U8

THE INCOME TAX SYSTEM

prepared for the course team by

Pet er Fulche r

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Welcome to Week 8 of AF308.

This week we look at tax administration. How in practice is an income tax

implemented across a range of thousands, perhaps hundreds of thousands,
perhaps millions of taxpayers? How do we effectively and efficiently administer
an income tax? What systems, what practical measures are required to make it
work?

Back in week 2, I said:

‘An income tax and an income tax system are cheese and chalk. In this
course our focus is on the cheese rather than the chalk. That said, we do
need to know a little about the chalk. Thus in week 8 we look in some
detail at the Fiji income tax system as a representative example of a tax
system.’

This being week 8 it’s time to keep the promise and look at the chalk.

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A General Introduction
An income tax system is composed of a variety of actors, a lot of procedural
rules, forms and more forms, and increasingly in modern times, computer based
information systems.

The Actors
The lead actors within the system are the tax authority and the taxpayer. Other
actors play a supporting role. These are third parties, tax professionals and the
courts. Here is a brief introduction to each.

the tax authority

The State has three broad categories of powers; legislative power, being the
power to make those rules of general application which we know as laws;
executive power also known as administrative power, being the power to
administer the affairs of the State; and judicial power being the power to
determine disputes. Generally these powers are given to separate and distinct
arms of the State under what is known as the doctrine of separation of powers.
The term government is most commonly used as a reference to the State’s
administrative arm. However, the term is also used as a reference to the State as a
whole.

Taxes are created and imposed by the legislature. The administration of a tax falls
to the administrative arm of government. Traditionally a department of
government, generically the ‘tax department’, overseen by the Minister of
Finance will administer taxes. However, there is no necessity to this as we see
when we look at Fiji. In Fiji, income tax was until 1998 administered by the
Inland Revenue Department. The permanent head of the department, known as
the Commissioner of Inland Revenue, and employees in the department, tax
officers, were public servants subject in regular fashion to the PSC. Today this is
no longer the set-up in Fiji. What was a government department has been hived
off into a separate statutory authority known as FRCS. FRCS administers a
number of taxes including the income tax. Tax revenues collected by FRCS are
paid over to the government treasury.

Since 1998 Fiji’s statutory authority has had two name changes. The authority
was created with the name FIRCA. This then changed to FRCA. More recently
the name has changed to FRCS (Fiji Revenue and Customs Service). Much of the
text that follows uses the older name (FRCA) rather than the current name
(FRCS).

[An aside.
When the most recent name was adopted I heard some well known
and respected individuals laud the name change because of the
attention given to service. They had in mind service as in customer
service, the customers being the public who deal regularly with
FRCS. Wrong! FRCS exists to serve the government and not the

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 taxpayer. This is service in the sense of the IRS or Inland Revenue
Service (the Federal Government tax authority in the USA) or the
armed services (army, navy and air force). The armed services, of
course, serve the Queen and not the subjects. HMS Endeavour is Her
Majesty’s Ship Endeavour.
(In the UK the navy historically is known as ‘the senior service’. An
island nation like Britain naturally values its navy over its army.
When I was younger, ‘Senior Service’ was also a cigarette brand with
a navy motif. The cigarette’s filter was white rather than the usual tan
colour, emulating the navy’s white uniform.)
One does sometimes hear FRCS referring to taxpayers as customers.
This is also wrong (and an insult and demeaning). Taxpayers are not
customers. Taxpayers are taxpayers. A customer is a person who
voluntarily brings their custom to a party selling goods or services.
Taxpayers are just people doing their duty as compelled by law.
Calling the taxpayer a customer of the tax authority is Orwellian.]

the taxpayer
Taxpayers are parties having some connexion to the tax jurisdiction. Most income
taxes select residence and source to identify taxpayers. Residents are taxed on
their worldwide income, non-residents are taxed on income derived in the taxing
jurisdiction. We have earlier seen this is the position under the Fiji ITA.

Taxpayers are not a homogeneous group. A resident taxpayer may be a company

or an individual. Individuals may be adults or infants, of sound mind or under
some incapacity. Companies may be in liquidation, individuals may be bankrupt.
Residents may be deriving income solely within Fiji or deriving income
elsewhere. Non-residents can be as diverse as residents.

Different taxpayers provide different administrative challenges. Ensuring

compliance by a non-resident may be more difficult than ensuring compliance by
a resident. Ensuring compliance by a company conducting a business may be
more difficult than ensuring compliance by an individual whose sole source of
income is employment. Ensuring compliance by a bankrupt, an infant or a
deceased taxpayer will require special provisions. A moments contemplation of
these matters can alert us immediately to the essentially practical nature of the
topic tax administration.

third parties
In this context I use the expression third party to refer to somebody, other than the
taxpayer, who is co-opted by the law to assist in administration of the tax. Third
parties may be given the task of reporting information concerning a taxpayer to
the tax authority, or assisting in collection of payments to the tax authority.

Employers are a classic example of a third party. The taxpayer in this example is
the employee. An employer may be required to report the taxpayer’s employment
income to the tax authority and to collect and pay over money from the
taxpayer’s salary.

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Co-opting third parties in this way shifts part of the administrative cost and
burden of implementing an income tax to the private sector. And does so without
recompense.

tax professionals
A tax being of its nature a liability imposed by law and due to the State, taxpayers
find themselves tangling with the law and bureaucracy. Many taxpayers lack
either the expertise or time to deal personally with their tax affairs.
Unsurprisingly a cadre of professional advisors emerges to aid taxpayers and
third parties in complying with obligations imposed by the tax law. These are
accountants, lawyers and tax agents. Tax professionals are often utilized to
represent taxpayers in their dealings with the tax authority. At the cutting edge,
they advise on tax effective means of undertaking future economic activities.

the courts
As in other contexts, courts play a duel role in an income tax system. The first is
as arbiters of disputes between the State and the taxpayer. Second, the courts
provide machinery by which obligations of a delinquent taxpayer can be
enforced. The first of these roles inevitably leads to rules and principles that
supplement the tax legislation. We have already delved deeply into the judicial
accounts of income according to everyday principles and usage and the capital
income distinction.

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Procedural Rules
What do we need to implement an income tax? We need full information
concerning the income circumstances of each taxpayer, we need a means of
assessing a taxpayer’s liability and we need a means of collecting payment in
satisfaction of the liability. Information, assessment, and collection are at the core
of an income tax system. Let me elaborate a little on each.

information
An income tax is a breathtakingly ambitious tax. It concerns much of the
economic life of the taxpayer over a twelve month period. In an income tax we
aim to provide an accounting of much of the economic life of the nation. This is
not being done at some general abstract level, as might occur when we set out to
gather statistics on the nation’s economic life, but at a very particular level. We
are taking an account of the particularities of each taxpayer’s situation. This is the
first need and challenge for an income tax system: to obtain as regards each
taxpayer the requisite level of detailed, reliable and complete information that
will constitute the facts on which an assessment operates.

assessment
An income tax is an assessed tax. (There are exceptions; e.g. some of the specific
taxes.) Tax is determined (assessed) at the conclusion of the income period. Once
the requisite information is in hand we need to apply the tax law to the facts (as
revealed by the information) to determine the tax liability for the tax period. This
needs to be done for each and every taxpayer. Many assessments will be
straightforward. However, many too will throw up matters requiring skilled
judgment.

collection
Information and assessment, in a sense, constitute only a prelude to the final
practical objective of any tax; to raise revenue for government. An accrued tax
liability is a debt. The taxpayer is a debtor, the State is a creditor. The third and
eminently practical concern of the tax system is to actually get in payment of the
tax debt.

legal machinery
In a machine, parts combine to produce a particular outcome (e.g. clean clothes
(washing machine); pleasant climate (air conditioner); useable power (internal
combustion engine)). Machines are judged by their functionality, simplicity,
robustness and efficiency.

In the law we have a lot of rules that are essentially legal machinery. Rules tell
people what to do, when to do and how to do something. Often the doing
involves the filling and filing of forms. Well-designed rules coupled with
compliance can result in a system that ‘runs like a well-oiled machine’.

The rules that work together to implement an income tax across the entire society
can be thought of as legal machinery. They are to be judged by their functionality,
simplicity, robustness and efficiency. What are these rules? We are going to look
at the rules that operate in Fiji.

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The Fiji Income Tax System
the governing legislation
The Fiji income tax system is constructed by three pieces of legislation and
regulations made thereunder. The Fiji Revenue and Customs Authority Act 1998
establishes the tax authority commonly known as FRCA and more recently as
FRCS. The Tax Administration Decree 2009 provides many of the procedural
rules for the practical administration of a variety of taxes. The Income Tax Act
2015 creates the general tax on income named Income Tax and a number of
specific income taxes, plus the taxes on fringe benefits (Fringe Benefits Tax) and
capital gains (Capital Gains Tax). The ITA also contains some tax administration
provisions.

We need to begin with a brief introduction to FRCA, the tax authority.

FRCA
Fiji Revenue and Customs Authority is a statutory corporation. In other words, it
is a corporate entity established by its own special purpose statute. This is the Fiji
Revenue and Customs Authority Act 1998 (‘FRCA Act’). Section 3 does the
establishing:
‘3 This section establishes the Fiji Revenue and Customs Authority as
a body corporate with perpetual succession and a common seal which
may -
(a) sue and be sued;
(b) purchase, acquire, hold or alienate real or personal property;
(c) do or perform such other acts or things as bodies corporate may by
law do and perform.’

The name of the legal entity, Fiji Revenue and Customs Authority, is rather
lengthy. In the legislation this is abbreviated to the ‘Authority’.

The Authority is an artificial legal person in the same way that a company created
under the Companies Act is a legal person.

Just as a commercial company requires real people (i.e. individuals) in order to

act and make decisions, so too does the Authority. Section 4 of the FRCA Act
provides that the Permanent Secretary for Finance plus three to five other
individuals appointed by the Minister of Finance shall constitute the members of
the Authority. These ‘members’ are similar to the board of directors of a
commercial company. They act as a group with decisions taken by majority vote
in a meeting known as a ‘meeting of the Authority’. Most of the powers of the
Authority may be delegated (s.24) and are in fact delegated to employees
(including executive employees) of the Authority.

The Authority’s principal purpose and responsibility is:

‘to act as agent of the State and to provide services in administering
and enforcing the laws specified in the First Schedule’ (s.22(a)).
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The First Schedule lists (inter alia) the Customs Act, the Excise Act, the ITA and
the VAT Decree. This is a list of all the major taxes imposed in Fiji.

Prior to the establishment of the Authority two different government departments

administered these laws. The Inland Revenue Department administered the
income tax and VAT legislation. The Customs and Excise Department
administered the customs and excise legislation. On establishment of the
Authority, all assets and liabilities of the two government departments vested in
the Authority and civil servants employed in the two departments overnight
become employees of the Authority. Thus the Authority came into being with a
fully staffed organisation in place. The organisation is commonly known as
FRCA. People referring to FRCA have in mind the entire organisation and not
just the very formal Authority.

the CEO
Heading the organisation is a chief executive appointed by the Authority in
consultation with the Minister of Finance (s.27(1)). The chief executive is given
the plain speaking title of Chief Executive Officer, often abbreviated to CEO.

The CEO has several district obligations. As with any chief executive he or she
has day to day oversight of the running of the entire organisation. In addition, he
or she is the chief tax officer for income tax and the chief tax officer for customs
and excise.

Over FRCA’s first decade, the CEO was also known as the Commissioner of
Inland Revenue, often abbreviated to CIR. This was the title used in the former
ITA for the chief taxation official. One and the same individual thus had two
titles. [More fully there were actually three titles. The CEO was also known as
the Comptroller of Customs and Excise for the purposes of the Customs Act.] In
2009 the title of CIR was excised from the old ITA. It does not reappear in the
new Act. Today the chief officer for income tax is known only as the CEO or
more fully Chief Executive Officer. The title CIR is a historical relic.

[Let me add a comment here. What’s in a name? Often one name is as good as
another. Designing a tutorial problem I may have a Mr Red. But it could as easily
be Mr White or Ms Blue. The name functions only as an identifier. On the other
hand, names can be more than identifiers. Over my life I have met girls or women
called Grace, and one or two called Hope and Charity. Presumably these names
were selected with the idea that a name is more than a tag or identifier.

CEO is a generic expression. The world is full of CEOs. To give this title to the
chief taxation official is singularly lacking in imagination. Even as an identifier it
fails. ‘Which CEO?’ is a quite reasonable question. To which the answer is: The
CEO per the FRCA Act. Or the CEO per the ITA (since the ITA now adopts that
name by reference). We could forestall the need to inquire with a better identifier.
How about CTO or Chief Tax Officer.]

[Recent news. In 2017 the Fiji Parliament passed legislation called the Fiji
Interchange Network (Payments) Act 2017. The Act establishes an Authority
which is to appoint a person with the title Chief Executive Officer. In Fiji we now
have the Chief Executive Officer per the FRCA Act and ITA and the Chief
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Executive Officer per the Fiji Interchange Network (Payments) Act 2017. Neither
officer should be confused with the other.]

[Final comment on names. If in this course you refer to the CEO as the CIR you
will not be penalised.]

funding
How is FRCA funded? Billions of dollars pass through FRCA’s hands annually as
payments are made to FRCA in satisfaction of tax liabilities arising under the
different tax statutes administered by the organisation. These payments do not
constitute income of FRCA. FRCA receives payments as agent of the State and
accounts to the State for sums received. How then does FRCA meet payroll etc?
FRCA is funded by a government grant under the annual Appropriations Act.
Nominally this is a payment for services rendered in acting as agent of the State
(see s.33 and s.34(a)).

secrecy
Under an income tax system, taxpayers must reveal considerable detail
concerning their financial affairs to the State. The taxpayer is not free to say, this
is private, this is none of your business. Effective administration of the tax
requires access to personal information. Administrative needs justify the State’s
encroachment upon the subject’s claim to privacy. The civil libertarian may gnash
his teeth but he cannot button his lips. He must supply the information required
for the making of an assessment.

That which justifies also limits. Information disclosed under compulsion of law
for the purposes of tax administration cannot be used for other purposes. Thus tax
officers are subject to a duty of confidentiality.

Section 52 of the FRCA Act concerns the secrecy obligations of revenue officers.
Section 52(2) provides:
‘(2) A revenue officer must regard as secret and confidential all
information and documents received in performance of duties as a
revenue officer.’

Section 52(1) requires all revenue officers to swear an oath of confidentiality.

Section 52(3)-(5) detail how information may be used.
Breach of an officer’s duty of confidentiality is a criminal offence that may result
in imprisonment (s.52(9)).

the TAD
The FRCA Act establishes the tax authority. The TAD and to a lesser extent the
ITA set out the rules by which the ITA’s various taxes are implemented.

The Tax Administration Decree 2009 was created when? Easy question! The
Decree’s provisions concern the administration of taxes created by the ITA, VAT
Decree, Custom’s Act, Excise Act and other tax legislation.

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Prior to the TAD each of these laws contained its own administration provisions.
For example, before 2010 close to half the sections of the old ITA concerned tax
administration. With the creation of the TAD most of the tax administration
provisions in each of the tax laws were repealed. In their place stands the general
purpose provisions of the TAD.

In theory the TAD is a good idea. We have one tax authority, FRCA,
administering a number of different tax laws, let’s have a single body of
administrative rules (the TAD) for all these different tax laws. In practice the idea
has its limitations. A value added tax produces administration issues unique to a
value added tax. An income tax produces administration issues unique to an
income tax, and so on. In consequence what we find is that the VAT Decree still
contains some administration rules. So too does the ITA. So too does the Customs
Act. The upshot is that to get the full picture on administration of the income tax
one must look to both the TAD and the ITA. Where before there was a one stop
shop for say the income tax, now there is a two stop shop.

some defined terms

The TAD, like most legislation, uses a number of defined terms. Have a quick
read of s.2.

Note in particular the following defined terms:

 ‘CEO’
 ‘tax assessment’
 ‘tax decision’
 ‘tax period’

the ITA
I noted above that notwithstanding the creation of the TAD, some tax
administration rules continue to be located in the ITA. In the ITA 2015 these
rules are found in Part 9 of the Act headed ‘PROCEDURAL RULES’.

Part 9 is divided into Divisions and Subdivisions. Here are the headings for the
different bits:
Division 1 - Application of Tax Administration Decree 2009
Division 2 - Procedural Rules for Income Tax, Social Responsibility Tax
and Presumptive Income Tax
Subdivision 1 - Tax Returns and Record
Subdivision 2 - Payment of Income Tax and Social Responsibility Tax
Subdivision 3 - Current Payment System
Subdivision 4 - Withholding Tax
Division 3 - Procedural Rules for Capital Gains Tax
Division 4 - Procedural Rules for Fringe Benefits Tax

The heading to Part 9 is a little misleading. This is because Division 2 (which is

also headed ‘Procedural Rules …’) is not solely concerned with administrative
matters. Division 2 also includes substantive provisions creating specific taxes in
relation to employment income, bank interest and (until recently) dividends. We
look at these substantive provisions in week 10.

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information, assessment, collection
In my earlier general introduction I stated that the real world implementation of
an income tax involves three principal topics: information, assessment and
collection. In looking at the Fiji income tax system we need to look at each of
these topics in turn.

In what follows, take care to note whether the reference is to the ITA or TAD.

Information: the taxpayer’s annual return

Who has the most complete knowledge of a taxpayer’s income for the tax year?
Usually, the taxpayer himself/herself/itself.

(I add the qualifier ‘usually’ because the taxpayer could be Baby. Or the taxpayer
could be Xco and Xco could be in receivership with all assets including the
company’s accounting records under the control of the receiver. There are too,
other examples.)

Income tax systems typically require the taxpayer to file an annual return of
income (i.e. a report of income). This is the leading source of information
regarding the facts on which an assessment for the general tax on income is
made.

In Fiji, we find the requirement of an annual return in s.104 of the ITA. Section
104(1) provides:
‘(1) A person liable for Income Tax or who has a net loss for a tax
year must file an Income Tax return for the year within 3 months after
the end of the tax year.’

Section 104(4) provides the return is to be in an approved form.

For resident individuals the tax threshold (in 2017) is chargeable income in
excess of $30,000. Must an individual with chargeable income below this figure
(and hence a zero liability for Income Tax) file an annual return? This is not clear.
But note that a taxpayer with a ‘negative chargeable income’, in other words, a
loss for the year, must file a return. As a practical matter this is important. The
return filed in a loss year will be used to establish the carry forward loss as a
deduction in the following year.

Note that since SRT is imposed on the same chargeable income figure as Income
Tax, the return required under s.104(1) also suffices for SRT.

the tax year

The s.104(1) return is to be filed within three months of the close of the tax year.
What is the tax year? Prima facie this is the calendar year (see s.2). However, a
company with the approval of the CEO may adopt an alternative twelve month
period (e.g. Sept 1 to Aug 31) as the company’s tax year (see ITA s.36).

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no return required
The return obligation in s.104(1) is expressed in general terms. It concerns every
taxpayer liable for Income Tax. Section 105 then adds a qualifier.

Section 105 provides:

‘An individual is not required to file an Income Tax return under
section 104 for a tax year if the only income derived by the individual
during the year consists solely of the following amounts –
(a) income from which tax has been withheld under section 111,
except if the person has two or more employments at the same
time for the whole or part of the tax year;
(b) income from which tax has been withheld under section 112
when section 125 treats the tax withheld as a final tax on the
income.’

Let me just summarise s.105.

The section concerns an individual whose only income is employment income,
bank interest and dividends
and this income is subject to a specific tax.
This individual is not required to file an annual return.

We will look at the finer details of the provisions mentioned in paragraphs (a) and
(b) of s.105 in week 10.

[Here is a technical comment re s.105.

Strictly speaking s.105 is an unnecessary provision. Nothing would change if the
section disappeared. Thus strictly speaking s.105 does not qualify s.104. Here is
the reason. Income subject to the specific taxes is not included in gross income.
An individual who has only the income detailed in s.105 will have no chargeable
income, in consequence no Income Tax liability and in consequence no obligation
to file a s.104 annual return.]

TAD re returns
Sections 3-7 of the TAD set out a number of general rules concerning tax returns.

Section 3(3) empowers the CEO to call for a further or fuller tax return.

Section 5 permits a taxpayer to apply for an extension of time to file a return and
for the CEO to grant an extension if satisfied there is reasonable cause.

Section 6 empowers the CEO to require a return before the end of the tax year
where the taxpayer has in some fashion left the jurisdiction. Section 6 of the TAD
provides:
‘If, during a tax period -
(a) a taxpayer has died;
(b) a taxpayer has been declared bankrupt, or has gone into
winding up or liquidation;
(c) the CEO has reason to believe that a taxpayer is about to leave
Fiji and is unlikely to return; or

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 (d) a taxpayer has ceased, or the CEO has reason to believe that a
taxpayer will cease, carrying on any trade, business, profession,
vocation, or employment in Fiji,
the CEO may, by notice in writing and at any time during the tax
period, require the taxpayer or the taxpayer’s representative, as the
case may be, to file a tax return for the tax period by the date
specified in the notice being a date that may be before the date that
the return for the tax period would otherwise be due.’

two final points

Before we leave s.104 there are two final points to note.

First, s.104(2) requires an annual return from a partnership and a trustee. These
are special cases that we will consider in week 11 when we look at partnerships
and trusts.

Second, s.104(3) concerns a taxpayer subject to Presumptive Income Tax. Recall

that PIT (s.9) is a specific tax imposed on a taxpayer conducting a micro
business. A return is required each quarter reporting the turnover for the quarter.

Information: third party returns

The taxpayer’s annual return must be filed in a timely manner, contain no
falsehoods and not omit any relevant information. This is a big ask. People
generally don’t like to pay tax and here they are being asked to provide the
information that will ensure they pay their full share. While not quite a case of
supplying the rope that will be used to hang oneself, s.104 is tending in that
direction. Here lies the weakness of the annual return as our primary source of
information - the temptation to omit or falsify information.

How can we counter this weakness? Putting the question another way, how can
we obtain dutiful compliance? The answers are unsurprising.
- Seek verification of matters reported in the annual return.
- Threaten to punish non-compliance.
- Make it likely that noncompliant behaviour will be discovered.
The last of these is important to ensure that the threat of punishment provides an
effective motivation to comply.

One means of verifying information in the taxpayer’s personal return is a third

party return. A third party with some knowledge of some aspect of the taxpayer’s
affairs is required to report that knowledge.

We see an example of this in the ITA s.107. A real estate agent receiving rent as
the payment agent of a landlord must annually report monies received together
with details concerning the landlord and rental premises.

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Obtaining information: other means
The personal return and third party returns are a cheap and expeditious means of
obtaining the information necessary for an assessment. Other more laborious and
resource intensive processes are also available. The tax authority can actively
search out information, summoning witnesses, undertaking audits and even
entering and searching premises. In Fiji these powers are found in the TAD.

administrative summons
TAD s.36 empowers the CEO to summons parties to produce documents and to
attend and give evidence before the CEO. A summons can be directed to a
taxpayer or to a third party with knowledge of the taxpayer’s affairs. Witnesses
can be required to give evidence under oath.

(Note that when we say the CEO we mean the CEO or his delegate. Most powers
of the CEO are exercised by tax officers (employees of FRCA) as the delegate of
the CEO.)

Under our general law certain communications are regarded as confidential. For
example, a banker must keep confidential information derived from and
concerning his customer. A lawyer must keep confidential information disclosed
by her client. The investigative powers of the CEO under TAD s.36 are
particularly potent since they override these traditional claims to confidentiality
(see s.36(5)).

audit
TAD s.37 empowers the CEO to audit the tax affairs of any taxpayer. Obvious
candidates for an audit are taxpayers who are known or suspected to be not
complying fully with their tax obligations. Additionally the CEO may conduct a
systematic audit programme: for example, selecting a geographic area and then
auditing all businesses within that area, or, selecting a particular line of business
(e.g. all restaurants) for audit.

The audit process need not be hostile. Audits commonly turn up errors in the
taxpayer’s affairs that are wholly innocent. Here the audit process can, inter alia,
perform a useful function in educating the taxpayer and improving compliance.

power to enter and search

TAD s.35 empowers the CEO (or officer authorised in writing) to enter and
search premises. The object of the search is not the murder weapon or a stash of
drugs (these are police matters) but financial information in the form of
accounting records. This is a rather startling and dramatic power. Here is s.35(1):
‘(1) For the purposes of administering any tax law with respect to a
taxpayer, the CEO or a tax officer authorised by the CEO, in writing,
for the purposes of this section -
(a) has the right, at all times and with or without notice, to full and
free access to any premises, place, property, accounts,
documents, records, or data storage device;

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 (b) may make an extract or copy of any accounts, documents,
records, or information stored on a data storage device to
which access is obtained under paragraph (a);
(c) may seize any accounts, documents, or records that, in the
opinion of the CEO or authorised tax officer, afford evidence
that may be material in determining the tax liability of a
taxpayer;
(d) may retain any accounts, documents, or records seized under
paragraph (c) for as long as they may be required for
determining a taxpayer’s tax liability or for any proceeding
under a tax law; and
(e) may, if a hard or electronic copy of information stored on a
data storage device is not provided, seize and retain the device
for as long as is necessary to copy the information required.’

Note that the power to enter premises and search is not limited to the premises of
the taxpayer. Premises could be those of a third party, for example, the office of
an accounting firm that provides services to the taxpayer. Nor is the power to
seize or copy documents limited to the documents of the taxpayer.

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Assessment
An income tax is an assessed tax. The second principal component in an income
tax system concerns a determination of the taxpayer’s tax liability.

Before looking at the current assessment process in Fiji, I want to briefly outline
the traditional process of assessment.

A general tax on income has a tax period. Tax is calculated by reference to the
taxpayer’s chargeable income. Chargeable income in essence is aggregate net
income for the period. Necessarily assessment must wait upon the conclusion of
the tax period.

Shortly after the conclusion of the tax year the taxpayer files their annual return
with the tax authority. Relying on information reported in the return, third party
returns and any further information at hand, the tax authority determines the
taxpayer’s chargeable income and consequent tax liability. The taxpayer is then
advised of the determination by way of a ‘notice of assessment’.

The notice of assessment will include a statement of the tax liability for the tax
year and a statement of payments that may have been made to the tax authority
over the tax year. The two sums are set-off. If the assessed tax exceeds
prepayments, payment of the shortfall will be due from the taxpayer to the tax
authority. If prepayments exceed the assessed tax, payment flows in the other
direction. The taxpayer has a ‘tax refund’.

In many cases the assessment story ends here. Everybody is happy.

Occasionally the taxpayer will be unhappy with the assessment, believing it to be

in error. (And of course in error in a particular way: the assessed tax liability is
excessive.) In this situation it becomes necessary to confront a basic proposition
of justice. Here is the proposition. No man should be judge in his own cause.

‘No man should be judge in his own cause’ is a principle of justice. It is also a
principle of good governance. It is one reason why the State’s monopoly power to
dispense justice (Don’t take justice into your own hands.) is vested in an
independent arm of government. What we call the independent judiciary or
courts.

This proposition of justice and good government is violated where the liability
(tax) to the State is determined by the tax authority, a member of the
administrative arm of the State. (It makes no difference that the tax authority is a
statutory corporation as with FRCA. The Authority serves the executive and is
answerable to the executive in the form of the Minister of Finance.)

Where the taxpayer is happy with the assessment, any contravention of our
principle of justice and good governance is wholly academic. The situation is
different where the taxpayer is unhappy with the tax administrator’s assessment.
In this situation the principle must be recognised and accommodated. How is this
done?

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The first resort is negotiation. The aggrieved taxpayer may ‘object’ to the tax
authority. A dialogue ensures with the possibility that the taxpayer and tax
authority may reach agreement. If agreement is reached, again everybody is
happy. End of assessment.

The alternative outcome is that the taxpayer’s objection is unsuccessful. The tax
authority stands by its assessment. In this situation the matter in dispute is handed
to an independent third party. This is a judicial body. (In Fiji this is the Tax
Tribunal established by the TAD s.75.)

The judicial body hears the dispute over the assessment in the same way as a trial
court hears a dispute. Each party (taxpayer and tax authority) may put evidence,
each party may be represented by legal counsel and each party may make
submissions on the governing law and its application to the particular facts of the
assessment in dispute.

The hearing before the judicial body is sometimes referred to as an appeal of the
assessment. Don’t be misled by such talk. This is not an appeal in the usual sense.
This is a hearing de novo. The judicial body hears and decides the dispute in the
same fashion as a trial court.

In one sense only is this an appeal. The tax authority’s assessment will stand until
overturned or varied by the judicial body. In consequence the burden is on the
taxpayer to establish what is the correct assessment.

The appeal of an assessment will typically not ‘stay’ the original assessment. In
other words, the tax authority remains free to seek payment of the assessed tax
liability in advance of the judicial hearing. This is a practical rule that discourages
taxpayers from bringing worthless challenges to an assessment simply to ‘buy
time’.

The party losing before the judicial body will normally be entitled to appeal as of
right to a higher ranking court. (In Fiji this is the Tax Court established by the
TAD s.90.) Such an appeal operates as a regular appeal. No evidence is led (the
facts have already been established before the earlier judicial body) and the
appeal is limited to points of law.

assessments in Fiji
Until recently the assessment process in Fiji followed the traditional model
outlined above. Indeed it still does to a large degree. But ….

But there is a but.

The but concerns stage one, the initial assessment. Today the TAD provides for
‘self-assessment.’ Self-assessment means exactly what it sounds like. The
taxpayer himself/herself/itself is responsible for assessing their chargeable
income for the year and consequent tax liability.

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Under a self-assessment system, the taxpayer’s annual return must report
information, and based thereon calculate chargeable income and the tax accruing
thereon. The tax calculated becomes the assessed tax liability of the taxpayer.

Section 8 of the TAD provides as follows:

‘For the purposes of this Decree -
(a) a self-assessment taxpayer who has filed a self-assessment return
is treated as having made an assessment of the amount of tax payable
for the tax period to which the return relates being that amount as set
out in the return; and
(b) a self-assessment return filed by a self-assessment taxpayer is
treated as a notice of the assessment served by the CEO on the
taxpayer on the date that the return was filed.’

Who is a self-assessment taxpayer?

Section 2 of the TAD defines ‘self-assessment taxpayer’ as ‘a person required to
file a self-assessment return’.
‘Self-assessment return’ is defined as ‘a tax return listed in Part B of the Third
Schedule’.

The TAD Third Schedule Part B provides:

‘The following are self-assessment returns for the purposes of this
Decree –
(1) …
(2) A return required under section 104 … of the Income Tax Act.’

[Paragraph (2) also lists ss.108, 126 and 131 of the ITA. The reference to s.108
appears to be a typo. Sections 126 and 131 concern returns for Capital Gains Tax
and Fringe Benefits Tax.]

To summarize: Every taxpayer required to file an annual return under ITA s.104
is a self-assessment taxpayer. The annual return is a report of income for the tax
year. It is also an assessment for Income Tax (and if relevant, SRT).

The same is true of a return for PIT under s.104(3).

What is the rationale for self-assessment? Perhaps this is just the modern world.
At the petrol station we have self-service. Supermarkets for years have used a
self-service model for shopping. In some countries, self-service has even been
extended to the checkout process at supermarkets. Self-service, of course, is no
service at all. It is rather the service provider ceasing to provide and instead
utilising the free labour of the customer. Hopefully the customer benefits by way
of a lower price. Making the taxpayer responsible for assessment potentially
reduces costs for the tax authority. The extent of savings will largely depend on
what percentage of returns/assessments are carefully reviewed and checked by
the tax authority.

A second rationale concerns the due date for payment of tax. Under a self-
assessment system all tax can be due and payable by the final date for returns. In
fact this is what we find in the ITA. Section 108 provides:

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 ‘(1) The Income Tax and Social Responsibility Tax payable by a
person for a tax year are due on the date that the Income Tax return
for the year is due or such other date as prescribed.
(2) The Presumptive Income Tax payable by a person for a quarter is
due on the date that the Presumptive Income Tax return for the
quarter is due.’

A self-assessment system, just like the traditional system in which the tax
administrator makes the assessment, potentially runs foul of the principle of
justice: No man should be judge in his own cause. The only difference is that now
the judge in his own cause is the taxpayer! How then do we deal with this? The
answer is an amended assessment. FRCA may review the taxpayer’s self-
assessment and if in disagreement serve on the taxpayer an amended assessment.
Section 11 of the TAD provides:
‘(1) Subject to this section, the CEO may amend a tax assessment by
making such alterations or additions to the assessment as the CEO
considers necessary to ensure that a taxpayer is liable for the correct
amount of tax payable in respect of the tax period to which the
assessment relates.’

A taxpayer who disagrees with the amended assessment may file an objection
with the CEO. At this point the assessment process works in the same fashion as
the traditional assessment process outlined earlier. Following are the relevant
provisions.

TAD s.16 provides:

‘(1) A person dissatisfied with a tax decision may lodge an objection
to the decision with the CEO -
(a) in the case of a tax decision that is a tax assessment, within 60
consecutive days of service of the notice of the decision; …
(2) If the tax decision to which an objection relates is an amended
assessment, a taxpayer’s right to object to the amended assessment is
limited to the alterations and additions made in it.’

FRCA considers the objection and either accedes to it or denies it. In the latter
scenario the taxpayer may take the dispute to the Tax Tribunal. TAD s.17
provides:
‘(1) A person dissatisfied with an objection decision may make an
application to the Tax Tribunal in accordance with section 82 for
review of the decision.’

TAD s.18 provides that a decision of the Tax Tribunal may be appealed by either
party as of right to the Tax Court.

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Collection
The third element in an income tax system is collection.

Tax that is due and payable is a debt due to the State. As regards an unpaid tax
liability, the State is a creditor and the taxpayer a debtor. TAD s.22(2) provides:
‘(2) Tax payable by a person is recoverable as a debt due to the State.’

The CEO can sue to enforce payment of an unpaid tax debt in just the same way a
landlord might sue his tenant to recover unpaid rent, or a bank sue a borrower to
obtain payment of unpaid principal and interest on a loan. As in a regular civil
debt action there is a limitation period. A suit (a legal action filed with the court)
brought to pursue payment of a tax debt must be filed within six year of the debt
becoming due and payable. TAD s.23 provides:
‘(1) Notwithstanding … any unpaid tax may be sued for and
recovered in any court of competent jurisdiction by the CEO suing in
his or her official capacity.
(3) A suit under subsection (1) for recovery of unpaid tax must be
brought within 6 years from -
(a) in the case of tax payable under a self-assessment, the date that
the self-assessment return was filed;
(b) in the case of tax payable under an amended assessment, the
date of service of notice of the amended assessment; or
(c) any other case, the date that the tax was payable.’

The points made above are fundamental truths but (and this is important) they
should not be understood as a description of how the system for collection
usually works.

Back in week 2 writing briefly about the tax system, I said this:
‘An annual income tax contains within itself a natural chronology.
The taxpayer derives income over the tax year. At the conclusion of
the year information concerning the past year is reported. Once
information is in hand an assessment may be made and notified, thus
crystallising the tax liability. Once the liability is determined the
taxpayer makes payment to the tax authority in satisfaction of the tax
debt.

In fact no tax system adheres to this simple and natural chronology.

Rather the system will typically require payments from the taxpayer
over the tax year. This is a story of advance payments. Not advance
payment of tax, but payments in advance towards an anticipated tax
liability, a liability that of its nature can only be definitively
determined following the conclusion of the tax year.

In addition to advance payments from the taxpayer, the system may

also utilise another collection strategy. Third parties making
payments that will constitute income in the hands of the taxpayer can
be required to pay a portion of the payment to the tax authority. …

Most income tax systems use a patchwork of advance payments from

the taxpayer and third parties throughout the tax year.’

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We are going to look at the collection strategies used in the Fiji income tax
system. These are fairly representative of what is found in most income tax
systems.

advance payments by the taxpayer

The ITA requires taxpayers who will become liable for Income Tax at the end of
the tax year to make advance payments towards this anticipated tax liability
during the tax year. Section 110, subsections (1) and (2) provide:
‘(1) A person liable for Income Tax for a tax year is liable to make
advance payments of Income Tax:
(a) in the case of a company, on the last day of the sixth, ninth and
twelfth months of the tax year; or
(b) in the case of any other person, on 30th April, 31st August and
30th November.
(2) If the total advance payments of Income Tax payable by a person,
other than a company, for a tax year is less than $120, the advance tax
payable by the person for the year is payable in one instalment on
30th September.’

In the case of companies (subs.(1)(a)) no actual date is listed because a company

may have a tax year other than the calendar year (recall ITA s.36).

Any rule requiring advance payment confronts an obvious and singular difficulty.
The liability being currently unknown, and indeed unknowable, what is to be the
dollar value of the prepayment? The ITA answers this by looking to history.
Section 110(3) provides:
‘(3) The amount of each advance payment of Income Tax payable by
a person for a tax year is computed according to the following
formula –
331/3% x (A - B)
where –
A is the person’s assessed Income Tax liability for the preceding tax
year, … and
B is so much of A that was paid by amounts withheld under
Subdivision 4 of Division 2 of this Part.’

This looks a little technical but it is all rather simple. The taxpayer is to make
three equal payments throughout the tax year. Each payment is one third of the
taxpayer’s Income Tax liability for the past year not including the value of tax
collected by means of withholding by third parties.

The valuation formula presumes two things.

First, that chargeable income for the current year will be much the same as the
preceding year.
Second, that if some advance payments in the previous year were effected by a
third party withholding, that too will happen in the current year.

Either assumption could be false and false in either direction. A taxpayer who
believes their Income Tax for the current year will be less than the previous year

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may file an estimate for the current year. The three advance payments due will
then be determined by reference to the estimate (see s.110(6)).

Should the estimate prove to be an under-estimate, the taxpayer risks incurring a

penalty being 40% of the difference between the estimate and what eventually
emerges as the taxpayer’s Income Tax liability for the year (see s.110(11)&(12)).

Advance payments under s.110 are set-off against the assessed Income Tax
liability for the year. Any shortfall is to be made good when the taxpayer submits
the annual return/self-assessment (see s.108). Any overpayment is refundable (see
s.110(10)).

advance payments by third parties

Under s.110 the taxpayer himself/herself/itself is making advance payments that
are to be used in satisfaction of the tax liability that is assessed at the conclusion
of the tax year.

Advance payments are also obtained with the assistance of third parties. Third
parties making payments to the taxpayer that will be income in the hands of the
taxpayer may be required to pay a portion of the payment to FRCA. This is
commonly referred to as ‘withholding’.

There are two withholding stories.

First, a third party subject to a withholding obligation may be merely aiding in
collection. Sums withheld are an advance payment towards the Income Tax
liability that results from the assessment following the close of the tax year. In
this situation the only difference with s.110 concerns the identity of the party who
is to make the advance payment.
Second, the withholding may be an element in a quite different story. This is the
story of a specific tax. Sums withheld and paid to the CEO are not credited
against liability to Income Tax. Rather they satisfy a specific tax levied on the
specific form of income the third party is paying to the taxpayer. The specific
form of income is not included in gross income, thus not present in chargeable
income and thus not subject to Income Tax.

The two different stories are clearly conceptually distinct. Think carefully about
them. The distinction needs to be clear in your mind.

Where a specific tax is coupled with a withholding obligation on a third party, the
specific tax will typically lack a tax period. The tax is rather simple. It is X% of
the payment made. Fullstop. End of story. No deductions. No carry forward
losses. No tax period. Just X% of the payment made. Discussing this type of
specific tax in week 2, I made the point that a specific tax of this character is
rather like a tax on income itself. (‘Rather like’ and not actually because formally
there is a taxpayer being the recipient of the payment.)

In the second of these stories the sum withheld and paid to the CEO is not an
advance payment. The payment constitutes what the ITA calls a ‘final tax’.

22
Let’s now return to the topic of advance payments and more specifically advance
payments towards Income Tax that is yet to be assessed.

The ITA has several provisions under which advance payments are to be paid by
a third party by means of withholding.

The first of these are regulations called the Income Tax (Collection of Provisional
Tax) Regulations 2016. These regulations require a person making payments to a
third party contractor to withhold 5% of the payment, which sum is the paid over
to the CEO. The regulations are largely a rebadged statement of regulations in
force for many years under the old ITA. You are not required to master the
intricacies of these regulations.

Sections 111 and 112 also impose withholding obligations. The withholding here
is rather chameleon like. At times the story is story one, a story of advance
payments by means of a third party. And at times the story is story two. A story of
a specific tax effected by withholding. It’s complicated. We will examine the
complication in week 10.

For present purposes we need only note this. Where the story operates as story
one, s.124 becomes relevant. Inter alia, s.124 provides:
‘(1) For the purposes of this Act, if tax has been withheld under this
Subdivision from income derived by a person, the amount of income
included in the gross income of the person is the amount derived
before the withholding of the tax.
(2) Subject to subsections (3) and (4), if tax has been withheld under
this Subdivision from income derived by a person, the person is
allowed a tax credit for the tax against the tax due by the person on
the chargeable income of the person for the tax year in which the tax
was withheld.’

Subsection (1) makes what I hope is an obvious point. Advance payments do not
constitute a deduction when determining gross income.
Subsection (2) is not as express as it might be. The tax due on chargeable income
is of course Income Tax (and for individuals also perhaps SRT). The ‘tax credit’
is a set-off. Advance payments collected by withholding as with advance
payments received under s.110 are set-off against the assessed Income Tax
liability following the close of the tax year.

other means of collection

In an ideal world, the ITA’s provisions for advance payments should result in the
CEO having in hand by the end of the tax year, a sum close to the Income Tax
liability assessed following the close of the tax year. Alas, the world, as we know,
is not ideal. It happens, that advance payments will sometimes fall short of the
taxpayer’s assessed liability. In this situation the CEO as an unsatisfied creditor
will need to pursue payment of any outstanding tax debt. What means are
available?

At the start of this topic (collection) I made reference to the TAD s.23. The CEO
like any unpaid creditor may bring a regular legal action on the unpaid debt. In
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fact the CEO will rarely elect to sue in this fashion. This is because the CEO has
a number of alternative and more speedy or efficacious means of pursuing
payment. Here is a brief summary of the menu of options open to the CEO.
- The CEO can obtain a charge (i.e. a mortgage) over land of a debtor (TAD s.28).
- The CEO may distrain on goods on the premises of a debtor (TAD s.29).
- The CEO has special garnishee powers (TAD s.27).
- The CEO may issue an order (Departure Prohibition Order) preventing an
individual from departing Fiji (TAD s.31).

Special avenues for collecting payment of a tax debt, exemplified in the above
sections, are found in most income tax regimes.

Departure Prohibition Orders, while a longstanding feature of income tax regimes

elsewhere, are a relatively new feature of the Fiji tax landscape. Unfortunately we
do not have any published statistics on the frequency with which such orders are
issued by the CEO. In several unreported cases taxpayers have successfully
challenged orders issued by the CEO.

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Further topics
An income tax system is constructed around three principal concerns:
information, assessment and collection. This is the main story. But it is not the
entire story. The entire story involves several further bits and pieces that I
propose to deal with briefly.

administrative penalties and offences

An income tax system can only run like a well-oiled machine if most taxpayers
on the whole largely follow the rules. Many taxpayers will comply because they
see it as their moral obligation to follow the law. But every one of us is subject to
temptation and to pressures. When working capital is tight and you can make
payroll or pay the taxman but not both, whose claim are you going to satisfy?

In an imperfect world we may need additional encouragement to meet our

obligations. That traditionally is the stick (rather than the carrot) or the threat
thereof.

The ITA 2015, in common with jurisdictions elsewhere, utilises two variants of
the stick. The first is ‘penalties’. The second is criminal sanctions. Here is an
example of each. The matter in issue is the late filing or failure to file a tax return.

TAD s.43(1) provides:

‘(1) A person who fails to file a tax return or lodge any other
document as required under a tax law is liable -
(a) in the case of a failure to file a tax return under which tax is
payable, for a penalty of 20% of the amount of tax payable
under the return;
(b) subject to paragraph (a), failure to file a tax return by the due
date for which tax is payable, a penalty of 5% of the amount of
tax payable for each month of default; or
(c) in any other case, for a penalty of $1 for each day of default.’

TAD s.49(1) provides:

‘(1) A taxpayer who, without reasonable excuse, fails -
(a) to file a tax return by the due date, or within such further time
as the CEO may allow under section 5; or
(b) to comply with section 3(3),
commits an offence and is liable for a fine not exceeding $15,000 or
to imprisonment for a term not exceeding 12 months or to both a fine
and imprisonment.’

Each of these sections address the same case of noncompliance.

Section 43 is an example of an administrative penalty. The penalty is imposed by
the CEO with no legal proceedings. It imposes the burden of additional debt but
does not give the taxpayer a criminal record.
Section 49 is a criminal law provision. It requires criminal proceedings before a
court. The taxpayer can be punished with both a fine and imprisonment. Once
convicted the taxpayer has a criminal record.

25
The administrative penalty and criminal proceedings are alternative sanctions.
The CEO cannot utilise both for the same event of noncompliance, but must
choose between the alternatives. Administrative convenience heavily favours the
penalty sanction and this is the form of sanction used in most situations.

advance rulings
Advance rulings are a rather clever innovation under which uncertainty as to the
meaning of a legislative provision, or uncertainty as to how a legislative
provision will apply to a particular fact situation can be remedied. In an advance
ruling the tax authority commits itself to a stated interpretation of a statutory
provision or a stated opinion as to how a statutory provision applies to a
particular set of facts. Thereafter, taxpayers know what is the position of the tax
authority.

We have two versions of the advance ruling.

The first is a public ruling (TAD s.61). This ruling is issued on the initiative of
the CEO.

The second is private ruling (TAD s.64). This results from an application for a
ruling by a taxpayer.

Neither form of ruling binds taxpayers. This is important. The CEO in a ruling is
not making law. He/she cannot make law. This is the job of the legislature. A
taxpayer who believes a ruling is wrong may appeal an assessment of the CEO
made in accordance with the ruling. The court hearing the appeal will then rule
on the correctness of the ruling.

The CEO can withdraw a ruling. Thereafter the CEO is not bound by the earlier
ruling and is free to adopt a different opinion as to the correct interpretation of the
law.

This concludes our review of the Fiji income tax system. Next week we return to
the matter which is the primary focus in this course; the tax or taxes on income.

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