Editorial

The timing of the report by the National Audit Office on the performance of the Tax Compliance Unit was quite auspicious. It came just as the government was about to launch its various tax reform options.

Who would have envisaged that the government's reaction would be to think of merging the tax collection departments? In theory the move seems to make sense, if for no other reason than to streamline investigations and avoid different departments picking on the same company for different issues, as admitted by Parliamentary Secretary Tonio Fenech (The Times Business, August 3).

Of course, the proof of the pudding is in the eating. In practice, the departments will need to share and concede territory, coordinate and correlate. Harder than it sounds.

The strategy and policy management board of the TCU - which includes the heads of the departments - had not met since 2003. That hardly paints a picture of eager cooperation!

Having a plan for the future still does not explain what happened with the TCU, however. It was meant to build up a staff complement of 96 by the end of 2004, generating Lm43.7 million in extra tax assessed. The reality was a paltry Lm9.4 million assessed and a staff complement of about 30.

Far more worrying is the fact that only Lm500,000 of the total assessed has been collected. Obviously, the appeals and objections procedure needs to be speeded up.

The concept behind the TCU was sound: Collect information from various sources and create a database that would immediately flag obvious anomalies. So far so good. Unfortunately, the TCU was never given the authority to instigate investigations. It could only investigate cases referred to it by the Inland Revenue Department or the VAT Department - and in some cases, it sent the referrals straight back because the departments were quite capable of handling them themselves.

Only eight per cent of the cases yielded additional income tax of more than Lm30,000 per year investigated. Over 40 per cent had additional tax liabilities of under Lm5,000. Was this the most effective use of its already-stretched resources? Hardly. It is using a sledgehammer to swat a fly... while the real culprits snigger on the sidelines, just out of reach.

Even so, the TCU must have had an impact. Mr Fenech pointed out that its very existence was acting as a deterrent, noting that the increase in tax revenue each year was far beyond what could be due to economic growth. The GDP grew by 11 per cent between 2001 and 2005 and tax revenue increased by 23 per cent.

However, he also commented that one had to find a balance between the impact on the economy and the need to fight tax evasion, saying that the "feeling is that even with 30 people, the TCU was already going overboard".

One can only hope that the TCU was not left champing at the bit because companies found it inconvenient to be investigated!

The report does not take into consideration the deterrent factor but neither does it recommend that the TCU should decide whom to investigate, rather saying that the relevant departments should enhance their risk assessment before referring cases. Surely the sophisticated IT used by the TCU makes it the perfect instigator, especially if more and more databases are integrated into the existing one!

Perhaps the merger of the departments will lead to a more coherent approach. One can only hope that the new entity will not be granted the half-hearted support given to the TCU.