1. Risk Management in Revenue Administration
Stan Shrosbree
Fiscal Affairs Department (PFTAC) Revenue Administration
April 22, 2016

2. Compliance Risk Management Model
Outline
Introduction
Compliance Risk Management Model
Identifying risks
Assessing and prioritizing risks
Analyzing compliance behavior
Developing treatment strategies
Evaluating results
Start identifying the risks
Remember only so many staff – we can’t audit everyone .. But we can use other tools and methods to reach them

3. What are the benefits of Compliance Risk Management?
A structured basis for Strategic Planning
Balanced and customized approach to improve compliance
Method for reserving the harsher compliance tools for the more non-compliance taxpayers
Allocation of resources to identified risk levels
Evaluation of projects/approaches
This is what we achieved!
The strategic plan should have strong emphasis on how the organization will deal with risk.
These are the issues and this is what we are going to do about them.
Who needs to know about the risk? Treasure? The Ministry?

4. Creating the Ripple Effect
We need to create ripple effects that impact compliance. Ways to make our presence felt so that we can influence the compliance behaviors of taxpayers across our country. Risk management is key in this process.
WE have to understand the symptom before we can do the treatment.
The treatment needs to have the ripple effect..
We create the ripple effect by letting taxpayers know what we are up to – the communication strategy!
Back to the compliance model …..

5. Starting to look familiar?
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
In an environment in which resources are limited, operating in accordance with a
process framework of this kind assists revenue authorities to:
• respond quickly to changing circumstances;
• ensure that treatment strategies are applied to activities of the highest
priority, and that those strategies have a high probability of success;
• leverage the impact of interventions; and thus ultimately;
• meet their business intent (to optimise collections under the law while
maintaining community confidence in the system).

6. Compliance Risk - Approaches
Macro Level
Socio-economic indicators
Trends in public attitudes to registering, filing, reporting and remitting
Tax gap
Systems based
Non-registration and fraud
Non-filing
Underreporting revenues, taxable incomes, and taxes owing
Market segmentation
Used to create groupings that allow for easier detection of risk
By size (e.g., Large, Medium, Small, and Micro)
By tax type (income tax, VAT etc.)
By sector (farming, professions, industries)
Macro level
Socio-economic development is the process of social and economic development in a society. Socio-economic development is measured with indicators, such as GDP, life expectancy, literacy and levels of employment.
System based
This is information that can be generated from your IT systems
For example, the number of registrations, false registrations
Non filers and late filers
Unreported income, over-statement of deductions (audit findings)
Payment, late payers and non-payers

7. Possible Risks? Growth in the service sector
Small cash-based businesses
Limited cash flow
Who are the risky taxpayers?
Younger males?
High-net-wealth individuals?
Risky sectors
Construction, taxis, bars and restaurants
Potential high revenue loss
Large taxpayer tax-avoidance strategies
Cash economy?
DEFINITION of 'Service Sector'
The portion of the economy that produces intangible goods. According to the U.S. Census Bureau, the service sector primarily consists of truck transportation, messenger services and warehousing; information sector services; securities, commodities and other financial investment services; rental and leasing services; professional, scientific and technical services; administrative and support services; waste management and remediation; health care and social assistance; and arts, entertainment and recreation services. Ghana Study in 2011
“The study therefore recommend that tax authorities should
switch their approach to tax administration from a onesize-
fits-all enforcement model to a model that builds on
the lessons of tax morale that matches the tax authority’s
response to that of the regulated individuals (taxpayers),
for example tougher sanction or special tax education for
low educated, young, unmarried and male self-employed”

8. Risk Profiling
“ The study therefore recommend that tax authorities should switch their approach to tax administration from a one size fits-all enforcement model to a model that builds on the lessons of tax morale that matches the tax authority’s response to that of the regulated individuals (taxpayers), for example tougher sanctions or special tax education for low educated, young, unmarried and male self-employed”.
Tax Compliance Among Self-Employed in Ghana: Do demographic Characteristics Matter? August 2011

9. Risk Assessment and Prioritization
A realization that we cannot reach all taxpayers in the system …
Is the risk serious?
Should we do anything about it?
Therefore the goal is to answer two questions:
A few examples from experience
Why chase a debt for $100 when there are debts of $ that are not being chased up?
Why try and get a taxpayer to submit a return who showed a profit of $1000 last year when we haven’t chased up a taxpayer with a debt of $ ?
Why continue auditing the same taxpayer every year even though audits have not produced results.
Why focus your audit resources on for example the banking industry when tax evasion is rife in construction or tourism?
Risk management is about prioritization – where will we get the best bang for our buck or where will we get the best return on investment?

10. Risk Assessment and Prioritization
Should we do anything about it?
Some questions:
Have we got capability to address this?
How will we treat the risk – what will be most effective?
Is it a top risk or number 10 on the list?
What will the Return on Investment be?
If there a risk of infection (other taxpayers jump on the bandwagon?)
Public perception

11. Risk Assessment and Prioritization
Is the risk serious?
A few things to consider:
Risk to revenue
Risk to public confidence in the tax system
(taxpayer perceptions)
Impact of achieving organizational goals both now and in the future
High level Budgetary Implications – the effect?
What implication has the risk got to the revenue collection – what will the impact be?
Do we need to address it – how will we address it?
Remember it’s not going to go away on its own.
If the public see that the Revenue Administration is not dealing with a big revenue risk they might say well “why should we comply”
Remember we always talk about “leveling the playing field” which means that everybody should pay their fair share “so why should I pay my share if other are not, why should I carry compliance costs while other are not – I will move to the cash economy like everyone else”
Remember – a core them of any Revenue Administration Strategy is to improve compliance – we should never compromise on that issue.

12. Your Perceptions … Taxpayer Perceptions?
Global firms such as Starbucks, Google and Amazon have come under fire for avoiding paying tax on their British sales. There seems to be a growing culture of naming and shaming companies.
Starbucks, for example, had sales of £400m in the UK last year, but paid no corporation tax.
Amazon, which had sales in the UK of £3.35bn in 2011, only reported a "tax expense" of £1.8m.
Google's UK unit paid just £6m to the Treasury in 2011 on UK turnover of £395m.

13. Problems - Causes Identify patterns Systematic or organized evasion
Which sectors are the worst?
Systematic or organized evasion
Are fraudsters exploiting legislative or administrative weaknesses?
Can we identify the causes
Which ones are possible to influence?
Trends
Is the problem growing or decreasing?

14. When prioritizing .. be realistic
The goal is to choose which risks will be treated with available staff and capabilities
High revenue impact
What is the return on investment (cost to benefit ratio)
Impact of taxpayers perceptions
Focus on outcomes … not outputs

15. Data, information and IT systems
Risk identification and assessment depend on accurate data
Build capacity over time .. this will not happen overnight
Start with a pilot project
We can all learn from each other
PFTAC can provide some assistance

16. Putting the building blocks in place
Third Party Data
Have decided not to comply
Do not want to comply
Try too, but do not always succeed
Willing to do the right thing
RA Risk Analysis system/Team
(internal data)
Compliance Strategy
Different Treatments encouraging compliance
Taxpayer Profile

17. Evaluation Once started the process will improve year by year..
Some key questions looking back:
Were the right risks identified?
Were they analyzed correctly?
Was the right treatment selected?
Was the risk reduced?
Important ..
Are Tax Policy and legal changes needed?
Do we need additional resources?

18. Understanding Risk is Important!

19. Evaluation
Look beyond the outputs to outcomes – did we change taxpayer behavior?
Are the trends moving the right way over time?
Taxpayer surveys (taxpayer satisfaction)
Filing and paying rates
Correct reporting
Registration rates
Reducing the tax gap?

20. Building Institutional Capability
Risk management and designing a Compliance Plan are new areas for PICs
It will take time to implement – accept that but make a start – start small
Applying a Risk Management approach has implications for your organizational structure – changes will be needed to get a maximum return on investment

21. What are these changes?
FAD/PFTAC recommends creating a new unit – a Risk Management Unit (RMU)
Try and find your best suited staff or recruit new staff for the role
This team (can be small) is vital to you succeeding in your strategy – it is worth the investment
The team should be structured on the following lines – see next slide

22. Risk Identification and Analysis Team Compliance Strategy Team
Risk Management Unit
Risk Identification and Analysis Team
- Identifies significant Compliance Risks (current and emerging)
- Analyses Data (internal and external)
- Uses data mining, data matching, intelligence and analytical technology
- Develops quantitative qualitative risk models to inform and influence compliance
- Identifies sectors, segments and builds Compliance Risk Scorecards highlighting risks
- Develops relationship models with external stakeholders (Industry Associations, Industry Associations, accountants, Chambers of Commerce, and other governmental bodies).
- Collaborates with functional departments to develop risk treatment plans, products and interventions geared towards improving compliance
- Develops integrated strategies, plans and campaigns to promote compliance and deal with non-compliance
Compliance Strategy Team

23. EUR 300 million VAT fraud
Today, a coordinated action by law enforcement and prosecution authorities from Germany, the Netherlands, the UK, Belgium, Spain, Poland, the Czech Republic and Switzerland, supported by Europol and Eurojust, took down the masterminds behind a criminal network responsible for defrauding EU citizens of approximately EUR 300 million in tax revenues via a sophisticated carousel fraud scheme. The action led to the arrest of 14 individuals. More than 40 searches were conducted. (Source Europol – Article 14 July, 2015)
To what extent is VAT fraud happening in the Pacific?

24. Risk – An everyday issue
Strategic planners, project managers, and business executives all do some level of risk management every day. All of us do. Risk management is simply trying to maximize potential gains while minimizing potential losses. It is what we do when we explore opportunities and assess threats, while counting the costs to defeat the threats and take advantage of the opportunities.

25. PICs can do it – PFTAC can help you!

26. A risk story……
ACTUAL transcript of a US naval ship with Canadian authorities off the coast of Newfoundland in October, This radio conversation was released by the Chief of Naval Operations on Americans: "Please divert your course 15 degrees to the North to avoid a collision." Canadians: "Recommend you divert YOUR course 15 degrees to the South to avoid a collision." Americans: "This is the captain of a US Navy ship. I say again, divert YOUR course." Canadians: "No, I say again, you divert YOUR course." Americans: "THIS IS THE AIRCRAFT CARRIER USS ABRAHAM LINCOLN, THE SECOND LARGEST SHIP IN THE UNITED STATES' ATLANTIC FLEET. WE ARE ACCOMPANIED BY THREE DESTROYERS, THREE CRUISERS AND NUMEROUS SUPPORT VESSELS. I DEMAND THAT YOU CHANGE YOUR COURSE 15 DEGREES NORTH. THAT'S ONE-FIVE DEGREES NORTH, OR COUNTER MEASURES WILL BE UNDERTAKEN TO ENSURE THE SAFETY OF THIS SHIP." Canadians: "This is a lighthouse. Your call."

27. Concluding comments
There are big compliance gaps across PICs - we are all aware of that
We all understand that we need to address these issues
The question is “How do we do it”
Ministries, Treasuries and Revenue Administrations can make great gains by working together to gain a common understanding of the issues and steps to improve compliance that holds benefits for all.

28. No reason to reinvent the wheel
Some PICs have started developing Compliance Improvement Strategies
Talk to them
Learn from their experiences
Share information
What worked for them?
Get support for launching your strategy
Ministry and Treasury
Possible staffing needs
Can PFTAC help you?

29. Thanks… and manage your risks carefully!