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Segmentation of the tax office

Creating specialization areas or branches in a tax administration’s office can increase revenue accumulation to the extent tax administrations can develop closer relationships based on trust and mutual understanding with its taxpayers. These relationships are also known as “cooperative compliance” practices because both taxpayer and tax administration cooperate to achieve the intended result.

Specialized tax administration branches can also reduce the incidence of tax audits and assessments as taxpayers have better access to the tax administration, and the officials are specialized who understand the issues faced by the taxpayer and are ready to achieve a solution that is mutually beneficial. 

Tax administration offices can create specialized branches that will deal with specific economic segments (i.e. for resource rich countries it might make sense to have an oil and gas branch, or an extractives office), or can compartmentalize taxpayers according to the degree of economic activity. The latter is the most common segmentation. Many tax administrations have a large taxpayers office and an SME office, to specialize on issues faced by these types of taxpayers. Specialized large taxpayers offices can be particularly helpful in those places where these taxpayers are responsible for the payment of most taxes. A good relationship between taxpayer and tax administration can increase revenue accumulation with reduced auditing effort, thereby freeing human resources (which are often scarce, especially in LDCs), to engage into other activities within the tax administration. Cooperative compliance relationships between taxpayers and tax administrations can also be beneficial to the taxpayer, since it may reduce uncertainty or compliance costs.   

 

The figure reports on the total domestic revenue collections attributable to LTOs, per income group. The data samples are only representative of the responding countries. The source of the 2013 decline in revenue from LTOs is unclear; data gathered under phase 3 of RA-FIT may shed further light on recent trends. Future analysis could investigate (i) the level of transparency in the taxpayer/tax administration relationship; and (ii) whether greater compartmentalization of the tax administration increases the potential for increased revenues.