Revenue administration reforms - recent trends and developments in the East AFRITAC region Andrew Okello Revenue administration Advisor

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Revenue administration reforms - recent trends
and developments in the East AFRITAC
regionAndrew OkelloRevenue administration
Advisor
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What is the East AFRITAC?

• A tripartite undertaking to strengthen capacity
  in East Africa in the areas of the IMFs
  expertise
• An effort to promote closeness and strengthen
  field presence for effective technical assistance
• A result-oriented approach and an enhanced
  governance structure

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Areas of East AFRITAC Assistance

• East AFRITAC delivers technical assistance on a
  grant basis in the following areas
• Banking supervision
• Monetary operations
• Revenue administration
• Macroeconomic statistics
• Public financial reform
• Macroeconomic analysis

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Membership and Funding

• East AFRITAC covers 7 countries in East Africa
• Eritrea, Ethiopia, Kenya, Malawi, Rwanda,
  Tanzania, and Uganda
• The Center is funded by 15 bi- and multi-lateral
  donors, two member countries, and the IMF
• AfDB, Canada, China PR, Denmark, Finland, France,
  Germany, Italy, Luxembourg, Norway, Russia,
  Sweden, Switzerland, The Netherlands, and United
  Kingdom
• 25 sub-Saharan countries covered by 3 AFRITACs

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Tax policy and administration

• Reform agendas full of undertakings that require
  major funding allocations
• Tax policy and tax administration are the means
  by which governments raise revenue to finance
  spending on public goods and services
• Tax policy the choice of tax instruments
• Tax administration the implementation of tax
  policy
• Policy change without administrative change is
  nothingMilka Casanegra, 1992
• An efficient tax system will provide the most
  sustainable source of government funding in the
  long term

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Outcome
Clients/Stakeholders
Revenue Agency

Improved Compliance
Excellent Service
Increased Revenue
Taxpaying Public and other Stakeholders
Taxpayer expectations. leveraging partnerships
Fair Enforcement
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Tax revenue performance for selected countries
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Revenue administration reform drivers

• Enhance revenue
• Modernize administration/improve service
• Reduce compliance burden
• Reduce administration costs
• Facilitate trade and investment
• Improve integrity

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Establishment of semi-autonomous revenue
collection agencies

• The advert of the semi-autonomous revenue
  authorities (RA) over the past 2 decades has been
  a distinguishing feature of revenue
  administration Anglophone Africa Ghana, Nigeria
• In the region, Uganda established, (1991) the
  first incarnation of the model that became widely
  emulated over the next 15 years in East and
  Southern Africa (Kenya, Tanzania, Rwanda, Malawi)
• This RA model brings all major central government
  revenue collection activities, particularly tax
  and customs administration under one umbrella

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Establishment of semi-autonomous revenue
collection agencies cont

• The RA model broadly provides a degree of
  operational autonomy through a governance
  arrangement that is distinct from the ministry of
  finance unlike the traditional government
  department
• Key issues
• Reforms without RA
• Autonomy??
• Independent funding
• Reduce corruption??
• Internal audit function

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Outsourcing revenue administration

• Uncommon in the region, however in the pursuit of
  savings and efficiency gains some functions have
  been outsourced.
• Core tax administration functions rarely
  outsourced audit of refund claims,
  exemptions???
• Private sector support in customs on the decline,
  PSI services phased out, only Tanzania replaced
  PSI services with DI services

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Integrated customs and tax administration
functions

• Degree of integration varies
• Shared functions planning, HR, administration,
  finance, legal, IT, taxpayer service?,
  investigation?
• Separate functions debt collection, audit,
• Pros and cons of integrated tax and customs
  administration
• LTU

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Revenue authorities other issues

• Tax policy formulation
• Delegation to sub-national levels

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A modern tax administration is characterized by

• An integrated organization with a function-based
  structure
• A strong headquarters function
• Effective businesses processes, based on self
  assessment
• Risk-based compliance programs
• Skilled and professional staff acting with
  fairness, honesty, and transparency

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How the structure of tax administration has
evolved
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Development of self-assessment

• Self-assessment -
• A system where taxpayers comply with their basic
  tax obligations without intervention of a tax
  official
• Tax officials provide taxpayer with information
  and education about their obligations
• Taxpayers complete their return accurately and
  submit them voluntarily with their payments
• Failing that, enforcement actions is taken and
  penalties applied
• VAT was the impetus
• Income tax now mostly self-assessed
• However, while most countries have adopted
  self-assessment, the practice in reality falls
  far short

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Conditions for self assessment

• Simple and stable tax law
• Good services to taxpayers
• Simple filing and payment procedures
• Effective collection enforcement
• Selective risk-based audit programs
• Fairly applied penalties
• Fair and timely dispute resolution

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Integration of domestic tax administration

• Traditional Anglophone influence in the region -
  split of direct and indirect tax administration
• RA and VAT missed integration opportunities
• VAT, income tax, and excise domestic operations
  have been merged in Kenya, Rwanda, Tanzania,
  Uganda, Malawi
• The revenue agencies have established fully
  integrated domestic tax administrations that are
  organized around the key functions at the
  operational and headquarters level
• Advantages of integrating domestic tax
  administration
• Reduces tax administration and taxpayers
  compliance costs
• Allows implementation of a unified,
  function-based organization
• Increases effectiveness of tax administration
  (common registration, collection, and audit
  functions)
• Head office/field office functions

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Integration of domestic tax administration
international perspective

• In early 2007
• 122 had an integrated department for all domestic
  taxes
• 7 had a special VAT department
• VAT was administered by customs in 1 country
  (Israel)

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Integration of domestic tax administration key
issues

• Legislative review and development of common tax
  procedures code
• Business process review and improvement
• Integrated tax administration system (ITAS)
• Change management, training and capacity building

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Taxpayer segmentation

• Taxpayers are not homogeneous
• In the past decade, many tax administrations have
  moved away from a one-size fits all approach and
  developed organizational structures on the basis
  of taxpayer segments
• Initially in the OECD countries (the Netherlands
  in 1990, New Zealand in 1994, and more recently
  Australia, France, and the UK)
• Several countries in the region have also
  developed the concept to improve their
  organization and tax compliance programs (Kenya,
  Rwanda, Tanzania, and Uganda)
• Tax administrations categorize their taxpayer
  population into 4 main categories large
  business, medium businesses, small businesses and
  micro businesses

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Distribution of taxpayers and revenue
Number of... Tax revenue
from...
Large enterprises
Medium-size enterprises
Small enterprises
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Why the move towards taxpayer segmentation?

• Developing compliance strategies that take into
  account risk management concepts
• Providing services to taxpayers according to
  their needs (better focus on client needs)
• Allocating enforcement and audit resources to
  areas of greatest risks

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Creation of large taxpayers units (LTU)

• Large taxpayers units established in all
  countries, as a first step in adopting a taxpayer
  segmentation approach
• Secure 60 percent of total tax revenue
• Expected benefits of LTUs
• Reduce level of non compliance among large
  taxpayers
• Provide better services to large taxpayers
• Use LTU as a pilot to introduce major changes
  (e.g., integration and self-assessment)
• Use LTU to secure implementation of major policy
  reform
• Signal governments commitment to enforce tax
  laws to the taxpayer community
• Centers of excellence???
• Functional and integrated organization
• Simplified procedures
• New approaches risk analysis, self-assessment
• Computerization

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Revenue contribution of large taxpayers - 2006
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Creation of medium taxpayers units

• Definition
• Early steps taken in identifying taxpayers in the
  next most important group by revenue potential
  i.e. medium-size enterprises
• Some countries are developing dedicated offices
  and/or programs for the administration of
  medium-size taxpayers
• However, management of medium taxpayers still
  weak and concept of medium tax offices not yet
  developed
• Critical focal area for the medium term

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Administration of small and micro taxpayers

• The very large number of small and
  micro-businesses pose many challenges for tax
  administrations
• Is a key sector that must be tapped if tax base
  is to be expanded
• Simplified tax administration regime for small
  businesses Eritrea, Ethiopia, Rwanda, Uganda,
  Tanzania, Kenya
• Use of withholding systems
• Block management system in Tanzania
• Issues design, resource allocation, cost....

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Customs Administration reforms

• Key issues
• The changing role of customs
• Traditional versus modern customs
• Performance indicators for customs services
• Integrity issues in customs
• Links to risk management

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Customs Administration reform strategies

• Reorganization of program delivery in customs
  distinction between policy and operations
• A service orientation including greater
  information to and engagement of the private
  sector
• Automation of transactions processing and
  management information support
• Self-assessment and use of risk-based approached
  to compliance management

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Customs Administration reform strategies

• Use of trader segmentation to implement
  appropriate compliance and trade facilitation
  strategies
• Simplified procedures for authorized economic
  operators/traders (Tanzania, initiatives in other
  countries)
• Pre-approved traders deemed to be highly
  compliant and low risk
• Formal application by these traders for the
  privilege
• Trader required to keep books and records that
  are periodically audited by customs
• An agreement is signed between customs and the
  trader detailing responsibilities and obligation
  of BOTH parties revocable for non-compliance

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Customs Administration reform strategies

• Use audit-based controls
• Post clearance audits of trader records and
  systems is superior to transactions-based
  controls
• Joint audits with VAT and income take place
• Training and capacity building - accounting
  systems, IT systems and auditing techniques

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Focal areas

• Revenue administration reform has taken hold in
  the region
• RAs were a major development
• Reforms have been steady, sometimes based on
  international experience
• Not effective without system and procedural
  modernization, integration, and segmentation
• Challenge To increase the tax-to-GDP ratio
  while reducing cost of collection, and improving
  services and support to taxpayers
• Requires achieving higher levels of voluntary
  compliance of taxpayers
• Development of compliance management programs
  that are structured around taxpayer segments the
  focal area

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Compliance Management program for medium
taxpayers
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Other issues

• Taxation of small business - a challenge
• Other emerging issues - transfer to RAs of the
  collection responsibility of other government
  levies such as social contributions, natural
  resource taxation and accountability issues
• THE END