The principle of simplicity in the tax field

Let’s imagine for a moment that, in a hypothetical country, its tax system is structured on the principle of self-determination of obligations; the taxes that compose it contain detailed clauses that aim to determine the taxes in the most exact and fair way possible, contemplating the particular situation of each taxpayer; and the tax administration is digitized, so the preparation and presentation of sworn statements and other procedures are carried out solely by computer means.

Not bad, right? Well then, let us suppose that this tax system is implemented in a country submerged in economic and social precariousness, where famine and illiteracy are rampant. In this country, the main concern of the population is having bread on the table tomorrow, so tax issues are an elusive and irrelevant aspect for most taxpayers. A computer or the Internet are luxuries that few can afford, and the tax administration watches helplessly as the development of an informal economy cannot be levied with its sophisticated taxes.

The extreme case that we have just illustrated aims to address the importance of the principle of simplicity as a guiding light in the structuring of tax systems; in addition to its devastating consequences when said principle is ignored.

The principle of simplicity

Among other characteristics, it is understood that a tax system is simple when the rules that structure it are written in a clear and simple way, remain relatively stable over time and are issued by few agencies. Likewise, the administrative work of the tax authorities should also be governed by the principle of simplicity: the formal procedures and duties must be able to be fulfilled in the most expeditious manner possible, avoiding unnecessary delays that only hinder the taxpayer’s activities.

A simple tax system encourages its compliance by obligated subjects, allows more time to be devoted to business, is easier for professionals engaged in tax work to study, and reduces litigation with the State. Consequently, the drafting of abstruse or difficult-to-apply regulations should be avoided, as well as the bureaucratization of procedures.

However, not everything is rosy. Sometimes, an excessively simple tax system can ignore the particular situation of certain taxpayers or sector of activity. And this is where the conflict between the principles of simplicity and equity occurs.

Suppose that the income tax of a country is made up of a single article that stipulates the following: “The income obtained by resident natural persons must be taxed at the rate of 10%.” Simple to understand? Yes. Inequitable? Maybe also, since its simplicity ignores the personal characteristics of each taxpayer. And this is how non-taxable minimums, deductions, progressive rates and income categories arose, among other measures that, sacrificing simplicity, seek to provide the system with a little more equity.

And Uruguay? How are we doing?

Although this is a very subjective and difficult to measure discussion, from our point of view we believe that the Uruguayan tax regulations contain certain provisions that are far from simple, but that do not satisfactorily achieve equity or any other positive purpose. Thus, we have the counterparty rule in the IRAE, the fictitious dividends in the IRPF and IRNR, the quantification of income derived from the sale of rural real estate and the agricultural IPAT regulations that, going against the current of all that is good , frighten taxpayers with their unsympathetic wording and unnecessarily hinder the work of tax advisors.

In another order of things, although the COVID-19 pandemic has accelerated the digital transformation of the tax administration, there are still redundant and obsolete procedures and formal duties that do not benefit anyone. For example, why are taxpayers still forced to submit form 2181 with the detail of VAT purchases and VAT sales for the month, if today almost all companies with relevant economic activity adhere to electronic invoicing? In a context in which the DGI knows who is buying and/or selling to whom in real time, presenting this form has lost its meaning.

Colophon

A thorough review of the Uruguayan tax system is imperative in light of the principle of simplicity if we want to stand out in the region as a country that is friendly to investment and employment, promote tax compliance, and follow the path of economic development.