Transcript Tax Administration and Development

Andrew Okello – IMF Fiscal Affairs Department
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The self assessment business model
The compliance model
Steps in developing a compliance program for LBT
Major compliance issues commonly associated with LBT
Approaches to managing LBT compliance
Summary: Elements of a LBT compliance strategy
References
The self-assessment business model
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The great majority of revenue agencies have or are moving
away from administrative assessment systems to a system of
self-assessment
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A self-assessment system relies on most taxpayers voluntarily
complying with their basic obligations without the
intervention of a tax officer:
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Register for tax
Keep proper records
File complete and accurate returns
Pay tax on time
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Three 3 key strategies will optimize voluntary
compliance:
 Helping taxpayers and their advisors understand their
obligations and entitlements
 Making it as easy and cheap as possible for taxpayers to
comply
 Verifying compliance using a risk management approach
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How do you help taxpayers and their advisors understand their
obligations and entitlements (taxpayers can’t comply if they
don’t know):
 Publish guidelines and technical interpretations in plain language (paper, web
etc)
 Provide easily accessible taxpayer services (enquiries; rulings etc)
 Engage in meaningful liaison arrangements with professional and industry
associations
 Conduct targeted education campaigns tailored to specific taxpayer groups
(industries; new businesses etc)
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Making it as easy and cheap as possible for taxpayers to
comply (taxpayers won’t comply if it is too hard or too
expensive):
 Simple policy
 Clear law and regulations
 Simple procedures (user-based design)
 Easy access to services (through preferred channels)
 Accessible dispute resolution mechanisms independent of original decision
maker
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Verifying compliance using a risk management approach:
 Taxpayers must perceive real risk of detection if they choose not to
comply
 Broader taxpayer community confidence in the tax administration
must be maintained
 No tax administration is funded to deal with all risks in the system at
one time
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Verification activities must therefore be:
 Targeted to the most severe risks
 Effective in dealing with the identified mischief and must promote
compliance (actual audit revenue accounts for only a small fraction of
total tax collections)
 Visible to the general community of taxpayers and regarded by them
as fair and reasonable
The compliance model
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The challenge for the administration is to get the right
balance in its compliance responses:
 Audit is not the best response to ignorance of the law
 Education is not the best response to deliberate evasion
 Taxpayer penalties are not the best response to missed
obligations where the fault lies in poor administrative
policies and procedures
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So, how do you determine the right intervention or mix
of interventions?
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Modern tax administrations develop “Compliance Models” to
provide a structured way of helping them understand the
factors that influence different compliance behaviour
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This enables the administrations to choose the most
appropriate intervention for the circumstances
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A compliance model recognizes that taxpayer
compliance behaviour is affected by many
circumstances which influence whether they choose
to meet their obligations
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It reflects a continuum of taxpayer attitudes to
compliance from “willing to comply” to hard core
evaders; and
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It aligns the different sorts of interventions and
support mechanisms that might be applied to
different compliance scenarios
Business profile
•Structure, sole trader
partnership
Industry
•Business activities
•Financial data
Psychological
•Industry definition
•Business age
•Risk
•Region
•Size, segment,
participants
•Fear
•Trust
•Values
•Fairness/equity
Economic
•Opportunity to evade
Sociological
•Profit margins
•Cost structures
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Norms
•Industry regulation
•Inflation
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Reciprocity
•Interest rates
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Age
•Tax system
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Gender
•Industry issues:
competition, seasonal
factors
•Government
policies
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Educational
level
•International
influences
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Ethnic
background
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The compliance model aims for a more responsive
form of regulation than traditional enforcement
programs
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It is based on the proposition that effective
enforcement requires a dynamic application of less to
more severe sanctions and regulatory interventions
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It advocates a deeper understanding of motivations,
circumstances and characteristics of taxpayers so that
enforcement can be tailored to promote better
compliance
Steps in developing a
compliance strategy for LBT
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As a first step, risks should be identified and documented in an exercise coordinated by the risk
management unit and involving staff at all levels of the organization. LTU should play a critical role in
identifying LBT risks.
The risk identification process should bring together multiple sources of intelligence
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Top down (macro economic/strategic analysis)
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Bottom up (case-based/operational)
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Experience of other administrations
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Insights obtained from the audit program
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Analysis of rulings
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Analysis of frequently asked questions
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Analysis of information in returns and financial statements
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Data from external agencies (Customs, other regulatory agencies etc)
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Intelligence from other jurisdictions, and from professional and industry liaison groups
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Community based information
Key product: A comprehensive register of all LBT risks
 Identified risks must then be assessed and prioritised in a structured manner using a
“likelihood and consequence” matrix
 “Consequence” should not be measured only on revenue at risk – but should include
measures such as the impact on the integrity of the system, and the impact on the
reputation of the government
 The aim is to achieve a reasonable balance of risk management across all market
segments with all “severe” risks under active management
 Sufficient, accurate and timely data is essential; utilize data analysis tools: data
matching; data mining; case review
Key products
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A register of risks that have been quantified and prioritized according to the risk
likelihood and consequence processes
• Documented organizational compliance priorities that form the compliance
programme for the year of effect
Consequence
/Likelihood
Insignificant
Minor
Moderate
Major
Severe
Remote
Negligible
Negligible
Low
Low
Significant
Unlikely
Negligible
Low
Low
Significant
High
Possible
Negligible
Low
Significant
High
High
Likely
Low
Significant
High
High
Extreme
Almost
Certain
Low
Significant
High
Extreme
Extreme
 A critical element of strategy development is identifying the specific target
population.
 The intent is to target those who are not complying for attention while
being as least intrusive as possible for complying taxpayers
 Priority risks must be analysed using the compliance model to identify the
drivers behind the attitudes and behaviours and to determine the
appropriate mix of interventions:
 Look beyond symptoms to causes
 Recognize the effect of the tax system itself
 Legislation
 Administration
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What drives specific behaviour?
WHAT is
occurring?
WHO is
doing it?
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e.g. Under reporting of income
Characteristics of
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Over claiming of expenses
the taxpayer (group)
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Duplicate books
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WHY are
they doing
it?
e.g. Lack of knowledge
Cost of compliance
Perceived inequality
Dishonesty
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Develop a balanced program based on sound
principles
Key products
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A compliance programme covering the current
planning period
Products and tools tailored specifically to
clients to be targeted through the compliance
programme
Tailored Approach to Compliance Strategies
Products / Strategies
Prosecutions, sanctions,
investigations.
Taxpayer management,
monitoring, profiling, reviews,
audits.
Consultative forums,
education, rulings, advice.
Attitude
EVASION &FRAUD
Active
Enforcement
Disengagement
Resisting
Assisted self
regulation
Self regulation - Cooperation
Resigned
Willing
Create downward pressure
COOPERATION & COMPLIANCE
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 The whole process from risk identification to strategy implementation should be
documented
 This forms the basis of your Compliance Plan and provides context for your front line
delivery staff
 It also enables you to respond to questions or criticism from commentators on how
you are deploying your scarce resources
 The compliance program should set out:
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The risks you have identified for intervention
The nature and timing of the planned interventions
The resources allocated to particular tasks
Efficiency indicators
Quality indicators
Effectiveness indicators
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Determine evaluation criteria at the time the treatment strategies are being developed
Developing an evaluation framework:
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Target (what behaviour are we treating?)
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registration,
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filing,
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reporting,
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payment of liability
Objectives (what are we intending to achieve?)
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direct impacts
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related impacts
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impacts over time
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Methodology (what broad approaches will we take?)
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audit based studies
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statistical techniques – trend or time series analysis
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qualitative techniques – surveys, interviews, observation
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Measures (what kind of indicators can be used?)
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macro indicators
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non-compliance indicators
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public opinion indicators
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programme impact indicators
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Data (what are the measurements based on?)
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data needs to be accurate and derived from many sources
Major compliance issues
commonly associated with LBT
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Related party cross border and tax haven dealings
Complex structures and intra group transactions
Tax avoidance
Customs fraud
Permanent establishment issues
Structured financing
International arbitrage
Entity classification
Valuation of derivatives
Loss importation transactions
Abusive trust arrangements
Inter-company financing
Foreign tax credit intermediary arrangements
Offshore deferral arrangements
Income gain on sale of assets
Excise fraud
Approaches to managing LBT
compliance
 Critical in promoting transparency and a cooperative approach to
compliance
 Building a relationship based on transparency, trust, and mutual
understanding will have a positive impact on LBTs
 Understanding the expectations of both the tax administration
and LBTs a good start
 Tax administration’s expectations; more openness, full disclosure,
compliance with the tax laws, open dialogue, and timely response
to inquiries and requests for information
 LBT’s expectations; increased openness and dialogue, greater
certainty, consistency, clarity of roles and accountability, timely
response and good guidance, sharing of audit plan and risk
assessment, early settlement and speedy resolution of issues
 Trend is to move from post-filing of tax return
examination to real-time evaluation of risk and
compliance issue resolution
 Instituting programs to provide greater certainty to LBTs
crucial; e.g.,
forward compliance arrangements
advance rulings (binding and non-binding)
advance pricing agreements
pre-filing agreements or advance agreements
contemporaneous documentation requirements (for crossborder transactions)
 use of client or relationship managers to provide clarity
 compliance assurance programs to resolve tax issues prior
to the filing of a tax return
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Tax administrations are increasingly using the corporate
governance principles to improve tax compliance; believe
that:
◦ The responsibility for a company’s tax policy should be at Board level
since tax is an important financial element as well as a major potential risk
to the LBT both financially and in terms of reputation
◦ Bringing tax policy to the Board level will foster more compliance and
lessen likelihood of engagement in aggressive tax planning
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The ATO for example has published a governance guide for
board members and directors. Directors can use this to selfassess the type and degree of tax risks in relation to the
overall performance
 Commitment to enhancing the technical and professional
skills necessary to deal confidentially with the complexity of
LBT as well as to improve focus on customer understanding
and commercial awareness
 Enhancing enforcement and customer service also requires
training and retention of highly qualified workforce capacity
 Complexity of the tax laws, business structures and
transactions have created a need for specialized knowledge
and expertise in certain areas.
 Also succession planning programs required to maintain
qualified and highly skilled workforce
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Technology can be used not only to improve the
quality of service to LBT but also to manage
compliance
Several electronic tools have been developed to
assist:
 improve the early identification of risk and increase the
efficacy of operating processes in the LBU
 in performing risk assessment and to better control and
manage compliance and to collect critical data
 LBU staff, irrespective of location, communicate, share
information and work collaboratively
 E-filing
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The taxpayer population and its segments
 What is the taxpayer population under the purview of the LBU?
 How is it composed, for example: individuals, (high net wealth individuals);
sector/industry; non-profit organizations; public institutions; etc.
Compliance patterns, trends, and the tax gap
 What are the taxpayer compliance patterns and trends?
 What is the tax gap and how is it composed—by economic sector, type of
taxpayer?
Key compliance risks—identification and treatment
 What are the key compliance risks and to taxpayer groups do these risks relate?
 Are any of the major risks caused by weaknesses in laws and regulations or the
administrative capacity of LBU?
 How should these risks be treated to achieve the best possible outcome?
Organizing for and managing taxpayer compliance
 How should resources be organized and allocated across the LBU to achieve the
best possible compliance outcome?
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IMF Technical Note (2010), Developing a
Compliance Strategy
OECD Guidance Note (July 2009), Compliance
Management of Large Business