introduction to public finance management module 4.1 -revenue administration

INTRODUCTION TO PUBLIC FINANCE MANAGEMENT

Module 4.1 -Revenue Administration

Module map

• Tax policy and Revenue administration• Main categories of taxes• Conditions for effectiveness, transparency and

due process• Institutional arrangements• Revenue Forecasting

Module outline

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• Tax Authorities handle large amounts of money and considerable scope for waste & corruption if insufficient oversight & accountability:

• Effective internal & external audit & legislative oversight function.

• Fraud and Corruption needs to identified and assessed

High risk of Fraud and Corruption

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• Tax policy determines

• The total tax burden

• The structure of tax revenue and the relative share of each tax

• The basis and the rate of each tax

• Revenue administration fulfils the following basic tasks:(all areas prone to fraud and corruption)

• Identification of the taxpayers

• Calculation of the tax basis, establishment of tax due by the taxpayer

• Tax collection

Tax policy and tax revenue administration

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• Tax policy and Revenue administration• Main categories of taxes• Conditions for effectiveness, transparency and due process

• Clarity of tax obligations• Effective measures for taxpayer registration & tax assessment• Effectivene collection of tax payments

• Institutional arrangements• Institutional arrangements for tax collection• Organisational aspects of revenue agencies

• Revenue Forecasting

Module outline

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• Direct vs indirect tax

• Direct tax: usually collected on the basis of a nominal enrolment, periodic, usually supported and paid directly by the tax payer (except wage tax/social security contribution)

• Indirect tax: linked to a specific event (e.g. the purchase of a consumption good), it is supported by the consumer but paid by the seller.

Categories of revenue

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Classification of Revenue1 Total Revenue1.1 Taxes1.1.1 Taxes on income, profits, and capital gains1.1.2 Taxes on payroll and workforce1.1.3 Taxes on property1.1.4 Taxes on goods and services1.1.5 Taxes on international trade and transactions1.1.6 Other taxes 1.2 Social contributions1.2.1 Social security contributions1.2.2 Other social contributions1.3 Grants1.3.1 From foreign governments1.3.2 From international organisations1.3.3 From other general government units1.4 Other revenue1.4.1 Property income1.4.2 Sales of gods and services1.4.3 Fines, penalties, and forfeits1.4.4 Voluntary transfers other than grants1.4.5 Miscellaneous and unidentified revenue

• Tax policy and Revenue administration• Main categories of taxes• Conditions for effectiveness, transparency and

due process• Institutional arrangements• Revenue Forecasting

Module outline

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Conditions for effectiveness, transparency and due process

Running Head 12-Point Plain, Title Case

Citizens have a clear understanding of their tax obligations and comply with registration and assessment requirementsTax agency is able to collect all tax due

Transparent tax liabilities(PEFA PI 13)

Effective taxpayer registration and assessment

(PEFA PI 14)

Effective tax collection

(PEFA PI 15)

Clarity & Comprehensiveness of tax liabilities

Requirements

(1) Clear and comprehensive legislation with limited discretionary power of tax agency

(2) Easy access to understandable information on tax liabilities and administrative processes

(3) Existence and functioning of tax appeal mechanisms

Transparency of Taxpayer Liabilities

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• Controls in taxpayer registration system those who should be registered, are registered. Registration then enables assessment.

• Unique tax payer identification system

• Database with linkage to other relevant government systems

• Occasional surveys

• Effective penalties for non-compliance

• Effective system to audit self-assessments

Effective Tax Payer Registration and Assessment

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• Tax liabilities still unpaid at end of FY should be paid in next FY.

• Tax collections should be transferred to Treasury-controlled accounts (daily)

• Tax collections submitted to Treasury must be consistent with assessments. Any inconsistency needs to be checked

Effective collection of tax payments (1)

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• Tax policy and Revenue administration• Main categories of taxes• Conditions for effectiveness, transparency and due

process• Clarity of tax obligations• Effectiveness of measures for taxpayer registration & tax

assessment• Effectiveness in collection of tax payments

• Institutional arrangements• Institutional arrangements for tax collection• Organisational aspects of revenue agencies

• Revenue Forecasting

Module outline

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• General directorate for customs and indirect taxes: bases the taxation and collects• Taxes and duties on imports and exports

• VAT on imported goods

• Domestic taxes on fuel products

• Excise duties

• General directorate of taxes: assesses the tax due and sometimes collects• Direct taxes

• Domestic VAT

• Land tax, etc.

Example of institutional arrangements

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1. Revenue administration establishes the tax base, the tax due and issue a request of payment.• 1.1 In some countries (francophone), the Treasury collects the tax

• 1.2 In others the revenue agencies collect the tax

2. The taxpayer assesses the tax due and pays it, generally to the revenue agency

Often the case for Corporate tax, VAT.

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Tax recovery: two main variants

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Two models:

• Revenues are administered by administrative division of the ministry of Finance

• Autonomous, or semi-autonomous under MOF, revenue agencies/authorities have been established in the interests of efficiency;

• May have separate salary structure;

• Hiring & firing does not have to be approved by civil service MDA covering MDAs

• Not subject to same control regime as for MDAs;

Organisational aspects of revenue administration (1)

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• Revenue administration usually organised along functional lines, particularly: Inspection, data processing, internal audit and administration.

• Common to have Large Taxpayers Unit (LTU), a small number of taxpayers may represent a large proportion of all tax collected.

May include natural resourced-based companies, or these may be covered by separate unit.

• Customs Dept. may have Enforcement Unit (anti-smuggling).

Organisational aspects of revenue agencies (2)

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• Tax policy and Revenue administration• Main categories of taxes• Conditions for effectiveness, transparency and due process

• Clarity of tax obligations• Effectiveness of measures for taxpayer registration & tax

assessment• Effectiveness in collection of tax payments

• Institutional arrangements• Institutional arrangements for tax collection• Organisational aspects of revenue agencies

• Revenue Forecasting

Module outline

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• Importance of acurate revenue estimates

• Legally the amount of revenue budgeted for year t is only a forecast

• For the preparation of the budget: determination of the expenditure ceilings depends on it

• For medium-term consistency (e.g. evolution over time of revenue in case of tariff reduction and introduction of VAT)

Revenue forecasts and projections (1)

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• How to do it?Projections of revenue in the budget documents of the previous years may serve as a starting point• If macro-economic determinants have changed they must be updated• If changes in tax policies are proposed they must be incorporated

Basis identity: revenue of tax i (TR) is tax base (TB) times tax rate (t):

TRi = TBi x ti

From one year to the next:

TRi = TBi x ti + TBi x ti

In many cases it is necessary to start from scratch (combine macroeconomic projections)

Revenue forecasts and projections (2)

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• Narrow tax base• Susceptible to market volatility• Specialist tax departments• High potential for corruption/fraud• May use resource income from commodities other

than taxation.

Resource Rich Countries

• Efficient revenue administration essential to mobilisation of resources necessary to finance public services.

• Taxpayers need clarity on tax obligations.

• Revenue agency needs to ensure tax payers are registered and comply with tax obligations, and that tax revenues are collected & deposited promptly in central treasury account.

• Large scope for tax evasion and avoidance, and corruption in revenue collection; care needed prior to devolving responsibility to an autonomous revenue agency.

Main Messages

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