Case
Treat People Well, Money Will Follow
By
Younes Boutamarhzoute, Mr.
Kingdom of Morocco
Le Marrakech is a medium-sized complex that consists of restaurant, caf6,
pizzeria, and patisserie owned by Mr. Abdullah. This latter has been the owner of his
enterprise for 15 years. Not long ago, Le Marrakech has been selected for a filed tax
audit. On September 20th 2006, Mr. Adel, a freshly recruited tax auditor was sitting at his
desk checking his e-mail, when he was called by Mr. Rafik, his supervisor:
Mr. Rarik: Adel, I know that you don't have enough time but I have to tell you that I've
just received a message from the chief audit director which in he is asking you to start a
new audit case which is Le Marrakech complex.
Mr. Adel: I think it will be very difficult for me to achieve the case before the end of the
year since I have three other cases not totally completed. Anyway, I will try my best.
Mr. Rafik: I'm sure you will do it. Now let's give a call to the owner-manager and fix a
meeting with him today.
Mr. Abdullah: Hello
Mr. Rafik: Hello! This is Mr. Rafik, the regional tax audit supervisor. Can I talk to Mr.
Abdullah?
Mr. Abdullah: I am Mr. Abdullah, how can I help you?
Mr. Rafik: Can my auditor, Mr. Adel arrange a meeting in your office at 12:00 pm?
Mr. Abdullah: For sure, welcome, I'll be waiting for Mr. Adel
At the initial meeting, Mr. Adel discussed the nature of Mr. Abdullah's business,
tried to gain a better understanding of the transactions recorded in his books, and made
some practical arrangements for work space. Then the inspection of the books and
records started sixteen days later.
At the beginning of the audit, it became apparent that Le Marrakech presented a great tax
risk and the tax fraud was evident for the following reasons:
A family controlled company
Cash-based business
Existence of unreal expenditures
Undeclared sales to a cafe owned by Mr. Abdullah's wife
The tax fraud in the case of Le Marrakech may be schematized as follows:
Figure 1:
AMOUNT OF TAX = SALES – EXPENSES = NET INCOME * TAX RATE
So the tendency is to lower sales and to boost expenses.
As a matter of fact, Mr. Adel was motivated by the simple desire to conduct his audit
case properly, productively, and efficiently. He is well educated and trained to implement
audits in accordance with the law and the administrative policies. He is, of course,
interested in reassessing tax where he believes tax is due. He has a difficult job to do on
behalf of the government. Like everyone else, Mr. Adel wanted and expected to be
treated with respect and courtesy.
Mr. Adel reports to Mr. Rafik, designed as a group head or team leader. Mr. Rafik is
more experienced than average field auditors. He doesn't have any higher level of
education but he must approve Mr. Adel's report before any reassessment can be
finalized.
During the 3rd visit to Mr. Abdullah's office Mr. Adel found that he didn't present all
books, records, and linking papers necessary to the commencement of the audit. Mr.
Abdullah also doesn't respond promptly to all requests for information and explanations.
But what makes Mr. Adel very angry was that Mr. Abdullah refused his access to some
business locations.
At that time, Mr Adel had the conviction that he had to go through a confrontation
situation with Mr. Abdullah which may delay the completion of the case. On the side and
few days after the last meeting with the taxpayer, Mr. Adel was checking his e-mail when
he came across correspondence via intranet from the Central Tax Administration: Code
of Conduct for Tax Auditors.
This code contained a very important chapter that deals with respect and protection of
taxpayer's rights. Auditors must operate within the framework of the rights Charter. The
main features of the Charter and their application in audit are set as follows:
Since audits can be a burden to people and may cause some disturbance to their
business, it is essential that they are conducted in a courteous and professional
manner,
The auditor must explain to the taxpayer the purpose of the visit,
He must outline to the taxpayer his rights,
He has to be conscious of the taxpayer's possible anxiety and any medical
problem if it exists,
He must adopt a professional approach in speech and behaviour and maintain that
approach even if the taxpayer is uncooperative. It is recognised that a taxpayer
may sometimes feel resentment at being selected for audit,
Auditors seek to collect only the correct amount of tax, no more and no less,
Auditor must be very careful not to do anything or accept anything which may
have the effect of compromising his integrity or weakening his official position,
Auditor must not engage in the audit of any case which involves a family member
or where a potential conflict of interest exists,
Auditor must have regard to the time and money costs associated with an audit
case. To keep these to a minimum, only significant points should be pursued. As
soon as it appears to an auditor that the tax return is substantially correct, the audit
must terminates,
Auditor must advise the taxpayer of any errors, omissions or irregularities in the
returns submitted, including those in the taxpayer's favour, and specify any action
that may be required to place the taxpayer on a compliant situation,
At the commencement of the audit, if the taxpayer refuses and continues to refuse
access to his business or to produce the records requested, he is regarded as
obstructing the audit process. In such circumstances the auditor spends a
reasonable period of time trying to obtain cooperation. If the refusal continues, the
Auditor withdraws and makes a report to the Chief Audit Director.
Mr. Adel to Mr. Rafik: I think this code of good conduct should be implemented only in
societies where the compliance to tax obligations is very high. In our culture, conflicts
between taxpayers and tax officers are so great and heavy losses for both parties from
conflict occurred. I find it difficult, if not impossible, to build and sustain cooperation
with the taxpayer in other to achieve higher performance.
Mr. Rafik: I am not sure you have understood what is behind the Charter of rights. You
must know that the DGI I (General Tax Administration) is on the move. The DGI wants
to bring the necessary changes to its culture, organisation, and employee qualification
procedures.
Our laws have been considered for a long time as complex, inelastic, inefficient and
inequitable, generating undesirable outcomes in the economy and limiting the
community's acceptance of the tax system as a whole. Tax reforms were inevitable and
have become increasingly important elements of adjustment programs in the country.
Mr. Adel: In our country many challenges to be faced by the DGI have a more profound
significance and implications than in develop countries. Some of the biggest challenges
in Morocco include:
Convincing taxpayers that the DGI and its representatives act in accordance with
the law, and that the integrity of financial processes is maintained. This creates an
environment in which more taxpayers will voluntarily comply.
Low registration rates
Limited enforcement of deliberate tax evaders
Difficulty taxpayers face in getting comprehensible information from the tax
departments.
Mr. Rafik: I want you to know, Mr. Adel, that we are about a complete transformation of
the DGI involving a design of a new business model (see figure 1), comprising a new
strategy for the DGI's relationship with the community, supported by a channel strategy,
a more skilled workforce deployed according to strategic priorities, more efficient and
consistent business processes and performance management. The new business model
will need to be supported by information technology. That's the reason why we are about
implementing the new IT tool SIT 2 (Integrated Taxation System). Figure I illustrates the
major parts of a modernization strategy for a revenue agency.
Mr. Adel: I totally agree with you, but let us now take the case of Mr. Abdullah
the owner of Le Marrakech and assist me to choo5e which method I have to use. I
prefer to schematize scenarios:
If Mr. Abdullah cooperate and provides us with all the requested information it
will work the best, and I will promise him to reach a compromise deal. Otherwise
we have three alternative solutions:
Figure 2:
Few days later Mr. Adel went to see Mr. Abdullah in order to convince him to be
cooperative and provide all the requested information.
Mr. Adel to Mr. Abdullah: I am simply doing my job. Don't take it personally. By
cooperating and making all the information available as soon as possible you will assist
me in completing the job quickly and moving on. Lengthy delays and stonewalling are
not good ideas. I have all the time. Furthermore, delaying the process may only
encourage me to dig deeper on the assumption that a large income is being hidden.
Obviously, I know there may be differences of opinions on tax treatment of various
items, but if you show a higher cooperation these can be resolved. I am here to educate
you, not to put more burdens on your business, and assure that you comply with tax law.
Every business and taxpayer is required to pay their fair, legal share of the tax.
As I already mentioned to you Mr. Abdullah, the chances of resolving the case on
acceptable terms at the beginning are better if you treat the audit process not as a
confrontation but a cooperative effort in which you and me try to develop common views
about the pertinent facts, the applicable law, and why not strengths and weaknesses of our
positions. If so, at the end of the audit I promise we will systematically reach a solution.
When Mr. Adel came back to his office, he joined Mr. Rafik and asked him the following
questions:
1) What is the main problem faced by Mr. Adel?
2) What benefits will Mr. Adel and Mr. Abdullah get from cooperation?
3) What is actually needed to make Cooperative model work in practice in this case?
4) What if a Mr. Abdullah does not wish to engage in Cooperative Compliance?
Appendix 1: Facts about tax field auditors in Morocco
Field audits in Morocco can take from few days to one year, depending on the nature of
the examination, the size and the complexity of the taxpayer's operations. The scope of
the audit is often predetermined by the auditor with the advice and directions of the
supervisor who decide which records should be reviewed and most importantly what
audit techniques should be used.
The audit period is usually for the four preceding calendar years. An audit of business
activities will cover several major areas, including:
1. Income: verification of proper amounts, classifications, and documentation.
2. Deductions and exemptions: verification of proper amounts, classifications, and
documentation.
3. Purchases: verification of purchase invoices
At the end of the audit the officer will notify the taxpayer of any change in his tax. He
must provide him with clear and concise explanations of all adjustments to his tax. If he
agrees with the audit, he must pay the full amount of tax, penalty and interest due within
60 days of the date the administration will notify him. Otherwise, he will also owe a late
payment penalty and additional interest.
If he disagrees with the audit, he has 30 days from the date the administration notifies
him for the second time to appeal formally to the local Tax Court, if not satisfied the
National tax court, if not the administrative court. In each correspondence the
administration provides the taxpayer with information about his rights and
responsibilities regarding the audit and appeal process.
Appendix 2: The transformation strategy of the DGI