Tax compliance determinants

1. Tax compliance determinants:
Social perceptions in Bolivia
and Panama
Ciat Technical Conference (Oct. 6-9, 2014)
Santiago de Compostela, Spain
ME Pecho

2. Mandate of the CIAT
General Assembly
• Resolution of the 45th CIAT General Assembly
(Quito, 2011)
- "(...)Tax administrations should consider
implementing methodologies aimed at measuring tax
morale and compliance of taxpayers, evaluating
results and determining appropriate answers for
improving both".

3. Traditional analysis of tax compliance
• A taxpayer who takes rational decisions (maximizing
his/her well being), given a serie of perfectly observable
parameters.
 Probability of being detected or audited
 Size of the sanction or penalty.
• The traditional analysis makes predictions which are
counter-intuitive:
 Given reasonables (realistic) parameters values, no taxpayer
would decide to comply.
 Non-compliance varies according to the tax rate.

4. New approximations
• BISEP Model
• Forum of Tax Administration Model
• Tax Morale theory
• Applications of Behavioral Economics

5. New approximations
• The taxpayer does not always have all the information
available
 The probability of being detected or audited is not known
 Sanctions vary and are sometimes unknown
• The decision to comply is not only of private nature.
Attitudes and beliefs also matter.
• Attitudes and beliefs are transmitted through social
interaction. Social networks are important.

6. Case studies sponsored by ITC-GIZ

7. Tax compliance
• Tax non-compliance level is perceived as 58% in
Panama and 54% in Bolivia.
• In both countries there is a perception that compliance
“has much or somehow improved" in recent years (68.8%
in Panama and 68% in Bolivia).
• In Bolivia, 75.4% consider "very or somewhat likely" to
improve the level of tax compliance in the coming years,
while in Panama this percentage is 67.2%.

8. Determinants of tax compliance
considered
• Social norms
• Deterrence
• Opportunities for non-compliance
• Justice and fairness of the tax system

9. Social norms
• "Positive" citizen values
 Panamanians and Bolivians perceive themselves as
“honest” (58.7% in Panama and 60% in Bolivia).
 Panamanians consider themselves as more “law-abiding”
than Bolivians (60.6% in Panama and 39.4%
in Bolivia).
 Panamanians and Bolivians perceive themselves as
“showing solidarity” (69.1% in Panama and 73.7% in
Bolivia).

10. Social norms
• Attitudes towards taxes:
 They are necessary so the State can “provide goods
or perform services” (72.5% in Panama and 74.3% in
Bolivia).
 Are a way of “redistributing wealth” (70.9% in
Panama and 57.8% in Bolivia).
 Constitute a “cívic duty” (62.5% in Panama and 71%
in Bolivia).

11. Social norms
• Effects of tax non-compliance
 It is perceived that “it decreases the resources that
the State needs to provide goods or perform services”
(34.3% in Panama and 36.9% in Bolivia).
 It is perceived that it “demotivate those who pay
correctly” (18.8% in Panama and 26.4% in Bolivia).
 It is perceived as “unfair regarding those who comply”
(19.4% in Panama y 16.5% in Bolivia).

12. Social norms
• Social interaction and compliance.
 Justifying non-compliance “because the other citizens
don’t pay either” is low in Panama and Bolivia.
 38% of Panamanians and 54.2% of Bolivians indicate
“knowing those who don’t comply”.

13. Deterrence
• Knowledge of the tax system
 96.6% of Panamanians declare having knowledge of
VAT, while only 49% of Bolivians express having
knowledge of VAT (regarding the Transaction Tax only
43.2% say they have knowledge of it).
 96% of Panamanians declare having knowledge of
the Income Tax. Only 36.5% of interviewed Bolivians
express knowledge of the VAT Complementary
Regime and 31.4% express knowledge of the
Corporate Income Tax.

14. Deterrence
• Probability of being detected
 Justifying non compliance because of a low
probability of being detected is more frequent in
Panama than in Bolivia.
 The factor perceived as having most influence on the
improvement of tax compliance is the control
performed by the tax administration (88.5% in
Panama and 78.5% in Bolivia).

15. Deterrence
• However, very few Panamanians and Bolivians
have knowledge of sanctions for those who don’t
comply.
 Knowledge of individual sanctionned: 16.8% in Bolivia
an 13.3% in Panama.
 Knowledge of sanctionned companies: 22.5% in
Bolivia and 10.2% in Panama.

16. Opportunities for non-compliance
• Simplification
 Panamanians and Bolivians perceive that one of the
factors that has most influenced the improvement of
tax compliance has been that “tax payment has
become a simpler process” (76.7% in Panama and
79% in Bolivia).
 Panamanians and Bolivians perceive that “there is
more and more information on how to pay the taxes”
(79.5% in Panama y 71.1% in Bolivia).

17. Opportunities for non-compliance
• Risks of non-compliance are higher in the
segment of independent workers.
 Panamanians and Bolivians perceive that one of the
factors which has most influenced in the improvement
of tax compliance has been “the increase in numbers
of people who (….) pay taxes because part of their
salary is withheld” (83.9% in Panama and 75.3% in
Bolivia).

18. Justice and fairness of the tax system
• Social contract
 Lack of clarity in the fiscal exchange: “taxes are what
the State force us to pay without knowing very well in
return for what” (62.2% in Panama and 54.3% in
Bolivia).
 Panamanians and Bolivians perceive that one of the
factors that has most influenced in the improvement
of tax compliance has been “the improvement in the
relationship between public goods and services
received and taxes paid” (79.6% in Panama and
72.6% in Bolivia).

19. Justice and Fairness of the tax system
• Progressivity
 The majority of Panamanians perceive that those who
have less are those who pay more taxes, which show
a perception of “unfairness in taxation”.
 On the other hand, the majority of Bolivians perceive
that those who have more are those who pay more
taxes, which show a perception of better “fairness in
taxation”.

20. Justice and Fairness of the tax system
• Governance
 Justifying non-compliance “because there is obvious
corruption and lack of transparency in the political
class” is much more emphasized in Bolivia than in
Panama.
 Justifying non-compliance “because there is no trust
in public management” is also much more frequent in
Bolivia than in Panama.

21. Some conclusions
• Civic values and attitudes towards taxes are not
necessarily reflected in tax compliance.
• Effects of non-compliance are partially
internalized.
• The formation of beliefs regarding non
compliance seems to be weak.

22. Some conclusions
• Much lower knowledge of the tax system in
Bolivia than in Panama.
• Lower risk perception in Panama than in Bolivia.
• Little knowledge of the sanctions imposed to
those who don’t comply.
• Simplification induces compliance.

23. Some conclusions
• More labor formality induce compliance.
• Improvements in fiscal exchange foster
compliance.
• Better perception of tax justice fosters
compliance.
• Less governance limits compliance.

24. Tax compliance determinants:
Social perceptions in Bolivia
and Panama
Ciat Technical Conference (Oct. 6-9, 2014)
Santiago de Compostela, Spain
ME Pecho