Developing a Compliance Strategy Stan Shrosbree Fiscal Affairs Department (PFTAC) International Monetary Fund Tuesday 19 April, 2016

Primary Goal of a Revenue Administration TO ENSURE COMPLIANCE WITH THE TAX LAWS

Outline Introduction Compliance Improvement Strategies Identifying risks Assessing and prioritizing risks Analyzing compliance behavior Developing Risk Treatment Strategies Evaluating results Creating a common platform for Revenue Administrations and Ministries to understand the potential of working together to improve compliance

Old Tax Administration V New Tax Administration

What is a Compliance Improvement Strategy? A Revenue Administration document that describes The major risks to be addressed Which taxpayers they relate to How the risks should be treated to achieve the best possible outcomes

What is Risk Management? Compliance risk management is a structured process for the systematic identification, assessment, ranking, and treatment of tax compliance risks (e.g., failure to register, failure to properly report tax liabilities etc). It is an iterative process that consists of well-defined steps to support improved decision-making.

Compliance …. with what? • Registration in the system • Timely filing or lodgment of requisite taxation information • Reporting of complete and accurate information (incorporating good record keeping) and Payment of taxation obligations on time

The role of RA’s All revenue authorities are generally required to maximize the overall level of compliance They are appropriated a finite level of resources, meaning that careful decisions are required as to how those resources are to be applied to achieve the best possible compliance outcome, in short: - What are the major compliance risks to be addressed? - Which taxpayers do they relate to? - How should these risks be treated to achieve the best possible outcome?

Benefits of a Compliance Plan Structured basis for strategic planning Method for reserving the harsher compliance tools for the more non-compliant taxpayers Allocation of resources to identified risk levels Improved compliance and program outcomes Introducing performance standards to monitor progress and improvements in compliance

The link between modernization and improving compliance Government/Donors Higher revenues Cost efficiency and effectiveness Return of investment Staff Development of people Application of modern technology Taxpayers Equity Cost efficient administration Professional service delivery Confidentiality Tax Administration Modernization Public More social services Building the nation

Making our taxpayers understand why tax compliance is necessary Quality of Life Standard of Living Work Housing Recreation/ Sport Safety and Security Pension funds Infrastructure Education Health HUMAN NEEDS Transport Welfare Understanding the needs and reasons of taxation

Risk Management Cycle (OECD Model) Assess and prioritise risks Analyse compliance behaviour (causes, options for treatment) Determine treatment strategies Plan and implement strategies Identify risks Monitor performance against plan Operating Context Evaluate compliance outcomes • Registration Filing Reporting Payment Assess and prioritize risks Analyze compliance behaviour

Key Compliance Issues Aggressive tax planning Underground economy VAT fraud Revenue collections and non-filers Question What would the Budget impact be if we improved compliance across these areas? Is it worth an investment in the tax administration and what would the return on that investment be?

Developing Program Strategies LINKING STRATEGY TO ATTITUDES

Applying the CM to tax arrears

The enforcement compliance model The model Provides the different interventions that Revenue Administrations (RAs) can use to generate the required revenue Suggests that RAs have the ability to influence taxpayer behavior by their responses and interactions Poses a challenge for RAs to get the right balance of services and enforcement actions across the different populations of taxpayers

Developing Program Strategies REMEMBERING TAXPAYER BEHAVIOUR Need to develop tailored compliance solutions based on an integrated view of our clients RAs working relationship with clients must be influenced by their compliance record Cross-program client compliance profile captures compliance and risk history of all taxpayers Profile also links associated entities (Taxpayer A owns Company B owns Company C etc.)

Understanding Taxpayer Behavior WHAT is occurring? WHO is doing it? WHY are they doing it? e.g., under-reporting of income, over-claiming expenses, e.g., lack of knowledge, cost of compliance, perceived inequity, dishonesty Characteristics of the taxpayer What are we going to do about it?

Potential reasons for Non- Compliance Equity Is the taxpayer treated fairly? Does the government make good use of the tax revenue Opportunity for non-compliance Cash based businesses Individual differences Risk taxpayers (e.g. younger males) Social norms Everybody does it ….. Dissatisfaction with the Revenue Authorities or Government

Designing treatment options Make obligations clear and make it easy to comply Understandable legislation and tax returns Readily accessible help (taxpayer services) Proactive education Use escalating sanctions Publicize service and enforcement activities

Making it easy … and reducing compliance costs

Remember: The ultimate goal is not to find non-compliance, it is to prevent non-compliance

Segmentation in developing a Compliance Improvement Strategy It is grouping of taxpayers according to similar attention, assistance and examination characteristics and thus offer a quality service implementation specialized and differentiated treatments for these segments.

Compliance V Segmentation From the compliance perspective, segmentation plays a vital role, as it differentiates group of taxpayers with their different needs Large Medium Small Furthermore, segmentation based on an industry matrix can also part of the strategy. For example: Real Estate Construction Manufacturers Pharmaceuticals Wholesalers/Retailers etc

Evaluating a Compliance Improvement Strategy Key questions Were the right risks identified? Were they analyzed correctly? Was the right treatment selected? Was the risk reduced? Is outside help needed from the Ministry Legislative changes? Additional resources? IT Investments?

Evaluating a Compliance Improvement Strategy Look beyond outputs to outcomes – look to see if taxpayer behavior is changing Are the trends moving in the right way over time? Taxpayer Surveys Filing and paying rates – are they improving? Correct reporting – audit results going down? Registration rates – going up? Is the tax gap being reduced?

An Evaluation Model Evaluating compliance trends is difficult, but …. what gets measured gets done! Input Activities Output Outcomes

Design … an important element of modern Revenue Administration Using data and business intelligence to build compliance improvement plans Understanding taxpayer behavior Employing the right people Exploring new ways of work Assistance Service Persuasion Education

Making taxpayers aware of RA plans and results Communication of the plan is key You must act according to the plan Deliver what you said you would and communicate it – fraud identified , imprisonment etc The results of the CIS

Developing a Compliance Improvement Strategy (CIS) Represents a new way of work for many PICs Takes leadership and guidance to implement A CIS will challenge your current business model … hard decisions to be made Breaking away from old traditional tax administration is not easy It’s a change initiative that will be challenged But.. You will reap the rewards!

So where to from here … two options?

Thanks.