In Uganda, tax administration encourages voluntary compliance, a key characteristic of which is self-assessment. It is the ideal scenario. However, often it does not happen or it is partial, leading to loss of revenue and the attendant effect on service delivery.
The most common practices are inflation of input materials (construction sector), under-declaration of finished product quantities (manufacturing sector), tariff misclassification of imported goods to obtain lower import duty rates or of customs values and disappearing after TIN registration.
Measures like financial and customs audits are used to counter such practices. And although these are effective in uncovering what taxpayers do not disclose voluntarily, authorities may not detect all anomalies due to several factors. Among them is the change in material composition and identity of imported goods.
If undetected, the anomalies would lead to revenue leakage, which is why Uganda Revenue Authority (URA) adopted and applies scientific investigations alongside the conventional compliance approaches.
Scientific investigations are good because they are based on logical principles and facts that can be continually validated. URA’s scientific approach to tax compliance comprises derivation of input-output ratios (IORs) especially in the manufacturing and construction sectors, laboratory analysis, digital forensics, document examination and geospatial technologies.
Although the details in the procedure of deriving IORs may differ between the manufacturing and construction sectors, the goal is always to compare the quantities of materials used as inputs and the quantities of the outputs (final product). The method of IORs validates claimed production losses, unveils concealed production volumes and addresses cases of diversion of input materials.
Analysis in laboratories determines material composition and actual identity of imported goods. Material composition and identity of goods is the basis for assessment of tax payable on them.
Plus, there are items which could contain prohibited substances, for example, hydroquinone in cosmetics, narcotics, etc. Results of laboratory analysis are used as basis to enforce against such harmful products, thereby protecting the society. Also, laboratory analysis supports evidence presented to court in some tax matters that require arbitration.
Material composition aside, falsification of documents is another anomaly that tax administrators continue to contend with. And because declarations determine assessments, documents ought to be authentic. But sometimes, in pursuit of lower assessments, taxpayers falsify documents. To address this, scientific document examination tools are used by revenue collectors.
This tool involves determining the validity of documents. For example, a returning resident, who owned a motor vehicle for a period not less than 12 months while abroad, has the benefit to register that vehicle duty-free. To unfairly benefit from this provision, some people have attempted to backdate the period on the car log books. Thanks to document examination, we have severally successfully identified forged documents and thus halting abuse of this privilege.
Additionally, geospatial technologies are used to manage, analyze and visualize geographic data. This facilitates pinpointing the precise location of a taxpayer. Moreover, as it is with the presumptive regime, location, among other aspects, is used for tax assessments. The various areas in which taxpayers are scattered make it difficult to access them for compliance and enforcement if modern computerized systems are not used.
Therefore, application of science in tax administration presents advantages to taxpayers. For example, it makes a ‘level ground’ for tax assessment since it is based on facts, and not assumptions. Additionally, reliance on science deters non-compliance and, ultimately, enhances voluntary tax compliance.
URA will continue to adopt and use science and other modern, computerised technologies to facilitate traders and deliver on the revenue collection mandate.
The writer is a scientist at Uganda Revenue Authority.