Public Disclosure Authorized

39110

Tax Administrations and Small and Medium

Enterprises (SMEs) in Developing Countries
Public Disclosure Authorized
Public Disclosure Authorized

Prepared by:
Lewis I. Baurer
Public Disclosure Authorized

Consultant
Small and Medium Enterprise Department
World Bank Group
July 2005

The ideas and thoughts expresses within should not be attributed to the World Bank Group,
its Board of Directors, it management, or any of its member countries.

1
 Table of Contents

Page
Table of Contents………………………………………………………………………....ii

Foreword……………………………………………………………………………...…vi

Section I…………………………………………………………………………….….….1
Background and Introduction

Section II…………………………………………………………………………………..3
Characteristics of Tax Administrations in Developing Countries Prior to Reform

Section III………………………………………………………………………………….6
Tax Administration/Business Interface

Section IV………………………………………………………………………………….7
Tax Administration Business Processes
Taxpayer Assistance, Registration, and Education
Receipt and Processing of Tax Payments, Tax Returns,
Information Documents, and Revenue Accounting
Audit/Control
Appeals
Collection of Delinquent Accounts/Enforced Collection
Non-filer/Stop-filer Operations
Tax Fraud/Criminal Investigations
Internal Audit/Internal Security
Information Systems Support and Management
Planning and Analysis
Administrative Services and Support
Legislative and Stakeholder Relations
Legal Services/Technical Rulings

Section V…………………………………………………………………………………..14
Core Business Operations and Support Operations
Taxpayer Service Operations
Return Processing/Revenue Accounting Operations
Audit/Control
Enforced Collection Non-Payer and Non-Filer Operations

ii
Section VI……………………………………………………………………………….25
Measures of Tax Administration Effectiveness
Global Measures
Functional Measures

Section VII……………………………………………………………………………….28
Building the Foundation for Best Practice Tax Administration Reform
Legislative Framework
Restructuring the Tax Administration
Best Practice Organizational Structure
Strategic Planning
Restructuring Using Business Process Re-Engineering
Information Management System and Unified TIN
Change Management Process
Written Procedures and Technical Rulings
Human Resource Management
Voluntary Compliance and Risk Management

Section VIII………………………………………………………………………….…..39
Reducing Corruption in a Tax Administration

Section IX ………………………………………………………………………………42
Reducing the Burden on SME Taxpayers
Tax Policy Measures
Tax Administration Measures

Summary………………………………………………………………………………..45

Annexes:

Annex1………………………………………………………………………………….46
Your Rights as a Taxpayer, U.S. Internal Revenue Service, Publication 1, May, 2005

Annex 2…………………………………………………………………………….……49
Taxpayer Charter, HM Customs and Revenue

Annex 3…………………………………………………………………………………..50
Taxpayers’ Rights and Obligations-Practice Note, Prepared by the OECD Committee of
Fiscal Affairs Forum on Tax Administration, GAP002

Annex 4………………………………………………………………………………….59
The Latvian State Revenue Service Strategic Business Plan-2001

Annex 5………………………………………………………………………………….70
The Tanzania Revenue Authority Five Year Corporate Plan-2003/4-2007/8

iii
Annex 6…………………………………………………………………………………76
The Uganda Revenue Authority Corporate Plan- 2002/3-2006/7

Annex 7………………………………………………………………………………..116
The Rwanda Revenue Authority Corporate Plan 2005-2007

Annex 8………………………………………………………………………………...147
The Latvian State Revenue Service Annual Report 2001

Annex 9………………………………………………………………………………..171
Compliance Risk Management: Audit Case Selection Systems, OECD Forum on Tax
Administration Compliance Subgroup, October 2004

Annex 10……………………………………………………………………………….172
OECD Risk Management-Practice Note-GAP003, Amended 10 May 2001

Annex 11………………………………………………………………………………..186
Code of Ethics and Conduct in Revenue Administrations: What Does International Practice
Tell Us, World Bank Tax Policy and Tax Administration Thematic Group,
Bill Mayville (undated)

Annex 12………………………………………………………………………………..206
Taxation and Small Business, OECD 1994, ISBN 92-64-14093X (not attached)

Annex 13………………………………………………………………………………..207
Income Tax Incentives for Investment, David Holland and Richard Vann, IMF, 1998

Annex 14………………………………………………………………………………..241
Amnesties, The World Bank Group, Tax Policy and Administration (worldbank.org)

Annex 15………………………………………………………………………………..250
Hungarian Tax Administration-APEH Web Site

Annex 16………………………………………………………………………………..257
Formation, Organizational Development and Strategy of APEH-APEH Web Site

iv
 Foreword

This paper is primarily based on my personal experiences over the last eleven years as an
international tax administration consultant. I have served as a resident tax administration
advisor in five developing countries in Eastern Europe and the Middle East; as the first
operational director of the Kosovo Tax Administration; and, as a short term advisor in
seven other developing countries. Prior to my international work, I spent 30 years as an
official of the U.S. Internal Revenue Service, most of which was at the senior management
level. A number of technical facets of tax administration addressed in this paper have been
covered elsewhere in greater detail. I have attempted reduce a large amount of information
to a manageable size so as not to lose the attention of the target audience of non-tax
administration professionals. However, I have provided additional source material and
references in the annexes to this paper, should the reader wish to delve further in the field
of tax administration.

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Section I

I Background and Introduction

1. A country’s tax administration is one of the few public sector organizations which
touches the lives of a country’s citizens and businesses on a daily basis and, arguably has
the greatest impact on their livelihood. Tax administration employees are amongst the
most frequently contacted government officials and often represent to the public what is
right or wrong about their government. The responsiveness, integrity, and quality of tax
administration staff must therefore meet a very high standard. Revenue collected from
taxes along with customs collections represents the major funding source for
governmental expenditures. An effective and efficient tax administration system is
integral to any country’s well being. The proper amount of tax must be collected in a
timely manner and the enforcement powers of the tax administration must be applied
judiciously and in an even handed fashion. The tax administration must provide an even
playing field for business by ensuring that all taxpayers meet their tax filing and paying
requirements. This requires significant efforts to deal with the underground economy and
to, therefore, increase the tax base. Failure to bring business activity from the shadow
economy into the tax system puts compliant taxpayers at a competitive disadvantage, and
ultimately leads to an erosion of the tax base. The tax administration must balance its
educational and assistance role with its enforcement role. The overriding goal is to foster
voluntary compliance with the tax laws. This represents a significant challenge in a
developing economy.

2. Private enterprises in developing countries often face difficulties when dealing

with the government in general and the tax administration in particular. Many of the
difficulties with the tax authorities are the consequence of poorly conceived tax policies
and a lack of certainty regarding future policy changes. It would be rare indeed to not
hear complaints about the complexity and/or ambiguity of the tax laws, high tax rates,
and the lack of an integrated fiscal strategy that takes social taxes, and local taxes and
fees into account when determining the overall tax burden placed on the business
community.

3. In carrying out their responsibilities, tax administrations can also create problems
for the business community when they impose burdensome reporting and record keeping
requirements; conduct excessive inspections and audits; fail to deal with corrupt tax
administration employees; and, fail to provide transparency in tax administration
operations. This type of environment harms individual businesses and the overall
economy. As a result, many in the business community react by taking steps which
adversely affect the tax base. This typically includes underreporting profits and turnover;
underreporting employee wages; and, by creating “phantom” employees. A significant
number of businesses also fail to register or file tax declarations. This only increases the
burden on those taxpayers who try to comply with the tax law, and discourages their
future compliance. The result is a vicious cycle which tends to preserve the status quo.
Only meaningful reforms to the tax system can break the cycle and result in an improved
business climate which will stimulate economic growth.

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4. This document is intended for use by staff of the International Finance
Corporation of the World Bank. It provides information and tools: to gauge the state of
development of a country’s tax administration; to serve as a primer on tax administration
organizational structure and operations; and, to describe best practices of modern tax
administrations. It, also, contains concrete examples of how a tax administration can
facilitate the growth of small and medium enterprises (SMEs) by eliminating
administrative and other burdens faced by these enterprises in developing countries.

5. Sometimes the line between tax policy and tax administration is blurred. For this
reason this document contains some tax policy options that have been used to promote
the growth of small and medium enterprises, but will primarily focus on tax
administration reform.

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Section II

II. Characteristics of Tax Administrations in Developing Countries Prior to

Reform
6. Most or all of the following characteristics are present in countries before tax
administrations undergo major reforms. This is especially true in a country which is
transitioning from a command economy to a market-driven economy.

™ All registered taxpayers and all tax liabilities are “controlled” on a regular basis.
The reliance is on the known universe of taxpayers who are subjected to frequent
and intrusive tax inspections regardless of their past compliance history or loss of
revenue risk they may pose. Little attention is paid to identifying non-filers and
bringing them onto the tax rolls. This is especially true with taxpayers operating
in the illegal, as opposed to the formal sector.

™ Most tax controls or inspections do not represent thorough or professional

financial audits practiced by modern tax administrations and do not meet
international standards.

™ There is no limit on the total amounts of penalties that can be assessed in addition
to tax. The actual amount of tax due may be substantially less than the penalties
assessed.

™ There is limited interest in building a system of self-assessment and voluntary

compliance with the tax laws. A PAYE (pay as you earn-employee taxes withheld
by an employer which are required to be deposited in the tax administration’s
account on a periodic basis) system may not be in place and there is limited
withholding at the source by banks or other third part payers (interest, dividends,
etc.).

™ There is a lack of specialization in the tax administration. Prior to a tax return

being accepted for filing, a tax inspector pre-reviews the tax return for “accuracy”
and may provide “advice” to the taxpayer. The same tax inspector may then
“assess” the tax liability, subsequently be responsible for collection of any unpaid
amount, and even determine if a control visit is necessary. This close relationship
where the tax inspector is responsible for a specific group of taxpayers can easily
lead to corruption.

™ The emphasis of the tax administration is to meet a pre-determined revenue target

for which they have limited or no input.

™ There is a significant “underground” or “grey” economy with a high percentage of

unregistered and/or non-filing taxpayers as well as filers who underreport their
income, turnover, or profits.

™ There are inadequate controls to prevent external or internal corruption.

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™ There are little or no written operating procedures to be followed by tax
administration staff either in the same tax office or in different tax office locations.

™ Taxpayer education and assistance efforts are minimal. There is a limited effort to
solicit business or trade association input on tax administration requirements or
operations.

™ Tax administration internal communications are minimal and/or there is a top

down management approach which discourages employee suggestions or
feedback. Overall management practices are poor.

™ Training is considered an overhead activity which does not justify much attention
or resources. There are few or no training professionals on staff. The emphasis of
staff training is on teaching the contents of tax laws as opposed to applying the
laws. Little or no attention is paid to skills, techniques, procedures, customer
relations, or managerial training.

™ There is little interest in improving the overall image of the tax administration.
Proper treatment of taxpayers and protection of taxpayer rights is not a major
concern.

™ There is limited use of computers. The emphasis is on the acquisition of hardware

as opposed to the development of an overall information system plan. Software
development is based on automating current operations as opposed to
reengineering the business processes of the tax administration to produce
maximum effectiveness and efficiency.

™ There is no centralized or unique numbering system used to identify all taxpayers.

Therefore, the establishment of a taxpayer master file for the country is impaired.
There may also be different numbering schemes used by other government bodies
such as business registration, customs service, social taxes, etc. for the same
taxpayer. These multiple systems impair the tax administration’s ability to obtain
and match information on business taxpayers.

™ Taxpayers may be faced with multiple and uncoordinated audits and/or controls
from different organizational elements of the tax administration. They may, also,
face audits by the social insurance agencies that collect their own “contributions”
or taxes which are not coordinated with the tax administration.

™ The number of employees and/or skill sets of tax administration staff are not in
balance with organizational requirements.

™ The number and location of tax administration offices are not in balance with
organizational requirements.

4
 ™ Written position descriptions and periodic written employee evaluations based on
job knowledge, skills, attributes, and overall job performance are minimal. There
is no formal merit promotion system. Staff salaries are inadequate to meet normal
living costs. Employees may receive additional funds solely on the basis of taxes
assessed and/or collected as opposed to the validity of assessment/collections or
qualitative performance measures.

™ Because top level tax administration management focuses on short-term results

over medium to long-term reforms, a strategic business plan has not been
developed or implemented.

™ There is an inadequate focus on large taxpayers and prioritization may not be

placed on the collection of major national taxes such as income tax or VAT.

™ With the exception of monitoring progress in meeting revenue collection targets,

the central office of the tax administration may only exercise limited control over
local tax office operations.

™ Political influence is often pronounced and damaging and may adversely impact
both the outcome of tax case work and the selection and promotion of staff at all
organizational levels.

™ Coordination between the tax administration and other government bodies,

including the customs service, is ineffective. Turf battles over both operations and
data are common.

™ The focus on inspection and control activities leaves little resources to concentrate
on collection of unpaid tax liabilities. Delinquent tax liabilities are large and may
include a number of state-owned enterprises.

™ Enforced collection of delinquent taxes is not aggressively pursued. Where a

system of secured transactions has not been established and title to land is
uncertain, the tax administration is also hampered in taking seizure and sale
actions.

7. The above listed characteristics are barriers which must be overcome not only to
engender reform in the tax administration but also, to provide better conditions for the
growth of the private sector. For example, a system of secured transactions is more
important for the banking, investment and development sectors than it is to the tax
administration. Transparency of tax administration operations provides valuable
information to assist private sector business planning and operations by knowing what to
expect under various scenarios. Effective tax administration operations result in timely
responses to taxpayer inquiries, processing of tax refunds and resolution of problems and
disputes.

5
Section III

III. Tax Administration/Business Interface

8. There are a number of points of contact between the taxpayer and the tax
administration. I will list them in terms of the frequency of contact.

9. The initial contact between the business taxpayer and the tax administration
usually occurs when registering to secure a taxpayer identification number. Registration
is a pre-requisite to conducting business operations. However, the taxpayer may first
contact the tax administration to secure information about tax filing and paying
requirements. Follow-up contacts may be made to request additional information or tax
forms, publications, or assistance. Assistance may be requested to check on the status of
the taxpayer’s account including VAT refund inquiries.

10. If the taxpayer has not provided all the information requested on the tax return, or
if there is a mathematical or other error on the return, there will be a follow-up contact by
the tax administration.

11. If the information provided on the tax return does not match other information in
the tax administration’s files that it is cross-checked against, the taxpayer will be
contacted.

12. If the taxpayer is selected for an audit or control, the taxpayer will be contacted.
The percentage of taxpayers audited is dependent on the status of the tax administration’s
development and resource availability.

13. If the taxpayer disputes the results of a tax audit, there will be contact in an
attempt to resolve the dispute. The percentage of cases that are appealed is dependent on
the status of the tax administration’s development and the clarity of tax legislation.

14. If the taxpayer fails to timely pay the required amount of tax due, or fails to file a
required return, a contact will result. The percentage of taxpayers delinquent in filing
and/or paying their taxes is dependent on the status of the tax administration’s
development as well as economic, social, and cultural conditions.
If the taxpayer is suspected of criminal tax violations, there will be contact by the tax
administration. Normally only a very small percentage of taxpayers will be the subject of
such contacts.

15. The contacts between the tax administration and taxpayers reflect the major
activities or business processes which the tax administration performs.

6
Section IV

IV Tax Administration Business Processes

15. Modern tax administrations all perform common types of activities or business
processes. Some of these activities (core business practices) directly relate to the mission
of the tax administration while other activities provide the support framework to properly
carry out this mission. Core business processes are interrelated and ongoing
communications and coordination between these processes is essential. For example
significantly increasing the number of audits in a given year will impact taxpayer services
and enforced collection resource requirements. Similarly, increased attention to non-filers
will impact audit and collection resource needs. Legislative changes will have similar
impacts. Therefore, the integration of all these factors into the development of an annual
operating plan for the tax administration becomes a complex and demanding task.
All these common business processes are represented in the tax administration’s
organization chart. However, even within a functionally structured organization the
design and substructure of these blocks vary. A modern tax administration system is
based on the establishment of a unique taxpayer identifying number (TIN) which is the
foundation of its management information system and which monitors the status and
movement of taxpayer cases through all core business processes.

™ Taxpayer Assistance, Registration, and Education

16. This business process provides taxpayer information and educational services and
includes the following activities:
• Registering taxpayers
• Assigning a unique taxpayer identification number (TIN)
• Maintaining and updating taxpayer registers
• Contact point for taxpayers who visit, call, or write (including internet) to the tax
administration.
• Providing and staffing taxpayer service counters and call-in operations
• Responding to general inquiries regarding registration, filing or payment
requirements and basic tax law, as well as the status of a taxpayer’s account, and
ensuring that the taxpayer is routed to other areas as appropriate
• Providing tax returns, instructions, and informational publications.
• Developing informational and educational publications
• Conducting seminars on changes to tax laws and procedures for targeted business
audiences
• Developing press releases, press conferences and conducting media relations
activities to communicate tax administration messages to the general public
• Monitoring subjects of queries to determine the need for additional educational
materials for taxpayers, internal tax administration training, and/or internal
operational changes.
• Developing and maintaining the content of the tax administration Website

7
 ™ Receipt and Processing of Tax Payments, Tax Returns, Information
Documents and Revenue Accounting

17. This business process involves “back office” activities and includes:
• Processing payments received directly from taxpayers or electronically from
banks or other third party sources
• Processing and perfecting tax returns and information documents received from
taxpayers and third parties
• Entering tax return and related data into tax administration databases
• Matching of taxpayer and third party documents and data
• Matching of taxpayer filing requirements against received returns
• Issuance of non-filer and stop-filer notices to taxpayers
• Matching of tax payments, credits, and debits against tax assessments
• Issuance of balance due notices to taxpayers
• Issuance of tax refunds
• Maintaining, updating, and providing revenue accounting data

™ Audit/Control

18. This compliance business process encompasses all taxpayer

audit/inspection/control operations
• Develops the tax administration’s audit plan
• Audit case selection including development and application of risk analysis
programs
• Conducting and managing both field and office audits for all types of taxes
(Income, VAT, etc.) and contributions (social security, health, unemployment, etc)
administered by the tax administration.
• Examination of tax returns, books, records, invoices, and related financial data
• Investigation of taxpayer sources of income, assets, and third party sources and
data
• Preparation of tax returns on behalf of the tax administration where the taxpayer
fails to voluntarily file.
• Issuance of written audit reports and determinations which can result in
additional tax, penalty, and interest liabilities; tax refunds; or no changes in tax
liability
• Analysis and application of tax laws and regulations to the facts of a case under
audit.
• Quality review of audits

™ Appeals

19. This process provides an independent administrative review upon request of a

taxpayer who disputes the results of determinations made by the audit functions.
• Conducts administrative hearings to review case determinations by audit staff.

8
 • Issues written determinations which can uphold or modify audit results.
• Where applicable, may also conduct hearing on decisions made in the enforced
collection function.

™ Collection of Delinquent Accounts/Enforced Collection

20. This process deals the actions the tax administration takes when the taxpayer fails
to pay a tax liability based on either a self-assessed tax return or an assessment resulting
from audit activities.
• Contacting taxpayers and requesting payment of all delinquent and current taxes
that are due.
• Interviewing taxpayers and third parties to secure information regarding sources
of income and assets
• Reviewing taxpayer financial records and third party data to determine the
taxpayers ability to pay delinquent taxes
• Determining the reason for non-payment
• Determining if the taxpayer should be granted additional time to pay a tax liability
based on financial analysis and granting installment payment privileges where
applicable
• Determining if a tax liability is collectible
• Conducting investigations to locate taxpayers and/or taxpayer assets
• Identifying assets of the taxpayer that can be attached or seized for non-payment
of taxes due
• Taking enforced collection actions when taxpayer refuses to pay voluntarily
• Issuing attachment orders to banks to freeze and/or seize taxpayer accounts
• Issuing attachment orders to third parties to secure funds due to the taxpayer
• Conducting seizures of tangible assets as permitted by law (e.g., real property,
machinery and equipment, motor vehicles, etc.)
• Conducting public auction sales of taxpayer assets as permitted by law

™ Non-filer/Stop-filer Operations

21. This process deals with the actions the tax administration takes when a taxpayer
fails to file required tax returns on a timely basis.
• Contacting taxpayers to request filing of all required returns as well as payment of
any amounts due.
• Interviewing taxpayers and third parties to secure information regarding
taxpayer’s filing requirements
• Determining the reasons for non-filing
• Securing delinquent tax returns and all amounts due
• Securing necessary books, records, and other information to enable the tax
administration to prepare the taxpayer’s return if the taxpayer refuses to
voluntarily file

9
 ™ Tax Fraud/Criminal Investigations

22. This business process involves determinations of criminal violations of tax related
laws
• Information gathering activities to determine criminal tax law violations
• Investigation of tax fraud and related crimes based on information provided by
audit, collection, or other tax administration functions.
• Criminal tax investigations based on information received from third parties
including other government agencies
• Recommendations for prosecution for tax crimes

™ Internal Audit/Internal Security

23. This business process relates to ensuring the integrity of tax administration
operating procedures and staff
• Conducts independent reviews to determine the adequacy of and adherence to tax
administration internal controls
• Conducts internal audits of all other tax administrations operations
• Conducts investigations of employee corruption and misconduct and attempts to
bribe tax administration employees
• Refers cases for criminal prosecution

™ Information Systems Support and Management

24. This business process involves the development of and updating of the tax
administration’s Information Systems Plan as well as all hardware and software support
services
• In conjunction with operating functions, determines computer and
communications hardware requirements to support tax administration operations
• In conjunction with operating departments develops computer software
applications necessary to support operating functions including management
information reports
• Manages tax administration systems and databases
• Maintains computer hardware
• Maintain the confidentiality, integrity, and security of the database of taxpayer
information;
• Ensure the security of the data during transmission to and from the offices as it is
passed over the communications network;
• Safeguard the information from unauthorized users, accesses, and tampering;
• Provide technical support for the tax administration’s web site
• Support electronic filing capabilities and other electronic data exchange with
external sources
• Develops management information reporting systems and provides reports to
other business processes.

10
 ™ Planning and Analysis

25. This business process guides the future development and improvement of tax
administration operations as well as current operations
• Development of strategic goals and objectives.
• Integration of annual business plans for each operating and other support function
• Setting priorities and allocating resources
• Analyzing and reporting operational results against plan objectives
• Developing performance measures
• Conducting environmental scans to determine how technological, demographic,
economic, sociological, political and other trends will impact tax administration
operations
• Conducting studies and tests to improve tax administration procedures
• Conducting compliance research to improve risk management programs
• Developing implementation plans for major operational changes
• Develop legislative implementation plans
• Obtaining feedback from internal and external stakeholders

26. One approach that applies these activities in a systemic fashion is receiving
increasing interest in many governments as well as in the private sector. It is called
Managing for Results. The managing for results process is a comprehensive approach to
focusing an organization on its mission, goals, and objectives. It establishes the
accomplishment of those goals and objectives as the primary endeavor for the
organization and provides a systematic method for carrying out the endeavor. It requires
the establishment of performance measures and the use and reporting of those measures
so that everyone can fairly and fully evaluate the outcomes.
27. These activities are depicted in the following diagram and represent a continuing
process. It is suggested that the planning and analysis activities of a tax administration
follow this process.

11
 A Managing for Results Process
Approach for the Tax
Administration
Mission & Purpose
Needs Assessment
Policy Direction Program Planning

Setting Priorities &

Strategic Planning Allocating Resources

Analysis of & Activity Planning

Feedback on Results & Organization

Management of
Monitoring Operations Operations
& Measuring Results

Services Provided

™ Administrative Services and Support

28. This process involves personnel management, training, fiscal management,

facilities management and other administrative support services to all other operations of
the tax administration
• Develops and manages position classification, performance evaluation,
recruitment, promotion, labor relations and other personnel programs
• Manages the vetting process for new employees
• Develops and manages training development and delivery programs
• Develops the tax administration budget and monitors budget execution
• Procures all necessary goods and services to support tax administration operations
• Manages and maintains tax administration facilities, motor vehicles, equipment
and supplies
• Provides and manages physical and document security

12
 • Develops a code of conduct for tax administration employees
• Provides or arranges interpreter services
• Provides other administrative support services as required

™ Legislative and Stakeholder Relations

29. This process involves two way communications with stakeholders which
significantly impact tax administration operations.
• Maintain liaison with the Ministry of Finance and legislature to get early notice of
proposed changes to tax legislation in order to assess impact on tax administration
operations
• Propose tax legislation to improve compliance and/or reduce the burden on both
taxpayers and the tax administration
• Consult with business and trade associations on a regular basis
• Maintains liaison with international tax administration organizations.

™ Legal Services/Technical Rulings

30. This process provides legal support services to the tax administration and
assistance in interpreting laws and regulations
• Provides general legal services to represent the tax administration in non-tax
matters (.e.g. contractual disputes regarding purchase of goods and services)
• Represents the tax administration on tax disputes that are appealed to the courts
• Protects the tax administration’s interest in taxpayer bankruptcy and insolvency
proceedings
• Represents the tax administration in court where other judicial intervention is
required (e.g. suits to reduce a tax liability to judgment, suits to enforce a
summons by the tax administration to produce books and records, etc.)
• Provides interpretations on the meaning of tax laws and regulations
• Issues technical public and/or private rulings on the application of tax laws to
specific circumstances on which taxpayers can rely prior to filing their tax return
• Conducts tax treaty negotiations and manages exchange of information programs
with other government agencies and foreign countries.

13
Section V

V. Core Business Operations and Support Operations

31. Core business operations reflect the purposes for which the tax administration
exists. These are: providing taxpayer services; processing tax returns and tax payments;
collecting delinquent accounts; securing delinquent tax returns; processing administrative
appeals; and conducting tax fraud investigations. All other business processes or
activities, though absolutely essential, are conducted to support these core business
activities.
32. All core operating processes involve some common activities in the headquarters
office of the tax administration with regard to their specific process. These include
• Developing and maintaining policies, operating procedures, and techniques
• Conducting reviews of field office operations
• Providing expertise to the training staff of the Administrative Department in the
development of technical training
• Providing expertise to the personnel staff of the Administrative Department in
developing job descriptions and work standards.
• Developing the annual work plan for their activities
• Evaluating results in field offices against the work plan
• Providing recommendations on resource requirements to the fiscal staff of the
Administrative Department
• Providing business process applications and information management
requirement to the Information Systems Department
• Providing legislative recommendations to the legal affairs department
• Providing input for the Corporate Strategic Business Plan

33. In a modern tax administration a relatively small number of taxpayers pursue

administrative appeals or are the subject of tax fraud investigations. The laws and
traditions of some OECD countries even require that these activities take place outside
the tax administration. I’ve attempted to diagram the workflow of the high volume core
business processes below. These are generic and nature and are only provided for
illustrative purposes. Optimal workflow diagrams for a specific country can only be
developed using the business process reengineering techniques described below.

34. Designated employees of each core operating business process can access data in
a case calendar (a segment of the overall information management system) in accordance
with their specific security profile. They are required to update the case calendars to
document activities regarding a taxpayer case. These case calendars contain the current
status of all accounts on which activity is taking place. For example, cases transferred for
enforced collection follow-up after returns processing and revenue accounting activities
because there is a balance due condition, are moved to the enforced collection database.
Enforced collection staff can access this database through the case calendar to determine
the tax office and name of the employee to whom the case is assigned. Case actions can
also be reviewed. The case calendar is updated when payments are received; payment

14
arrangements are agreed; or the case is closed. Similar activity occurs in other core
business processes in regard to their operations. These databases are integrated so that the
status of any case in the tax administration can be determined by staff with proper access
requirements. For example, taxpayer service staff can access all information about the
taxpayer’s filing, payment, and refund status. This is necessary as many taxpayer
inquiries involve the status of their refund, payment, audit, etc. Another feature of the
case calendar permits staff of all functions to request the computer system to issue
correspondence. For example the audit department can request than an appointment letter
is sent and the system will ensure that the appropriate taxpayer data is inserted in the
proper letter format. The enforced collection department can request that a final notice is
sent to the taxpayer before enforcement action is taken, and the appropriate form will be
generated by the system with all necessary taxpayer data.

™ Taxpayer Service Operations

35. Of all the various operating functions of the tax administration, the staff of the
taxpayer service function has by far the most interactions with taxpayers and the general
public. They are, in effect the public face of the tax administration. Their attitude and
demeanor will shape the taxpayers’ feelings towards the tax administration. The staff
must, therefore, be good communicators and have a genuine desire to assist the taxpaying
public and have the ability to stay calm when faced with adversity. They must adopt the
courteous and professional image which the tax administration must promote.
In most cases they are the initial point of contact with taxpayers. As such they are
expected to have a good working knowledge of tax law, tax office procedures, filing
requirements and the tax obligations of the taxpayer. It is essential that advice given by
the Taxpayer Service function is correct and consistent.
As the initial entry point for most walk-in, phone in or written contacts, taxpayer service
staff respond to common questions and route more complex questions to other taxpayer
service specialists or staff from other functions as appropriate. The accompanying
diagram depicts general workflow of operations when taxpayers visit a branch office of
the tax administration.

15
 TAXPAYER SERVICE
Upon entering a branch office, a taxpayer's first contact will be with the Taxpayer
Service reception desk. From this point, they will be funneled to the appropriate
Taxpayer Taxpayer Service personnell/Department.

Connect taxpayer with

Technical
appropriate specialist
Assistance Yes
from Taxpayer Service
Request?
Department

No

Make a
Direct taxpayer to
payment /file a Yes
Cashier
return?

No

Arrange with
appropriate
Requesting a
Yes Department (Audit,
meeting?
Enforced Collection
etc.)

No

Attending a Direct taxpayer to

Yes
meeting? appropriate Department

No

Provide taxpayers with

Self Help? Yes
brochures

No

Form/ Provide form;if phone

Document Yes inquiry,provide internet
Request? access information

16
Return Processing/Revenue Accounting Operations

36. This “back office” function is responsible for all returns processing and revenue
accounting activities; data and funds reconciliation; issuance of computer generated
assessments, notices, and related documents. Data entry clerks input data from tax returns,
related documents and payment data into the tax administration’s computer systems. The
computer system does a mathematical verification of the tax return and generates a notice
to inform the taxpayer. Other errors on the tax return are reviewed by an error resolution
staff. These clerks should have good operational knowledge of the data entry procedures
for all types of tax returns and related documents. Error resolution staff must possess a
higher level of technical expertise. Additionally this function is responsible for data entry
through electronic document scanning and electronic filing of tax returns. It processes all
payments whether by cash, checks or electronic funds transfer. Payments are reconciled
against tax liabilities and computer generated notices are issued for unpaid amounts.
Refunds and offsets are also generated. Accounts must be reconciled on a daily basis and
funds deposited in the government’s treasury account.

17
 RETURNS PROCESSING
A taxpayer desiring to file a declaration, make
a payment or submit any other document
requiring a receipt at a tax office will do so
through the Cashier. No pre-submission
review will be conducted by a tax advisor
Taxpayer Cashier
Return to taxpayer
for correction; refer Taxpayer makes
Are the documents
No to Taxpayer necessary adjustments
acceptable?
Service if and re-starts the process
appropriate
Yes
Receipt to taxpayer Log in document; Transfer
assign DLN and information to
No
generate receipt Enforced
Collections

Update Revenue Was the Update Revenue

Is there a payment? Are
Payment Accounting payment Accounting
there documents?
records sufficient? records

Documents Yes

Batch documents Account in

balance
Payment
information from
Submit documents Central Bank
for data entry

Batched documents are transmitted for data entry.

Data is first reviewed for accuracy, corrected
where deficient, then entered into appropriate
databases. Once data has been posted
electronically, papaer documents are archived.

Data Entry

Is the data Update Revenue Archive

No
deficient? Accounting database documents

Yes

Error Correction
resolves problem

18
Audit/Control

37. The function is responsible for managing a coordinated audit program for all taxes
for which the tax administration is responsible (Income Tax, VAT, etc.). This does not
necessarily mean that an auditor will be expected to do a complete audit of all taxes but
rather that the Audit Department will adopt a coordinated approach in selecting and
conducting audits. Whenever possible, income tax and VAT audits should be conducted
simultaneously, even though different tax periods may be audited for each type of tax.
For example, an income tax audit for 2002, 2003 and 2004 tax years and a VAT audit
only for 2004 tax periods. This will enable common issues, records and areas of concern
to be dealt with comprehensively.

38. The Audit Department must also develop close cooperation with all other
Departments of the tax administration in particular; the Anti-Evasion Department – not
only to ensure cases of suspected evasion are referred on a timely basis but also to
volunteer the expert audit services of the Department in investigations being conducted;
the Enforced Collections Department - to receive referrals of audit stop-filers or non-
filers; and, the Appeals Department – to re-audit taxpayers who have produced new
evidence during the appeal process.

39. The substructure of the department will include units to conduct both office audits
and field audits. Additionally, auditors can be grouped by specialty, both by type of tax
(VAT, Excise, Income, etc.) and type of industry (banking, manufacturing, retailers, etc.)
Repeated focus on an industry will permit an auditor to become expert in the tax
legislation issues and the necessary audit techniques related to specific industries.

40. A separate unit will handle audit planning, case selection and classification. Until
an automated case selection system based on risk analysis is developed, this unit will
manually assign cases based on rudimentary risk analysis criteria. Once the automated
system is in place, staffing will be reduced but will still be necessary to ensure that the
risk assessment system is functioning properly and to supplement it as appropriate. This
is necessary to provide a small number of audits for compliance coverage even where the
risk is relatively low, and to deal with newly discovered pockets of non-compliance.

41. Finally a separate audit review unit is necessary for post audit quality assurance
and trend analysis. A strong accounting education is required for the staff assigned to
perform income tax and specialty audits in the field (outside the tax administration’s
office). Staff handling simple office audits (where the taxpayer visits a tax administration
office) and VAT audits or controls require minimal accounting skills. Auditors assigned
to large case audits, audit classification, and audit quality review, should possess
excellent skills and have significant experience in the department. All staff must be
knowledgeable in tax law, audit techniques, and internal operating procedures. Along
with all other public contact employees of the tax administration, they must possess good
interpersonal skills and exercise good judgment in accomplishing their work assignments.

19
 AUDIT
Audit Selection
Selected taxpayer
Annual Audit Plan process determines
Candidate list assigned to specific
developed prioritized list of audit
audit team
candidates

Audit Case entered in

Case Calendar

Taxpayer notification
detailing planned scope
Taxpayer
and timing of audit
notified
activities, and required
documents

Auditor reviews
taxpayer
business Audit performed.
records, DPR
tax files

Auditor prepares
Draft Report &Work Papers

Notify taxpayer of Report Report Not Return to audit team for

Audit Review
proposed adjustments Approved Approved modification .

Additional taxpayer
Taxpayer Taxpayer provides
Disagrees information reviewed by
response basis for disagreement.
Branch Office.

Agrees
Branch Office issues
Case Calendar Final Report for this
updated, sent to case.
Revenue Accounting to
update records.
Taxpayer
Agrees
response
Taxpayer pays in full or
enforced collection
Disagrees
process begins

Taxpayer files an
Appeals Department
Appeal; Case Calendar
Central Office
updated

20
Enforced Collections

42. These activities focus on taxpayers who are delinquent in meeting their tax
obligations. As discussed above, the returns processing and revenue accounting
department systemically generates notices to the taxpayer when a balance due condition
exists. This occurs when the taxpayer has paid less than the required amount of tax due
(including any penalties or interest). Similarly, the returns processing and revenue
accounting department systemically generates notices to the taxpayer when a required tax
return is not timely filed. This occurs as a result of the computer system matching filed
tax returns with each taxpayers filing requirements, established when the taxpayer
registers with the tax administration. For simple tax returns, the Enforced Collection
function may also be given responsibility to prepare the taxpayer’s delinquent return,
when the taxpayer does not do so, and sufficient data is available. Where insufficient data
is available or an income tax or other complex tax return is involved, the case will be
transferred to the audit department.

43. Enforced collection staff must be knowledgeable in tax law, collection techniques
and internal operating procedures. As a cost saving measure, collection staff should
employ all office collection methods possible before making field contact with taxpayers.
The substructure of the department may contain both office and field collection units.
Large and/or complex cases should be assigned to the most experienced staff. Because of
the nature of their duties, enforced collection staff, more than any other public contact
employees of the tax administration, will often encounter distraught taxpayers. For this
reason, they must possess excellent interpersonal skills.

21
 ENFORCED COLLECTION - NON PAYMENT
Case Calendar provides
Taxpayer sent Notice of
taxpayer cases from returns
delinquency requesting
processing and revenue
payment
accounting

Revenue Accounting
Taxpayer pays
Taxpayer response section records
full amount
payment, case closed

Taxpayer does not pay or pays

less than full amount due

Case Calendar and

Revenue Accounting
records updated

Final Demand.
Phone/write taxpayer Does taxpayer request
No Yes Financial information
and request full additional time to pay
secured
payment

Analyze taxpayer ability to pay

Is debt collectible No, only by

Yes Offer installment
in full? installment payment
payment arrangement

No

Taxpayer Taxpayer response Prepare report to write

pays off debt

Case Calendar updated

Taxpayer Taxpayer to reflect agreement,
Taxpayer does not pay
Attach bank account Taxpayer response
does not pay agrees to plan/pays Revenue Accounting
Case closed, updates records
Revenue Accounting
updates records Taxpayer defaults on agreement

Seizure/sale of Case closed,

Full payment
other assets No Yes Revenue Accounting
received
initiated updates records

22
 ENFORCED COLLECTION - NON FILING

Case Calendar provides

Taxpayer sent Notice of
taxpayer cases from returns
delinquency requesting filing
processing and revenue
of return
accounting

Files (2)
Collection case
Taxpayer does Taxpayer files and closed, Revenue Audit Selection process
Taxpayer response Audit Pool determines prioritized
not file pays full amount Accounting updates
records list of audit candidates

Case Calendar Candidate list

updated
Taxpayer files and
makes no or partial payment Selected taxpayer
assigned to specific
audit team
Final Notice.
Phone/write taxpayer and
request return filing Case Calendar and Revenue
Accounting records updated -
Audit Case entered in
begin non-payment process
Case Calendar
Taxpayer response

(1) Complex income tax

Does not file
returns and questionable
records, taxpayer claims
Can data be easily not to have any records
reconstructed from
Is data available from
taxpayer's records? No Case forwarded to the
previous filing history?
No (Especially wage Audit Department
withholding)
Yes

Prepare Substitute for

return based on previous Yes
filing history

Update Case Calendar

Send to Revenue
Accounting to update
records and begin
enforced collection
payment process

23
 COLLECTION NON-FILING / AUDIT INTERFACE
(1)
Taxpayer response Taxpayer claims not to have any records (2)
Collection case closed,
Does not file
Revenue Accounting
Case forwarded to the updates records
Is data available from Summons taxpayer's Audit Department
No
previous filing history? records
No

Yes
Audit Pool

Taxpayer complies with Refer to

Prepare Substitute for No
summons Legal Department
return based on previous
filing history
Audit Selection process
determines prioritized list of
Yes audit candidates
Provide a copy of
Substitute for return
to the taxpayer Yes Can return be easily
constructed from
taxpayer's records?
(Especially wage
withholding) (decision
required)
Update Case Calendar
Send to Revenue
Accounting to update
Does taxpayer
records and assess tax
protest return or file No
penalty and interest
own return Case assigned to specific Candidate list
(Decision is required on
where and how penalty is audit team
assessed)

Yes

Enforced Collection
Non-Payment
Forward to Audit process begins
Department
Audit Case entered in
Case Calendar

24
Section VI

VI. Measures of Tax Administration Effectiveness

44. The Strategic Business Plans of modern tax administrations contain goals against
which their achievements can be measured. Additionally, a number of standard measures
exist to determine both the overall effectiveness of a tax administration, as well as the
effectiveness of key operational business processes. A number of standard measures are
provided below. To the extent possible, baseline data should be collected before major
reforms take place.

™ Global Measures

45. Three of the most significant overall measures of effectiveness are:

• The total operating costs of the tax administration expressed as a percentage of
total revenue collections (voluntary and enforced collections)
• Total tax revenue (adjusted for inflation/deflation) compared to prior years tax
revenue
• Voluntary tax payments as a percentage of total collections (voluntary and
enforced collections).
46. Other global measures include:
• Total numbers of registered taxpayer by taxpayer class (type of taxpayer, type of
tax and size of taxpayer) compared to prior years
• Total delinquent account payments (adjusted for inflation/deflation) compared to
prior years
• Amount of delinquent account payments as a percentage of total delinquent
account inventory

• Number of tax administration employees as a percentage of total number of

taxpayers
• Public opinion of taxpayers concerning the image of the tax administration

™ Functional Measures

47. Audit
• Total amount of audit assessments collected as a percentage of total amount of
assessments
• Number of audits
• Number of audits broken down by tax class
• Yield per hour, by tax class
• Total assessments recommended by audit
• Total refunds as a result of audit
• Number of non-agreed assessments upheld by Appeals as a percentage of a total
number of assessments referred to Appeals

25
 • Value of non-agreed assessments upheld by Appeals as a percentage of a total
value of assessments referred to Appeals
• No change rate ( no tax assessed or refunded) by tax class
• Average time per case by tax class
• Percentage of direct time (time spent working cases) to total time (time spent
working cases plus vacation time, sick time, administrative time, training time, etc.

48. Enforced Collection/ non-payer

• Number of enforced collection cases closed
• Number of enforced collection cases closed as a percentage of enforced collection
cases in inventory
• Total revenue collected through enforcement actions
• Revenue collected per staff hour
• Total delinquent tax account inventory, by number and amount, type of tax, and
age of accounts
• Number of enforcement actions: bank account attachments, attachment of third
party receivables, etc.
• Total revenue collected by type of enforcement actions
• Total revenue collected broken down by tax , penalty, and interest

49. Non-filer activities:

• Number of delinquent tax returns secured
• Revenue collected as a result of securing delinquent returns
• Revenue yield per staff hour
• Average number of hours for securing the return
• Percentage of returns secured with full payment
• Number of substitute returns prepared by the tax administration when the
taxpayer has failed to file voluntarily

50. Prevention and Detection of Tax Frauds:

• Number of tax fraud cases closed
• Number of tax fraud cases brought to court
• Guilty verdicts as a percentage of fraud cases brought to court
• Revenue collected from fraud cases
• Yield per staff hour on fraud cases
• Total publicity on fraud cases: number of cases, number of newspaper articles, etc.

51. Appeals:
• Total number of appeals cases closed
• Number of appeals cases where assessments are not upheld by court as a
percentage of total number of appeals cases

26
 • Value of appeals cases where assessments are not upheld by court as a percentage
of total value of appeals cases
• Average elapsed time per appeals case
• Average time per appeals case, by class of taxpayer

52. Taxpayer Service:

• Number of taxpayers assisted, by phone, by walk-in and by correspondence
• Correct answers given to taxpayers as a percentage of all answers given to
taxpayers (sample review)
• Average delay time in waiting for phone service, walk-in service and responses to
correspondence
• Number of telephone busy signals as a percentage of taxpayer telephone attempts
(sample review)
• Number of published information materials distributed to public
• Number of courses given to public, total attendance

53. Returns Processing and Revenue Accounting:

• Number of returns processed
• Average amount of time to process a return
• Error rate in processing tax returns
• Error rate in processing of payments
• Elapsed time per return to complete all processing
• Elapsed time to deposit all cash receipts into tax administration bank account

54. Training:
• Number of courses developed for employees
• Number of courses conducted
• Number of employees who complete courses
• Percentage of employees who pass test
55. In addition to the above statistical measures, taxpayer surveys can also be used as
a qualitative measure of tax administration effectiveness. This can be done in a variety of
ways, including through sampling using written instruments and focus group interviews.
It is preferable to begin the survey process before implementation of major tax
administration reforms in order to establish a baseline against which future surveys can
be compared.

27
Section VII

VII. Building the Foundation for Best Practice Tax Administration Reform

56. Requirements for major reforms to a developing country’s tax administration are
similar to other public sector reforms. Major changes require the political support of the
government. Only marginal improvements can be made without such support. The reform
of tax administration is a long-term process and requires a number of elements to be put
in place to operate effectively. Legislative changes will normally be required, the extent
of which will vary by country. The tax administration’s business processes must be
reviewed and restructured and an organization structure that facilitates implementation of
the reforms must be put in place. Other major elements include: a competent, well
trained, motivated, and ethical work force; an integrated information management system
based on a unique taxpayer identification number to support operations and serve as its
backbone; and efforts to combat internal and external corruption. Significant funding
must be made available to undertake meaningful reform and this usually implies grants or
loans from international sources. This is especially true as regards purchase and
development of the necessary information systems infrastructure for the tax
administration. As would be expected, resistance to major changes in the tax system can
be anticipated from those who perceive them as a threat to their interests. Unfortunately
this usually includes some employees of the tax administration, who derive personal
benefits and rents from the current non-transparent and discretionary system.

™ Legislative Framework

57. A legislative framework must be in place which clearly: specifies the taxes to be
administered; provides a rational system of sanctions for failure to comply; and specifies
the rights and responsibilities granted to the tax administration; and, the rights and
responsibilities of taxpayers. These will be covered in greater detail below. To the extent
possible the tax administration should not be used to administer or enforce non-tax
obligations including license fees and fines. The legislation should specify that the head
of the tax administration becomes the principal official of the government responsible for
the assessment and collection of national taxes. The head of the tax administration must
be given the legal authority (subject to appropriate oversight) to organize the
administration of taxes in the most efficient and effective way. This includes control over
the central (or headquarters) office as well as all branch offices, and the authority to
determine the number and location of both tax administration staff and offices.
Some countries, including the United States and the United Kingdom and have enacted or
developed a specific Taxpayer Bill of Rights (Annex1) or Taxpayer Charter (Annex2)
which summarizes rights and responsibilities – switch to annexes. The OECD has also
developed guidance with respect to taxpayer rights and responsibilities. (Annex 3)
Taxpayer rights and responsibilities generally include:

• The obligation to register with the tax administration and to secure a taxpayer
identification number.

28
58. This is true for both natural and artificial persons (individuals and business
entities). It must be accomplished prior to incurring any tax liability or filing requirement.
Registration information includes the taxpayer’s name, address, and type of business.
Taxpayers must also indicate the types of taxes for which they may be liable and/or
required to file tax returns or information documents. Taxpayers are required to notify the
tax administration of any changes in name, address and filing and/or payment
requirements. Taxpayers are required to use their tax identification when submitting their
tax returns, information documents, making tax payments, or issuing invoices.

• The obligation to file and pay taxes

59. Taxpayers are required to file and pay taxes for which they are liable and within
the timeframes required by law. Taxpayers are also required to pay any penalties and
interest which the law requires as a consequence of their non-compliance.

• The obligation to maintain books, records, invoices, and other financial data.

60. Taxpayers must keep this material to serve as substantiation of information they
report on their tax returns. The burden of proof of any deductions or credit is on the
taxpayer. Taxpayers are required to make tax-related information available in the course
of an audit or investigation by the tax administration.

• The right to appeal

70. Taxpayers should be given the opportunity to administratively appeal decisions

taken by the tax administration. These usually relate to actions taken in the audit process
resulting in additional tax liability. The review should be conducted by specialized staff
of the tax administration (see Appeals Business Process below). Taxpayers should also be
able to pursue appeals through the courts.

• The right to be treated in a fair, impartial, professional and respectful manner.

71. Tax administration staff should be required to treat all taxpayers with dignity and
respect. Taxpayers who believe they are being unfairly treated have the right to complain
to an employee’s supervisor. Staff must follow uniform procedures in dealing with all
taxpayers.

• The right to confidentiality and privacy

72. Taxpayer’s have the right to expect that their personal, business and financial
information be kept confidential. Employees illegally disclosing such information are
subject to both administrative and criminal penalties.

• The right to receive assistance and information in meeting their tax obligations

29
73. Tax administrations are obliged to inform taxpayers of their tax filing and
payment responsibilities and to provide basic assistance. Taxpayers must be given access
to tax returns and informational publications.

• The right to be represented in dealings with the tax administration

74. Subject to appropriate written request, taxpayers have the right to be represented
by someone else in their absence and/or to have someone else be present in their dealings
with the tax administration.

• The right to receive a refund of overpaid taxes.

75. Taxpayers have a right to receive a timely refund of overpaid tax (including VAT)
in the manner prescribed by law and regulations.

76. Tax administration rights and responsibilities also include:

• The right to assess and collect tax, penalties and interest

77. This includes the right to assess additional tax based on mathematical errors
and/or the results of an audit. Penalties may be imposed for late filing, late payment,
underreporting, or other violations of tax laws and regulations.

• The right to take administrative and/or legal action to enforce the collection of
delinquent taxes.

78. This includes the right to place a tax lien and/or attach liquid and fixed assets
(e.g., bank accounts, accounts receivable, merchandise, motor vehicles, machinery, real
property, etc.)

™ Restructuring the Tax Administration

79. A crucial element in the tax administration reform process is to review and revise
the organizational structure. The new structure must support and facilitate the
implementation of the reforms. There is no one organizational structure that fits all
countries. That said, however, there are three basic ways to structure a tax administration;
by type of tax; by type of taxpayer; or, by operating function.

• Type of Tax

80. Under this organizational configuration a separate division or department of the

tax administration is responsible for each type of tax collected in the country; e.g. Income
Tax; VAT; Excise Tax; etc. Employees, who enforce the tax laws, provide assistance and
advice to taxpayers, and who provide support services and conduct back office
operations, specialize in one type of tax. Countries in the early stage of development or
transition are generally organized by type of tax. This mainly involved a department to

30
administer income and profit taxes and a separate department to administer sales taxes or
VAT. Most countries have moved away from this organizational structure. The United
Kingdom was among the last OECD countries to do so when they combined their
Department of Inland Revenue with the Customs and Excise Department. Among the few
countries maintaining separate Income and VAT organizational structures are Bangladesh
and Egypt.

• Type of Taxpayer

81. Under this organizational configuration a separate division or department of the

tax administration is responsible for each type of taxpayer in the country; e.g. large
taxpayers; medium taxpayers; and small taxpayers. Employees, who enforce the tax laws,
provide assistance and advice to taxpayers, and who provide support services and
conduct back office operations, specialize in one type of taxpayer. Some of the more
advanced tax administrations have adopted this type of structure including the United
States and New Zealand.

• Functional Structure

82. Under this organizational configuration a separate division or department of the

tax administration is responsible for each major business process or activity performed by
the tax administration; e.g.; audit/inspection; taxpayer service; returns processing and
revenue accounting; collection; etc. Employees, who enforce the tax laws, provide
assistance and advice to taxpayers, and who provide support services and conduct back
office operations, specialize in one activity or business process. The vast majority of all
other tax administrations are organized primarily along functional lines.

83. However, modern tax administrations usually contain some features of all three
structures and all vest overall authority to a centralized head of tax administration for the
country. The best practice consensus for developing countries is an organization based on
function and featuring a large taxpayers unit.
.
84. The organizational status and location of the tax administration in overall
governmental structure is another issues to be addressed as part of the reform process.
Tax administration has traditionally been a subordinate structure of the Ministry of
Finance

• Relationship with the Ministry of Finance

85. Although tax administrations may and should make recommendations on

legislation dealing with its powers and responsibilities, tax policy issues are the province
of the Ministry of Finance and the legislature. The tax administration, however, should
provide inputs dealing with its ability to administer new legislation from both a practical
and resource perspective. The administration of the tax laws must be transparent and free
from political influence. OECD countries have enacted legislation which severely

31
restricts the disclosure of case related tax administration data to bodies external to the tax
administration, included the Ministry of Finance.

• Combined Revenue Authorities

86. In most developed countries the tax administration is also responsible for the
collection of the national governments’ employer and employee social security insurance
(pensions, and various benefits related to temporary or permanent disabilities; death and
survivor benefits); health insurance; and unemployment insurance taxes and
contributions. While these are sometimes called “contributions” as opposed to “taxes”
they are essentially one and the same. However, the administration of the social benefits
system, i.e., the determination of eligibility for, and payment of, benefits is vested with
other governmental bodies. This is, also, the recommended approach in developing
countries.

87. A recent trend has been the integration of Customs and Tax Departments into a
single Revenue Administration. Some member countries of the European Union find this
an attractive option as the existence of common customs and tariff regimes reduces the
need for a large customs organization. Combined Revenue Authorities can either remain
subordinate to the Ministry of Finance or be structured as Independent Revenue
Authorities.

• Independent Revenue Authorities

88. While most tax administrations in OECD countries are an organizational

component of the Ministry of Finance, another trend has been the formation of
independent or quasi-independent revenue authorities, as is the case in the Ireland,
Latvia, Rwanda, and Uganda to name only a few. There, revenue authorities have a
separate budget authorization and exercise more control over their budget than other
government bodies. All or some staff members are given specified length employment
contracts. Employees are not restricted to civil service pay scales but in return lose
certain civil service protections and can be terminated upon the expiration of their
contract.

™ Best Practice Organizational Structure

89. The consensus of tax administrators around the world is that an organizational
structure based on function with a large taxpayer unit is best suited for modernization
efforts in a developing country. The exact design including the number and location of
offices will vary from country to country. Factors such as: population distribution;
geography; the nature of the economy; infrastructure; social and cultural conditions; etc.,
must all be taken into account. It is a well accepted principle that the largest 20% of
taxpayers in a developing country produce 80% of tax revenue, making the case for
creation of a large taxpayer unit. It is also suggested that the tax administration should
eventually be responsible for the collection of all social taxes or contributions. However,
a tax administration may not have the capacity to absorb these additional responsibilities

32
until it has moved made progress with its own reforms. The functional organization
structure will be covered in greater detail below.

• Centralization/Decentralization Issues

90. In a functionally structured tax administration the central or headquarters office is

responsible for the overall development, improvement, management, and automation of
all subordinate units. Activities include: strategic and tactical planning; information
systems development and management; the development and maintenance of operating
policies and procedures; designing and developing employee performance standards;
training development; establishing reporting requirements; evaluating functional
performance and performance of field offices; establishing, implementing and monitoring
integrity standards; formulating the tax administrations budget and monitoring its budget
execution; and providing other centralized support services.

91. Except where the large taxpayers unit is part of the central office, the main
responsibility of field offices is to implement and apply policies and procedures
developed by the central office in processing taxpayer accounts and working taxpayer
cases. The bulk of the tax administration’s staffing is located in field offices. In a nutshell
the central office develops and manages programs while field offices manage cases and
develop staff.

™ Strategic Planning

92. An integral part of successful implementation of major reforms to establish a best

practice tax administration requires the development of a strategic business plan (SBP).
The strategic business plan contains the tax administration’s vision and mission
statements, strategies, objectives, goals, actions items, timelines, and measurement tools.
It typically covers a three to five year period, lays out what actions will be taken in each
year of the plan, and is updated annually. Recently developed mission statements include
the following elements:

ƒ collecting the proper amount of tax at the lowest possible cost;

ƒ continuously improving the quality of service to taxpayers;
ƒ achieving the highest possible level of public trust in its integrity, effectiveness
and fairness.

93. The development and implementation of business process reengineering,

information systems planning, transition planning and implementation and all other major
changes to improve the tax administration should be addressed in the SBP.
Examples of strategic business plans from selected countries in various stages of
development include Latvia (Annex4),Tanzania (Annex5),Uganda (Annex6),and Rwanda
(Annex7).
Most established tax administrations also publish annual reports detailing their
accomplishments. They also provide an opportunity for the government to display both
revenue sources and revenue expenditures. Such is the case in Latvia. (Annex8)

33
 ™ Restructuring Using Business Process Re-Engineering

94. The modernization of a tax administration requires the development of a

restructuring plan to provide the methodology to be employed and guidelines to be
followed. While all modern tax administrations operate using common business
processes (e.g. returns processing, revenue accounting, audit/inspection, enforced
collection, etc.), the restructuring plan must define how these business processes will be
designed to produce the most effective and efficient tax administration system for the
developing country. The oversight of this plan and the assignment of key staff to develop
and implement it, is best placed in the hands of the head of the tax administration or a
principal deputy. A restructuring committee should be formed and staff should be made
available on a full time basis. This is time consuming and difficult work. However, it
represents the future of the tax administration and must be given the highest priority and
the necessary human and financial resources must be made available.

95. Typically the methodology to be used in the restructuring effort first requires a
comprehensive review and documentation of current operations. This is not a simple task
as the central or headquarters tax office may not have developed universal operating
procedures and branch or local offices may each operate in a somewhat different fashion.
Once current processes are documented, the restructuring committee, usually with the
help of experienced foreign technical advisors, must determine how to streamline
operations to improve effectiveness and efficiency.

96. High level data flow diagrams or flow charts of the new business processes and
their interrelationships must be developed. Decisions must be made as to where various
processes and procedures should take place, i.e. in centralized or decentralized locations.
Staffing and skill level needs must be determined and compared against existing staff
capabilities. This will result in a revised organizational and staffing structure. Detailed
operating procedures will then have to be developed and formalized for staff to be trained
and to provide work guidelines. This process must be done in conjunction with internal or
external information systems developers in order to produce an information systems plan
to automate and support the new business processes and work procedures. A timetable
must be established to implement the new system and structure while maintaining current
operations. This, in turn will require transition planning.

™ Information Management System and Unified TIN

97. Both the tax administration and the taxpayer benefit from the assignment of a
single and unique taxpayer identification number. This critical element must be in place
at the beginning of the reform process. Based on taxpayer registration information, the
tax administration uses this number as a foundation for the development of a
computerized taxpayer master file. The master file contains: a listing of all types of taxes
for which the taxpayer is liable; the taxpayer’s filing and payment history for each type of
tax, by tax period; and other basic information such as the name, address and nature of
the taxpayer’s business.

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98. An information management plan is required to determine the computer and data
communication hardware and software necessary to support the reform and redesign of
the tax administration. Using the unique taxpayer identification number and taxpayer
master file as its basis, the new information system must be able to track the status and
location of taxpayer cases and control case movement through the various business
processes through which it must pass. Software application programs will be required for
each business process to support the implementation of case processing procedures. The
information systems plan must include specifics as to the nature, number, location and
delivery dates of computers; servers; data communication and other hardware; the
development and implementation of applications software based on new business
processes; automated tracking and control of taxpayer cases; and management reporting
capabilities. Training both computer and operational staff in the new system is, also, an
integral part of the plan.

™ Change Management Process

99. Change management principles should be followed in the restructuring and

reform of the tax administration. A concentrated effort must be made to secure the “buy-
in” of management staff at all levels. An internal communications process must be
established to: keep employees apprised of the reform timetable; communicate the
rationale for the changes; provide an opportunity to make suggestions to streamline
operations; and advise them of organizational changes that will impact them. Some
employees will have their jobs eliminated, significantly redesigned or moved to other
offices. These should be identified as early as possible. To the extent possible, training
should be made available for employees to learn new skills. A staff redeployment plan
should be made a part of transition planning. An external communications plan should be
developed to secure the buy in of taxpayers, trade and business associations, impacted
governmental organizations, and other external stakeholders.

™ Written Procedures and Technical Rulings

100. As discussed above, written operating procedures are required to ensure that tax
administration staff properly works cases through each business process. These must be
followed in all offices of the tax administration to ensure that taxpayers are treated in a
uniform manner regardless of their location in the country. Tax administrations must also
uniformly apply the tax laws and regulations. Technical issues often arise regarding how
the law and regulations will be applied in specific circumstances and a ruling is
requested. A formalized system is required to document and publish rulings that could
impact similarly situated taxpayers, as well as certain “private” rulings. Taken together
this formal system guiding tax administration behavior provides transparency, which is
one of the elements required to demonstrate the integrity and fairness of the tax
administration system to all taxpayers.

™ Human Resource Management

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101. Professional well trained and respected employees are the most important asset of
any modern tax administration. Low wages, an absence of performance management
systems, minimal formal training, and poor treatment by management staff are too often
the norm in developing tax administrations. Employees have little incentive to treat the
taxpayers they contact in the professional and courteous manner they deserve. Low
wages, along with an absence of formalized written procedures and internal controls also
provide a breeding ground for employee corruption.

102. It is difficult to increase overall staff compensation in most developing countries

due to fiscal constraints and linkages to other public sector employment. This is
especially true where there is no government-wide position classification system based
on education, experience, and training. However, even within funding constraints, best
practice tax administrations must move forward to develop a transparent performance
management system. Employees should be evaluated annually on overall job
performance based on critical success factors, and promotions must be based on these
performances. Non-monetary employee recognition programs should be explored,
including special assignments and training. Training programs must be expanded to
include:

ƒ employee orientation and responsibilities

ƒ basic functional procedures and techniques training;
ƒ tax law training;
ƒ computer training;
ƒ advanced technical training;
ƒ basic management training;
ƒ advanced management training;
ƒ train the trainers training;
ƒ The development and design of training programs as well as personnel
management
This requires the use of specialists in these fields as well as technical specialists from the
operating functions of the tax administration. Some tax administrations, like Tanzania
and Lithuania have developed their own tax administration training academies.

™ Voluntary Compliance and Risk Management

103. Developed countries base their tax systems on self-assessment by taxpayers and
their voluntary compliance with tax laws. They also employ PAYE and other withholding
at the source by banks and other third part payers. Invariably there are gaps between the
total amount of taxes that should be paid and the total amount that is actually paid. Tax
administrations must discover the nature and reasons for these gaps and determine which
treatments should be applied within resource constraints to increase compliance and
maximize revenue collections.
104. Risk management is an iterative process that consists of well-defined steps to
support improved decision-making. The compliance risk management process is an
integral component of a revenue body’s strategic management framework. It is used in
modern tax administrations as a structured process for the systematic identification,

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assessment, ranking, and treatment of tax compliance risks (i.e., various forms of
taxpayer behavior resulting in a failure to register, to file returns on time, to properly
report tax liabilities, and to pay tax). It can be used in two ways: (1) at a strategic or high
level for the whole country or specific regions to identify non-compliance behavior or
trends; or (2) at the operational level to identify specific taxpayers. At the strategic level
the answers to three questions are required.
1) What are the key compliance risks to be addressed?
2) Which groups of taxpayers do they relate to?
3) How should these risks be treated to achieve the best possible outcome?

105. Examples of possible treatments include:

1) Targeted taxpayer education efforts
2) Targeted audits
3) Non-filer/stop-filer initiatives
4) Expanded enforced collection activities
5) Changes to the structure and application of penalties
6) Additional record keeping and information reporting requirements
7) Redistribution of tax administration resources between functions and/or offices
8) Improved coordination with and access to databases of other governmental
organizations
8) Tax treaties and information sharing agreements with other countries
9) Rulings to clarify applications of the law
10) Additional changes to tax administration operating procedures
11) Recommendations for legislative changes
12) Targeted tax crime investigations and prosecutions

106. Modern tax administrations are able to routinely apply risk management to their
business processes (audit, collection, etc.) because they have highly skilled specialized
staff; have successfully conducted compliance research programs; and have accumulated
significant historical taxpayer profiling and results data. They also possess significant
computer processing and analysis capabilities to use this data in prioritizing, selecting
and assigning taxpayer cases at the operational level. Since modern tax administrations
have limited resource availability they must target their activities towards those taxpayers
where loss of tax revenue is at greatest risk. This is especially true with regard to the
audit function where only a small percentage of taxpayers can be audited.
This is usually not the case in developing tax administrations. Risk management at the
strategic level must be addressed as part of the development of a strategic business plan
to create the necessary framework, while short-term initiatives should immediately be
undertaken at the operational level. This is not any easy task in developing countries as,
for example, results of prior compliance activities may not be well documented,
maintained or analyzed. The majority of prior tax administration compliance activities,
especially as regards small and medium businesses, may have been devoted to inspection
or control visits as opposed to financial audits. The former require minimal accounting
skills or expertise and are most useful for checking VAT compliance as opposed to profit
or income taxes. Inspection or control visits normally consisted of a cursory review of

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books, records, cash register receipts and a physical inventory of goods. As stated above,
these inspection visits can be intrusive and often target the same taxpayers regardless of
risk. Results of these inspections are not usually employed to determine and treat the root
causes of non-compliance.

107. Development of a risk analysis system at the strategic level is a multi-year

process. Developing tax administrations can initially most successfully apply risk
management concepts at the operational level in the audit process for small and medium
taxpayers. One hundred percent of large taxpayers should initially be subject to audit, but
the depth and frequency of audit should be adjusted based on prior results. Rudimentary
risk analysis can be accomplished even before the implementation of an integrated
management information system. It should be as a tool for identifying which taxpayers
are prioritized and selected for audit based upon predefined criteria.
Auditors, however, must first be trained in proper audit procedures and techniques.
Audits must be conducted using these techniques and procedures and taxpayer profile
data, audit results and auditor time expenditure must be collected and analyzed in a
uniform manner. These audit results can then be used to develop an operational audit
plan. Cases can then be prioritized and selected for audit, and results can then be
documented. Some of the factors to be used in selecting and prioritizing cases for audit
include:
• Results of previous audits
• Non-filer/stop-filer cases
• Tax period to tax period comparisons
• Industries with known compliance problems (e.g., alcohol, tobacco, oil and gas,
etc.)
• Unusually high business expenses
• Low profit margins
• Questionable receipts
• Unusual balance sheet items
It should be noted that case selection can not only be based on certain taxpayers where
the risks of non-compliance are the greatest. Some degree of compliance coverage must
be provided to all types of taxpayers, regardless of their size, type of business or location.
This is necessary to provide a deterrent for future non-compliance.
Additional OECD material on risk analysis is being provided (Annex9 and Annex10)

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Section VIII

VIII. Reducing Corruption in a Tax Administration

108. Implementation of a best practices tax administration will significantly reduce the
level of staff corruption. Specific requirements include:

• Establishment of an Internal Controls and Investigations unit.

109. The major duties of such an organization are described above and usually involve
two major areas: reviewing the adequacy of internal controls; and, conducting
investigations of employee misconduct. It is imperative that this organization report
directly to the head of the tax administration. This unit can conduct investigations and
internal audits based on requests and referrals from tax administration and external
sources as well as to generate its own investigations and audits based its own assessment
of tax administration. The U.S. Internal Revenue Service, and the Latvian State Revenue
Service, are but two of many revenue bodies with this organizational component.
• Development of a Code of Conduct

110. The establishment and enforcement of a code of conduct is vital to help ensure the
integrity and ethical behavior of tax administration employees. The code defines and
provides examples of acceptable staff behavior as well as defining prohibited activities,
potential conflicts of interest, and unauthorized disclosures of confidential information.
Public contact employees of the tax administration are provided with photo IDs
displaying their names and titles. The proper use of these IDs or credentials is, also,
governed by the code of conduct. The code makes mandatory the reporting of misconduct
on the part of other employees. All employees should be given an orientation course
providing the rationale behind, and application of, the code of conduct in their
professional and personal activities. A presentation on the code of conduct must be
incorporated into new hire training. Additionally, employees should be required to certify
in writing that they have received a copy of the code which should be placed in their
personnel file. Violations of the tax administration’s code of conduct can result in
administrative sanctions up to and including dismissal of an employee. This is in addition
to any prosecution for criminal acts covered by the tax and/or other legislation.
Additional information on codes of conduct including case studies for Pakistan, Tanzania,
and Bosnia-Herzegovina can be found in Annex11.
• External Oversight

111. Another anti-corruption tool is oversight, audit and investigations of tax

administration operations and staff by special purpose governmental entities. These
organizations may be located in the executive, legislative and/or judicial branches of the
government and deal with corruption or abuse in the public sector.

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 • Separation of Duties/Specialization

112. One of the benefits of an organizational structure based on type of function is that
it reduces the impact of any one employee in managing a taxpayer’s account.
Enforcement staff (audit and collection) are only assigned cases after back office
employees and computer systems have been involved in mathematical verification, data
entry, and processing operations. Separate staff handle audit and enforced collection
cases. Even in the audit process different employees handle case selection, auditing and
quality review tasks.
• Improved Management of Human Resources

113. Actions taken to improve the conditions of employment and work environment of
tax administration staff can also reduce corruption. This includes basing staff hiring and
promotions on objective criteria. The qualification required for each position must be
formalized and job standards developed for every type of position (e.g. auditor, taxpayer
assistor, data entry clerk, fraud investigator, etc.) This must also be done for management
positions. Employees should receive written evaluations at least annually based on theses
qualifications and standards. The role of the first level manager must change from that of
a super technician to a developer of people. Proper wages, training, equipment and
facilities must be provided.
114. Finding the necessary funds for all of this is one of the thorniest issues that must
be dealt with. As discussed above, taking the tax administration out of the civil service is
one possibility. Another possibility is to allow the tax administration to retain a small
portion of revenue collections. This must be managed extremely carefully and in a
transparent manner so as not to create a negative perception of the tax administration.
Enforcement employees should not receive additional pay based upon individual audit
assessment or enforced collection goals.
• Vetting New Hires

115. Potential hires should be screened and their background checked to ensure that
they conform to the high standards of the tax administration as reflected by the code of
conduct. Interviews with potential public contact employees should be structured to
determine if they possess the appropriate attitude and demeanor to properly represent the
tax administration.
• Rotation of Enforcement/Audit Staff

116. There is a danger for integrity breaches if compliance staff is assigned to work
cases on the same taxpayers over an extended time period. For this reasons the case
assignments and/or tax office assignment of staff should be rotated every two or three
years.
• Risk Based Audit Case Selection

117. A risk based audit selection system reduces the potential for corruption by
ensuring that audits are conducted based on risk as opposed to other factors. Additionally

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modern tax administrations normally limit the number of consecutive tax periods that can
be subjected to audit unless prior audits result in additional tax liability being assessed.
• Taxpayer Self-Assessment

118. The risk of employee corruption is reduced under a self-assessment system

where the taxpayer or the taxpayer’s authorized representative (as opposed to
tax administration staff) prepares and files tax returns

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Section IX

IX. Reducing the Burden on SME Taxpayers

119. A number of initiatives can be taken by government in the tax field to foster the
growth of small and medium enterprises and/or reduce the paperwork burden that SMEs
face. Measures which have the greatest impact are those which are established by tax
legislation. Though tax policy is not the major thrust of this paper, a brief mention of
some of these measures follows, along with measures that the tax administration can
employ.

™ Tax Policy Measures

120. Special tax regimes, rate structures, incentives, and accounting rules are
commonly applied to small and medium businesses. These include:
• Exemption from VAT registration and filing based on threshold amounts
proscribed by law. However, small businesses with turnover under the threshold
amount may be permitted to opt into VAT.(e.g. Albania, Bulgaria and most other
countries with VAT systems)
• Simplified recordkeeping and/or accounting rules for small business taxpayers
(e.g. Ireland).
• Single tax for small taxpayers combing all types of taxes (income, VAT, etc.)(e.g.
Kosovo)
• Presumptive tax based on the size, location, and type of business activity for small
enterprises (e.g. Spain)
• Progressive income tax rates based on net profits (e.g. Iceland)
• Tax allowances or exemptions based on net profits (e.g. France)
• Tax holidays, incentives, or relief from taxation based on new business
investments. Almost all countries employ some form of grant, subsidy,
investment credit or deduction.
Tax policy measures in specific countries are subject to change. The reader is
directed to annexes 12 and 13 for additional information on tax policy issues.

™ Tax Administration Measures

121. The following measures are normally incorporated in the reform of the tax
administration.
• Simplified Registration and Unique Taxpayer Identification Number. This is
normally the first measure to be put in place. In some countries, including most of
the former Yugoslav republics, the same identifying number is used for all
business registration purposes with government agencies, including the tax
administration. This number must also be used to open a bank account. (This is
usually the starting point in reform efforts)
• Transparency of tax administration policies and procedures. With limited
exceptions, written tax administration policies and procedures should be made

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 available to taxpayers. This can serve as a guide in explaining taxpayer rights and
responsibilities as well as the consequences of non-compliance with the tax laws
• Uniform application of laws, regulations, policies and procedures. Certainty is a
prized commodity in the business community.
• Highly skilled, helpful, and ethical staff who can resolve tax issues professionally
in reasonable timeframes.
• Risk Assessment/Limitations on Audits. The proper use of risk management in
the audit case selection process will minimize the number of audits of compliant
taxpayers as will limiting the number of audits that result in no change to the
amount of tax due.
• Increased taxpayer assistance and educational programs. This can include internet
services and electronic filing of tax returns where technology and legislation
permit. Electronic payment of taxes through the banking system should also be
utilized. The small business taxpayer may particularly benefit from providing
taxpayer services after normal business hours and weekends.
• Tax Return Simplification. Tax returns can be designed to be as short and simple
as possible. Small taxpayers in particular would benefit from the use of “plain
language” tax returns and instructions. Both tax returns and accompanying
instructions should be provided free of charge.
• Less frequent Return Filings. Monthly tax returns should be discouraged
wherever possible, especially for small business taxpayers.
• Simplified Recordkeeping. Small business taxpayers should not be subjected to
the same recordkeeping as large corporations. Small business taxpayers should be
permitted to use cash accounting methods
• Single Return for Employment Taxes. A single return can be used by employers
to report all employee wages; all employer withholding for income tax and social
taxes (pension, health, unemployment, etc.), and employer contributions for social
taxes.
• Special Assistance to New Business Taxpayers. When small business taxpayers
register with the tax administration they should be provided with all the necessary
information, tax returns and instructions they will need to meet their filing and
paying requirements. Some countries provide a “Small Businessman’s Kit” for
this purpose. The time spent in guiding the new taxpayer through this process
saves both the taxpayer and the tax administration time and resources in the long
run, and can provide a favorable image of the tax administration.
• Creation of Business Advisory Panels. Some tax administrations establish
business advisory panels. These panels provide a forum for business taxpayers to
voice their concerns over tax administration procedures or practices that they
consider unnecessarily burdensome, and to suggest practical alternatives. These
panels are also used by the tax administration to seek input prior to implementing
new programs and procedures that will impact the business community.
• Liaison with Chambers of Commerce and Business Associations
Tax administrations have found it useful to periodically meet with chambers of
commerce and business associations. This also presents a forum for the business
community to provide valuable feedback on tax administration operations.
Additionally industry specific associations (traders, bankers, etc.) can be used as a

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 sounding board for new procedures or regulations which will impact their
members
• Coordinated and Package Audits. To reduce the number of tax audits, all types of
tax returns for which the taxpayer is liable should reviewed at one time as part of
a “package” audit. Multiple tax periods should also be covered at one time. In tax
administrations utilizing special auditors for VAT, information should be shared
with income tax auditors to minimize asking the taxpayer to provide the same
material more than once.
• Expedited VAT refunds. Tax administrations should adopt procedures to expedite
VAT refunds, particularly for taxpayers who have a good compliance history.
• Penalty Waivers. Taxpayers should have the right to seek waiver of certain
penalties assessed by the tax administration for reasonable cause. Examples of
reasonable cause include waiving late filing penalties caused by natural disasters
and other circumstances over which the taxpayer has no control
• Payment Plans and Administrative Settlements. A small percentage of taxpayers
neither pay the total amount of self-assessed tax due when they file their returns
or as a result of a subsequent audit assessment. If, after review and investigation
of the taxpayer’s financial information, the tax administration determines that it is
the best interests of the government, an installment payment plan can be granted.
This is typically only done if the taxpayer remains current in all other tax
obligations. Use of this collection tool avoids taking enforced collection action
which could result in putting the taxpayer out of business. If permitted by law,
additional administrative settlements can be pursued to reduce the taxpayer’s
assessed liability.
• Tax Amnesties. In order to move taxpayers from the shadow economy onto the
tax roles, or to bring registered but non-compliant taxpayers current in their tax
obligations a tax amnesty program can be considered. Depending on the nature of
the amnesty program, taxpayers may be forgiven for past non-filing or non-
payment of taxes, have all penalties and/or interest waived, or be exempted from
prosecution for past tax crimes. Experience has shown that amnesty programs are
most effective if well publicized, not repeated, and followed by strict enforcement
measures for taxpayers who don’t take advantage of the program and remain non-
compliant. Additional information on tax amnesties including a partial list of
countries where amnesties have been used can be found in Annex14

Hungary and Latvia are examples of two countries that have taken steps to improve
conditions for small and medium taxpayers as well as the taxpaying public in general.
They have adopted almost all of the above referenced measures as well as the best
practices described earlier in this paper. Additional information on Hungary’s
experience can be found in Annexes 15 and 16. Two other countries making great
strides in this direction are Rwanda and Uganda. The previously referenced Corporate
Business Plans for Latvia, Rwanda, and Uganda evidences their progress.

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 Summary

122. The successful modernization of the tax administration in a developing country is

a long term process. The opportunities to achieve success are facilitated by an
environment which embraces the rule of law, a political commitment to public sector
reform, a political commitment to combat corruption, and rational tax policies. Given this
environment; adequate resources; an information management system based on a unique
TIN; technical assistance by experienced consultants; and a reasonable timeframe,
success will be achieved. It should be noted, however, that tax administration reform will
achieve only marginal success unless it is undertaken as an integrated process. Support
business processes must also be in place. The need for an overall implementation plan
and process cannot be overemphasized.
123. A well functioning tax administration, perceived as treating all taxpayers fairly
and with respect, and concerned with collecting only the proper amount of tax, will go a
long way towards achieving the goal of voluntary compliance which benefits everyone.
While no one enjoys paying taxes, seeing others escaping the tax net while you are
attempting to pay your fair share is even less appealing. In the end, SMEs along with
other taxpayers benefit from a well functioning tax administration system.

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