INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 4.1: Tax revenue administration

Scope and Rationale Scope This module only cover Tax revenue, see DRM course for other revenues”; Rationale Taxes are the main source of revenue (data) High risk area Tax Authorities handle large amounts of money and considerable scope for waste & corruption if insufficient oversight & accountability: Effective internal & external audit & legislative oversight function.

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 3

Tax policy determines The total tax burden The structure of tax revenue and the relative share of each tax The basis and the rate of each tax Revenue administration fulfils the following basic tasks:(all areas prone to fraud and corruption) Identification of the taxpayers Calculation of the tax basis, establishment of tax due by the taxpayer Tax collection Tax policy and tax revenue administration 4

Illicit Financial Flows Illicit financial flows generally involve the following practices: Money laundering bribery by international companies tax evasion (2/3 of all IFF) trade mispricing 5 Real Illicit Financial Flows by Region, Growth Rate (in billions of constant U.S. dollars, base year 2010, or in percent) Data: Developing-Countries pdf

Evasion Use illegal activities to hide tax liabilities Avoidance Use legal methods to avoid tax liabilities (e.g. transfer pricing) Tax evasion v Tax avoidance

7 o The developing world lost US$991.2 billion in IFF in 2012, over ten times the amount of ODA received by these countries in that year o From 2003 – 2012, US$6.6 trillion left developing country economies illicitly Cumulative Illicit Financial Flows by Region, (as percent of total real illicit outflows) Data: content/uploads/2014/12/Illicit-Financial-Flows-from- Developing-Countries pdf

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 8

Direct vs indirect tax Direct tax: usually collected on the basis of a nominal enrolment, periodic, usually supported and paid directly by the tax payer (wage tax/social security contribution may be administered by employers) Indirect tax: linked to a specific event (e.g. the purchase of a consumption good), it is supported by the consumer but paid by the seller. 9

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Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 11

Conditions for effectiveness, transparency and due process covered in PEFA 19 (PI pilot)  Citizens have a clear understanding of their tax obligations and comply with registration and assessment requirements  Tax agency is able to collect all tax due Transparent tax liabilities (PI 13) Effective taxpayer registration and assessment (PI 14) Effective tax collection (PI 15)

PEFA Framework Revision More focus on natural resources revenues 13 IndicatorImprovements New PI-15. Revenue budgeting 3 New dimensions Medium-term forecasting of revenues Assessment of the fiscal impact of proposed policy changes Variance in revenue composition during the last 3 years New PI-19. Revenue administration compliance Reformulated tax administration dimensions New management of risks to revenue New PI-20. Accounting for revenues New coverage and timeliness of revenue information collection

Clarity & Comprehensiveness of tax liabilities Requirements (1)Clear and comprehensive legislation with limited discretionary power of tax agency (2)Easy access to understandable information on tax liabilities and administrative processes (3)Existence and functioning of tax appeal mechanisms Transparency of Taxpayer Liabilities 14

Clarity & Comprehensiveness of tax liabilities Requirements (1)Clear and comprehensive legislation with limited discretionary power of tax agency (2)Easy access to understandable information on tax liabilities and administrative processes (3)Existence and functioning of tax appeal mechanisms 15 Transparency of Taxpayer Liabilities

Controls in taxpayer registration system  those who should be registered, are registered. Registration then enables assessment. Unique tax payer identification system Database with linkage to other relevant government systems Occasional surveys Effective (Punitive) penalties for non-compliance Effective system to audit self-assessments Effective Tax Payer Registration and Assessment 16

Tax liabilities still unpaid at end of FY should be paid in next FY. Tax collections should be transferred to Treasury- controlled accounts (daily) Tax collections submitted to Treasury must be consistent with assessments. Any inconsistency needs to be checked Effective collection of tax payments 17

PI-19 "revenue administration compliance" Scope expanded to cover non-tax revenue; Reformulated/merged tax administration dimensions ; New: management of risks to revenue PI-20 "accounting for revenues" Scope expanded Scope expanded to cover non-tax revenue; New: coverage and timeliness of revenue information collection PEFA Test Version Revenues

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 19

TADAT is supported by international development partners and institutions. They include the European Commission, Germany, International Monetary Fund (IMF), Japan, Netherlands, Norway, Switzerland, United Kingdom and the World Bank. TADAT – Tax Administration Diagnostic Assessment Tool

The tax administration’s management of compliance risks results in higher levels of voluntary compliance and community confidence in the tax administration. Taxpayers have the necessary information and support to voluntarily comply at a reasonable cost to themselves. Taxpayers file returns on time. Taxpayers pay their taxes in full on time. Taxpayers report complete and accurate information in their tax returns. The tax dispute resolution process is independent, accessible to taxpayers, and effective in resolving disputed matters in a timely manner. Tax administration operations are efficient and effective in performing key functions and achieving expected outcomes. The tax administration is transparent in the conduct of its activities and accountable to the government and the community. All businesses, individuals, and other entities that are required to register are included in a taxpayer registration database. Information held in the database is complete and accurate.

Tax Administration Diagnostic Assessment Tool (TADAT)(TADAT) 22 Completed and Proposed Pool of TADAT Assessment Pilot Countries November 2013First PilotZambia December 2013Second Pilot Norway June 2014Third PilotSouth Africa November 2014Fourth Pilot Paraguay February 2015 Fifth Pilot Fiji March 2015Sixth PilotMozambique April 2015 Seventh PilotKosovo August 2015 (confirmed by Rwanda Revenue Authority) Rwanda May 2015 (Tentative)Code D'Ivoire June 2015 (Tentative)Malaysia June/July 2015 (Tentative)Egypt

The model recently developed by the WB is made available to tax administrations (TA). This tool assesses and monitors the performance of tax administration over time.. The measurement framework of IAMTAX can be used both as a benchmarking tool and a monitoring and diagnostic tool. INTEGRATED ASSESSMENT MODEL FOR TAX ADMINISTRATION (IAMTA)

General directorate for customs and indirect taxes: bases the taxation and collects Taxes and duties on imports and exports VAT on imported goods Domestic taxes on fuel products Excise duties General directorate of taxes: assesses the tax due and sometimes collects Direct taxes Domestic VAT Land tax, etc. Example of institutional arrangements 24

1.Revenue administration establishes the tax base, the tax due and issue a request of payment. 2.The taxpayer assesses the tax due and pays it, generally to the revenue agency Often the case for Corporate tax, VAT. Tax recovery: two main variants 25

Two models: Revenues are administered by administrative division of the ministry of Finance Autonomous, or semi-autonomous under MOF, revenue agencies/authorities have been established in the interests of efficiency; May have separate salary structure; Hiring & firing does not have to be approved by civil service MDA covering MDAs Not subject to same control regime as for MDAs; Organisational aspects of revenue administration (1) 26

Revenue administration usually organised along functional lines, particularly: Inspection, data processing, internal audit and administration. Common to have Large Taxpayers Unit (LTU), a small number of taxpayers may represent a large proportion of all tax collected. May include natural resourced-based companies, or these may be covered by separate unit. Customs Dept. may have Enforcement Unit (anti- smuggling). 27 Organisational aspects of revenue administration (2)

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 28

Importance of acurate revenue estimates Legally the amount of revenue budgeted for year t is only a forecast For the preparation of the budget: determination of the expenditure ceilings depends on it For medium-term consistency (e.g. evolution over time of revenue in case of tariff reduction and introduction of VAT) Revenue forecasts and projections (1) 29

How to do it? Projections of revenue in the budget documents of the previous years may serve as a starting point If macro-economic determinants have changed they must be updated If changes in tax policies are proposed they must be incorporated Basis identity: revenue of tax i (TR) is tax base (TB) times tax rate (t): TR i = TB i x t i From one year to the next: TR i = TB i x t i + TB i x t i In many cases it is necessary to start from scratch (combine macroeconomic projections) Revenue forecasts and projections (2) 30

Narrow tax base Susceptible to market volatility Specialist tax departments High potential for corruption/fraud May use resource income from commodities other than taxation. Resource Rich Countries

Discloses Information on Tax payments, Licences, contracts, production and other key elements Standards to promote accountability on resources Extractive Industries Transparency Initiative (EITI)

Extractive Industry Transparency Initiative (EITI) 33 Countries have to disclose information on tax payments, licences, contracts, production and other key elements around resource extraction.

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Resource-rich Countries and EITI WEST AND CENTRAL AFRICA 35 Extractive Industries have the potential to become real vectors of growth and sustainable development * Non Budget Support Countries

2.3 International Initiatives Standard setting at International Level Reforming existing international tax standards to fight tax evasion and avoidance and to increase information sharing Extractive Industry Transparency Initiative (EITI)EITI Tripartite Initiative EU/WB/ OECD on Transfer Pricing G20/OECD base erosion and profit shifting (BEPS)Action PlanBEPS G20/OECD Automatic Exchange of Information (AEOI) RoadmapAEOI OECD Task Force "Tax and Development " Global Forum on Transparency and Exchange of Information for Tax PurposesGlobal Forum International Tax CompactInternational Tax Compact UN Committee of Experts on International Cooperation in Tax Matters Financial Action Task Force FATFFATF 36 GOAL

International Initiatives Financing International Initiatives EITI Multi-Donor Trust Fund (MDTF)MDTF IMF Topical Trust Fund on Managing Natural Resource Wealth (MNRW-TTF)MNRW-TTF IMF Tax Policy and Administration Topical Trust Fund (TPA- TTF)TPA- TTF 37

Regional Initiatives o Support to Regional Organizations of Tax Administrations o Policy dialogue o Financial support Africa – African Tax Administration Forum (ATAF) / Centre de rencontres et d’études des dirigeants des administrations fiscales (CREDAF) Latin America – Inter-American Center for Tax Administrations (CIAT) Asia – not yet established 38

Efficient revenue administration essential to mobilisation of resources necessary to finance public services. Taxpayers need clarity on tax obligations. Revenue agency needs to ensure tax payers are registered and comply with tax obligations, and that tax revenues are collected & deposited promptly in central treasury account. Large scope for tax evasion and avoidance, and corruption in revenue collection; care needed prior to devolving responsibility to an autonomous revenue agency. Main Messages 39