EMMANUEL KIMINGI: Lessons Kenya can learn from Swedish tax system

Are those paying taxes feeling they are the minority?

In Summary

•One of the biggest wins out of high tax compliance in such an economy is in its contribution to democracy because taxes create interdependence between taxpayers and the state.

•Paul Collier, who wrote the book “The bottom billion” describes the situation in the poorest countries in the world.

The KRA headquarters at Times Tower in Nairobi
The KRA headquarters at Times Tower in Nairobi
Image: FILE

How can the taxman who takes away 60 per cent of people’s money and makes prices of goods and services go up by 25 per cent due to tax become so popular and appreciated?

Much of the answer to that question lies in the process of change that a once -feared Tax collector carried out over several decades to become a popular service agency trusted by the public.

Today, that tax agency collects an estimated Sh 15 trillion annually from its nine million people.

One of the biggest wins out of high tax compliance in such an economy is in its contribution to democracy because taxes create interdependence between taxpayers and the state.

Paul Collier, who wrote the book “The bottom billion” describes the situation in the poorest countries in the world.

He noted that states which tax their citizens tend to be less oppressive than states that rely more on natural resources for their income.

Sweden, whose temperature plummets to minus 30 degrees centigrade during winter, is cold. But decades ago, its tax agency was colder.

A book titled “From a feared tax collector to a popular service agency” by Anders Stridh and Lennart Wittberg who are tax compliance strategists from Sweden, and upon which this article is based, captures a few incidents.

There was once a woman who nearly collapsed at the tax offices after running out of breath while rushing to address an intimidating taxman’s letter threatening to send her to prison.

A prominent Swedish businessman by the name Ingmar Bergman, faced the wrath of the taxman after he was dramatically arrested by the police alongside tax officials and taken through a highly publicised trial.

After he was cleared of all charges, he said “I realised that my adversaries were not impartial, objective, hard-working and judicious authorities, but a pack of prestige-powered poker players”.

Ingmar not only left his country for good but also left his property for the Swedish Tax Agency (STA) to do as they pleased. Besides businessmen, the political class also joined the drubbing.

The country’s topmost leadership, the Swedish Prime Minister, Olof Palme exclaimed made“The Swedish people don't want to have a police state controlling their lives or the tax authority’s sleuth hounds at their heels”.

Beyond the public outcry, incidents of businesses going down due to the taxman’s enforcement activities were observed.

Among the big players to close shop was a large taxi company whose tax audit reassessment had hit a jackpot returning 293 times.

There was no recourse at the time as the tax agency’s main mission was to bring as much money as possible through enforcement activities to meet the tax collection targets set by the government, especially at a time in which Sweden was undergoing a financial crisis in the 90s.

Even with enforcement being self-evident in terms of bringing good tax results, it never blinded the government from demanding Service.

The government passed an Administration Act which prescribed the kind of Service it wanted to be provided to the citizens.

For a tax agency already shining with good results in meeting tax collection targets, it felt like fixing something that was not broken. Many wondered how the government could demand so much money from the tax agency but at the same time deny the tax agency the right to ruthlessly collect it.

How was Service going to work in an environment of high revenue collection demand?

Every cloud has a silver lining. Besides the external push for reforms by the government, some insiders in the organization had started seeing the aftermath of sinking businesses to their long term tax collection efforts.

For instance, as a result of the large taxi company going bankrupt, they noted that the anticipated taxes never came in.

Subsequent follow-up was only about the tax claimed, not the tax actually paid.

Many wondered why it was a good thing that the tax agency found so many errors among taxpayers.

Should one measure of success not be that taxpayers made few errors?

This was the question discussed over a number of years at the TAX although as part of many ideas and which proved fundamental to the making of a Service Agency that the public and the government demanded.

Although many of the staff in STA probably agreed with the importance of Service on an intellectual level, it was difficult to teach old dogs new tricks as the culture of enforcement and yields was so entrenched that it took a long time before anything changed.

It had to take visionary leadership at the tax agency to proactively chart a new path towards Service lest the government moved into micromanaging the change.

Since then, STA has stayed ahead of their government and collects revenue from taxpayers willing to do their fair share. What did they do to get there?

No size fits all as every change is unique. But one of the key findings by Anders and Lennart which Taxmen in the spotlight for their tax enforcement activities, can reflect upon is that ‘Enforcement cannot be a solution if taxpayers see the tax system as unfair’.

The issue is therefore not enforcement but rather about what the taxpayer sees in a tax system from the fairness point of view. So what does a taxpayer see?

The tax experts call them the three levels of fairness - distributive, procedural and retributive.

All the three are important for an appreciation of any tax system by the taxpayer to occur.

What it means in layman’s language is that taxpayers have to see the benefits of paying taxes through distribution, they have to see procedures are simple and have to see that everyone else is behaving correctly.

To become an appreciated and popular tax agency, the STA somehow had to work on these three levels in its reform journey towards a service agency.

To make a case to taxpayers that paying taxes has benefits, Sweden, as a welfare state, features among the top 10 best places to live in the world today. Medical care and education are free.

There are subsidies for housing as well as for raising children. Public transport is free for those below 18 years and those above 65 years.

To make the case for paying taxes even stronger, the STA had to conduct a campaign as part of their change journey especially after their study discovered the growing attitude of young people towards untaxed work which would threaten future collection.

Aided by professionals, the Tax Agency worked with the government to identify key facilities funded by taxpayers and labelled them “PAID FOR BY YOU”.

Beyond stickers and information materials, the campaign included an audio-visual broadcast.

As much as the campaign evoked controversy that governments should not advertise what they are duty bound, the campaign was lauded by Anders and Lennart as an important hallmark that widened public discussion on the importance of paying taxes in Swedish Society.

The controversy meant that STA stayed out of future campaigns. The two authors advocate that such campaigns should be done outside the tax agency.

An American researcher, Tom Tyler has researched in depth the second concept of procedural fairness.

He claims that this is the most important explanation for why people are willing to comply with decisions which are to their disadvantage.

If procedures for decision-making are perceived as just, the outcome is also perceived as fair and builds confidence in the decision-maker.

Most of the reforms in STA as documented by Anders and Lennart, revolved around procedural fairness.

It is in the STA's interest to reduce errors from taxpayers by simplifying the tax return as much as possible.

The “tick-a-box” era in Sweden is the practice where taxpayers receive prefilled tax returns from STA and simply agree to the findings by ticking a box or signing against the return.

Given the trust they have in the tax agency, most taxpayers often agree to the computation.

As much as there were internal fears that taxpayers would take advantage of such a system and hide wealth not identified by STA, such fears were later proved unfounded.

As retribution towards tax crimes, STA has since reshaped enforcement away from deterrence.

Relying on findings that publicity of tax offenders as they once did with Ingmar Bergman in the late 70s, may unintentionally pass the message that others are not doing their share, a lot of care is put into public communication to ensure that those who pay taxes are never made to feel as if they are the minority.

The shift from deterrence to the preservation of social norms has entrenched a culture that the majority of people pay their fair share.

Have there been results? A study shows that from 2006 to 2013 the willingness to do one’s fair share had increased, trust in STA had also increased, taxpayers felt they were treated better, and -last but not least- the tax gap had decreased.

The tax gap is an expression to describe tax revenue lost due to unintentional error or unintentional fraud.

Unlike the 90s when the tax collection figure was a target, today, the target at the tax agency is closing the tax gaps. 

So in Kenya today, are there opportunities presented by all that branding we do on public facilities funded by Constituency Development Funds (CDF), County Governments and agencies of the National Government to speak directly to the taxpayer?

Are there more opportunities for procedural fairness? and above all, are those paying taxes feeling they are the minority?

Emmanuel Kimingi is a Change Management Practitioner and once worked at the Kenya Revenue Authority. The writer went to Alliance.

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