The Addis Action Agenda highlights the need to enhance revenue administration. Countries have taken important steps to strengthen the institutional framework necessary to increase their potential tax revenue over the last five years. This section explores the tools available for Member States to improve tax administration.
A number of criteria can be used in order to identify a country’s level of sophistication when deploying an effective tax system. A broadly used international survey on tax administration, called the International Survey on Revenue Administration (ISORA), was launched as a joint endeavor between The Inter-American Center of Tax Administrations (CIAT), the IMF, the Intra- European Organisation of Tax Administrations (IOTA) and the OECD.
During 2017, the 2016 round of the ISORA was completed with 135 tax administrations participating. The survey found that while 91 per cent of tax administrations have strategic plans, only 64 per cent publish them. In terms of autonomy of tax authorities, 73 per cent have authority over their own internal structure, and 64 per cent have authority over their internal budget. Over 91 per cent of revenue administrations provide tax policy advice to their Governments.
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Some of the criteria to indicate the effectiveness of a tax system might include, but are not limited to whether: (i) there are specialized branches within the tax administration to deal with specific taxpayer groups, such as large taxpayers and SMEs; (ii) how effective a tax administration is in registering taxpayers, hence integrating the informal sector into the formal economy; and (iii) a country’s ability to audit its taxpayers to effectively have control over the data which is reported voluntarily. The automation of the tax system would be one step further from that, but unfortunately there is as of yet no known index to indicate what percentage of countries has entered the area of digitalized tax administration.
The 2016 survey was the first survey for the International Survey on Revenue Administration (ISORA) partners (Centro Interamericano de Administraciones Tributarias (CIAT), the International Monetary Fund (IMF), Intra-European Organisation of Tax Administrations (IOTA) and the Organization for Economic Cooperation and Development (OECD) to jointly gather tax administration data through a single, shared, online survey. Aggregated data from this survey round is available to the public, while participating tax administrations may access country level data. The ISORA 2018 will be launched in May 2018 with a simplified and shortened questionnaire to make it easier for tax administrations to complete.
The database is based on a number of criteria which include framework and autonomy, management practices, outsourcing, IT and innovation, automatic exchange of information, budget and human resources, segmentation, taxpayer identiﬁcation and registration, return ﬁling, payment, service and education, collection and enforcement, compliance/audit, and dispute resolution. These are benchmarked within and across country groups, for example by income and features such as conﬂict affected or resource dependent. It should be noted that speciﬁc country information is not public, though benchmarking using aggregate data is available. This data can be complemented with tax performance assessment by multi-stakeholder assessments of Public Expenditure and Financial Account- ability (PEFA) undertaken in selected countries.
One important tool to help countries further improve tax administration is undertaking a thorough diagnostic analysis, which can help identify options for strengthening the tax administration’s human resources and collection tools.
There is currently a shortage of comparable public data on transparency and accountability of tax administrations. In 2014, the IMF, World Bank and a number of their development partners launched the Tax Administration Diagnostic Assessment Tool (TADAT), aimed to identify strengths and weaknesses and assess performance in tax administrations on a country-by-country basis. As at end-February 2018, 53 TADAT assessments have been conducted, with 36 in middle-income countries, and two for subnational authorities. Developed countries are also conducting the exercise. At least eight national level assessments are planned or in progress, with a further two subnational assessments planned. Reports can only be published with the authorisation of the assessed country.
A tax administration can increase its ability to collect revenues by focusing its efforts on taxpayer registration, and in that way, making sure the formal economy captures the whole array of economic activities occurring in the country.
The figure shows data from the RA-FIT database on the average percentage of total registered corporate and individual taxpayers that are considered active in the countries that participated in the survey. Considering the RA-FIT’s experimental nature to date, this data can serve as a comparator for future, more detailed analysis. More thorough data would be needed to make a determination if countries, in aggregate, are making progress in expanding the tax base and formalization. For example data, capable of indicating whether taxpaying business registration growth is outstripping economic growth over time, and what percentage of the population is registered as individual taxpayers over time. As it is, RA-FIT data is not yet able to make those correlations.
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Aggregated data on taxpayer registration are difficult to interpret without time-series information and appropriate comparators such as population and economic growth. However, RA-FIT data are not public, making appropriate comparisons difficult. The data presented does not allow one to verify whether countries have in fact been making progress in expanding the tax base, because business registration will be related to economic size. Future analysis can work towards breakdowns taking into consideration the total number of registered offices, the countries’ total population, economic growth and nominal GDP, or other factors, to account for the overall division between formal and informal economies.
An action or campaign specifically geared towards taxpayer registration might be particularly interesting for LDCs and middle-income countries hosting a large informal sector. Municipal and sub-national campaigns such as “demand your invoice” or “attach your social security number to your purchase and win a lottery award,” have shown to have significant impact on multiple fronts: (i) it turns the consumer into an ad hoc government agent, to the extent he demands for the transaction to be a registered transaction in order to qualify for the government program; (ii) it mandates for the business making the sale or providing the service to register the transaction, thus forestalling tax evasion and avoidance; and (iii) it provides the government with insight over the individual’s economic buying power, thus providing an additional tool for the tax administration to check the reliability of the information provided through the voluntary income tax declaration. The more automated the tax administration (i.e. through electronic income tax declarations, electronic invoicing for indirect taxes, etc), the easier it will be for the tax administration to cross-check the information and demand the (unpaid) taxes potentially due on the transaction.
Increasing a country’s IT infrastructure (or digitalizing a country’s tax administration), can be an important aspect of revenue mobilization. The automation of tax reporting and collection systems is especially important to LDCs and MICs, that tend to rely on limited human resources to exercise all of the tax administration functions. By automating tax systems, tax administrations are able to devote more of its efforts towards the strengthening of the domestic legal system, to make sure the policies in place are robust and are effective in maximizing the country’s revenue generation ability.
A case study explores how the World Bank assisted Armenia in the reform of its tax code, and of the tax administration processes. Armenia was assisted from 2012 to 2016, during which it underwent drastic digitalization of many of its tax functions.
Auditing is an important aspect of the tax collection and administration process, but it is time-consuming, requires many man-hours of investigation, and is susceptible to human error and volatility (including crimes such as bribe and corruption). An effective and efficient tax system should use auditing as its last resort.
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An automated tax administration office, which is able to collect and report on taxpayer information automatically, has the mechanisms in place to cross-check information reported voluntarily by the taxpayer against his economic activities, has a wide base of registered taxpayers and has a close relationship with some of the key taxpayers and economic generators (through a segmented tax office, or through cooperative compliance techniques), should only have to rely on auditing taxpayers as a last resort. A very low auditing activity index could therefore mean that the investment in alternative compliance tools has been effective, and that the tax administration is able to limit the number of tax investigations it has to run against its taxpayers.
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.
RA-FIT data compiled from 2011 to 2013 regarding countries’ level of segmentation demonstrates that most tax administrations, including tax administrations in LDCs, are currently segmented and that more than 50% of revenue derives from specially segmented branches of tax administrations.