Appendix A Sample Late Payment Interest Provision

Drafting note: The title “Director-General” is used for the purposes of the sample provisions in both Appendix A and Appendix B but this title should be substituted with the actual designation used in a particular country such as “Commissioner” if that is the title that applies.

1. Late payment interest

  • (1) Subject to subsection (8), a person who fails to pay tax on or before the due date for payment is liable for late payment interest at the prescribed rate on the amount unpaid calculated for the period commencing from the date the payment was due to the date the payment is made.
  • (2) When calculating interest under subsection (1) in respect of an adjusted assessment, the due date for the payment of the tax is the date on which tax became payable under the original assessment without regard to any extension of time to pay that may have been granted.
  • (3) Any interest paid by a person under subsection (1) must be refunded to the person to the extent that the amount to which the interest relates is found not to have been payable.
  • (4) Late payment interest payable by a person in respect of withholding tax is borne personally by the person and is not recoverable from any other person.
  • (5) Interest payable under this section is computed on a daily compounding basis.
  • (6) The Director-General may serve a taxpayer liable for late payment interest with notice of the amount of late payment interest payable by the taxpayer and the due date for payment.
  • (7) A notice of the amount of late payment interest payable by a taxpayer may be included in any other notice, including a notice of a taxation assessment, served by the Director-General on the taxpayer.
  • (8) When—
    • (a) the Director-General notifies a taxpayer in writing of the taxpayer’s outstanding tax liability under a tax law (including in a taxation assessment); and
    • (b) the taxpayer pays the balance notified in full within the time specified in the notification (including late payment interest payable up to the date of the notification), late payment interest does not accrue for the period between the date of notification and the date of payment.
  • (9) Interest payable under this section is in addition to any administrative penalty imposed under sections [•] or any fine imposed under sections [•] in respect of the same act or omission.
  • (10) The total amount of late payment interest payable by a taxpayer in respect of an unpaid tax liability must not exceed the amount of the liability.
  • (11) In this section, “tax” includes customs duty and excise tax imposed under the Customs legislation but does not include late payment interest.

Appendix B Sample Administrative Penalties Provisions

1. Tax shortfall penalty

  • (1) This section applies where—
    • (a) a person makes a statement to a taxation officer that is false or misleading in a material particular or omits from a statement made to a taxation officer any matter or thing without which the statement is false or misleading in a material particular; and
    • (b) the tax liability of the person, or any other person, computed on the basis of the statement is less than it would have been had the statement not been false or misleading (the difference being referred to in this section as the “tax shortfall”).
  • (2) Subject to subsections (3) and (4), a person to whom this section applies is liable for a tax shortfall penalty equal to—
    • (a) when the statement or omission was made knowingly or recklessly, 75% of the tax shortfall; or
    • (b) in any other case, 20% of the tax shortfall.
  • (3) The amount of a tax shortfall penalty imposed under subsection (2) on a person is increased by—
    • (a) 10 percentage points when this is the second application of this section to the person; or
    • (b) 25 percentage points when this is the third or a subsequent application of this section to the person.
  • (4) The amount of a tax shortfall penalty imposed under subsection (2) on a person is reduced by 10 percentage points when the person voluntarily discloses to the Director-General the statement or omission to which this section applies before the earlier of—
    • (a) discovery by the Director-General of the tax shortfall; or
    • (b) the commencement of an audit of the tax affairs of the person to whom the statement relates.
  • (5) No tax shortfall penalty is payable under subsection (2) when—
    • (a) the person who made the statement did not know and could not reasonably be expected to know that the statement was false or misleading in a material particular;
    • (b) subject to subsection (6), the tax shortfall arose as a result of a taxpayer taking a reasonably arguable position on the application of a revenue law to the taxpayer’s circumstances in lodging a self-assessment return; or
    • (c) the failure was due to a clerical or similar error, other than a repeated clerical or similar error.
  • (6) A position taken by a taxpayer in making a self-assessment that is contrary to a public ruling in force is not regarded as a reasonably arguable position for the purposes of subsection (5)(b).
  • (7) Nothing in subsection (5) prevents the imposition of late payment interest in respect of a tax shortfall when the tax is not paid by the due date for payment.
  • (8) For the purposes of this section, a statement made to a taxation officer includes a statement made, in writing or orally, in any of the following circumstances—
    • (a) in an application, certificate, declaration, notification, tax return, objection, or other document lodged under a revenue law, or a Customs entry lodged under the Customs legislation;
    • (b) in information furnished under a revenue law;
    • (c) in a document provided to a taxation officer otherwise than pursuant to a revenue law;
    • (d) in an answer to a question asked of a person by a taxation officer;
    • (e) in a statement to another person with the knowledge or reasonable expectation that the statement would be passed on to a taxation officer.

2. False or misleading statement penalty

  • (1) This section applies where—
    • (a) a person makes a statement to a taxation officer that is false or misleading in a material particular or omits from a statement made to a taxation officer any matter or thing without which the statement is false or misleading in a material particular; and
    • (b) either—
      • (i) there is no tax shortfall; or
      • (ii) a tax refund for the person, or any other person, computed on the basis of the statement is more than it would have been had the statement not been false or misleading (the difference being referred to in this section as the “excess refund”).
  • (2) Subject to subsection (3), a person to whom this section applies is liable for a false or misleading statement penalty equal to—
    • (a) in the case where there is no tax shortfall —
      • (i) when the statement or omission was made knowingly or recklessly, [1% of the person’s total taxable income for the preceding year of assessment or $1,000, whichever is higher]; or
      • (ii) in any other case, [0.5% of the person’s total taxable income for the preceding year of assessment or $500, whichever is higher]; or
    • (b) in the case of a tax refund,
      • (i) when the statement or omission was made knowingly or recklessly, 75% of the excess refund; or
      • (ii) in any other case, 20% of the excess refund.
  • (3) No false or misleading statement penalty applies when—
    • (a) the person who made the statement did not know and could not reasonably be expected to know that the statement was false or misleading in a material particular;
    • (b) subject to subsection (4), the tax refund arose as a result of a taxpayer taking a reasonably arguable position on the application of a revenue law to the taxpayer’s circumstances in lodging a self-assessment return; or
    • (c) the failure was due to a clerical or similar error, other than a repeated clerical or similar error.
  • (4) A position taken by a taxpayer in making a self-assessment that is contrary to a public ruling in force is not regarded as a reasonably arguable position for the purposes of subsection (3)(b).
  • (5) Section 1(8) applies in determining whether a person has made a statement to a taxation officer.

The tax law function within the Legal Department of the IMF is responsible for providing high-quality legal advice and training in relation to taxation to the IMF’s member countries in the context of technical assistance (TA), capacity development/ training, IMF surveillance, IMF financial assistance programs and Financial Sector Assessment Programs (FSAPs).

Tax Law IMF Technical Note series reflects the views of the tax counsels of the Legal Department with respect to a topical tax law issue, drawing on their experience in advising the wider IMF membership in relation to tax law design and drafting.

1

The authors acknowledge the benefit of comments received from Wouter Bossu of the IMF’s Legal Department and from Juan Toro, Katherine Baer, Margaret Cotton, Lucilla McGlaughlin, Patrick De Mets and Miguel Pecho of the IMF’s Fiscal Affairs Department.

2

Some countries instead choose to impose additional fines or charges—sometimes referred to as “default surcharges”—in lieu of interest to compensate for the time value of money.

3

Tax penalties are by no means the only way to achieve tax compliance. There are other compliance strategies that are not based on deterrence. For instance, in some countries, a good compliance track record is a prerequisite for the taxpayer to avail itself of favorable treatment (for instance, compliant taxpayers may be allowed to defer payment of VAT/GST on importation of goods to their periodic tax return to alleviate cash flow costs). More recently, several countries have further finetuned their compliance strategies by drawing on research in the field of behavioral economics. For a more comprehensive discussion on tax compliance strategies, see International Monetary Fund (IMF), 2015, “Current Challenges in Revenue Mobilization: Improving Tax Compliance”, IMF Policy Paper (Washington: International Monetary Fund).

4

See, for example, Making Tax Digital: interest harmonization and sanctions for late payment, UK HMRC, December 1, 2017.

5

The priority of monetary tax penalties and of tax debts more generally in a bankruptcy or liquidation case is a separate issue, which does not fall within the scope of this note.

6

See IMF and Organization for Economic Co-operation and Development (OECD), 2017, “Tax Certainty” IMF/OECD Report and, 2018, “Update on Tax Certainty” IMF/OECD Report for the G20 Finance Ministers.

Designing Interest and Tax Penalty Regimes
Author: Mr. Christophe J Waerzeggers, Mr. Cory Hillier, and Mr. Irving Aw