminary Objection
Points of law, Appeal bad in law, intention
to appeal, .................. 199, 201, 206, 207
Principle of equity
progressive, inequalities of income and
wealth ..................................... 35, 61, 78
Reflection effect
Tax compliance, Cardinal utility function,
marginal utility ................................. 171
Res Sub Judice
jurisdiction, relief, power to condone
delay, Preliminary Objections, proper
execution........................................... 206
Right to appeal
Opportunity rights, negative human rights,
jury trials, ......................... 188, 196, 220
Right-based approach
transparency, participation, accountability,
negative approach, positive approach, 54
Roman Empire
Publicani, Gifts, Fiscus Cesares, Portoria,
Inheritance tax, retirement funds,
Augustus Caesar, Sait Mathew,
Temporal powers ............................... 13
SAARs
Substantive taxing, transfer pricing,
mechanical rules .......................... 8, 152
Social Contract
sovereign, welfare. liveral society, ......... 42
Societal norms
Tax law, tax morale, civic duty, internal
motivation ........................................ 172
Socio-political theory
Social and political objectives, economic
problems, welfare economics, burden of
taxation, ............................................. 69
Stabilization function
economic stability, full employment,
inflationary pressures, private demand,
private consumption and saving ........ 36
Subjective test
Motivations of taxpayers, economic
substance doctrine, business purpose
doctrine, Step transaction doctrine ,
Sham transaction doctrine................ 129
Substance of convictions
reviewable, Appeals, minimizing the risk,
......................................................... 193
Tanzania Revenue Authority
Tanzania Revenue Authority Cap 339 2, 6,
7, 8, 10, 23, 30, 158, 159, 187, 189,
190, 206, 235
Tax exemptions
tax credits, tax breaks, tax holidays,
revenue administration..... 36, 38, 91, 92
Tax on pollution
Carbon emission, triple dividend, bad
externalities, external costs ................ 40
Tax wedge
240
labour costs, net take home, ex-post
avaerage effective tax burden, revenue-
neutral ................................................. 39
Taxation
Adam Smith, Seligman, Bastable Charles,
Lutz,... 2, 6, 9, 11, 12, 13, 16, 20, 21, 24,
25, 26, 28, 29, 31, 32, 34, 36, 38, 40,
41, 45, 46, 47, 49, 51, 52, 53, 58, 68,
80, 84, 87, 92, 98, 99, 140, 182, 217,
218, 219, 220, 221, 222, 223, 224, 225,
226, 227, 228, 229, 230, 231, 232, 233,
234, 235, 236
Taxpayer compliance program
High level plan, compliance risk,
administrative approach, risk-based
verification programs ............... 167, 168
Taxpayers rights
human rights, tax justice, voluntary
compliance ................................... 56, 57
Territorial Ordinance
Income Tax Law, Uganda, Tanganyika
and Zanzibar, Protectorate
governments, Eat African High
Commission, East African Income Tax
Management Act, 1952 ...................... 21
trade cycle
inflation, deflation, purchasing power,
abnormal demand, demand and supply,
depression, incentives , savings .......... 36
Uganda Revenue Authority
Act of Parliament in 1991, .. 8, 22, 194, 235
United Nations Universal Declaration of
Human Rights
basic human rights, social democratic
political discourse ............................... 55
War Taxation (Income Tax) (amendment)
Ordinance 1941
East African Income Tax (Management)
Act, 1952, Tea Ordinances, ................ 21
Weberian bureaucracy
Representation and services, Europe rulers
............................................................ 45
Prof Handley Mpoki Mafwenga Simba
[Ph.D finance (COU), Ph.D International Economic Laws (OUT), MSc finance (Strathclyde),
MBA Mg. Eco (ESAMI/MsM), LLM taxation (UDSM), LLB (Tudarco), PGD tax mgt (IFM),
AD tax mgt (IFM), ICSA(UK)}

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