Chapter Four

Tax Administration: an Overview

Contents
4.1.The need for tax administration
4.2.Tax administration and Fiscal
Federalism
4.3.Constitutional Bases of Taxation
 4.1 Need for tax adm.
Reaping revenue from tax requires effective tax administration.
Raising revenue from base expansion requires even better
administration.
The best tax policy in the world is worth little if it cannot be
implemented effectively.
How a tax system is administered affects its yield, incidence and
its efficiency. Unfair and capricious administration brings the
system into disrepute and weaken the legitimacy of government.
How revenue is raised – the effect of revenue generation effort -
on social capital, equity, the political fortunes of the government,
and the level of economic welfare - may be more important from
many perspectives than how much revenue is raised.
 4.1 Need for tax adm.
• The focus of a tax administration is not merely revenue
maximization.
• The “best” tax administration is not simply that collects the
most revenue. Equally important is how the revenue is raised.
• The effect of the revenue mobilization effort on equity and
economic welfare needs to be considered.
• A poor quality tax administration may collect large amount of
tax revenue from easy-to-tax sectors such as wage earners
while unable to enforce taxes on business entities and
professionals/consultants.
• Thus, the level of collection is unsophisticated measure of
the effectiveness of a revenue administration.
 4.1 Need for tax adm.
• More accurate measure of the effectiveness of a tax
administration is the level or size of the compliance gap, the
gap between actual and potential revenue collection.

Tax gap: The aggregate amount of true tax liability imposed by

law for a given tax year that is not paid voluntarily and timely
(the difference between actual and estimated - the lost
revenue)
• An in depth analysis of gap and benchmarking are
required to examine the effectiveness of tax
administration.
 4.1 Need for Tax Adm
Indicators of Effectiveness
A) Quantitative Indicators:
• Total revenue collected/ Annual revenue collection
target.
• Total revenue collected/GDP.
• Number of tax declarations filed/ Number of
registered taxpayers.
• Number of tax declarations received on time/ Total
number of tax declarations filed.
• Amount of taxes paid voluntarily by taxpayers/
Amount of taxes payable on the basis of tax
declarations.
 4.1 Need for Tax Adm
Indicators Cont…
• Additional taxes assessed after investigation and
audit/ tax liability declared.
• Amount of additional assessed taxes upheld in
appeal/ Amount of additional assessed taxes
challenged in appeal.
• Amount of tax arrears recovered/ Total amount of tax
arrears at the beginning of an year.
• Number of cases of tax evasion, customs fraud or
smuggling successfully prosecuted each year.
 4.1 Need for Tax Adm
B) Qualitative Indicators
Perception of taxpayers regarding:
• Risk of detection of non-compliance and severity of
consequences.
• Quality of assistance provided by the RA to enable
taxpayers to comply with their legal obligations.
• Effectiveness of the RA in resolving taxpayer
problems.
• Public perception regarding the degree of corruption
in the RA.
• Revenue Administration morale and self-image.
 4.1 Need for Tax Adm
Benchmarking
• In all cases, benchmarks or guidance at interpreting
performance indicators are needed to make
interpretation.
• Cross country, previous year, or targeted performance
benchmarks such as timeliness e.g agreed date, cost,
coverage, duration etc may be used to interpret
* A careful benchmarking, identification of dates, and
implementation responsibility are essential to
measure the performance.
 4.1 Need for Tax Adm
Goal of tax adm….
• To enhance revenue through voluntary compliance
Voluntary compliance: the timely filing and reporting of
required tax information, the correct self-assessment of taxes
owed, and the timely payment of those taxes with out
enforcement action
An effective tax administration can improve voluntary
compliance through taxpayer education and enforcement of
tax laws.
Effective TA requires establishing an environment in which
citizens are induced to comply with.
 4.1 Need for Tax Adm

Compliance…
Tax administration can be improved if it is able to deal
with shortfalls such as unregistered taxpayers, stop
filers, non filers, evaders, and delinquent taxpayers
Tax administration should encourage voluntary
compliance and address obstacles that prevent
voluntary compliance.
 4.1 Need for Tax Adm
The important obstacles to taxpayers’ compliance
are:
Perceived inequity of the tax system;
The complexity of the tax laws;
The lack of fairness of the penalty system;
Weak taxpayer education program; Low levels of
integrity and professionalism of the tax
administration’s staff;
The tax administration’s inability to ensure
impartiality in the appeal process;
 Weak or lack of well designed audit program;
etc…
 4.1 Need for Tax Adm
Compliance…

Fairness, simplicity, services, cost, integrity of tax

official-all stimulate voluntary compliance
Voluntary compliance and self assessment are the
foundations of modern tax administration.
 4.2 Tax Adm & Fiscal Federalism
 Federal and sub national governments share the
responsibilities of tax administration.
 Special laws and constitutions provide for the
responsibilities.
Rationale for fiscal decentralization
(A) Economic arguments:
1) Efficiency in resource allocation: decentralization
can reduce the number of decision making layers.
 4.2 Tax Adm & Fiscal Federalism

2) Productive efficiency: fosters accountability, reduces

corruption, increases cost effectiveness.
3) Priority for local preferences: local leaders know their
constituencies better than central govt authorities.
4) Equity and poverty concerns: mobilization of local
resources and increased participatory process.
5) Enhance tax effort and sustainability of services:
people are more willing to pay for services which they
find to be more responsive to their preferences. Local
knowledge increases the potential efficient tax yield.
 4.2 Tax Adm & Fiscal Federalism

6) Increase competitiveness among sub-national govts.

to satisfy the needs of the local residents.
7) Increase access to service delivery: delivering services
to hitherto neglected peripheral and remote areas.
Other arguments:
a) Political necessity: component of democratization
process
b) Ideological values: increases popular participation in
decision making
c) Indicator of good governance: Good governments
are those closer to people
 4.2 Tax Adm & Fiscal Federalism

Elements of Good FD Program

1) An adequate enabling environment: constitutional or legal
mandates for minimum level of autonomy, rights and
responsibilities for local governments – a foundation on which
to build decentralization.
Elements required:
a) Political conditions – strong national will to decentralize
b) Clearly defined constitutional and legal provisions to support
decentralization
c) Mechanism to coordinate the decentralization activities
d) Adequate resources for sub national govts to function (Transfer
programs)
 4.2 Tax Adm & Fiscal Federalism

Elements…
2) Assignment of appropriate functions to sub-national
govts
 Poor capacity of local govts will lead to poor
performance
3) Assignment of appropriate revenues to local govts:
 Responsibilities should be supported by appropriate
revenue assignment,
 4.2 Tax Adm & Fiscal Federalism

Challenges of revenue assignment

a) Assigned revenues are never adequate
- transfer programs are inevitable
b) Local govts use too many unproductive revenues that
barely cover the cost of collection
c) Lack of attention to implementation
d) Local revenue sources suffer from design process:
static bases, ineffective collection mechanism
4) Developing an appropriate transfer system: Local
own resources generally do not cover expenditure
responsibilities.
- Transfers help to recover local govt fiscal imbalances
 4.2 Tax Adm & Fiscal Federalism

Elements of FD
- Helps to offset fiscal capacity differences among local
govts
Transfer systems: Different types of programs are used for
different purposes
a) Unconditional grants for redistribution function
b) Conditional grants for specific services
5) Developing local access to investment capital: Local
govts get most of their income from transfers
Some decentralized govts are able to borrow (Brazil,
Columbia: direct access to borrow; India, Poland: limited
access)
A good FD should develop a program to finance capital
investment, from grants and subsidies to loans for fiscally
sound local govts
 4.3 Constitutional Bases
Tax levy power in Ethiopia
Article 95-100 of the constitution deal with revenue sharing and
taxation.
Article 96: the Federal power of taxation
Article 97: State power of Taxation
Article 98. Concurrent power of taxation
Article 99 Undesignated Powers of Taxation
The House of the Federation and the House of Peoples'
Representatives, in a joint session, determine by a two-thirds
majority vote on the exercise of powers of taxation which have
not been specifically provided for in the Constitution.
 4.3 Constitutional Bases
Article 100 Directives on Taxation
– In exercising their taxing powers, Sates and the Federal
Government ensure that any tax is related to the source of
revenue taxed and that it is determined following proper
considerations.
– They ensure that the tax does not adversely affect their
relationship and that the rate and amount of taxes shall be
commensurate with services the taxes help deliver.
– Neither States nor the Federal Government levy and
collect taxes on each other's property unless it is a profit-
making enterprise.
• (Also refer Proclamation No 33/1992)
 4.3 Constitutional Bases
Sharing Formula
TYPE OF REVENUE DISTRIBUTION FORMULA
Fed. Lev. Reg. lev.
Fully federally owned enterprises
(Profit tax, Payroll tax, VAT, Excise) 100% Nil
Unincorporated enterprises (Sole)
(Profit tax, Payroll tax, VAT, Excise) nil 100%
Jointly owned public enterprises
- Profit tax based on: Capital contr. Cap. contr.

- Payroll tax 50% 50%

- VAT and Excise Taxes 70% 30%
Private companies
- Profit tax , dividend tax 50% 50%
- VAT, Excise tax 70% 30%
Large scale joint ventures in petroleum and minerals
- Profit tax 50% 50%
- Royalties 60% 40%
End of Chapter Four
 Chapter Five
Tax Administration Functions

Contents
5.1 Taxpayer Registration
5.2 Taxpayer Services
5.3 Return Processing and Payment Processing
5.4 Collection Enforcement
 5. Tax Adm Functions
Elements in Adm.
The steps necessary for the smooth functioning of collection and
compliance.
The procedures and functions include:
- identifying taxpayers,
- registering taxpayers giving identification numbers,
- collection of information both from internal sources and external
sources,
- filing control,
- assessment, valuation and audit,
- dealing with other compliance such as inspection and
investigation,
- tax collection including withholding of tax,
- procedures of penalties and prosecution
 5. Tax Adm Functions

5.1 Taxpayer Registration

I. Identifying and registering taxpayers:
- to ensure that all potential taxpayers are registered;
- to keep database of taxpayers;
- routine identification of taxpayers for a range of
administrative functions (through TIN); and
- location of those who avoid registration
 5. Tax Adm Functions
Registration is done:
(1) voluntarily (at the initiation of taxpayers)
(2) through identification of taxpayers by tax authority
Registration process consists of:
- promoting and advertising the requirements to
register,
- processing and assessing applications for registration,
-verifying applications for registration to ensure they
represent legitimate businesses, and
- seeking out businesses that ought to be registered
 5. Tax Adm Functions
5.2 Taxpayer services:
Includes
- assisting taxpayers on their queries (clearly
and timely)
- advising on tax laws and regulations
(education and awareness through public
seminars etc)
-Providing information through bulletins and
tax guides
 5. Tax Adm Functions
5.3. Processing Returns and payment
(a) Processing returns: This involves
examination of returns for assessment
(b) processing payment: involves updating the
taxpayer records for payment
 5. Tax Adm Functions
5.4. Collection of tax:
Normally collection is made through
withholding, advance payment, installment
payment, and periodic (monthly, quarterly,
biannual and year end filing) payments
End of Chapter Five
 Chapter Six
Administration Function: Accounting and Auditing

Contents
6.1 Revenue Accounting
6.2 Audit and Assessment
6.3 Delinquency Control and Compliance
6.4 Tax appeal and enforcement
6.5 Tax Accounting and Auditing in Ethiopia
 Accounting and Auditing

6.1. Revenue Accounting: Involves timely recording of

collection;
Recording payments to individual taxpayer’s files,
and to appropriate accounts;
This facilitates refunds, bank reconciliation, and
revenue sharing , and guides eventual enforcement
efforts, and a base for selecting for audit.
 Accounting and Auditing
6.2. Audit and Assessment:
Promotes taxpayer compliance, detect non compliance, and
prevents future non compliance.
• Assessment: an initial review by the tax official of the tax
declarations and information provided by a taxpayer and a
verification of the arithmetical accuracy of the declared tax
liability shortly after the submission of declarations. (called
official assessment)
• Audit (tax): Detailed examination of the selected tax
declarations
- Helps reduce tax evasion and avoidance
Audit Types: Desk audit and Field audit
 Accounting and Auditing
Audit may be conducted on a comprehensive basis (examination of
all information relevant to determination of tax liability) or on
limited scope basis.
Limited scope audits are confined to specific issues on the
tax return. The objective is to examine key potential risk areas of
noncompliance.
Tax audit is one of the most sensitive contacts between the taxpayer
and the revenue body.
Pre requisites for tax audit
(1)A comprehensive legal framework
(2)Well defined organizational and mgt processes
(3)Well defined audit techniques and support arrangements
(4)Adequate human resource mgt and development programs
 Accounting and Auditing

Legal framework: essential to provide integrity in tax

adm and to protect taxpayer rights
This includes:
- Record keeping obligations
- Tax officials access to taxpayer’s books
- Tax official’s access to third party information
- Information from other national revenue bodies
- Powers of revenue body to amend returns
- Sanctions for non compliance
 Accounting and Auditing
6.3. Delinquency Control and Compliance
Tax authorities compare returns received against master file to
determine what accounts are delinquent. Those taxpayers are
contacted to obtain returns and finally taxes due. The
delinquency may involve
(1) tax owed by the taxpayer directly,
(2) tax owed by the taxpayer but collected from others, and
(3) taxes that the entity is expected to remit for other taxpayers.
6.4 Tax Appeal and Enforcement
Appeal: Taxpayers are permitted to give appeals against audit
and assessment.
Appeals assure non discriminatory application of the tax
system, and work toward the achievement of an equitable tax.
 Accounting and Auditing
Enforcement: The last resort for the collections of
taxes due. Procedures for collection enforcement is
done for those who fail to comply
Enforcement of sales and income taxes involve action
against the income or wealth of the taxpayer, seizing
and selling assets attaching wages, attaching
individual or business bank accounts and so on. Real
property taxes are traditionally enforced by action
against the property
• Tax Fraud Investigation is also another important
function of tax adm.
 Accounting and Auditing
2.5 Tax Accounting in Ethiopia
- Ethiopia uses FGE system of Accounting to account for taxes
- FGE - a modified Cash Basis of Accounting
Procedures:
- Captures the transaction through the source document/ the
Receipt Voucher
- Records into the accounting system - by transferring to the
Transaction Register from the source document
- Summarize in accounts - posting to Ledger Card from
transaction register
- Sends monthly reports to MoF or reporting entities
 Accounting and Auditing
Tax audit in Ethiopia
Procedures in Audit (special ref. to large taxpayers)
Conducted by the Assessment and Audit division
Participated by the audit team leaders and the screening
committee
(1) Preparing an audit work plan (regarding standard time,
number of audit to be done, resources required etc)
(2) Screening returns: Assesses declarations of all taxpayers and
select for audit (based on accuracy in computations,
declarations of prior years, type and reasonableness of
expenses, margin of prior years, matters raised in prior
assessment etc)
 Accounting and Auditing
Tax audit…
(3) In office procedures: Conducting research on taxpayer
(taxpayer’s operations, possible compliance issues, specific
legislations applicable to the taxpayer)
(4) Procedures in the premises
- Initial review
- Review the role of external auditor
- Examine legal records and books
Test of accounting records
- examination of revenue, expenses, assets, liabilities, equity
etc…
- May use sampling techniques
 Accounting and Auditing
Tax audit….
Taxpayer’s audit file: Record of audit activity, and information
about taxpayer’s compliance history
Audit working papers: Evidence of the way the auditor has
completed the audit plan (details of assessment, basis for
evaluation..)
Audit report: Information about the completion of audit
function. Discloses the results of audit
- reassessment, additional taxes, penalty etc……
End of Chapter Six
 CHAPTER SEVEN
ADM. ORGANIZATION
Contents:
7.1 Types of tax Administration organization
7.2 Institutional framework of Revenue bodies
7.3 Tax Administration procedures and input
 Types of Tax adm. Organization
(1) Centralized: Central govt administers all taxes
(2) Decentralized: Central and sub national tax authorities operates
independently
(3) Central + sub national administration with shared or cooperative
operations of certain adm. tasks
Internal Org models.
Three models; Type of tax model, Taxpayer segment model, and
Functional model
Internal Org models.
Three models; Type of tax model, Taxpayer segment model, and
Functional model
A) Type of tax model
Based on ‘type of tax’ criterion
-Separate multifunctional departments for each tax
- Self sufficient and independent of each other
But, causes duplication of work, inconvenience for taxpayers,
complicated taxpayer’s compliance, uneven and inconsistent
treatment, complicated org. planning.
 7.1 Types of Adm. org.

B) Taxpayer segment model:

The client based model
- staff are assigned to units that focus on specific groups of
customers. The rationale for organizing around taxpayer
segment is that each group of taxpayers has different
characteristics and compliance behavior

The groups are frequently based on the taxpayer’s scale of

operation, form of ownership, or economic sector. (large
taxpayers, small/medium, wage earners)
 7.1 Types of Adm org.
C) Functional Model: Staffs are organized principally by
functional grouping. (viewed as best suited to support a reform
and modernization program).
This model is based on the theory that in grouping together similar
activities that require similar skills or specialties, real gains are
achieved through an increased depth of knowledge in core areas
of business expertise.
Several common tax administration activities emerge in a
function-based model, these include:
1. Taxpayer services and education
2. Returns processing and payment
3. Audit and investigations
4. Collections enforcement
5. Tax operations policy
 7.1 Types of Adm. org.
Advantages of function based model
a) Greater uniformity and specialization across the organization
b) Improved compliance results
c) Simpler processes for the taxpayer and the administration (once
access point)
d) Centers of excellence (possibility for research & development)
e) Better resource management. (costs is reduced as duplicated
processes are eliminated, better positioned to determine
resource allocation )
f) A tool for integrity (shares responsibility for all tax types across
functional lines).
 7.2 Revenue Bodies
7.2 Organizing Rev agencies
• In recent years, the establishment of autonomous revenue
agencies (also called boards or authorities) has become
attractive as a perceived means to sustained revenue
improvement, high level of compliance, increased service
delivery, reduced corruption
First established in Indonesia in the early 1980s, the model was
introduced in Ghana (the first country in Africa) in 1985,
followed by Uganda in 1991.
Advantages of autonomous agency:
a) Perceived increased effectiveness, efficiency and equity of a
new agency by taxpayers
 7.2 Revenue Bodies
b) Greater flexibility in human resource management; including
- More competitive salaries to attract and retain staff
- Greater flexibility over pay structures, particularly for
management and scarce skills
- Greater freedom to hire and fire, in response to staff
performance and skills needs
- Ability to recruit from outside the civil service
c) To integrate tax operations and restructure
- acts as a catalyst to restructure organizations so as to take
advantage of economies of scale and information, and to
eliminate duplication of functions.
 7.3. Adm. procedures & Input
Procedures:

Good Adm. needs simplified and transparent procedures

(1) A strategic plan: For the operation and further

developments in tax administration, to clarify the tasks and
objectives
(2) Clear and transparent formal procedures: crucial for
equitable administration and restricting corruption
(3) A strong internal audit system (overcomplicated
procedures may induce informal procedures)
(4) A code of conduct: Tool to set out the behavior and
standards expected of employees
(5)Taxpayer grievances and appeal procedures
 7.3. Adm. Procedures & Input
Input:
(1) Committed, dynamic and honest leadership, capable of
building a corporate identity and motivating change.
(2) A clear division of responsibility between the agency
and the Ministry of Finance over tax policy, Good
working relationships between the Board & Ministry of
Finance.
(3) A clear strategy and timeframe for successful operation
of the agency; Careful prioritization and sequencing of
change initiatives (for instance, autonomy, integration,
systems modernization, computerization) is essential.
 7. Adm organization
Inputs:
(4) Tax administration budget to promote adm
efficiency. A certain percentage of revenue collection
or through allocated budget.
(5) Physical infrastructure: Building, equipment,…
(6) Human resource: In required quantity and quality
- supported by recruitment procedure, job
description, performance evaluation, promotion,
compensation and other incentives to motivate tax
administrators; and setting up training center for tax
and customs officials, and
(7) Information Technology: A recent development
End of Chapter Seven
 Chapter Eight
Administration Challenges
Contents
8.1 The need for automation
8.2 Automation in Ethiopian Tax adm.
8.3 Outsourcing tax administrative functions
8.4 VAT challenges
 8. Adm Challenges
- Throughout the years, tax administrators have been
constantly concerned about developing new ways of:
- improving institutional performance,
- increasing the effectiveness of tax control, and
- providing taxpayer services that may allow them to
better comply with their tax obligations.
- The complexity and multiplicity of activities in a
permanently changing environment like taxation, call for
the development of IT as a success factor for achieving
the objectives.
- An effective tax adm may look into areas such as
outsourcing feasible administrative functions, for
improvement.
 8. Adm Challenges
8.1 Need for Automation:
- Improvements in Tax adm calls for a transformation of procedures
and methods. Thus, Information technology facilitates this
transformation.
- IT in tax adm. enhances
- Information processing and exchange, taxpayer service,
revenue collection, and enforcement of law (tracking
noncompliance).
-
The areas to be computerized fall broadly into:
(1) Systems related to taxpayer records and tax collection
(2) Systems related to internal mgt of control over resources
(3) Systems related to legal structure and procedures
(4) Systems to lower compliance costs
 8. Adm Challenges
Automation…
- Technology will allow passing from the measurement of production
or service units, to the relevant measurements of the performance
of processes, and the measurement of final results of the
operation.
- Impact of using automation in adm
1. Greater speed in communications
2. Immediate interconnection with different databases and the immediate
crossing of transactions for their verification, loading or tax credit.
3. Access to the systems from anywhere, with only a PC and a navigator, or
a mobile phone, which in turn causes the systems to adjust themselves,
change their formats, and modification of processes.
4. Reduces processing time and production cycles, permit rapid adjustments
in the procedures, grant greater flexibility, which translates into increase
in effectiveness.
5. Lowers cost, permits to achieve clear advantages to administrative
processes.
6. Offers services which were not feasible otherwise
 8. Adm Challenges
Automation…
- attend the taxpayer in any part of the world in which a PC
connected with Internet exists.
- available to anyone, without requiring physical presence
- file returns or make their payments from their homes 24 hours a
day, 7 days a week with operating costs, to provide this service,
minimal compared with the traditional operating schemes.
- know more details of each taxpayer and administrate this
information to be able to offer personalized services and specific
specialized controls.
 8. Adm Challenges
Automation…

7. The quality of the information of the transactions carried out by

the taxpayers with the tax administration improves significantly.

8. Increases the means to receive mass information from taxpayers

and information agents, reducing significantly the time for
processing and availability of that information.
9. More and better information from the external environment in
which the administrations interact.
10. Can have direct contact, on line, and interaction with all
branches and employees.
 8.2 Automation in Ethiopia
8.2 Automation in Ethiopia…
- Identifying the benefits of IT in tax administration, Ethiopian Govt
introduced automation in tax adm.
- The Standard Integrated Government Tax Administration System
(SIGTAS), the automated tax adm system, was initially applied
for VAT only.
- The system has been made operational since year 2006 for all taxes.
It is planned to be applied in all regions through a national
network.
- The development of the system has taken into account the
constitution of Ethiopia, the tax laws, regulations, and directives
in force.
 8.2 Automation in Ethiopia

• It provides management tools to track amounts assessed,

collected, and outstanding amounts including aging of
arrears.
• The expected benefits from the proper implementation
of SIGTAS are the following:
 Increased revenues and enhanced control
 Better service to taxpayers
 Standardized practices throughout departments
 Reduction of non-value adding activities
(reduced paper based mgt)
 Good time management (reminders, remittances,
etc.)
 8.2 Automation in Ethiopia
- Integrated management of all taxes (especially
for audit)
- manages all aspects of system administration
including the tracking of late-filers and late-payers,
exemption period-automatically,
- provides an over all view of all taxpayer liabilities
and payments,
- eliminates manual calculation of penalties and
interest,
- helps ensure that data collected is valid,
 8.2 Automation in Ethiopia
- provides an easy-to use and allows assessment
calculation from previous years as well as the current
year.
- The automated procedures incorporated in SIGTAS
include:
Registration, Assessment, Cashing, Collection, Audit,
Objections, and Information & administration
procedures
Discussion Question
• What are the challenges Tax Administration face
due to automation?
 8.3 Outsourcing tax adm
Outsourcing tax administration:
• Certain administrative tasks can be contracted out to
the private sector where this can be clearly shown to
improve efficiency or effectiveness.
• The government loses no autonomy if certain
administrative activities are delegated.
• There are a variety of TA functions that can be
privatized or outsourced ranging from producing tax
forms, to mandatory financial audit, to tax withholding
etc…
 8.3 Outsourcing tax adm
(1) Tax receipts

(a) Printing and sale of forms: Forms are frequently

changed due to streamlining procedures.

Alternatives:
- Printed in their own printing press
- Contract out to private companies (Bolivia, Argentina)
Forms lay out should be as per the instructions of tax
office
 8.3 Outsourcing tax adm

(b) Distribution and sale of forms:

The procedures used are:
- Picked up at the tax adm office
- Mailed to known taxpayers
- Specialized companies distribute forms
- Available at banks, stationary shops, and book stores
- Distribute through dailies/newspapers
(Some with payment for the service, some without
payment)
 8.3 Outsourcing tax adm

(C) Receipt of filled up forms:

- Mail to tax office
- Directly giving to tax office
- Through banks; But needs Confidentiality, should not involve
verification of returns
- Electronic ways of submission

(2) Processing Returns:

May assign data entry function to banks
 8.3 Outsourcing tax adm

(3) Collection

a) Receipt of cash, checks etc

- Collection by tax office
- Assign the function to banks (may retain the collection
from large taxpayers by tax office)
b) Withholding tax at source:
- one of the most revolutionary steps
- assignment to collect taxes in advance
- effective in reducing tax evasion
- requires monitoring withholding agents
 8.3 Outsourcing tax adm

c) Tax refunds: withholding may increase the volume of

tax refund:
- may assign refund (immediately or at a later date)
responsibility to financial institutions that receive
declarations could refund the surplus after the tax
return of say large taxpayers.
4) Audit:
The most significant step taken to privatize the audit
function is the introduction of self-assessment.
 8.3 Outsourcing tax adm

Legitimizing previous returns- a mechanism introduced in

legislation of countries which guarantees to the taxpayer that his
tax returns for earlier tax periods will not be audited so long as
his most return is correct.
5) Collection of delinquent taxes:
- The responsibility may be assigned to companies/persons
(lawyers)
- Tax adm should give reliable data on delinquent taxes
- Legal system must provide for such adm. procedures instead of
always requiring involvement of courts
- May also be given to tax adm’s own employees with varying
salary.
 8.3 Outsourcing tax adm

6) Requesting information from third parties

7) Requiring private sector to assist in taxpayer services

- developing database for computer enquiries
- software dev’t for preparation of tax returns
- private audit before filing returns
- publication of specialized literature
- training seminars on tax matters
Discussion Question
What are the challenges that tax administration face
while outsourcing functions?
 8.4 VAT Challenges
The introduction of VAT occasionally disrupts the functioning of
an existing adm. Certain decisions are to be taken in this
regard:
1. Where to place VAT adm within the overall tax adm?
There are three possibilities
a) Adm by the department responsible for domestic tax
operations (Middle east and African countries).
b) Administration by a separate department (Albania, Australia,
Bulgaria).
c) Adm by the customs department.
 8.4 VAT Challenges

2) How to implement the basic principles of self

assessment in a country willing to introduce VAT?
self assessment- critical/ saves time
small taxpayers are too illiterate to complete returns.
(with high threshold, they are out of VAT)
A good approach to ease adm is VAT withholding
(Latin American, some parts of West Africa)
More resources may need to be allocated to VAT
preparations with little or no experience of self
assessment
 8.4 VAT Challenges

3) Audit: Audit performance is reported to be a particularly poor

aspect of VAT adm. Several developing countries which
adopted the VAT in the last 10-15 years do not yet have
effective audit programs.

Without effective audit, VAT compliance deteriorates and the

credibility of tax adm suffers. Strengthening audit is thus a key
challenge in developing countries.

Well designed audit program is essential to reduce the extent of

VAT fraud and evasion
 8.4 VAT Challenges
In many developing and transition countries, audit
programs fail due to
- insufficient number of required highly skilled and
appropriately remunerated audit practitioners
- Lack of institutional history of sound audit practice
- Authorities’ concern about collusion between taxpayers
and auditors
- Inadequate preparations at the time of implementation
- lack of clear political support
- lack of appropriate legal and judicial environment
 8.4 VAT Challenges

4) Refunds: An effective refund mechanism is essential

to preserve the VAT as a tax on consumption and to
avoid distorting allocation of resources. Refunds
- can create opportunities of fraud
- may invite corruption
- may create cash flow problems for businesses (delay
in refund)
End of Chapter Eight
 Chapter Nine
Tax Reforms
Contents
9.1 Need for reforms
9.2 Strategies of reforms
9.3 Ethiopian Tax Reforms
 9 Tax Reforms

Tax reform is the process of changing taxes or the way

taxes are collected or managed by the government
Reformers have different goals. Some seek to reduce the
level of taxation, some seek to make the system more
or less progressive, some others may try to make their
tax system more understandable or more accountable.
 9.1 Need for reforms
Poorly designed or poor functions of tax system create a variety
of problems in developing countries
Some of them include:
1. Fiscal imbalance and insufficient revenue: In some countries,
fiscal deficits are too large and public expenditure needs are
too pressing for a fiscal balance to be achieved by cuts in
expenditure.
2. Distortions in resource allocation that can reduce economic
welfare and growth: This happens when taxpayers either
modify their behavior in an attempt to reduce tax burdens or
spend resources in evading tax
 9.1 Need for reforms

3. Inadequate provision of equity: Tax systems in developing

countries are not progressive and the poor often bear
significant tax burden Even those who should pay tax are not
taxed equitably
4. Poor administration of taxes: Since taxes are involuntary
payments to govt, taxpayers have a strong incentive to
minimize their tax liabilities either through avoidance or
through evasion.
 9.1 Need for reforms
Major tax reforms are generally required when there is a
need for either or both of the following
(a) reduction in distortions imposed by the existing tax
system, and
(b) increased revenue mobilization.
Those countries that are undergoing their tax reform
programs also feel that proper attention should be
given to the administrative aspect as well.
 9.1 Need for reforms

The main goals of the reform includes;

1. To generate revenue
2. To lift the tax burden off the poorest households and to
ensure that actual tax structures become more equitable both
horizontally and vertically
3. Simplifying tax administration and strengthening tax
administration to enforce the interest of a reformed tax code
Not all the objectives of the reform can be satisfied
simultaneously. Trade- offs are unavoidable.
 9.2 Reform strategies
Strategies include:
(1) Broadening tax base: The base can be broadened in two
ways;
(a) identify new bases of tax; and
(b) expand the bases of existing taxes.
Some potential new bases include environmental damage,
which can be taxed through environmental taxes, and activities
in the informal sector, which can be taxed through
presumptive indicators.
The narrower the base the higher the rate that is required to
generate a given amount of revenue. The higher the tax rate,
the greater the possibility of avoiding and evading tax
 9.2 Reform strategies
• For taxes on goods and services, broadening the base
involves subjecting to taxation more goods and
services. In recent years VAT has come into favor as
an instrument for broadening tax base in developing
countries.
• For income taxes, broadening base involves
subjecting more types of income, income in kind and
fringe benefits to taxation; and reducing many special
purpose allowances, deductions, and exceptions
 9.2 Reform strategies
2. Rationalizing rate structure : The choice and number of rates
should be justified by assessing cost and benefit. Too many
rates increase the complexity of tax system, increase tax
evasion and tax administration cost.

Rationalization often involves reducing the differentiation in the

rate structure. Experience indicates that rationalization
becomes a pressing concern when the number of rates for a tax
instrument exceeds ten
 9.2 Reform strategies
3. Improving Tax administration: At each of the adm. Stages,
weakness of administration will prevent the fulfillment of
objective
Tax administration reform should aim to improve (a) compliance
on the part of taxpayers and (b) efficiency with which taxes
are assessed, processed, and collected.
Tax administration must have resources in terms of manpower,
infrastructural, and equipment support, and managerial input
through organizational hierarchy and an intra organizational
communication and information sharing system
 9.2 Reform strategies
Principles in reform strategy
1) Political commitment to and the sustainability of the reform
2) Simplify the tax system to facilitate administration and
reduce compliance cost
3) Encourage voluntary compliance
4) Formulate a clear strategy
5) Identify the tax and accounting laws that require change
6) Differentiate the treatment of taxpayers by size
7) Ensure the effective management of the reform process
 9 Tax Reforms
Principles in reform strategy
7)Set priorities and establish a time table
8)Begin fundamental reform with pilot projects- Pilot
projects do not require a lot of material and human
resources, yet they allow the tax administration to
design and test new procedures for tax
administration functions before expanding these to
the rest of the tax administration.
One option developing countries have chosen is to
introduce pilot reform to administer the large
taxpayers.
 9.3 Tax Reforms of Ethiopia
With the aim of facilitating the overall development of
the economy, the Govt of Ethiopia has undertaken a
comprehensive tax reform program beginning year
2002.
The reform measures are intended to encourage trade,
investment & development and thereby to alleviate
poverty.
Prior to the tax reform, the govt noticed difficult
signals indicating need to overhaul tax system. The
important among them are:
 9.3 Tax Reforms of Ethiopia
1.Complex and outdated tax laws : The tax law, which was put
into practice for more than 40 years (No 173/53) could not
serve the current economic set up and could not go with
globalization and automation.
Complexity in tax laws together with high rates and many tax
brackets, and narrow tax bases could not help the system
collect the due revenue
2. Weak Tax administration: Tax administration was
characterized by weak assessment, collection, follow up, and
enforcement due to lack of skilled manpower, proper work
procedures, and modern equipment
 9.3 Tax Reforms of Ethiopia
3) Failure to generate adequate revenue to meet
government expenditure: Govt could not collect the
tax revenue due in past years. This resulted in fiscal
imbalance in the economy
World Bank and IMF identify certain key features for
good practice in tax system
They are:
- Increased reliance on broad based consumption taxes
( such as VAT)
- Low import tariff rates
 9.3 Tax Reforms of Ethiopia
- Limited personal exemption and deductions, moderate rate, and
few tax brackets, exemption for people with moderate
income, and extensive use of withholding system for income
tax. Corporate tax should be levied at one rate
- Enhance accuracy and fairness of assessment
Based on the above features, the following projects were
incorporated into the tax reform of the country.
1) Tax Policy and Legislature project
2) Tax Identification Number Project
 9.3 Tax Reforms of Ethiopia
3) Presumptive tax project
4) Value added Tax project
5) Reorganization and work producer development project
6) Taxpayer Education project
Goals of revenue adm. reform
1. raise the tax revenue- GDP ratio
2. enhance the institutional capacity
3. Improve tax administration by sealing leakage
loopholes
 9.3 Tax Reforms of Ethiopia
4. establish a culture of professionalism and mutual support
5. promote and facilitate cooperation among tax administration
and taxpayer community
6. identify strategies to combating tax evasion and avoidance,
promote ethics and integrity
7. strengthen tax payer education
8. coordinate capacity development and technical assistance
through seminars, workshop, and training
9. respond to the needs and interest expressed by taxpayers
 9.3 Tax Reforms of Ethiopia
10. emphasize self assessment systems and reduce
compliance and administrative costs
11. implement organizational reforms to modernize the
tax authority and enable provision of quality service
12. recognize the role of tax adm. in the promotion of
econ. development and good governance
End of Chapter Nine