1. Overview of Taxpayer Segmentation
Stan Shrosbree
Fiscal Affairs Department (PFTAC) Revenue Administration
April, 2016

2. Taxpayer Segmentation .. Why?
Tailor services and compliance strategies for:
Small
Medium
Large
To better understand compliance and taxpayer behavior
Used to target specific approaches
To facilitate effective risk management

3. Segmentation of taxpayers
“Slice and Dice”
Segmentation of taxpayers
Natural Persons
Small
Large
Businesses
Medium

4. Segmentation of business by Industry - example
LTU
Large
Medium
Small
Micro
Total
Agriculture 2 15 -
Mining 3 10
Manufacture 20
Construction
Wholesale 8
Retail 5
Real estate
Education 1 35
100
2000
8000
15000
25135
Example

5. Typical Distribution of Taxpayers
and Revenue Number of Taxpayers Contribution to Tax Revenue
Large Business
> 1 %
Large: 70+ %
Different Challenges
Medium – 25%
Medium business
5 – 25 %
Small: 0 – 10%
Micro and Small business
70 – 95%

6. Large Taxpayers Large Taxpayers
70 percent > of total revenue
Criteria
Turnover
Tax liability
Etc.
“Special” Institutional arrangements set up
One stop shop approach
Full range of functions and services

7. Features of Large Businesses, tax optimization and LTO expectations
JOH-RNS CS-P2
Tax Optimization Incentives
LTO Expectations
Features of Large business
Pay a large percentage of tax revenues
High volume of transactions and value
Complex business models
Complex sectors
Global trading partners
Complex accounting systems
Big employers
Significant investment in country
Pressure from shareholders to maximise profits
Sophisticated internal tax management capabilities to manage tax risks
Complex business models
Lack of transparency
High risk of misinterpretation or incorrect treatment of tax issues
Large Business will exploit the grey areas of the law
The areas are generally significant impact areas
Often, the grey areas can be legally defendable (reputational risk for the TA)
When we talk about risks for the large segment – we need to understand what we are dealing with!
Besides this – the risks for us are that:
Spider web of operations
International trading
Could be a holding company, a branch or offshore branch
Potential to manipulate profits
Complex financial and capital restructuring arrangements
Have the smartest advisors
A story

8. Complexity of Large Taxpayers and Tax Administration Challenges
JOH-RNS CS-P2
Complexity of the Large Taxpayer
Tax Administration challenges
Complex structures
Large potential revenue loss
“Abusive” or “aggressive” tax planning
Increasing tax leakage if issues not addressed by Tax Administrations
Need talented smart people
Specialization
Staff retention difficult – competition from accounting firms/private sector
Tension
The complexity of large business is a risk to tax administrations
There is also a risk that the Tax Administration has not got the capacity to manage that risk – I am sure you will agree that this is key
There will always be some tension between the taxpayer and the tax administration – we want them to pay what is fair and due under the law – even if there is a good relationship – even if we have a cooperative compliance model in place there will always be discussion around interpretation issues.
From the outset let’s get one thing straight – more often than not they may be smarter than we are.
Bank audit in SA – they had a full professional team that we had to contend with – very smart – accountants and lawyers! Tell the story
Effective company tax rate – 30 % they were paying 12%
Provisions for expensed not actually incurred – delaying tax
We eventually got what we wanted but it was not easy!
Staffing is important – specialization needs to be built and I am concerned at this stage as some tax administration are losing their best staff because salaries are so low in the civil service. This is a big risk for us.
SOURCE: Team analysis

9. Medium taxpayers Contribute around 10-25 % of taxes Challenges
Less formal structures
Mostly also deal in cash
0pportunities to under report
Recognized as a group from which substantial additional revenues could be generated
Strategies emerging

10. Small taxpayers Contribute 1-10 percent of taxes
Largest segment in most countries
Most difficult to control
Large numbers
Poor record keeping
Requires a large investment (audit resources by a RA)
Shift towards a Presumptive Tax
Simplification

11. Interesting facts – Small Taxpayers
Becoming increasingly global
International transactions
Investments
Important driver .. Internet trade
Contributors to the cash economy
Compliance risks differ from large
Risks
Don’t register and file
None or poor payment record
Under reporting
Poor book keeping

12. Presumptive Taxation
“Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on a taxpayer’s accounts.” (Thuronyi)
A pragmatic, but imperfect approach to the challenges of taxing small business, that may be the only viable method in some environments.

13. High Wealth Individuals
At the top of the wealth or income scale
Mobile
Complex personal and business affairs
Onshore and offshore
Opportunity for aggressive tax planning
Covers a wide spectrum ranging from entrepreneurs, sportspersons and investors

14. A focus on high net worth (HNWI) individuals .. Why?
Significant challenge for tax administrations
Complexity of their affairs
Their revenue contribution
Opportunity for aggressive tax planning
Impact of their compliance behavior on the integrity of the tax system
What can we do about it?

15. Segmentation - Advantages
A better understanding of the client base
Able to identify risks attributable to each segment
Allocation of resources based on risk to revenue
Better matching of enforcement, service, and educational programs to specific types of taxpayers

16. Segmentation - Disadvantages
Duplication and fragmentation of units?
Example .. LTO’s
Audit
Arrears and outstanding returns collection
Taxpayer services
Do the pros outweigh the cons?
A hybrid approach?
Focus on large, medium and small but a functional approach for registration, processing and payments?

17. Thanks.