08 Apr Legal and Human Factors in Tax Compliance and Enforcement

Human factors can be seen as the missing link in turning law in the books into law in action. They can add an important dimension to legal analysis. Psychological, organisational and social conditions determine human perception and reflection, cooperation and action. Task performance and problem-solving are constrained by limited information processing capacity and available resources.  Theory and research from a variety of social science disciplines can help to better understand how laws are applied and what extra-legal factors determine their successful application and implementation. In the context of PROTAX project, human factors are important to understand not only the enforcement side of tax laws but also the behaviour of tax payers (natural and legal persons), their calculation of risks and the motivational drivers for compliance such as e.g. trust in state institutions. (Turksen U, ‘A Comparative Analysis of Tax Crimes in the European Union’, PROTAX Report D3.2)

What is the relevance of human factors?

Research focusing on human factors fundamentally seeks to ensure that human errors are reduced, efficiency and effectiveness are enhanced, productivity is increased, and wellbeing is harnessed. In the tax ecosystem, these benefits can be felt at the criminal level of enforcement to minimise tax crimes and ensuring compliance.

Challenges faced by law enforcement agencies (LEAs)

PROTAX has found that LEAs face several challenges in enforcing tax laws and promoting voluntary compliance thereof. A few are outlined. Firstly, the perception of LEAs about the seriousness of tax crimes sometimes runs counter to that of governments, in which the desire of different jurisdictions to preserve their competitive advantage in taxation goes to impede the work of LEAs.

Secondly, while LEAs mostly perceive tax crimes as critical and serious offences, both the legal framework and the general criminal sanctions mechanisms granting lesser sentences to tax criminals not only stand in the way of spirited investigation and prosecution. This tepid approach to criminalisation and sentencing also reinforces the perception that tax crimes are lesser crimes in comparison to other crimes of dishonesty and fraud. (Rasmouki F, ‘Approaches to tax crimes in the European Union’, PROTAX Report D2.3) In fact, cultural orientation and attitudes of the public towards paying tax is one of the challenges facing LEAs to enforce tax laws. (Shavitt S, Lee AY, & Johnson TP, ‘Cross-cultural Consumer Psychology’ in Haugtvedt C P, Herr PM, & Kardes FR (eds), Handbook of Consumer Psychology (Routledge 2018), p.1103.)

Thirdly, there are organisational and systemic gaps which cascade into many loopholes including limited communication and cooperation partly due to trust issues, language barriers and diverse connotations of tax crimes; and poor data systems on tax crimes particularly relating to convictions, and taxpayer behaviour in compliance to assist LEAs.

Fourthly, it is challenging to identify, understand and investigate the factors that shape the behaviour (including motives, incentives, attitudes) of taxpayers, thus requiring the need to consider diverse contexts and scenarios to ensure tax compliance. LEAs usually juggle between the normative legal duty of taxpayers to pay taxes in national tax legislation, and the practical situation of tax honesty and compliance. (Turksen U, ‘A Comparative Analysis of Tax Crimes in the European Union’, PROTAX Report D3.2)

How PROTAX research benefits LEAs

PROTAX found that understanding of human factors and the challenges related to them require continuous reshaping, retooling and reconnecting in the counter tax crime ecosystem. PROTAX research derived empirical findings from end-user stakeholders to counter the impediments to human factors, which in turn informed the development of two key toolkits to support LEAs in their operations: Tax Fraud Investigation Framework (TFIF) and PROTAX Risk Assessment Methodology (PRORAM). TFIF is designed to assist LEAs to understand and use germane procedures, principles/standards, evidences and best practices in their operations to enable them to investigate and prosecute tax fraud successfully. (Turksen U, ‘A toolkit for LEAs and tax authorities’, PROTAX Report D7.2) PRORAM is developed to support practitioners and authorities in self-assessing suspicious behaviours and warning signs of tax crimes, as well as assessing risks, vulnerabilities and controlling tax crimes in the European Union.  PRORAM can also be used by LEAs as a training tool on tax crimes. Hall M, ‘Risk assessment framework for countering tax crimes’, PROTAX Report D7.3)

PROTAX Team has so far conducted 14 interactive workshops to demonstrate these toolkits to key stakeholders from 20 different European countries including tax authorities, law enforcement agencies, financial intelligence units, judicial authorities and recovery agencies. PROTAX Team also delivered master classes to Europol’s newly founded European Financial and Economic Crime Centre, as well to other stakeholders from EUROJUST, EUROFISC, OECD and Tax Justice Network.

Dr Adam Abukari and Prof Umut Turksen

Centre for Financial & Corporate Integrity, Coventry University, UK