An Inter-American Development Bank study has found that despite marked improvements in the tax administration in Latin America and the Caribbean, tax evasion remains widespread.
In a recent study titled “More Than Revenue: Taxation as a Development Tool”, the Bank said tax collections have increased approximately 30 per cent for each dollar of output or income in Latin America and the Caribbean in the last 20 years. Most of this increase is due to improvements in tax administration. It said tax administrations now boast technical and budgetary autonomy and highly qualified professional staff, while their collection function, focusing on large taxpayers, has been strengthened, thanks in part to the widespread use of technology.
“However, the challenges facing tax administrations are greater than their achievements. A large number of workers and businesses in the region never have contact with the tax authority. Although some are exempt by law from filing tax returns, most simply hide from the tax administration through the use of avoidance strategies or directly illegal fraud,” the study found.
According to the IDB, half of the potential collection of individual and corporate income tax is lost through evasion, along with over a quarter of the tax revenues that VAT should raise. The Bank said the main reason is that the probability of being punished for tax evasion is virtually nil.
“To begin with, few people are registered taxpayers – only 10 per cent of the population in Latin America compared with 59 per cent in developed countries. Of the registered taxpayers, only 2.8 per cent are subject to general audits each year and an insignificant 0.2 per cent are subject to in-depth audits.”
These numbers, the Bank said, can be misleading because the audits are not random: “they focus on taxpayers who show most evidence of sophisticated and substantial tax fraud. This targeting is a bad thing for fat cats who have nowhere to hide, but much better for the majority of taxpayers for whom the probability of being sanctioned is even lower.”
But this is not all. “When fraud or other offences are detected, the penalties are not applied with sufficient vigour. Tax fraud is well defined in Latin American legislation, but judgments are almost non-existent on average, in every country in Latin America.”
The report said that in a few countries, there has been not a single judgment for tax fraud in the last five years. A note of caution: in Chile, Colombia and Mexico, the number of judgments is reasonable and could be increasing. As a result of this permissive chain, the impact of audits on total revenue is a meagre 1.6 per cent on average in all Latin America (and much less than that in most countries).
According to the Bank, raising the potential cost of evasion is an essential step, but possibly not enough. The efforts of tax administrations would be more effective if there were more “tax morality”.
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