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Tax administration

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.

Effective tax systems

A number of criteria can be used in order to identify a country’s level of sophistication when deploying an effective tax system. The IMF’s Revenue Administration Fiscal Information Tool (RA-FIT) database has been used to track some elements that are indicative of the level of success in revenue administration performance for select income groups. Foremost, the RA-FIT data reported to date indicates progressive improvement in the way in which tax administrations have been devising policy and handling taxes.

The tool has now been expanded into a more broadly used international survey on tax administration, called the International Survey on Revenue Administration (ISORA), 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. By November 2016, some 132 countries had participated in inputting the survey data on the RA-FIT Data Collection Platform.

Diagnostic assessment

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. More than 30 TADAT assessments were conducted through October 2016. Of these, 12 were in countries that are signatories to the Addis Tax Initiative. Four of the countries (Jordan, Liberia, Georgia and Zambia) have authorized the publication of their reports on the TADAT website. Reports can only be published with the authorisation of the assessed country.

 

The figure shows the use of certain practices in the tax administrations in the 36 countries that have undergone TADAT assessments. It shows that out of the 36 countries assessed to date, 61 per cent use electronic payment methods, 86 per cent routinely apply withholding income taxes and 77 per cent have tax dispute resolution systems in place and make use of those systems routinely. Of the categories analyzed, cooperative compliance is the one who seems to be lagging behind, with 47 per cent of the countries failing to apply it entirely, and 30 per cent of the countries using it only on an ad hoc basis.   Since TADAT information is private; it is not possible to relate the information to the assessed countries’ geographic location or economic grouping. 

Registering taxpayers: formal vs. informal economy

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. 

 

 

Automation

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

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. Unfortunately, RA-FIT is not yet apt to capture the data that would inform us whether any of the economic groups have reached (or are close to reaching) this level of automation and sophistication in the collection of taxes.

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.

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.