Interest and penalties are sanctions applied against a Taxpayer for failure to make payments when due, or for conduct which fails to comply with Tax legislation. Because the payment of interest and penalties are sanctions in addition to the Tax which is normally levied, particular provisions should apply to interest and penalties to ensure that a Taxpayer is treated fairly.
- The Taxpayer shall pay interest as may be calculated and such penalties as may be duly levied in accordance with the law of the State.
A Taxpayer shall pay interest as may be calculated and such penalties as may be levied in accordance with the laws of the State, meaning that there is no prohibition, as such, on the right of the State to assess interest or levy penalties. However, such matters should comply with the further rules outlined below.
- The State may charge interest on late payments of Tax, and the State shall pay interest on overpayments of Tax with the rate of interest and the calculation basis being the same whether the amount is owing to or from the State.
The rate of interest charged on late payments of Tax should not exceed the rate of interest paid on overpayments of Tax, and the calculation basis should be the same. Failure to do so results in a bias in favour of the State. This is inappropriate and results in a Tax system being perceived as unfair and not having integrity. One justification for this by the State is the fact that the State incurs bad debts, and the credit worthiness, in general, of Taxpayers is less than that of the State. However, this results in a majority of Taxpayers paying for the delinquency of a few. Also, the uneven playing field is commonly made worse because interest paid on Taxes owing is not deductible to the Taxpayer but interest is taxable. This is also unfair but might be justified somewhat on the basis that Taxpayers need some deterrent to encourage timely payment of Tax.
- Where a penalty is assessed, the basis of the penalty must be clear and unambiguous in legislation and the basis for the justification of the penalty must be disclosed by the Tax Authority.
Where a penalty is assessed, the basis of the penalty must be clear and unambiguous in the legislation so as to provide certainty to Taxpayers. In the event of doubt, the penalty should not be assessed or should be reversed, thereby promoting fairness in the system. The basis for the justification of the penalty must be disclosed by the Tax Authority with sufficient particulars. Note also that the burden of proof to justify a penalty rests with the Tax Authority.
- A Taxpayer shall not be charged a penalty for an error or omission made in good faith provided the Taxpayer has exercised a suitable level of care and due diligence.
Penalties are increasingly becoming commonplace in Tax systems. This is inappropriate, because a penalty is an additional sanction levied on top of the Tax which is lawfully due. Accordingly, a penalty shall not be applied where a Taxpayer has acted in good faith and exercised due diligence. This leads to the proposition that the penalty should be waived for reasonable cause. This is fundamental to a Taxpayer's right to proportionality with regards to enforcement action by the Tax Administration and the Tax system being administered fairly and with integrity. However, this requires that the Taxpayer take due care in carrying out their Tax responsibilities. This should apply to all manner of penalties but the Taxpayer should be held to a high standard.
- The State shall have the ability to mitigate or waive a penalty in appropriate cases.
Legislation shall provide that the State have the ability to mitigate or waive a penalty. An example might be a late filing due to illness. This again follows from the Taxpayer's right to proportionality and the Tax system being administered fairly and with integrity. The Taxpayer shall prove that they have acted reasonably by exercising diligence and care in carrying out their Tax responsibilities.
- Where a penalty results by virtue of a Taxpayer not reasonably being able to comply with a requirement under legislation, then provided the Taxpayer can substantiate with reasonable detail the reasons for this, then the penalty shall be waived.
Where a Taxpayer is reasonably unable to comply with the requirements of legislation, then if the Taxpayer can substantiate this with reasonable detail, any penalty levied shall be waived. If, for example, a Taxpayer does not have information reasonably necessary to report a component of income, because such income is unavailable by the due date for filing a Tax return, and subsequently the information becomes available, no penalty should result. This is beyond the Taxpayer's ability to comply and therefore a Taxpayer should not in the result be punished, as this would undermine the Taxpayer's right to proportionality and fairness in the Tax system. Another example may be where third party Tax information is provided to a Taxpayer which is subsequently amended, resulting in an understatement of the Taxpayer's Tax liability.
- The penalty shall be of an amount and nature which is reasonable to the circumstances giving rise to the penalty and where a penalty is of a level to be considered appropriate to a criminal action, the State shall demonstrate that all the rights of the Taxpayer have been protected and due process has been followed.
A penalty shall not be of an amount or nature which is patently unreasonable in relation to all of the surrounding circumstances which have given rise to the penalty. This would undermine the Taxpayer's right to proportionality. It is therefore not appropriate for a penalty of a large amount (say 20% of assets, for example) to be levied for failure to file an information return, especially where the failure was due to inadvertence. While a penalty is to act as a deterrent and also a punishment, the punishment must be appropriate to the circumstances. Failure to do so violates the principles of fundamental justice and proportionality.
- No penalty shall be levied where the circumstances surrounding the penalty do not involve fault, recognizing that a penalty is a sanction applied in addition to the Tax lawfully due.
A penalty shall only be levied where it involves fault. No penalty shall be applied where a Taxpayer is not at fault, as this would not duly follow from the principles of proportionality and integrity.
- Interest payable to the State by a Taxpayer, and interest owing by the State to the Taxpayer, may be offset against one another by the State.
Typically interest payable to the State by a Taxpayer is not deductible for Tax purposes, but interest owing by the State and paid to the Taxpayer is taxable. This introduces an undue bias into the Tax system, and an offset mechanism should be provided to prevent the State from receiving an undue windfall. This mechanism is important in promoting fairness between Taxpayers and the State.