Trends in tax policy and tax administration reform: the HR factor

1. Trends in tax policy and tax administration reform: the HR factor Manila, JUNE 2019

2. Better Tax Systems & Improved Governance: A Two Way Street • Effective tax systems: • Generate public resources • Support the private sector • Are equitable and fair • Promote openness, transparency and accountability Factors Affecting State Capacity and Capability • Public expenditure • Corruption • Trade practices Factors Affecting Willingness to Tax • Inclusive decision • making Mutual trust: Government and tax payer • Dependence on resource rents State capacity and capability to levy tax Willingness to tax • Citizen voice • Design for economic downturns • Administrative capacity • Political economy • Sector policies • Favorable domestic outcomes for: • Public service delivery • Equitable growth • Shared prosperity Macroeconomic shocks and spill-overs • International tax related issues: • Tax competition and incentives • Illicit Financial Flows • Base Erosion and Profit Shifting

3. Revenue collection and development outcomes are correlated

4. Zooming in on tax morale Tax Policy Reforms Balance between Trust, Facilitation and Enforcement • Tax and equity • Broadening the tax base (removing distortionary tax incentives) • Legitimacy of the tax system: building trust Tax Administration and Customs Reforms • Fairness in administering the tax system • Striking a balance between enforcement and facilitation of tax compliance • ICT element • HR policies • Medium Term Revenue Strategies: bottom up or top down approach?

5. Social acceptance of thetaxsystem

6. Getting to the 15%: many developing countries face the challenge of a low tax to GDP ratio. IMF WoRLD data show that nearly half of low-income countries had a tax to GDP ratio below 15 percent, with a majority of low income countries falling below this tipping point. Tax revenue as percent of GDP for low income and lower middle income countries in 2014

7. Tax Improvement: Necessary but Difficult A deteriorating fiscal situation in developing countries, propelled by a dip in government revenues Collections are lowest in countries with the greatest needs and dependent on declining resource income in some countries Tax Revenues in % GDP Developing countries are more dependent on revenues from firms—and at risk from aggressive tax planning Advances in the performance of tax systems is mixed, especially in fragile and other IDA countries Net change in PEFA scores for tax indicators, 2005-15 Rev. outturn/ budget Collection Transparency Registration

8. Perennial divergence between poor and rich countries’ tax collection

9. Trend in Total Revenues by Income (1990 – 2013) • Total revenue increased from 18% to 21% of GDP in LICs from 1990 to 2013 • Increase in VAT contributed in rise of total revenue in LICs • Middle income countries also recorded similar growth • High income countries have more or less reached a plateau Source: Fiscal Affairs Department/IMF, Tax Policy Division

10. Behavioral economics and taxation

11. Understand taxpayer behavior • There is extensive literature on the contribution of behavioral economics to the to the design and improvement of tax policy • A less well-developed area is the potential for behavioral research to contribute to better tax administration • Better understanding of the motives of taxpayers and their attitudes can improve both voluntary compliance levels and the efficiency of the tax administration • Broad determinants of tax compliance: deterrence; norms (personal and social);fairness and trust (in the tax administration); opportunity and complexity: and the role of government and the broader economic environment.

12. Factors that influence taxpayer behavior • Deterrence effects (standard model of tax compliance) • The impact of norms on behavior (social norms influence taxpayer behavior) • Fairness and Trust in Tax Administration • Opportunity and complexity in the tax system • Factors affecting decision-making: loss aversion; inertia; framing; intuition; fundamental attribution error; anchoring….. • The paradox of choice (Barry Schwartz) • Role of Government and broader economic factors • Compliance characteristics: • Age, gender, marriage, education, tax status, employment, tax rates, sector, sanctions, agents, filing method…..

13. Optimal tax policy design Policy advisers probably rely less on theory than on rules of thumb closer to Adam Smith’s famous canons of taxation-certainty, simplicity and convenience, and economy ( Bird, 2010). For example: • The Broad-Based Low-Rate (BBLR) approach: taxes should have broad bases and low rates • A corollary to this proposition it to minimize tax concessions • Other prescription intended largely to discourage corruption and evasion is for fewer rates of tax • Improving the convenience and simplicity of the tax • Taxes on international trade should be reduced • Revenues from income taxes are buoyant (governments should be interested in both the elastic and the progressive characteristics of the income tax-the first to finance expanding expenditures and the second to increase the degree of perceived fairness and trust in government)

14. Institutional Transformation INTEGRATION ICT Org. structure Processes HR STRATEGIC THINKING

15. ICT Trends • Increased tax avoidance and IT sophistication of largest taxpayers and HNW individuals • Revenue administrations must respond with increased intelligence and knowledge • Virtual tax offices are now feasible • AI-based systems can mine taxpayer data • Good SW alternatives are available in the market

16. Changing our perception of the future This is our updated view of the future… Once upon a time this was the future……

17. 6D’s of Exponential Technologies Digitized Dematerialized Deceptive Demonetized Disruptive Democratized Source: Singularity University - 2018

18. Disruptive Technologies and Revenue Administration Information technologies in the 20th century allowed tax administrations to automate the process and become more efficient, and even today some tax administrations still believe that automated processes are the same, just adjusted to make them faster and more convenient. WRONG!!!! A Tax Organization of the 21st century can uses the technologies to radically transform how business is being done.

19. Human Resources management in tax admin • Staff is the most valuable asset of a tax administration. The complexities involved in administering the tax systems require trained and skilled staff especially in core business areas such as tax audit, ICT or tax arrears management • An HR strategy is needed to manage HR in a coordinated and structured way in order to improve the overall HR environment • An analysis of the salary levels when compared with similar jobs/position in private sector may be of use in terms of explaining retention problems • Relevant information in this area concerns the allocation of employees to the different functions with a special focus on control of tax compliance • Modernizing the HR function is then a key objective of any tax administration reform program. It is critical to provide the HR function with the tools needed to improve HR management, enhancing staff development, overhauling HR policies and procedures, and providing a HR Management and Information System.

20. Impact of technological change • Technological change especially the development of e-services (virtual offices) and use of big data and other technological innovations is resulting in centralization of processes and reduction in the number of territorial offices. • Impact on organizational structure • Over the past two decades, tax administrations show a clear trend of reduction in the number of employees (downsizing) due to this technological change. • New staff skills are required and reallocation of personnel from routine tasks to more high-value tasks is needed. • A workload analysis in conjunction with a workforce planning strategy reflecting emerging needs from organizational reform should be conducted • Rotation of personnel/age

21. https://www.taxdiamond.org/

22. HR Module The framework used is based on international good practices and uses 262 indicators and sub indicators designed to provide an extensive view of the HR landscape of the organization throughout the employment lifecycle. It measures 9 HR functional areas and 11 organizational cross- functional areas.

23. Tax policy + Revenue Administration = The Real Policy. An overview of tax administration core processes. 1. Segmenting taxpayers is the key to success 2. Why is the taxpayer registry so important? Why is it most of the time neglected by tax administrations? 3. Strategies for effective revenue collection. 4. Focusing on prevention and risk management as a strategy for compliance. 5. The importance of paying attention to the legal framework.6. Is there life after tax appeals? • Administering a tax systems is first and foremost managing information. The rest is information too.

24. Is there a paradigm shift in tax administration? • Moving away from self-assessment towards assessment? • Understanding taxpayer behavior • Cooperative approach to compliance • The international dimension • Integrated Revenue Administration along functional lines/Semi-autonomous revenue authorities/taxpayer segmentation • Tax administrations as results-oriented organizations • Increased relevance of sub national taxation. How to administer subnational taxes? • IT leads to changes in organizational structures and processes • New tax audit strategies to increases tax audits’ efficiency (risk-based audit/mass audit) • Increasing important of HR

25. Tax administration matters.Avoid quick fixes Tax Admin. Tasks Smart Tax Administration NN • Facilitating compliance • Find taxpayers • Process for determining tax liabilities • Collect taxes (taxpayers services) • Access to simple tax appeals process • Enforcing compliance Keep it simple Risk-based audit and broadening tax audit coverage Tax payer as a client Finding the North Star IT – the solution or the problem? Private sector approaches Salvation through reorganization? It’s not just how much revenue is raised but how it is raised.

26. The taxpayer registry is the cornerstone of an effective and efficient revenue administration. Features of a taxpayer registry • The tax administration should use a single taxpayer identification number (TIN) for all taxes (social security contributions when relevant) • It should be mandatory by law to use the taxpayer identification number in all-tax related transactions, including customs • For control of compliance it is vital to have an up-to-date register of active taxpayers. • .

27. Taxpayer segmentation underpins effective tax administration. • Taxpayer segmentation recognizes the different risks, requirements, and contribution to overall revenue of the various segments of the taxpayer population. • It usually commences with the introduction of a full service large taxpayer office • Strengthened accountability for organizational outcomes • Allocation of resources based on risk to revenue, and • Better matching of enforcement service, and educational programs to specific types of taxpayers. Advantages of Taxpayer Segmentation

28. Why people evade taxes…..and what to do about it • Tax administration perspective • How can tax evasion be controlled? • Taxpayer perspective • How and why people evade taxes? • The cost-benefit model • Tax morale • Measuring tax evasion/tax avoidance • How to assess the amount of revenue lost through evasion/avoidance?

29. The tax evasion spectrum

30. Hard-to-tax sectors • Is there a way to control informality? • Some attempts of tax administration to incentivize formalization and tax compliance of small businesses: • & Use of indirect methods • & Presumptive taxation: simplified tax regimes • & E-invoice • & Electronic cash register machines • & Regulations limiting the use of cash in transaction

31. Compliance cycleNew paradigm: focus on prevention Tax audits Enforced collection Admin Appeals Assistance to prepare tax returns Automated audits • TP Assistance • Education • Compliance agreements • Real time management control + Pre-filled tax returns COSTS _

32. Taxpayer services • Taxpayer services: taxpayers expect tax laws, administration, and collection to be easy to understand and transparent. • Major challenges are the complexities of tax laws and a large population of taxpayers • “Channel delivery” strategies • Strong commitment to deliver quality services and sustained investment in resources and technology. • “Virtual offices” (an e-tax office is an on-line platform for the communication between taxpayers and the tax authority) • E-invoicing and e-archiving • Taxpayer education programs

33. A holistic approach to improving revenue management in developing countries • .Combining tax policy and revenue administration reforms Enhance the quality of the tax system but tax administration matters • Understand political economy drivers of tax reform • Ensure political commitment and ownership and provide for a logic sequence of reforms • Solid analytics to lay the ground for institutional reforms and capacity building technical assistance • Automation for greater transparency and less corruption and a more efficient use of information when administering the tax system • Addressing the HR and institutional gaps that come with automation • Harmonization of IT systems and integration of information that would lead to more integrated revenue bodies • Facilitation of taxpayers’ compliance and remove barriers for formalization • Risk management approach to increase voluntary compliance with tax laws • Modern management information systems to monitor progress wit reforms • Factor in internationaltaxationissues(e.g. exchange of information, profitshifting, taxavoidance)