Trends in tax policy and tax administration reform

Trends in tax policy and tax administration reform: the HR factor MANILA, JUNE 2019

Better Tax Systems & Improved Governance: A Two Way Street Effective tax systems: • Generate public resources • Support the private sector • Are equitable and fair • Promote openness, transparency and accountability Factors Affecting State Capacity and Capability • Trade practices Factors Affecting Willingness to Tax • Dependence on resource rents • Citizen voice Willingness to tax Mutual trust: Government and tax payer State capacity and capability to levy tax • Administrative capacity • Political economy Macroeconomic shocks and spill-overs • Public expenditure • Corruption Favorable domestic outcomes for: • Public service delivery • Equitable growth • Shared prosperity • Inclusive decision making • Design for economic downturns • Sector policies International tax related issues: • Tax competition and incentives • Illicit Financial Flows • Base Erosion and Profit Shifting 2

Revenue collection and development outcomes are correlated

Zooming in on tax morale Tax Policy Reforms Balance between Trust, Facilitation and Enforcement • Tax and equity • Broadening the tax base (removing distortionary tax incentives) • Legitimacy of the tax system: building trust Tax Administration and Customs Reforms • Fairness in administering the tax system • Striking a balance between enforcement and facilitation of tax compliance • ICT element • HR policies • Medium Term Revenue Strategies: bottom up or top down approach?

Relevant factors Description Economic factors Taxes as a cost of economic transactions. This factor provides an incentive to evade taxes. Psychological factors Perception of the tax system as fair/unfair on the part of taxpayers Socio political factors Quality of public services. Links between tax policy and public expenditure policy Organizational elements Perception of the tax administration as an institution (e. g. corruption) Legal factors Complexity and stability of the tax system Social acceptance of the tax system

Getting to the 15%: many developing countries face the challenge of a low tax to GDP ratio. IMF Wo. RLD data show that nearly half of low-income countries had a tax to GDP ratio below 15 percent, with a majority of low income countries falling below this tipping point. Tax revenue as percent of GDP for low income and lower middle income countries in 2014 6

Tax Improvement: Necessary but Difficult A deteriorating fiscal situation in developing countries, propelled by a dip in government revenues 50 45 40 35 30 25 20 15 10 5 0 Collections are lowest in countries with the greatest needs and dependent on declining resource income in some countries 2 Fiscal Balance (RHS) Gross Debt Overall Revenues Tax 1 Tax Revenues in % GDP 35 0 30 -1 25 -2 20 15 -3 10 -4 5 -5 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Developing countries are more dependent on revenues from firms—and at risk from aggressive tax planning Revenues (% GDP) 0 Fragile Resource Low Income Lower MIC Upper MIC High Income Rich Advances in the performance of tax systems is mixed, especially in fragile and other IDA countries Net change in PEFA scores for tax indicators, 2005 -15 Rev. outturn/ budget Transparency Registration Collection

Perennial divergence between poor and rich countries’ tax collection

Trend in Total Revenues by Income (1990 – 2013) • Total revenue increased from 18% to 21% of GDP in LICs from 1990 to 2013 • Increase in VAT contributed in rise of total revenue in LICs • Middle income countries also recorded similar growth • High income countries have more or less reached a plateau Source: Fiscal Affairs Department/IMF, Tax Policy Division

Behavioral economics and taxation 10

Understand taxpayer behavior • There is extensive literature on the contribution of behavioral economics to the design and improvement of tax policy • A less well-developed area is the potential for behavioral research to contribute to better tax administration • Better understanding of the motives of taxpayers and their attitudes can improve both voluntary compliance levels and the efficiency of the tax administration • Broad determinants of tax compliance: deterrence; norms (personal and social); fairness and trust (in the tax administration); opportunity and complexity: and the role of government and the broader economic environment.

Factors that influence taxpayer behavior • Deterrence effects (standard model of tax compliance) • The impact of norms on behavior (social norms influence taxpayer behavior) • Fairness and Trust in Tax Administration • Opportunity and complexity in the tax system • Factors affecting decision-making: loss aversion; inertia; framing; intuition; fundamental attribution error; anchoring…. . • The paradox of choice (Barry Schwartz) • Role of Government and broader economic factors • Compliance characteristics: • Age, gender, marriage, education, tax status, employment, tax rates, sector, sanctions, agents, filing method…. .

Optimal tax policy design Policy advisers probably rely less on theory than on rules of thumb closer to Adam Smith’s famous canons of taxation-certainty, simplicity and convenience, and economy ( Bird, 2010). For example: • The Broad-Based Low-Rate (BBLR) approach: taxes should have broad bases and low rates • A corollary to this proposition it to minimize tax concessions • Other prescription intended largely to discourage corruption and evasion is for fewer rates of tax • Improving the convenience and simplicity of the tax • Taxes on international trade should be reduced • Revenues from income taxes are buoyant (governments should be interested in both the elastic and the progressive characteristics of the income tax-the first to finance expanding expenditures and the second to increase the degree of perceived fairness and trust in government)

Institutional Transformation Processes HR STRATEGIC THINKING Org. structure INTEGRATION ICT

ICT Trends q. Increased tax avoidance and IT sophistication of largest taxpayers and HNW individuals q. Revenue administrations must respond with increased intelligence and knowledge q. Virtual tax offices are now feasible q. AI-based systems can mine taxpayer data q. Good SW alternatives are available in the market

Changing our perception of the future Once upon a time this was the future…… This is our updated view of the future…

6 D’s of Exponential Technologies Digitized Deceptive Dematerialized Demonetized Disruptive Democratized Source: Singularity University - 2018

Disruptive Technologies and Revenue Administration Information technologies in the 20 th century allowed tax administrations to automate the ! ! ! process and become more efficient, and even today ! G N still believe that some tax administrations O R the same, just adjusted to Ware automated processes make them faster and more convenient. A Tax Organization of the 21 st century can uses the technologies to radically transform how business is being done.

Human Resources management in tax admin Staff is the most valuable asset of a tax administration. The complexities involved in administering the tax systems require trained and skilled staff especially in core business areas such as tax audit, ICT or tax arrears management An HR strategy is needed to manage HR in a coordinated and structured way in order to improve the overall HR environment An analysis of the salary levels when compared with similar jobs/position in private sector may be of use in terms of explaining retention problems Relevant information in this area concerns the allocation of employees to the different functions with a special focus on control of tax compliance Modernizing the HR function is then a key objective of any tax administration reform program. It is critical to provide the HR function with the tools needed to improve HR management, enhancing staff development, overhauling HR policies and procedures, and providing a HR Management and Information System. 19

Impact of technological change Technological change especially the development of e-services (virtual offices) and use of big data and other technological innovations is resulting in centralization of processes and reduction in the number of territorial offices. ◦ Impact on organizational structure Over the past two decades, tax administrations show a clear trend of reduction in the number of employees (downsizing) due to this technological change. New staff skills are required and reallocation of personnel from routine tasks to more high-value tasks is needed. A workload analysis in conjunction with a workforce planning strategy reflecting emerging needs from organizational reform should be conducted ◦ Rotation of personnel/age 20

https: //www. taxdiamond. org/

HR Module The framework used is based on international good practices and uses 262 indicators and sub indicators designed to provide an extensive view of the HR landscape of the organization throughout the employment lifecycle. It measures 9 HR functional areas and 11 organizational cross- functional areas.

Tax policy + Revenue Administration = The Real Policy. An overview of tax administration core processes. 1. Segmenting taxpayers is the key to success 2. Why is the taxpayer registry so important? Why is it most of the time neglected by tax administrations? 3. Strategies for effective revenue collection. 4. Focusing on prevention and risk management as a strategy for compliance. 5. The importance of paying attention to the legal framework. 6. Is there life after tax appeals? Administering a tax systems is first and foremost managing information. The rest is information too.

Is there a paradigm shift in tax administration? ØMoving away from self-assessment towards assessment? ØUnderstanding taxpayer behavior ØCooperative approach to compliance ØThe international dimension ØIntegrated Revenue Administration along functional lines/Semi-autonomous revenue authorities/taxpayer segmentation ØTax administrations as results-oriented organizations ØIncreased relevance of sub national taxation. How to administer subnational taxes? ØIT leads to changes in organizational structures and processes ØNew tax audit strategies to increases tax audits’ efficiency (risk-based audit/mass audit) ØIncreasing important of HR

Tax administration matters. Avoid quick fixes Tax Admin. Tasks Smart Tax Administration Keep it simple Facilitating compliance › Find taxpayers › Process for determining Tax payer as a client tax liabilities › Collect taxes (taxpayers services) › Access to simple tax appeals process Enforcing compliance Private sector approaches Finding NNthe North Star Salvation through reorganization? Risk-based audit and broadening tax audit coverage IT – the solution or the problem? It’s not just how much revenue is raised but how it is raised.

The taxpayer registry is the cornerstone of an effective and efficient revenue administration. Features of a taxpayer registry • The tax administration should use a single taxpayer identification number (TIN) for all taxes (social security contributions when relevant) • It should be mandatory by law to use the taxpayer identification number in all-tax related transactions, including customs For control of compliance it is vital to have an up-to-date register of active taxpayers. .

Taxpayer segmentation underpins effective tax administration. • Taxpayer segmentation recognizes the different risks, requirements, and contribution to overall revenue of the various segments of the taxpayer population. • It usually commences with the introduction of a full service large taxpayer office Advantages of Taxpayer Segmentation • Strengthened accountability for organizational outcomes • Allocation of resources based on risk to revenue, and • Better matching of enforcement service, and educational programs to specific types of taxpayers.

Why people evade taxes …. . and what to do about it Taxpayer perspective • • • How and why people evade taxes? The cost-benefit model Tax morale Measuring tax evasion/tax avoidance • How to assess the amount of revenue lost through evasion/avoidance? Tax administration perspective • How can tax evasion be controlled?

The tax evasion spectrum Main types of tax evasion What to do about it Tax avoidance/tax planning • • Increased analytical capacities of tax administration Increased skills of tax auditors A tax audit strategy that relies on risk-based criteria, specialization by sectors, and strong IT support Horizontal monitoring Exchange of Information with other tax administrations to monitor cross-border transactions Withholding taxes can play a role Under reporting, claiming tax incentives improperly or over reporting deductions • • Strengthen tax audit and investigation Increased use of third-party information Combine comprehensive audits with “mass” audits. Use of presumptions Taxpayers outside the tax net • • Simplified tax regimes that incentivize formalization and growth Rely on verification and indirect methods to control this segment Non-payers • Strengthen enforcement • •

Hard-to-tax sectors v. Is there a way to control informality? v. Some attempts of tax administration to incentivize formalization and tax compliance of small businesses: & Use of indirect methods & Presumptive taxation: simplified tax regimes & E-invoice & Electronic cash register machines & Regulations limiting the use of cash in transaction

Compliance cycle New paradigm: focus on prevention Assistance to prepare tax returns ØTP Assistance ØEducation ØCompliance agreements ØReal time management control Pre-filled tax returns Automated audits Filing Prevention _ Tax audits Enforced collection Admin Appeals Ex-post controls + COSTS

Taxpayer services • Taxpayer services: taxpayers expect tax laws, administration, and collection to be easy to understand transparent. • Major challenges are the complexities of tax laws and a large population of taxpayers • “Channel delivery” strategies • Strong commitment to deliver quality services and sustained investment in resources and technology. • “Virtual offices” (an e-tax office is an on-line platform for the communication between taxpayers and the tax authority) • E-invoicing and e-archiving • Taxpayer education programs

A holistic approach to improving revenue management in developing countries q. Combining matters tax policy and revenue administration reforms Enhance the quality of the tax system but tax administration q. Understand political economy drivers of tax reform q. Ensure political commitment and ownership and provide for a logic sequence of reforms q. Solid analytics to lay the ground for institutional reforms and capacity building technical assistance q. Automation for greater transparency and less corruption and a more efficient use of information when administering the tax system q. Addressing the HR and institutional gaps that come with automation q. Harmonization of IT systems and integration of information that would lead to more integrated revenue bodies q. Facilitation of taxpayers’ compliance and remove barriers formalization q Risk management approach to increase voluntary compliance with tax laws q. Modern management information systems to monitor progress wit reforms q. Factor in international taxation issues (e. g. exchange of information, profit shifting, tax avoidance)