IMPROVING TAX COMPLIANCE 6th IMF-Japan High-Level Tax Conference For Asian Countries Tokyo; April 7, 2015
Outline Measurement and trends Some key methods and issues Managing compliance Supporting compliance management
MEASUREMENT AND TRENDS
Measuring noncompliance Widely cited (MIMIC) estimates are nonsense to be used with caution Informative traces can be found E.g. change in consumption/income Informality is too loose lumps together very different forms of noncompliance
Compliance gaps are the way to go 16% 14% 12% 10% 8% 6% 4% Calculated by an increasing number of RAs but very far from all UK VAT Compliance Gap Do not necessarily indicate recoverable revenue Alone, do not indicate remedial action needed Various ways to calculate 2% 0% Actively promoted through RA-GAP program
Compliance gaps were generally falling 60 50 40 30 20 10 Latin America ave (VAT) EU ave (VAT) Australia (GST) Japan (VAT) Colombia (CIT) Mexico (CIT) Mexico (Excise) UK (CIT) UK (Excise) 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
but then Changes in averages, 2005-7 vs. 2009-11 0.3 LVA Change in compliance gap ESP LTU EST HUN DNK ROU CZE PRT SVK SVN IRL FRA NLD GRC BGR LUX BEL ITA GBR FIN 0 JPN -0.2-0.15-0.1-0.05 0 0.05 Change in output gap SWE 0.25 0.2 0.15 0.1 0.05 DEU AUT MLT -0.05 POL Weaknesses of many RAs exposed
SOME KEY METHODS AND ISSUES
Fundamentals of RA Sticks and carrots Key roles for: 120 110 100 90 80 Underreporting Gap Net Misreporting Percentage $120B 100% 90% 80% 70% Withholding Third party information 70 60 50 $64B 56% 60% 50% 40% Segmentation 40 30 30% Links with policy 20 10 0 $11B $12B 1% 8% 11% 20% 10% 0% Behavioral aspects I. Amounts subject to substantial information reporting and withholding (Wages & Salaries) II. Amounts subject to substantial information reporting. (Pensions & annuities, unemployment compensation, dividend income, interest income, Social Security benefits) III. Amounts subject to some information reporting. (Deductions, exemptions, partnerships/s-corp income, capital gains, alimony income) IV. Amounts subject to little or no information reporting. (Nonfarm proprietor income, other income, rents and royalties, farm income, Form 4797 income, adjustments)
And some empirics on compliance For panel of VAT compliance gaps, 26 EU plus Japan, 2000 2011: Output declines significantly worsen compliance but the effect seems fairly short-lived Spending on tax administration has a significant long run effect in improving compliance
The hard to tax Emerging issues 70 High Wealth Individuals Income Tax Liability of Top 5% 60 50 Income Tax Liability, % 40 30 20 US UK Netherlands 10 0 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
MANAGING COMPLIANCE
Revenue administrations Key for assuring compliance and wider state-building and are large complex organizations Tax Receipts Compared to Revenues of Largest National Companies 40 30 31.1 Percent of GDP 20 16.8 15.0 22.6 18.8 10 2.8 2.3 1.3 1.1 4.0 3.2 3.2 5.2 2.5 2.4 2.3 8.8 7.5 4.8 4.7 0 USA UK Japan Chile That have been through turbulent times and face rapidly changing environment ahead
Organizational management requires. Strong and empowered HQs Streamlined office network Turnover of Commissioners by Region 2009 2013 70.0% 60.0% 50.0% Sufficient Autonomy Assuring Integrity 40.0% 30.0% 20.0% 1 Commissioner 2 Commissioners 3+ Commisioners Adequate, stable financing 10.0% 0.0% AFR (31) APD (21) EUR (36) MCD (16) WHD (26)
as was an issue during the crisis, Changes in Tax Administration Spending, 2008-2011 In percent of GDP 0.1 0.05 0 Romania Mexico France New Zealand Sweden Korea El Salvador Indonesia Italy Australia Ireland Malaysia Israel Austria United Kingdom Bolivia Russia South Africa Ecuador Demanrk Latvia Honduras Uruguay -0.05 Iceland Cyprus Argentina Slovenia Canada Poland Singapore Portugal Saudi Arabia Germany United States Chile Japan Belgium Spain -0.1-0.15-0.2 Source: CIAT, RA-FIT, OECD
And squaring up to challenges, such as Pressure to take major expenditure functions...with a quite different set of clients and needs Change management reform while maintaining revenue performance
To do lists: 1. Operational management Better focus, especially in DCs, on main compliance risks Identify compliance gaps and sources Better segmentation of taxpayers to tailor responses More effective audit and collection of tax debts Strengthened taxpayer services Legal changes may be needed Over-reliance on comprehensive audits 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 19% 28% 53% LOW INCOME COUNTRIES (16) Audit Mix, 2010 25% 25% 23% 50% 52% 25% 23% LOWER MIDDLE INCOME COUNTRIES (20) UPPER MIDDLE INCOME AND HIGH INCOME COUNTRIES (19) 44% 33% Grand Total (55) Desk Audits Issue Oriented Audits Comprehensive Audits
2. Information management Back to basics key for reliable data Enhance RA capacity to monitor compliance Front- and back-ends New frontiers and new risks Pre-populated tax return e-invoicing, e-accounting, etc. Extending digital services to banking, accounting sites
3. Stakeholder relations (Accountants, industry associations, etc.) Still largely ad-hoc Need for proactive relationship with taxpaying community in developing countries Variety of channels, formal and informal Fairly recent approach of enhanced relationship Risky for countries with weak enforcement capacity
SUPPORTING COMPLIANCE MANAGEMENT
with new analytical tools 20% RA-GAP: Actual vs full compliance 15% 10% 5% 0% RA-FIT: Collects RA data and establish baselines/benchmarks TADAT: Assessment tool Accountability and Transparency Integrity of the Registered Taxpayer Base Operational Efficiency and Effectiveness Assessment and Mitigation of Risk Tax Dispute Resolution Performance Outcome Areas Supporting Voluntary Compliance Ensuring Accuracy of Reporting Payment of Obligations Filing of Tax Returns