Does waiving tax penalties promote compliance?

In Uganda, tax laws are passed by Parliament, with the President’s assent finalizing them into law. The Uganda Revenue Authority (URA) enforces these laws, offering amnesty programs to increase compliance and ease taxpayer burdens.

These include waivers on penalties and interest for timely tax payments, with notable amnesties in 2007, 2019, 2020, 2023 and an extension in 2024 under the Tax Procedures Code (Amendment) Act, 2024 by fixing section “40E” waiver of interest and penalties on payment of principle amounts outstanding as at June 30, 2023 by December 31, 2024.

While these measures aim to encourage compliance and reduce financial strain, there’s debate on whether they may inadvertently foster a culture of non-compliance and impact government revenue.

Retrospectively, taxpayers ought to update their tax ledgers to ensure they are current and accurate, and this can be done through having a series of ledger reconciliations, tax health checks and as well reaching out to their tax agents for advice on how to go about it .

Taxpayers must, however, take note of the deadline (December 31, 2024) to benefit from this amnesty.

Where the taxpayers are unable to pay all the principal tax at once, they can remit it in installations and the interests and penalties shall be waived off on a pro rate basis.

So, the underlying issue is whether the consistent extension of this amnesty encourages compliance, or it is an indication of a backsliding syndrome.

The extension of the amnesty on penalties and interest for tax periods until June 30, 2023 upon payment of the proportionate principal tax liabilities by December 31, 2024 may be a strategic move to promote tax compliance and increase payments. This extension gives taxpayers additional time until December 31, 2024 to pay their outstanding principal tax and benefit from the waiver of associated interest and penalties. This approach is proactive, aiming to help taxpayers meet their obligations and ease their financial burden.

The tax amnesty program is designed to encourage taxpayers to disclose and pay their outstanding tax liabilities, thereby improving compliance. St Francis of Asisi reportedly said: “The best way to eat an elephant is one bite at a time” (Eat the Elephant strategy). The implication herein is, by waiving penalties and interest, the government incentives taxpayers to regularize their tax affairs, which can help broaden the tax base and increase revenue collection as there is a much more collection of the principle tax other than waiting to collect both principle tax, penalties and interests which may even be forfeited.

However, one may argue that the repeated extensions of the amnesty program may raise concerns about URA’s ability to enforce tax compliance effectively. If taxpayers do not see a clear and consistent approach to tax enforcement, there is a higher probability that they may not trust the URA to follow through on its commitments, which may trigger non-compliance.

The amnesty program may also be seen as a tool that reduces the fear of punitive measures, such as high penalties and interests, which are more less equivalent to the principal tax, which often deter taxpayers from declaring their tax obligations. This fear can lead to non-compliance and thus the amnesty comes in to provide a safe and more attractive option for taxpayers to come clean about their tax liabilities.

However, it is prudent to note that the effectiveness of interest and penalties as a deterrent for late payment is as well diminished if taxpayers believe they could be waived, in this regard making tax evasion less costly and less risky for taxpayers.

Regular waivers can have a negative impact on the fiscal budget, as the government may be counting on these penalties and interest as part of their revenue and thus if not handled carefully, it may result into an increased fiscal burden.

The repeated extensions may create the perception that the government is favoring certain taxpayers or groups, which can undermine trust in the tax system. This perception can also lead to resentment and further non-compliance among taxpayers who feel they are being unfairly treated.

Additionally, compliant taxpayers may view the amnesty at an angle of weakness or an act of desperation by the URA tax administration rather than as a compassionate tool, that is, if it is ineptly implemented which is apparently vivid as the waived off amounts are not effected in the tax payers ledgers and thus a possible escalation in the taxpayer cynicism.

In my opinion, while the government’s tax amnesty programs are mostly designed to encourage compliance, the repeated extensions may also indicate a backsliding syndrome if not managed efficiently and effectively.

It is thus crucial for the URA to maintain transparency and consistency in its enforcement approach to build trust and ensure long-term compliance in addition to appreciating the fact that there is need to strike a balance between providing incentives for compliance and enforcing tax laws and regulations effectively.

Tophil Othieno, tax advisor, Ernst & Young Uganda.