Ethics in Tax Administration

Group Number 1

Advanced Mid-Career Training Programme

for
Commissioners of Income-tax
03rd July, 2015

Sandip Garg
Anshu Shukla Pandey
Sunil Kumar
Dinesh Sawkmie
N. Jayasankar

A Study carried out at the Indian Institute of Management, Bangalore

Take Deviation

referenced literature - unless specifically mentioned

Plumley AH, 1996, The Determinants of Individual Income Tax Compliance
James S and Alley C, 2002, Tax Compliance, Self-assessment and Tax Administration
Journal of Finance and Management in Public Services, Vol 2, No. 2, p. 27
Cowell FA, 1992 Tax Evasion and Equity Journal of Economic Psychology, Vol. 13, p. 521
Allingham MG and Sandmo A, 1972 Income Tax Evasion: A Theoretical Analysis Journal
of Public Economics, Vol. 1, p. 323
Cuccia, AD, 1994 The Economics of Tax Compliance: What Do We know and Where Do We
Go? Journal of Accounting Literature, Vol. 13, p. 81
Anderson J, Erard B and Feinstein, J, 1998 Tax Compliance Journal of Economic
Literature Vol. 36, p. 818
Alm J, 1991, A Perspective on the Experimental Analysis of Taxpayer Reporting The
Accounting Review, Vol. 66, No. 3, p. 577
Alm J, McClelland GH and Schulze WD, 1992 Why Do People Pay Taxes? Journal of
Public Economics Vol. 48, No. 1, p. 21
Cummings RG, Vasquez JM, McKee M and Torgler B, Effects of Tax Morals on Tax
Compliance: Experimental and Survey Evidence, Working Paper No. 2005-29
Collins JH, Milliron VC aad Toy, DR, 1992 Determinants of Tax Compliance: A
Contingency Approach Journal of the American Taxpayer Association, Vol. 14, No. 2, p. 1
Andreoni J, Erard B and Feinstein JS, 1998 Tax Compliance Journal of Economic
Literature, Vol. 36, No. 2, p. 818

referenced literature - unless specifically mentioned

Song Y and Yarborough TE, 1978 Tax Ethics and Taxpayer Attitudes: A Survey Public
Administration Review, Vol. 38, p. 442
Grasmick SG and Scott WJ, 1982 Tax Evasion and Mechanisms of Social Control: A
Comparison with Grand and Petty Theft Journal of Economic Psychology, p. 213
Roth JA, Scholz JT and Witte AD, 1989 Taxpayer Compliance Volume 1: An Agenda for
Research
Wattick M and Mark MM, 1992 Detection Probability and Taxpayer Compliance: A
Review of Literature Journal of Accounting Literature, Vol. 11, p. 1
Hanno DM and Violette GR, 1996 An Analysis of Moral Obligation and Social Influences
on Taxpayer Behaviour Behavioural Research in Accounting, Vol. 8 (Supplelemnt), p. 57
Aizen I and Fishbein M, 1980, Understanding Attitudes and Predicting Social Behaviour
Gorsuch RL and Ortberg, J, 1983 Moral Obligations and Attitudes: Their Relation to
Behavioural Intention Journal of Personality and Social Psychology, Vol. 44, p. 1025
Cohen J, Pant L and Sharp D, 1994 Behavioural Determinants of Auditor Aggressiveness
in Client Relations Behavioural Research in Accounting, p. 121
Kollmuss A and Agyeman J, 2002 Mind the Gap; Why Do People Act Environmentally
And What Are the Barriers To Pro-environmental Behaviour Environmental Education
Research, Vol. 8, No. 3, P. 239

referenced literature - unless specifically mentioned

Ajzen I and Maden TJ, 1986, Prediction of Goal-Oriented Behaviour: Attitudes, Intentions and
Perceived Behavioural Control Journal of Experimental Social Psychology, Vol. 22, p. 453
Bobek D and Hartfield R, 2003 An Investigation of Why Taxpayers Prefer Refunds: A Theory
of Planned Behavioural Approach Behavioural Research in Accounting, Vol. 15, p. 13
Spicer M and Becker LA, 1980 Fiscal Iniquity and Tax Evasion: An Experimental Approach
National Tax Journal, Vol. 33 (June), p. 171
Porcano TM, 1984 Distributive Justice and Tax Policy The Accounting Review, Vol. 59, p.
619
King, S and Sheffrin SM, 2002 Tax Evasion and Equity Theory: An Investigative Approach
International Tax and Public Finance, Vol. 9, p. 505
KM CK, Evans JH and Moser DV, 2005 Economic and Equity Effects on Tax Reporting
Decisions Accounting Organizations and Society, Vol. 30, p. 609
Richardson G, 2005 An Exploratory Cross-cultural Study of Tax Fairness Perceptions and Tax
Compliance Behaviour in Australia and Hong Kong The International Tax Journal, Vol. 31,
No. 1, p. 11
Gilligan G and Richardson G, 2005 Perceptions of Tax Fairness and Tax Compliance in
Australia and Hong Kong A Preliminary Study Journal of Financial Crime, Vol. 12, No. 4, p.
331
Kim CK, 2002 Does Fairness Matter in Tax Reporting Behaviour? Journal of Economic
Psychology, Vol. 23, p. 771

referenced literature - unless specifically mentioned

Cullis JG and Lewis A, 1997 Why People Pay Taxes: From a Conventional Economic
Model to a Model of Social Convention Journal of Economic Psychology, Vol. 18, p. 305
Kohlberg, L, 1969 Stages and Sequences: The Cognitive Development Approach to
Socialization Handbook of Socialization Theory and Research, p. 347
Ho D and Wong B, 2008 Issues on Compliance and Ethics in Taxation: What Do We
Know? Journal of Financial Crime, Vol. 15, No. 4, p. 369
Kaplan SE, Reckers MJ and Roark SJ, 1988 An Attribution Theory Analysis of Tax Evasion
Related Judgments Accounting Organizations and Society, Vol. 13, No. 4, p. 371
Ghosh D and Crain TL, 1995 Ethical Standards, Attitudes Towards Risk and Intentional
Non-Compliance: An Experimental Investigation Journal of Business Ethics, Vol. 14, No.
5, p. 253
Kaplan, SE, Newberry KJ and Reckers MJ, 1997 The Effect of Moral Reasoning and
Educational Communications on Tax Evasion Intentions Journal of the American Taxation
Association, Vol. 19, No. 2, p. 38
Erard B and Feinstein J, 1994 Honesty and Evasion in the Tax Compliance Game Rand
Journal of Economics, Vol. 25, No. 1, p. 1
Wenzel M, 2004(a) An Analysis of Norm Processes in Tax Compliance Journal of
Economic Psychology, Vol. 25, p. 213
Wenzel M, 2004(b) The Social Side of Sanctions: Personal and Social Norms as
Moderators of Deterrence Law and Human Behaviour, Vol. 28, No. 5, p. 547

referenced literature - unless specifically mentioned

Wenzel M, 2005(a) Motivation or Rationalization? Causal Relations between Ethics,
Norms and Tax Compliance Journal of Economic Psychology, Vol. 26, p. 491
Wenzel M, 2005(b) Misperceptions of Social Norms About Tax Compliance: From Theory
to Intervention Journal of Economic Psychology, Vol. 26, p. 862
Henderson BC and Kaplan SC, 2005 An Examination of the Role of Ethics in Tax
Compliance Decisions Journal of the American Taxation Association, Vol. 27, No. 1, p. 39
Ho D and Wong B, 2006 An Exploratory Study of Personal Tax Ethics in Hong Kong The
International Tax Journal, Vol. 32, No. 2, p. 31
Blanthorne C and Kaplan S, 2008 An Egocentric Model of the Relations Among the
Opportunity to Underreport, Social Norms, Ethical Beliefs and Underreporting Behaviour
Accounting Organization and Society
Ho D and Wong B, 2009 A Study of Hong Kong Tax Compliance Ethics International
Business Research, Vol. 2, No. 4, p. 288
Eisenhower JG, 2008 Ethical Preferences, Risk Aversion and Taxpayer Behaviour The
Journal of Socio-Economics, Vol. 37, p. 45,
Kaplan SE and Reckers MJ, 1985 A Study of Tax Evasion Judgements National Tax
Journal, March, p. 97
Doyle E, Hughes JF and Summers B, 2009 Research Methods in Taxation Ethics:
Developing the Defining Issues Test (DIT) for a Tax Specific Scenario Journal of Business
Ethics, Vol. 88, p. 35

referenced literature - unless specifically mentioned

Webley P., Cole M, Eidjar O, 2001 The Prediction of Self-Reported and Hypothetical Tax
Evasion: Evidence from England France and Norway Journal of Economic Psychology,
Vol. 22, No. 2, p. 141
Hunt SD and Vitell SJ, 1986 A General Theory of Marketing Ethics Journal of
Macromarketing, Vol. 6, p. 5
Hunt SD and Vitell SJ, 1986 The General Theory of Marketing Ethics: A Revision and
Three Questions Journal of Macromarketing, Vol. 26, No. 2, p. 1
Elfers H, Weigel RH and Hessing DJ, 1987 The Consequences of Different Strategies For
Measuring Tax Evasion Behaviour Journal of Economic Psychology, Vol. 8, No. 3, p. 311
Hessing D, Elfers H and Weigel R, 1988 Exploring the Limits of Self-Reports and
Reasoned Action Journal of Personality and Social Psychology, Vol. 54, p. 405
Larkins ER, Hume EC and Garcha BS, 1997 The Validity of the Randomized Response
Method in the Tax Ethic Research Journal of Applied Business Research, Vol. 13, No. 3,
p. 25
McGee RW, Ho SSM and Li AYS, 2008 A Comparative Study on Perceived Ethics of Tax
Evasion: Hong Kong versus the United States Journal of Business Ethics, Vol. 77, p. 147
Bosco L and Mittone L, 1997 Tax Evasion and Moral Constraints: Some Experimental
Evidence KYKLOS, Vol. 50, No. 3, p. 297
Eriksen K and Fallan L, 1996 Tax Knowledge and Attitudes Towards Taxation: A Report
on a Quasi-Experiment Journal of Economic Psychology, Vol. 17, No. 3, p. 387

 The senses say myself first.

Ethics says I must hold myself last
Swami Vivekananda

If it is not right do not do it.

If it is not true do not say it
Marcus Aurelius

It is the love of right that drives men wrong

Kim Stanley Robinson

Price is what you pay,

Value is what you get
Warren Buffet

 Philosophical Abstraction and Foundation

Ethics definition and narrative
Need for Ethics in Tax Administration

(Evolving) Context
Tax Administration: The Sovereign Nations Perspective
Economic Framework and Revenue Risk Assessment
India-specific Challenges
Harmonizing Stakeholder Behaviour

The Indian Experience

Case Examples of Un-Ethics

Studies on Ethical Models

The Taxpayer Compliance Tax
Administration Interface

Findings and Recos

What we have done
What we need to do

Philosophical Abstraction and

Foundation

self-inquiry (vichara) and quo vadis?

Must Tax Administration follow ethical formulations? Possess ethical

dimensions? Self-regulate through ethical boundaries?
Organizational interest versus national interest
Competitive advantage versus harmony and service

Must Tax Administrators be ethical?

Just-in-time hearings and assessments

Denials of fairness and natural justice

Attaining budgets and performance measures

Statistical subterfuge and gladiator mentality

Personal interest versus organizational interest

Self-centricity, narcissism, careerism, agency problem, empire building

Must Tax Payers be ethical?

Is God (Nature) Ethical?

ethics: definition and drivers

A standard of behavior that instructs human beings on their
action in different situations
Impacts transactions and relationships between the individual and
the society at large including organizations

Commonly mistaken for:

Law the law can guide or impose ethical action, but the law may not
always be ethical (e.g. apartheid, euthanasia)
Culturally accepted norms Some cultural practices are not ethical
(e.g. honour killings, slavery, caste system).

NB: Some have evolved into ethical standards and law

What drives ethics?

Information, knowledge and
wisdom (or lack of these) cognitive

Personal sense of right/wrong (intuitive)

Will discipline and energy towards a higher ideal and/or
subjugating self to a noble cause
Perceptions of rewards and threats system-generated

ethics: models
Some Abstract Models
The website of the Santa Clara University, CA, USA show up
the following 5 approaches
Utilitarian Approach
Balances good/harm; creating greatest good over
harm

The Common Good Approach

Should contribute to the common
good of society

The Rights Approach

Respect and protect individual rights

The Justice Approach

ETHICS

Treat all humans fairly

The Virtues Approach
Ethical action

Other Approaches
The winner gets all; To each according to his ability/contribution; Equal Division; Total Sacrifice

ethics: personal to organizational

Making people conform
Appealing to innate sense of goodness
Emphasizing true goals and methods

Contributionis Harmonizing with the

m
larger

Inspiring them to act through

What is good and what

is bad, do we need to
teach these to
anyone? - Plato
Do your
positions/actions prick
your conscience?

Leadership and Example

Creating a system-driven environment of trust,

incentives, checks and sticks

Personal judgementalism versus systemic mechanistics

Organizational/societal issues and challenges in
the adoption and institutionalization of ethics

Passive passion versus active participation/implementation

(Evolving)
Context

ethics in tax administration

As with all professions that require human interaction and
judgment, there are ethical issues facing tax administration
Powers of Tax Administrators

impact

Asses taxes (including to the Best of Judgment)

Collect Revenue; Seize Property
Garnish Bank Accounts
Commence/conclude legal (criminal/civil)
proceedings

Taxpayers

Loss of property and income

Imprisonment
Loss of some of their
fundamental human rights

Tax
Administration

Our ethical transactions with

public/stakeholders need to be
based on the 4 pillars

ethics in tax administration

Our decisions/actions surround these pillars

Acceptance of gifts
Conflict of Interest
Selective application of or
inconsistency in applying the law
Political influence
Confidentiality/secrecy
Discretion
Corruption
Fairness
Lack of Autonomy

Imbalanced pillars

Principal objective of tax

administration in a country

Tax
Administration

Equity
Transparency

Accountability

Maximize voluntary compliance

with tax provisions and
regulations

tax administration environment

The Environment

Overall Tax Policy and Administration

(Tax Officials)

Tax Payers

Output
Maximization
The Transactional Interplay
Economic
International Trends

Behavioural

Ethics

the tax administration context

Taxes aim to better the (economic) environment and:

are transfers from the rest of the economy to the government
provide financial resources to its activities and operations

Both Economic and Behavioural Dynamics influence the interplay

between the Tax Administrator driven Environment and the Tax Payer
Economic
Administering tax policies
Administrative costs
(of tax organizations)

Compliance costs
(of tax payers)

Behavioural: Taxes and taxation impact taxpayers

Environment

affect incentives to work, save,

invest, and take risks
impact on economic activity
affect employment, incomes, and tax base

the evolving (tax administration )context

Need for tax policy-makers/administrators to continuously review whether

the laws, regulations, and administrative practices are negatively impacting
economic activities
Overall Tax Environment
(Tax Officials)

Policy/Administrative
Drivers

Behavioural
Drivers

Tax Payers

Revenue risk assessment merits to be an integral part of any tax

administration organization
Tax administration challenges even more severe in India

Indias Global Integration:

Economic, Legal, Accounting
Specialized skilled staff, and
institutional memory facilities

Indias Rapid
Economic Growth
Our systems, structures
and functioning needs to
deal with the above

Increasing global incomes of

mobile individuals
Sensitivity in engaging them
and sustaining international
activities

evolving context
To change the environment, we therefore inter
alia need to address the following:
Reconsider our approach and behaviour towards
existing Indian and foreign taxpayers
Incentivize their work, savings, investments, and
taking of risks
Develop appropriate sensitivities towards not
hampering the engagement of foreigners and the
Indian Diaspora with India

Examine whether our laws, regulations, and

administrative practices are negatively impacting
economic activities
All the above mean:

Transparently set codes of ethical conduct by all

mutually and collectively acceptable to all
Better Systems and Control Mechanisms

The Indian Experience

Case Examples of Un-Ethics

case examples
In Domestic Taxation
Misuse of Section 40(a)(ia) of the Act
Unmindful of chargeability to tax in India

Raising Demand and attaching bank

accounts without granting opportunity to
meet budget targets
Artificial delays in granting of refunds

Surveys and Searches violations of rights

Non-transparent behaviour

case examples

In Transfer Pricing

Asymmetric selections of comparables in TNMM/RPM/CPM

Sliding the window by cherrypicking and rejecting comparables
Fallacy of incomplete evidence; Confirmation bias

Aggressive valuations of Corporate Guarantees, Brand Values and other

Intangibles
Models based on Credit Ratings
Abuse of the DCF Model

Non-consideration of business realities in rejecting adjustments

Valuation of Intellectual Property by MNEs

Reluctance to publish Pricing Policy

case examples
In International Taxation
Base Erosion and Profit Shifting (BEPS) by MNEs
Inbound Treaty Shopping
IP
Transfer

ForCo
(in India)

ParentCo
Cost-sharing
payments

MaurCo

Dividend
s/
Interest

Equity/De
bt

MaurCo
(Subs)

(Subs)
Interest
Royalties

IndCo
(Subs)

Outbound Transfer of IP

IndCo
(Subs)

Debt

Studies on Ethical Models

ethical models
International trends

Concerns about tax evasion enablers

Transparency, full disclosure

The ethics of taxpayers

Proceeds of Corruption
Information sharing (Swiss Banks)

Seminal paper titled A Critical Review of Ethics and Moral Dilemmas in Tax
Compliance Research by Afidah Sapari, Ern Chen Loo and Margaret
McKerchar [Proceeding paper (2010): 9th International Conference on Tax
Administration - Building bridges] shows that ethics are a strong determinant
of compliance behavior
States/contains, inter alia, the following:

The Economics of Crime versus that of Tax Offences

Unlike criminal laws

Tax compliance requires a series of actions involving

substantial effort, reading, computation skills and
judgement. Deliberate decision not to comply may not
be the only reason behind non-compliance

evolving context

Research Literature on the Economics of Crime suggests the use of harsh

sanctions, penalties and tax audits to deter tax evasion
Limitations of deterrence theories: These enforcement measures still do
not explain why taxpayers comply
Different taxpayers, different objectives and beliefs

The Theory of Reasoned Action (TRA): Attitude to Behaviour and

Subjective Norms
Relationship between intention and actual behaviour: passive to active
Not the only determinant; Additional variable perceived behavioural
control [The Theory of Planned Behaviour (TPB)] perception of extent on
control an individual has over a particular behaviour
Attitude to Behaviour
Subjective Norms
Perceived Behavioural Control

Behavioural
Intention

TPB

Ethics is increasingly a variable in tax

compliance behaviour studies

evolving context

The ethics of tax administrators

Do Taxes Matter? Tax Compliance and Morality by James Alm and Benno
Torgler [Journal of Business Ethics [July 2011, Volume 1, Issue 4, pp 635651] speaks of 3 paradigms
Based on the finding that individuals are not merely rational and selfinterested but also ethical

Need to change the Tax

Administration Environment
Employ not merely
administrative/policy/economic
measures but also
Measures that will attend to TPB

New Trust paradigm

on a foundation of ethics
Less traditional Service paradigm
kinder and gentler administration
Traditional Enforcement
paradigm neo-classical

Findings and Recos

 What needs to be done

Ethical Standards and Principles

tools - direct
An Effective Enforcement System

should have the following

Standard of behavior expected of the

traits:
employees in the performance of
their duties. The code provides
1. Written and (legally)
enforceable code;
guidance as they make decisions,
both personal and professional
2. Clearly defined penalties for
Code of Conduct
infractions;
The code aims to:
1. Standardize behavior
2. Establish minimal standard of
conduct
3. Formalize existing practices

An Effective Tax Appeal System

1. Dispute Resolution Panel
2. Filtering of cases substantial
Revenue and Substantial Question

for minor offenses

(administrative discipline and
punishment);
for fraud and corruption
(prosecution);
3. Obligation to Report
(Protection of Whistleblower);
4. A continuous education system
that creates awareness of
responsibility for both the
taxpayer and the public;

 What needs to be done

Standardization
of Procedures
Norms

Simplification
of the Tax System

Professionalism

tools indirect (environmental)

1.
2.
3.
4.
5.

Reduce discretion of officials

Limit scope of scrutiny
Limit one-one/out of office contact
with the taxpayer
Internal controls
Performance Standards

1. Simple and clear rules

2. Anti-convolutism [e.g. fewer exemptions]
3. Concerted effort to remove ambiguities/
loopholes

1. No political appointments
2. Recruitment/promotion on merit
3. Responsibilities clearly defined (job
description manuals)
4. Segregation of duties
5. Staff rotation and continuous training
schemes

what has been done

Enforcement: AIR CIB, Third Party Info,
DWBA
Services: E-Filing, CPC, CPC (TDS), Refund
Banker, AAR, APA
Trust: Self-Assessment, Advance Tax, SHR

context
International trends today
Functional organization of tax departments
Separation of Assessment from Collection and Audit

Staff specializing in:

Particular sectors of the economy
Activities such as Information Technology, Audit and Enforcement; and
Areas such as International Taxation

Information and knowledge management systems

Specialized staff with Data Mining and Tax Information Network capabilities
Appropriate policy and administration feedback loop

The above will require increased use of reliable third-party data

 The compartmentalized view of

different taxes is passe; the tax
system is viewed as a whole (e.g.
LTUs)
Communication links and
cooperative arrangements
between administration of
different taxes

E-tax services are increasingly

essential; India has progressed
along company accounts and tax
collection
Lower transaction costs needed
for individual income tax

context

Taxpayer Service Orientation

essential for high level of
voluntary compliance
Excessive and arbitrary use of
statutory powers increases the
difficulty in collecting revenue
The collective ingenuity of the
tax payers, and the increasing
sophistication and mobility of
financial services industry
always greater than those of the
tax administrators

 Jerry Rao letter Mphasis

Bimal Jalan statement

Maximize voluntary compliance

with tax provisions and
regulations

evolving context

Overall Tax Policy

The Tax Administration Environment

The following should be consistent with the above objective

Societal norms of acceptable (ethical) behavior by all stakeholders
are also relevant. The stakeholders include:
tax officials and tax payers

Overall Tax Policy and Administrative

Environment (Tax Officials)
Tax Payers

Appropriate incentives and disincentives to taxpayers are needed for

high level of compliance

International Examples
Malaysia: Gap between self-reported and assessed taxable incomes
ranged between 47.2% (RM 75.4 billion) to 49.4% (RM 99.1 billion)
during 1995 to 1997