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The extent of revenue body autonomy

Generally speaking, the range of powers given to a national revenue body depends on a range of factors including the system of government in place and the state of development of a country’s public sector administration practices, as well as the institutional model adopted for tax administration. As noted earlier, increased autonomy brings with it a prospect of increased efficiency and effectiveness, but it has been difficult in practice to produce clear evidence of such outcomes. As outlined above and indicated in Table 1.1 over half of the OECD member countries have established semi-autonomous bodies while Table 1.2 provides a greater insight into the range and nature of powers that revenue bodies have been delegated. In practice, this autonomy includes some or all of the powers/ responsibilities described in Box 1.3.

Box 1.3. Typical powers of autonomous revenue bodies

Budget expenditure management: Discretion to allocate/adjust budgeted administrative funds across administrative functions to meet newly emerging priorities. In practice, this power should enable a revenue body to use its resources more wisely, obtaining “better value for money spent”.

Organisation and planning: Responsibility for: 1) determining the internal organisational structure of the revenue body to conduct tax administration operations, including network size and geographical location of tax offices; and 2) formulating the revenue body’s strategic and operational plans. Effective exercise of these powers could be expected to enable a revenue body to be more responsive to changed circumstances, contributing to its overall efficiency and effectiveness.

Performance standards: Discretion to set its own administrative performance standards (e.g. for taxpayer service delivery).

Personnel recruitment, development, and remuneration: The ability to set academic/ technical qualification standards for categories of recruits, and to recruit and dismiss staff, in accordance with public sector policies and procedures; the ability to establish and operate staff training/development programmes; and the ability to negotiate staff remuneration levels in accordance with broader public sector-wide policies and arrangements. In practice, effective use of these powers should enable the revenue body to make more effective use of its human resources.

Information technology: Authority to administer its own in-house IT systems, or to outsource the provision of such services to private contractors. Given the ubiquity of technology in tax administration, effective use of this responsibility could contribute enormously to overall organisational performance (including responsiveness).

Tax law interpretation: The authority to provide interpretations, both in the form of public and private rulings, of how tax laws will be interpreted, subject only to review by judicial bodies. The proper exercise of this power in practice can be expected to assist taxpayers by clarifying the application of the law and its administration.

Enforcement: The authority to exercise, without referral to another body, certain enforcement powers associated with administration of the laws (e.g. to obtain information from taxpayers and third parties and to impose liens over property in respect of unpaid debts,). The proper exercise of this power enables revenue bodies to respond quickly to taxpayers’ non-compliance.

Penalties and interest: The authority to impose administrative sanctions (i.e. penalties and interest) for acts of non-compliance and to remit such sanctions in appropriate circumstances. In practice, effective use of this power would engender greater flexibility to the revenue body in its treatment of taxpayers’ non-compliance.

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Table 1.2. Delegated authority of national revenue bodies

For notes indicated by “/ (number)”, see Notes to Tables section at the end of the chapter, p. 53.

Source: CIS survey responses.

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Based on revenue bodies’ survey responses as reflected in Table 1.2, the areas of least flexibility/autonomy in an overall sense were:

1.the design of their own internal organisational structure (16 countries);

2.the ability to allocate budgeted funds to meet new priorities (11 countries);

3.the ability to determine the levels and mix of staff (16 countries);

4.the authority to hire and dismiss staff (9 countries)

5.the ability to influence/negotiate staff remuneration levels (23 countries).

Among OECD countries, the overall degree of autonomy appeared relatively limited in revenue bodies in Belgium, Japan, Luxembourg, Portugal and Turkey, based on the information reported by them.

Table 1.3 provides a summary of how the distribution of powers/autonomy aligns with the nature of the institutional body reported by surveyed revenue bodies. As will be evident from the data displayed those revenue bodies reporting that they were established as semiautonomous bodies (with or without a board) tended to report having greater autonomy/ freedom in relation to the design of their internal structure, the allocation of budgeted funds, fixing the levels and mix of staff, influencing staff recruitment criteria, hiring and dismissing staff, and negotiating pay levels.

Table 1.3. Authority delegated to revenue bodies

Even with increased autonomy, revenue bodies still must operate within frameworks designed to ensure they remain accountable to wider government and the citizens whom they serve. For some, these frameworks include the establishment of management boards and the existence of external agencies that are tasked to oversee the operation of the tax system. Both these areas are covered in more detail later in the chapter and in Chapter 2.

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Scope of responsibilities of the revenue body

A unified body for the collection of direct and indirect taxes

Table 1.1 also provides an overview of the taxes administered by revenue bodies. With few exceptions, surveyed countries have unified the collection of direct and (most) indirect taxes. The most recent occurrence of unification was the UK’s amalgamation of its Inland Revenue and Customs and Excise departments into a single organisation – Her Majesty’s Revenue and Customs (HMRC) – that commenced operations in April 2005.

As of end-2011, the operation of separate tax bodies among surveyed countries is confined to very small number (i.e. Cyprus, India, Luxembourg, Malta, and Malaysia). In late-2011, Malta’s Government enacted legislation that creates a position of “Commissioner of Revenue” that will head an integrated tax and customs body to be created in the coming years.

There is one fairly common exception to this more unified approach to administration. As reported in Table 1.1, 19 countries administer the collection of excises through a body other than the main revenue body, in most countries the body responsible for customs administration.

The collection of social security contributions

Social security contribution (SSC) regimes have been established in the vast majority of countries as a complementary source of government revenue to fund specific government services (e.g. health, unemployment and pensions).6 As evident from the data in Table 6.1 (Chapter 6), SSC are the largest single source of government revenue in many OECD countries, particularly those in Europe. However, as indicated in Table 1.1, Governments have taken quite different paths as to how the collection of SSC should be administered.

Of the 32 OECD countries with separate social security regimes, the majority (some

19 countries) currently administer their collection through a separate social security agency (or a number of such agencies), rather than through the main tax revenue body. In the other 12 OECD countries, the collection of SSC has been integrated with tax collection. However, notwithstanding the dominance of the separate approach to SSC and tax collection, the clear trend over the last two decades has been towards integrating their collection. At the time of preparing this series, three countries – the Czech and Slovak Republics, and Japan – had work underway to integrate the collection of tax and SSC over the coming years while integration has been foreshadowed as a likely future direction for both Greece and Portugal.

Beyond OECD economies, this dichotomy in approach to government revenue collection is also apparent – Cyprus, Malaysia, Singapore and South Africa all administer the collection of SSC via a separate agency while other countries (i.e. Argentina, Brazil, Bulgaria, China (for some, but not all provinces), Estonia, Latvia, and Romania have integrated the collection of SSCs and tax revenue. The Russian Federation transferred responsibility for SSC collection to its revenue body in the early 2000s but subsequently reversed that decision following reform of its SSC regime.

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The rationale for integrating the collection of taxes and social security contributions

The pros and cons of these fundamentally different approaches to administering government revenue collection have not been studied by the FTA. However, the operation of separate bodies for the collection of taxes and SSCs raises some obvious questions concerning their relative efficiency and effectiveness, not to mention the additional compliance burden imposed on businesses from having to deal with separate collection bodies.

Research by the IMF’s Fiscal Affairs Department to identify the reasons why so many countries have chosen to integrate the collection of SSC with tax collection operations over the last decade or so provides some useful insights as to the potential benefits from an

Box 1.4. The integration of tax and social security contributions (SSC) collection

The main arguments for integration presented in the IMF working paper are as follows:

1.Commonality of core processes: This argument for integration stems from the commonality of the core processes involved in the collection of tax and SSC, including the need to (1) identify and register contributors and taxpayers using a unique registration number; (2) have systems to collect information in the form of returns from employers and the self employed, usually based on similar definitions of income; (3) for employers, withhold tax and contributions from the income of their employees and pay this to the agencies (usually via the banking system);

(4) have effective collection systems to follow up those employers who do not file, or do not account for payments; and (5) verify the accuracy of the information in returns using modern risk-based audit methods.

2.Efficient use of resources: Countries that have moved to integrate SSC collection activities into their revenue administrations have often found that the marginal costs of expanding systems used for tax administration to include SSC are relatively minor. This is a particularly important factor to consider for those countries that lack the resources to implement two very similar sets of reforms in different agencies. For example, some countries have integrated the collection of payments as diverse as accident compensation insurance contributions, Medicare contributions, child support contributions, and student loans repayments into the tax administration. While the features of each are very different, the countries in question have seen the value of using the tax administration’s core collection capacity to lower collection costs and improve collection rates.

3.Core competencies of tax and social organisations: Over time, tax administrations build core competencies in relation to revenue collection functions. There are countries where tax administrations have been shown to have improved collection levels in relation to social contribution type payments, or been able to do this more efficiently, when they have been transferred from social insurance agencies. Tax administrations, where the sole focus is on revenue collection, develop compliance-based organisational cultures and strongly-aligned processes suited to the assessment and collection of monies. Similarly, social insurance agencies typically build a strong focus on establishing individual entitlements to benefits and efficiently paying them out to recipients. They develop organisational cultures and processes aligned to this role and it is logical to conclude that incorporating the somewhat counter-intuitive responsibility for collections compromises both the collection efficiency and the provision of benefits. Social insurance agencies may have limited success in proceeding beyond a certain level of collection performance.

4.Lowering government administration costs: Placing responsibility for collections with the tax administration eliminates duplication of core functions that would otherwise occur in the areas of processing, verification, and enforced collection of returns and payments. This can contribute to significantly reducing government administration costs, with: (1) fewer staff and economies of scale in human resource management and training, fewer numbers of managers, and common processes for filing and payment and enforcement and data entry data and verification; (2) lower infrastructure costs in office accommodation, telecommunications networks, and related functions; and (3) elimination of duplicated IT development costs and less risk in system development and maintenance.

5.Lowering taxpayer and contributor compliance costs: Placing responsibility for collections with the tax administration can also significantly reduce compliance costs for employers, with less paperwork as a result of common forms and record-keeping systems, and a common audit programme covering income, VAT and payroll taxes, and social contributions based on income and payrolls. The increasing use of Internet-based electronic filing and payment systems within the tax administration also lowers taxpayer and contributor compliance costs. This simplification can also improve the accuracy of the calculations made by employers, and therefore compliance levels.

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integrated approach to tax and SSC collection (see Box 1.4). These considerations are likely to be particularly relevant to developing countries that are contemplating the establishment of SSC regimes or are experiencing difficulties with regimes already in place (in the absence of an integrated approach), and to advanced economies with separate regimes that are looking for opportunities to improve effectiveness and efficiency.

The arguments set out in Box 1.4 raise important considerations for Governments and are supported by the observed experiences of a number of countries that have integrated tax and SSCs collection.

In 2010, researchers working on behalf of the European Institute of Social Security (EISS) examined the approaches and experiences of five countries that had undertaken integration activities over the prior 10-15 years, including Estonia, Hungary, Netherlands and United Kingdom. In addition to many observations they concluded that integration can be a cost-effective and efficient approach, burdens on employers and individuals can be greatly reduced, collection is facilitated by new technologies and the ensuing opportunities for stricter control and enforcement procedures can be expected to result in higher contribution compliance, thereby safeguarding the sustainability of the social security systems. On the other hand, they acknowledge that in practice there are various obstacles and challenges that must be overcome to undertake a successful integration exercise. Proper planning and effective execution of the steps required is clearly critical to achieving the potential benefits to be realised. A brief summary of their observations is set out in Table 1.4.

Table 1.4. Case studies: Obstacles, challenges and benefits with SSC integration

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Table 1.4. Case studies: Obstacles, challenges and benefits with SSC integration (continued)

Source: Bakirtzi, E., P. Schoukens, and D. Pieters (2010), Case Studies in Merging the Administrations of Social Security Contribution and Taxation, European Institute of Social Security (EISS).

With increasing pressures on Government agencies to improve performance and cut costs, it is inevitable that other countries will take steps to consider the feasibility of integrating the collection of SSCs and taxes. At the time of preparing this series, three countries were undertaking preparations to integrate the collection of tax and SSCs in the coming years:

Slovak Republic: A detailed account of plans to unify the collection of taxes and SSC within a single agency, and the rationale for this, were set out in CIS 2010 (pages 26-27). For this series, officials reported that integration is scheduled to take effect from January 2014 (although this date could be delayed owing to Parliamentary elections and the need to complete formalities).

Czech Republic: Plans to re-organise tax administration into a single organisation (on 1 January 2011) and to transfer competence to collect SSC from the Czech Social Security Administration and health insurance funds to an integrated revenue agency (on 1 January 2013) were set out in CIS 2010 (page 27). For this series, officials reported that integrated collection will now commence in 2014.

Japan reported that in a recent statement– the Outline of Comprehensive Social Security and Tax Reform (Cabinet Decision on 17th February 2012) – the (then) Government announced that it would immediately launch work to establish a “Revenue Agency” to collect both tax and social security premiums. Accordingly, a working team was set up to plan such an agency. However, with a change of government in December 2012 it is now unclear whether the proposal will be implemented.

Assistance provided by revenue bodies to social security agencies

In those countries where separate arrangements exist for tax and SSC collection, the overlapping nature of the revenue collection responsibilities of the respective bodies and their client base presents opportunities for co-operation and mutual assistance. In their

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survey responses, a number of countries indicated that this occurs in practice to varying degrees in a variety of ways (e.g. through use of common audit programs, information exchange between agencies, assistance with enforced collection of unpaid contributions, and collaboration to streamline information exchange procedures) – see Table 1.5.

On the other hand, quite a few revenue bodies, including a number where SSC are a substantial source of government revenue, reported that no practical assistance is provided to SSC agencies, raising questions as to amount of duplicated effort that occurs in administering both tax and SSC collection and whether there is potential for increased efficiency and effectiveness from a more collaborative “whole of government” approach to SSC administration.

Table 1.5. Social security contributions: Assistance provided by revenue bodies not having primary collection responsibility

For notes indicated by “/ (number)”, see Notes to Tables section at the end of the chapter, p. 53.

Sources: CIS survey responses, OECD Revenue Statistics (2011), EC, and IMF Article IV Staff Reports.

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Non-tax related roles of national revenue bodies

As noted in prior series, Governments in many countries have over the last decade or so allocated additional roles (hereafter referred to as non-tax related roles) to their revenue bodies, not directly related to the collection of tax revenue. In some cases, these roles have entailed use of a country’s tax legislation framework to provide economic benefits to taxpayers (e.g. welfare-type benefits) or to use the tax system collect non-tax amounts owing

Table 1.6. Selected non-tax roles of revenue bodies

(Table only includes revenue bodies with one or more such functions)

For notes indicated by “/ (number)”, see Notes to Tables section at the end of the chapter, p. 53. Source: CIS survey responses (of countries reporting one or more such roles).

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to Government (e.g. student loans). In other situations, the role/function linkage has been less directly related to “tax system” administration (e.g. oversight of certain gambling activities).

Information concerning the “non-tax” functions of revenue bodies and reported for this series is set out in Table 1.6. (Countries not mentioned in the table reported no such roles). As will be apparent from the information displayed, the vast majority of surveyed countries reported one or more such roles, and this practice appears to have grown over the last decade. The most common of these roles are: a) customs administration; b) the collection of non-tax debts owed to Government (e.g. student loans and overpaid welfare benefits); c) payments of various categories of “welfare” to citizens, some of which are integrated with elements of the tax system, or whose payment relies on information held by the revenue body; d) administration of aspects of a Government’s retirement incomes policy (e.g. New Zealand’s KiwiSaver scheme or Australia’s Superannuation Arrangements); and e) administration of elements of the Government’s child support arrangements; and f) a Government property valuation function (and for some countries linked to the administration of property taxes). The resource implications of such arrangements are discussed in Chapter 5.

For this series, Austria reported that its newly established Financial Police function is responsible for regulatory policy tasks (in particular labour market tasks as well as controls to ensure compliance with the Gambling Act) including the following: 1) uncovering the illegal employment of foreign workers; 2) uncovering breaches of the provisions of the Employment Law Harmonisation Act; 3) uncovering breaches of the registration duties contained in the Unemployment Insurance Act; 4) uncovering illegal practice of a trade under the Industrial Code; 5) uncovering social welfare fraud under the Criminal Code; and 6) gambling.

Customs administration

As of mid-2012, 12 OECD countries (i.e. Austria, Denmark, Estonia, Greece, Hungary, Ireland, Israel, Mexico, Netherlands, Portugal, Slovak Republic and Spain) had aligned the administration of tax and customs operations within a single organisation, while the Czech Republic is planning to complete the merger of its tax and customs administrations under a single body by 2014. This practice is also followed by some of the non-OECD countries surveyed (e.g. Argentina, Brazil, Colombia, Latvia, Romania and South Africa) and is envisaged by Malta for its new integrated tax and customs body. The internal organisational arrangements for these integrated bodies have not been studied although organisational charts for selected revenue bodies set out in Chapter 2 suggest that the degree of integration achieved in practice varies quite significantly.

This development appears to have its origins in a number of factors, including; 1) perceived synergies with customs operations which are responsible for the collection of VAT on imports, a major revenue source in many developing countries; 2) efforts to obtain economies of scale (e.g. human resource and IT functions; and 3) historical factors associated with the separation of direct and indirect taxes administration). Countries that have most recently integrated tax and customs operations are Hungary (2011), Portugal (2012) and the Slovak Republic (2012).

On the other hand, experience from two other larger countries has gone in the opposite direction. Customs operations were moved from the Canada Customs and Revenue Agency to the newly established Canada Border Services Agency in 2003, and in 2007 the United Kingdom Government created a new UK Border Agency which, among other things, entailed a transfer of staff (over 4 800) and funding from HMRC.

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