Is Compliance in Order?
A tax system must obviously consist of robust laws that contain no loopholes, are understandable, executable, and straightforward. Here are some requirements that a tax legislator must consider. This list is by no means exhaustive. In the Netherlands, a government memorandum called "Zicht op wetgeving" is used, which is very useful for assembling good legislation. This could also be very beneficial in Curaçao. Whether the legislation subsequently meets all these requirements is another issue: politicians and interest groups are particularly adept at focusing on their pet projects and embedding them into legislation, which does not necessarily benefit optimal legislation.
After a parliamentary process, if we hopefully have the best possible law, its implementation is often underestimated. In the Dutch process of new legislation creation, the Tax Authority is always explicitly consulted about the executability of proposed legislation. This occasionally results in strange outcomes. For instance, regarding the pillar 2 legislation of the OECD – the so-called minimum tax that is also to be introduced in Curaçao – the Tax Authority has indicated that this regulation is executable, while everyone agrees that these are the most complex tax rules we currently know. Conversely, the Dutch Tax Authority believes that a capital gains tax to replace the notorious box 3 system is inexecutable, which is incomprehensible since part of the tax legislation already includes a capital gains tax, and moreover, such taxes are commonly applied in many other countries. The implementation test is therefore rather opaque in places.
However, what comes next is most important: the actual implementation of the levy and collection. Curaçao, in particular, can speak volumes about the latter: the collection of taxes is a significant concern. Regardless of the approach, it is undoubtedly beneficial that the Curaçao Ministry of Finance is fully committed to enhancing compliance among taxpayers and thereby hopefully raising and collecting a substantial amount of taxes. It is important to have good tax rules, but if there are issues with the levy and collection, they are not very useful. Compliance in levying, for example, means that there must be proper control of taxpayers: information must be provided, but the Tax Authority must also request information. The Tax Authority has sufficient resources for this. Another compliance issue concerns conducting audits. This should occur with every entrepreneur and should take place every five years. The Netherlands, however, is not a good example of this: the frequency of audits is about once every 35 years. This is incomprehensible and undesirable: audits more than pay for themselves. Compliance is not only beneficial for correctly levying taxes but also from a fairness perspective among citizens: if one citizen pays too little by committing fraud, failing to meet their tax obligations, or simply not paying taxes, another citizen has to pay extra. Essentially, one citizen is stealing from another, which is obviously very undesirable. Therefore, adhering to tax obligations is of great importance and should be a high priority for a Tax Authority. This is a matter of fiscal ethical behavior.
The role of the government in this whole process is, of course, also of great importance: it must set a good example as a proper party. If that does not happen, it provokes resistance among taxpayers who might feel – wrongly – justified in not adhering strictly to the rules. This must be prevented. Recently, an unusual case occurred in this regard in the judiciary. Or rather, a large number of cases, as it concerned the issue of undisclosed foreign bank assets by a large number of taxpayers. The tax authorities discovered these assets through information provided by a foreign tax authority. Then, the relevant taxpayers were approached to verify if this information was correct. Most of those taxpayers responded little or not at all to the inquiries from the tax authorities. Some of these taxpayers were administratively fined, while others were prosecuted criminally. This was apparently done in a somewhat arbitrary manner, which is of course undesirable. The criminally prosecuted taxpayers appealed to the court, providing a valuable learning moment for the prosecutor: the information received from the German tax authority could only be used for tax purposes under the tax treaty between the Netherlands and Germany, not for criminal purposes: the prosecutor was therefore declared inadmissible. Based on the una via principle, the tax inspector could then do nothing more, and the silent taxpayer thus went entirely free. A very unsatisfactory outcome and quite foolish of the prosecuting government. In another case, the government also did not handle things properly: the tax authority received certain criminal information not under the tax treaty with Hong Kong. Subsequently, the prosecutor obtained this information under the treaty with that country concerning criminal matters. The information was provided, and then the prosecutor passed this data to the inspector. In the subsequent court case, the court quickly dismissed it: such a setup is contrary to the rules that apply to a trustworthy government, and thus the information from Hong Kong was rightly disregarded.
All in all: compliance is a great asset. This applies both to the taxpayer and the government.
Peter Kavelaars is a professor of Tax Economics at Erasmus University Rotterdam and counsel at Deloitte Dutch Caribbean.
