Revenue administration reforms - recent trends and developments in the East AFRITAC region

Andrew OkelloRevenue administration Advisor

What is the East AFRITAC?A tripartite undertaking to strengthen capacity in East Africa in the areas of the IMFs expertiseAn effort to promote closeness and strengthen field presence for effective technical assistanceA result-oriented approach and an enhanced governance structure

Areas of East AFRITAC Assistance

East AFRITAC delivers technical assistance on a grant basis in the following areas:

Banking supervisionMonetary operationsRevenue administrationMacroeconomic statisticsPublic financial reformMacroeconomic analysis

Membership and Funding

East AFRITAC covers 7 countries in East Africa:Eritrea, Ethiopia, Kenya, Malawi, Rwanda, Tanzania, and Uganda

The Center is funded by 15 bi- and multi-lateral donors, two member countries, and the IMF:AfDB, Canada, China PR, Denmark, Finland, France, Germany, Italy, Luxembourg, Norway, Russia, Sweden, Switzerland, The Netherlands, and United Kingdom

25 sub-Saharan countries covered by 3 AFRITACs

Tax policy and administrationReform agendas full of undertakings that require major funding allocationsTax policy and tax administration are the means by which governments raise revenue to finance spending on public goods and servicesTax policy the choice of tax instrumentsTax administration the implementation of tax policy

Policy change without administrative change is nothing Milka Casanegra, 1992

An efficient tax system will provide the most sustainable source of government funding in the long term

Excellent ServiceFair EnforcementTaxpaying Public and other StakeholdersImproved ComplianceIncreased RevenueTaxpayer expectations. leveraging partnershipsOutcomeClients/StakeholdersRevenue Agency

Tax revenue performance for selected countries

CountryYearTax-to-GDP ratioKenya2005/0617.7Zambia200517.0Malawi2005/0615.6Rwanda200614.1Tanzania2005/0612.9Ethiopia2005/0612.2

Revenue administration reform driversEnhance revenueModernize administration/improve serviceReduce compliance burdenReduce administration costsFacilitate trade and investmentImprove integrity

Establishment of semi-autonomous revenue collection agenciesThe advert of the semi-autonomous revenue authorities (RA) over the past 2 decades has been a distinguishing feature of revenue administration Anglophone Africa Ghana, NigeriaIn the region, Uganda established, (1991) the first incarnation of the model that became widely emulated over the next 15 years in East and Southern Africa (Kenya, Tanzania, Rwanda, Malawi)This RA model brings all major central government revenue collection activities, particularly tax and customs administration under one umbrella

Establishment of semi-autonomous revenue collection agencies contThe RA model broadly provides a degree of operational autonomy through a governance arrangement that is distinct from the ministry of finance unlike the traditional government departmentKey issuesReforms without RAAutonomy??Independent fundingReduce corruption??Internal audit function

Outsourcing revenue administrationUncommon in the region, however in the pursuit of savings and efficiency gains some functions have been outsourced.Core tax administration functions rarely outsourced audit of refund claims, exemptions???Private sector support in customs on the decline, PSI services phased out, only Tanzania replaced PSI services with DI services

Integrated customs and tax administration functionsDegree of integration variesShared functions planning, HR, administration, finance, legal, IT, taxpayer service?, investigation?Separate functions debt collection, audit, Pros and cons of integrated tax and customs administrationLTU

Revenue authorities other issuesTax policy formulationDelegation to sub-national levels

A modern tax administration is characterized byAn integrated organization with a function-based structureA strong headquarters functionEffective businesses processes, based on self assessmentRisk-based compliance programsSkilled and professional staff acting with fairness, honesty, and transparency

How the structure of tax administration has evolved

Development of self-assessmentSelf-assessment - A system where taxpayers comply with their basic tax obligations without intervention of a tax officialTax officials provide taxpayer with information and education about their obligationsTaxpayers complete their return accurately and submit them voluntarily with their paymentsFailing that, enforcement actions is taken and penalties appliedVAT was the impetusIncome tax now mostly self-assessedHowever, while most countries have adopted self-assessment, the practice in reality falls far short

Conditions for self assessmentSimple and stable tax lawGood services to taxpayersSimple filing and payment proceduresEffective collection enforcementSelective risk-based audit programsFairly applied penaltiesFair and timely dispute resolution

Integration of domestic tax administrationTraditional Anglophone influence in the region - split of direct and indirect tax administrationRA and VAT missed integration opportunitiesVAT, income tax, and excise domestic operations have been merged in Kenya, Rwanda, Tanzania, Uganda, MalawiThe revenue agencies have established fully integrated domestic tax administrations that are organized around the key functions at the operational and headquarters levelAdvantages of integrating domestic tax administration:Reduces tax administration and taxpayers compliance costs Allows implementation of a unified, function-based organization Increases effectiveness of tax administration (common registration, collection, and audit functions)Head office/field office functions

Integration of domestic tax administration international perspective

In early 2007:

122 had an integrated department for all domestic taxes7 had a special VAT departmentVAT was administered by customs in 1 country (Israel)

Integration of domestic tax administration key issues

Legislative review and development of common tax procedures codeBusiness process review and improvementIntegrated tax administration system (ITAS)Change management, training and capacity building

Taxpayer segmentationTaxpayers are not homogeneous In the past decade, many tax administrations have moved away from a one-size fits all approach and developed organizational structures on the basis of taxpayer segmentsInitially in the OECD countries (the Netherlands in 1990, New Zealand in 1994, and more recently Australia, France, and the UK)Several countries in the region have also developed the concept to improve their organization and tax compliance programs (Kenya, Rwanda, Tanzania, and Uganda)Tax administrations categorize their taxpayer population into 4 main categories: large business, medium businesses, small businesses and micro businesses

Distribution of taxpayers and revenue Number of... Tax revenue from... Large enterprisesSmall enterprisesMedium-size enterprises

Why the move towards taxpayer segmentation?Developing compliance strategies that take into account risk management conceptsProviding services to taxpayers according to their needs (better focus on client needs)Allocating enforcement and audit resources to areas of greatest risks

Creation of large taxpayers units (LTU)Large taxpayers units established in all countries, as a first step in adopting a taxpayer segmentation approachSecure 60+ percent of total tax revenue Expected benefits of LTUsReduce level of non compliance among large taxpayers Provide better services to large taxpayersUse LTU as a pilot to introduce major changes (e.g., integration and self-assessment)Use LTU to secure implementation of major policy reformSignal governments commitment to enforce tax laws to the taxpayer communityCenters of excellence???Functional and integrated organizationSimplified proceduresNew approaches risk analysis, self-assessmentComputerization

Revenue contribution of large taxpayers - 2006

CountryNumber of large taxpayersPercentage of total taxpayer populationPercentage of revenue contributionNumber of staffKenya8121.372147Rwanda2861.77664Tanzania3702.07080Uganda4743.36558

Creation of medium taxpayers unitsDefinitionEarly steps taken in identifying taxpayers in the next most important group by revenue potential i.e. medium-size enterprisesSome countries are developing dedicated offices and/or programs for the administration of medium-size taxpayersHowever, management of medium taxpayers still weak and concept of medium tax offices not yet developedCritical focal area for the medium term

Administration of small and micro taxpayersThe very large number of small and micro-businesses pose many challenges for tax administrationsIs a key sector that must be tapped if tax base is to be expandedSimplified tax administration regime for small businesses Eritrea, Ethiopia, Rwanda, Uganda, Tanzania, KenyaUse of withholding systemsBlock management system in TanzaniaIssues design, resource allocation, cost....

Customs Administration reformsKey issuesThe changing role of customsTraditional versus modern customsPerformance indicators for customs servicesIntegrity issues in customsLinks to risk management

Customs Administration reform strategiesReorganization of program delivery in customs distinction between policy and operationsA service orientation including greater information to and engagement of the private sectorAutomation of transactions processing and management information supportSelf-assessment and use of risk-based approached to compliance management

Customs Administration reform strategiesUse of trader segmentation to implement appropriate compliance and trade facilitation strategiesSimplified procedures for authorized economic operators/traders (Tanzania, initiatives in other countries)Pre-approved traders deemed to be highly compliant and low riskFormal application by these traders for the privilegeTrader required to keep books and records that are periodically audited by customsAn agreement is signed between customs and the trader detailing responsibilities and obligation of BOTH parties revocable for non-compliance

Customs Administration reform strategiesUse audit-based controlsPost clearance audits of trader records and systems is superior to transactions-based controlsJoint audits with VAT and income take placeTraining and capacity building - accounting systems, IT systems and auditing techniques

Focal areasRevenue administration reform has taken hold in the regionRAs were a major developmentReforms have been steady, sometimes based on international experienceNot effective without system and procedural modernization, integration, and segmentationChallenge To increase the tax-to-GDP ratio while reducing cost of collection, and improving services and support to taxpayers Requires achieving higher levels of voluntary compliance of taxpayersDevelopment of compliance management programs that are structured around taxpayer segments the focal area

Compliance Management program for medium taxpayers

RisksInterventionsConcealing sales through cash and barter transaction.Late and non filers, and nil filers.Poor record keeping, and false records.VAT fraud.Failure to comply with employer obligations.Use of third-party information (e.g, from banks and service providers).Establishment of quantitative benchmarks for trades and other businesses.Elimination of inactive taxpayers from the taxpayer register.Taxpayer education and publicity campaign to impress on taxpayers their filing obligations, closely monitor filing performance.Make early contact with late/non filers. Also review nil filers.Field operations should include reviewing record-keeping practices.Apply appropriate mix of audit techniques.Distinguish between taxpayers with a history of compliance and those with poor or unknown compliance history.Manual screening of VAT refunds using generic criteria/ITAS can aid screening of VAT refunds.

Other issuesTaxation of small business - a challenge Other emerging issues - transfer to RAs of the collection responsibility of other government levies such as social contributions, natural resource taxation and accountability issues

THE END

.East AFRITAC stands for East Africa Regional Technical Assistance Center.

What we call technical assistance, other agencies may call technical cooperationit is free technical advice, including diagnosing weaknesses and proposing solutions, based on the IMFs world-wide experience.

East AFRITAC was created in 2002 in response to calls by African Heads of States in the context of NEPAD to strengthen macroeconomic capacity in sub-Saharan Africa.

A tripartite undertaking bringing together African recipient countries, donors, and the IMF, which is the executing agency. The Center provides technical assistance in those areas where the IMF is recognized as an international technical authority.

The originality of the East AFRITAC is that it has a permanent field presencewe are based in Dar es Salaamits closeness to clients, its demand-driven nature, and its quick-response capacity to urgent requests.

We are hands on and results oriented. We typically come in once a government has devised a reform program, often with the help of IMF headquarters or some other development partner, and needs practical assistance in implementing it. I said that we provided technical assistance in those areas where we were considered an international technical reference or an international norm provider.

Those areas are: Banking supervision. Monetary operations. Revenue administration. Macroeconomic statistics. Public financial reform. And macroeconomic analysis.

The main objective of the East AFRITAC is to assist countries in strengthening their administration. Efficient government reduces interference with market mechanisms, stability in government rules and regulations, and less hassle, paperwork and red tape, all of which is good for private business.

Because of the time constraint, I will focus on the first three areas, which are of the most direct relevance to the development of the private sector.

East AFRITAC covers 7 countries in East Africa, as indicated on the slide.

The Center is funded by 15 bi- and multi-lateral donors, two member countries, and the IMF, again as indicated on the slide.

Three AFRITACs, respectively located in Dar es Salaam, Bamako, and Libreville provide technical assistance to 25 sub-Saharan African countries.

What I am going to say is based on our experience in East Africa, but I believe that it is broadly valid for the rest of sub-Saharan Africa.So after this quick overview, let me now turn to the main issue which is. How Does East AFRITAC Help the Private Sector?It is widely recognized that financial stability is a precondition to sustained economic growth, which in turn is fueled by investment and private sector development. All these are necessary to reduce poverty and progress toward achieving Millennium Development Goals. A reliable and stable banking system is also key to accessing credit, and fast payments systems are essential for business transactions.

The private sector understands well the need to pay taxes, but businesses need to pay those taxes in an equitable fashion. Taxes should not distort competition, and legitimate tax refunds should be timely and fair.

Against this background, let me now turn to specifics in those areas where we believe our action is helping the private sector to grow. In sub-Saharan Africa, banks account for more than 80 percent of the financial assets; insurance, stock markets, non-bank financial institutions are small.

In general, banks are adequately capitalized, highly liquid and profitable, but a number of specific banks are still weak due to inadequate corporate governance and non-performing loans.

Most rural citizens do not have access to even basic banking services or savings accounts, and large parts of the productive sector cannot obtain credit easily or at all.

Improvements in financial market infrastructure have been slow, owing to in appropriate legal environment, weak property rights, and inefficient judicial systems making the collection of collaterals difficult.

Payments systems, especially transnational payments systems, remain cumbersome and hinder effective business transactions.

East AFRITAC countries are in different stages of financial sector reform to establish sound, deep, and efficient financial sectors that are critical for improving the business climate and creating conditions for private sector-led growth.

Key to a vibrant private sector is an efficient financial sector. East AFRITAC is involved in strengthening and enhancing the efficiency of national financial sectors through several of it capacity-building interfaces such as:

Focus on promoting safe and sound banking processes through effective supervision of financial institutions by central banks. This supervision focuses on a risk-based approach, whereby limited supervisory resources are channeled to identified risks.Use of the international CAMEL (capital, adequacy, management, earnings, and liquidity) rating system for on-site and off-site supervision.Working with central banks in creating an efficient monetary operations environment, predicated on building dynamic inter-bank money market, which results in better access of the private sector to credit.Working with central banks and banks to establish and manage efficient national payments and settlement systems that facilitate smooth and reliable settlement of financial transactions. East AFRITAC initiatives touch on both national and cross-border systems, and facilitate new initiatives such as value cards and e-money.Specific achievements include:

Risk-management guidelines, issued to commercial banks were instrumental in strengthening many banks risk-management systems, thereby strengthening those banks directly, especially small- and medium-sized banks.

Risk-based supervision of banks moved from pilot phase to full implementation in several central banks: BNR, BoT, and CBK; issuance of Risk Management Guidelines ( BoE, RBM); Risk-based Supervision Manual (CBK, NBE).

Use of CAMEL rating system adopted for on-site and off-site supervision in several central banks: BNR, BoE, BoT, and NBE.

Framework for consolidated supervision (CBK and BoU)

Tax policy design and tax administration practices have a significant role to play in creating an enabling environment for both new and existing investment. Bad tax policy design and inefficient and ineffective tax administration can significantly increase the cost of taxpayer compliance and make the business environment unattractive for investment. Typical concerns to investors, as reported in our interactions with the private sector, include:

Need for greater certainty and consistency in interpretation of the law and an effective system of binding pubic rulings.Investors sometimes have limited confidence in the objections and appeals systems, which they view as lacking independence and objectivity.Non trader-friendly processes and behavior in customs administration.Submission of businesses to multiple and uncoordinated audits with different teams for different taxes.Good compliance is not rewarded with the compliant taxpayers being squeezed for more revenue, while deliberate offenders remain largely undetected by revenue agencies.

In the area of tax policy, East AFRITAC assistance aims at a more level playing field by extending tax systems to all businesses, improving competition, and streamlining the interface of the tax authority with private businesses, thus reducing time and energy spent interacting with tax departments and officers.

We aim at prioritizing areas of support that are catalytic and provide multiplier effect segmentation, risk management, and audit and compliance enforcement methodologies.

Experience shows that the existence of separate tax departments for VAT and income tax perpetuates inefficiencies and duplication of staff, facilities, resources, and effort, and is not conducive to taxpayer compliance. East AFRITAC assists member countries establish a single organization for the administration of both direct and indirect taxes. In addition, technical assistance is provided in re-organizing these tax administrations along functional lines.

It is vital for a tax administration to understand its client base, particularly the different segments that constitute the taxpayer population. East AFRITAC assists member countries embrace this concept through, initially the establishment of full-fledged large taxpayer offices, and subsequently the establishment of offices to manage medium and small taxpayer segments of the population. The mandate of large taxpayer management and operations is now fully defined and staffed in Ethiopia, Kenya, Rwanda, Tanzania, Uganda. Zanzibar implemented a large taxpayer office.

As a global best practice, revenue agencies utilize risk management to efficiently allocate their limited resources to achieve high levels of compliance and revenue collections. East AFRITAC is supporting implementation of major initiatives in this area and presently a number of revenue agencies are at different stages of implementing risk-management programs.

Risk-management curriculum is now used in Kenya, Rwanda, Tanzania, Uganda and the EAC.Uganda Revenue Authority is implementing a credible corporate risk-management framework for managing risks - piloted in the LTO with excellent results. Dedicated risk management units and staff have been established in Kenya, Uganda, Rwanda, and Tanzania.

The level of trade facilitation in the region is low. The average release times, from lodgment to release, are comparatively high, with up to 90 percent of the goods subjected to some kind of verification. This is an inefficient compliance management and trade facilitation approach, especially when returns from this high level of intrusion are low, and while they disrupt trade. East AFRITAC has assisted customs administrations with:Designing and implementing compliance strategies that identify high-risk goods and trades;Simplifying customs clearance procedures;Developing strategies for discontinuing pre-shipment inspection;Implementing facilitated trader schemes in which compliant traders clear their goods without intrusive verifications but agree to post-clearance audit at least once a year.

This approach has been adopted in several countries in the region, in collaboration with the administration of the East Africa Community.