1. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development OECD Meeting with Mexican Legislators on Fiscal Policy and Finance Tax Administration and the Reform Process 27 March 2007 Richard Highfield (Head, Tax Administration Division (CTPA)

2. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 2 Tax Administration in OECD Countries These notes are drawn largely from the work of the CFA’s Forum on Tax Administration (FTA). The FTA was established to: - explore the key domestic issues confronting national revenue bodies; - facilitate the identification and recording of best practice in tax administration; - to provide data for benchmarking the features & performance of revenue bodies.

3. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 3 Topics to be covered Institutional & organizational arrangements. Staffing and costs of administration. Audits Tax debt collection Aspects of personal tax administration. Aspects of VAT administration Key directions for tax administration reform

4. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 4 Institutional & organizational arrangements SAT- a unified semi-autonomous body for tax collection. ? SAT administers customs function. - very few OECD countries* administer both tax and customs from within a single organization, and there is no trend to do so. ? SAT does not collect/enforce social contributions (SCs) - Growing trend to integrate collection of tax and SCs to improve compliance and collection efficiency Tax operations organized largely by function Dedicated large taxpayer operation * Denmark, Ireland, Netherlands, Spain, UK, (non-OECD: South Africa, Argentina).

5. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 5 Integrated collection of personal tax and SCs Why integrate? -Employers can readily withhold, pay and report PIT and SCs in a single process. -Efficient use of government staff resources. -More effective detection of, and response, to non-compliance. Which countries have integrated collections? OECD: Canada, Finland, Hungary, Ireland, Italy, Netherlands, Norway, Sweden, UK, and USA Non-OECD: Argentina, Bulgaria, Brazil, Romania, Russia, Slovenia, South Africa

6. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 6 Staffing & costs of administration Compared to other many other OECD revenue bodies, SAT has relatively few staff (FTEs) for tax and customs administration operations- around 1 staff / 1,900 labour force members (but recognizing Mexico’s low tax burden and separate organization for collection of SCs: Other countries Ratio of staff/ labour force Argentina *764 South Africa*1,149 Spain736 Turkey621 * collect SCs Integrating tax and SCs collection/ enforcement could provide SAT with more staff at no extra cost to government (e.g. Korea).

7. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 7 Tax Audits Audit coverage is relatively low and declined significantly in case number terms in 2004 (v 2003). Aggregate audit revenue is a relatively insignificant share of overall revenue collections (i.e. well under 1%) Auditor productivity (i.e. case numbers / staff members) appears quite low: Mexico-8 cases/staff, S.Africa- 30 cases/staff, USA-15 cases /staff Other verification checks appear minor in scale. Superficially, substantial scope to intensify compliance improvement efforts, but further in-depth study required to confirm key issues and possible approaches.

8. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 8 Tax Debt Collection Enormous inventory of tax debts – end-year inventory of net tax debts exceeded 34% of annual collections in 2004 (second highest of any OECD country) and is rising over time. Canada- 7%, South Africa- 15%, Spain 7.3%, US- 5.5%. 2005 survey of debt collection practices revealed: - poor IT systems to support the tax debt collection function - potential to strengthen management of the tax debt function - few special initiatives to reduce debt inventory and payment noncompliance Further study required to identify possible remedies for improved payment compliance.

9. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 9 Aspects of Personal Tax and Social Contributions Administration Collections of social contributions exceed personal income tax but are collected separately The existence of separate revenue collection bodies raises co-ordination and efficiency issues. The number of individuals registered with the SAT is equivalent to < 20% of the labour force population- likely to raise issues around non-filer detection capabilities? - know who your clients are! Most revenue bodies in OECD countries have 100% coverage.

10. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 10 Aspects of VAT administration Poor VAT system design severely complicates its administration: - complexity of tax base, by definition, results in non- compliance - absence of a threshold adds far too many low value “nuisance” payers to the VAT system; hard to identify and deal with major non-compliers. - monthly filing obligation for all taxpayers adds unnecessarily to taxpayers’ compliance costs and SAT’s processing costs.

11. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 11 Aspects of VAT administration Examples of threshold and filing requirements UKChileMexico Population (mln)59.816.1103.4 VAT/ GDP(%) 20047.08.33.7 VAT c-efficiency ratio46.4n.a30 Registration thresholdc. $90000nil No. registrants1.80.76.3 Filing/ payment All quarterlyAll monthly

12. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 12 VAT abuses/ revenue leakage Mexican research* indicates annual evasion/ revenue leakage of VAT could be up to 45% of base (using national accounts method). (Other (lower) estimates exist) Estimated leakage in other countries: Argentina- 24.8% (2004), Chile-13.9% (2004), UK- 14.5% (2006). As a result of both policy design and non-compliance factors, 70% of personal consumption expenditure in Mexico avoids the VAT. * Centro de Investigacion y Docencia Economica (2004), Evasion Fiscal in Mexico

13. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 13 VAT revenue leakage Main administrative responses (not just about more audits!!!) Strengthened risk assessment Tightened “new business” registration checks Intensification of refund validation checks Strengthening fraud detection resources Realistic thresholds- get rid of nuisance low value taxpayers

14. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 14 VAT revenue leakage Main administrative responses (cont.) Targeting specialist resources at criminal abuses Additional staff resources-audits & debt collection Increased co-operation across borders

15. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development 15 A VAT designed for sub-optimal performance? LOW THRESHOLDS NARROW BASE (AT STD RATE) + MULTIPLE RATE STRUCTURE LARGE NUMBERS OF SMALL VALUE PAYERS REQUIRE KEY FEATURES HIGH STANDARD RATES INCENTIVES TO EVADE COMPLEXITY POOR USE OF AGENCY RESOURCES LEADING TO RESULTING IN POOR COMPLIANCE HIGH COMPLIANCE COSTS HIGH ADMINISTRATION COSTS

16. 27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Key Directions for Tax Administration Reform Single revenue collection body with adequate autonomy to collect all major government revenues (incl. SCs). Wide use of withholding at source for major income types Appropriate use of thresholds, variable filing/payment requirements and simplified liability determination arrangements for small businesses Use of strategic & operational risk management techniques to target resources to major risk areas Adopting a “whole of taxpayer” approach in key processes. Optimal use of modern technology in all aspects of tax administration, including to better understand taxpayers’ behaviours.