Globally, much of the funding required for government spending comes from taxes on income and goods and services. Tax administrations have to be as efficient and effective as possible for this to happen. Contact J. Gregory PEO for professional help.

Across the world, much of the revenue required to fund government operations comes from taxes on income and purchases of goods and services. These taxes must be collected as efficiently as possible, taking into account taxpayers’ rights and needs. In addition, tax administration should be as transparent as possible. 

In recent years, many developing countries have implemented radical reforms in their tax collection system. Traditional tax departments have been transformed into semi-autonomous revenue authorities (ARA). This change has shifted the balance of power between the central and subnational levels of government and has raised expectations of a more efficient, fair and competent tax administration. However, the actual consequences of a shift to an autonomous tax administration have not been clear.

Autonomy in the context of tax administration refers to a number of issues, including management and personnel autonomy. This is the most important factor in determining perceptions of administrative competence and fairness. A lack of managerial and personnel autonomy in a tax administration is a major reason for low compliance rates and ineffective service. Moreover, it is necessary for tax administrations to be able to manage large amounts of private information, which must be protected in accordance with the laws of privacy and data protection.

The issue of autonomy becomes even more complicated when different levels of government have varying roles in collecting tax. For example, a federation can maximize state or local autonomy by assigning the same taxes to each level of government. This arrangement is common in the United States, Switzerland, and Brazil. However, this model has the disadvantage of causing problems with coordination between tax administrations.

Another option is to divide the tax administration into a central department and several regional or provincial offices. This can lead to better coordination and more efficient processes, but it can also increase the complexity of the tax system. In addition, it may lead to a lack of consistency in the application of tax law. Finally, it can result in a loss of revenue for the government and a higher cost of taxpayer compliance.

Centralization

In most countries, taxes are a major source of public revenue. They are levied on a variety of goods and services including excise duties and personal income taxes, while social security contributions are also collected from individuals. Tax administrations are faced with a multitude of challenges, including increased complexity and changing relationships with taxpayers. They need to be performant to overcome these challenges. The 2024 edition of TAS takes a closer look at the ways in which tax administrations can ensure they are up to the task.

The main challenge is to improve efficiency and effectiveness without increasing costs. The 2024 TAS highlights that there are many factors that can affect this, from organizational structures to the quality of training and recruitment strategies. Effective people management is crucial in any organization, and tax administrations are no exception. Effective human resources management can lead to lower attrition rates, more committed employees, and better productivity.

There are four basic conceptual models for assigning the tax administration function to different levels of government. These include central government tax administration, with transfer of the revenue to subnational governments; central government tax administration with transfer of the revenue and the levy of different taxes to different levels of government; multilevel administration where each level of government administers only the taxes assigned to it; and a mix of the two options.

In general, centralized models have the advantage of simplicity and cost efficiency. They also allow for more precise monitoring of tax administrations. However, these models have the disadvantage of limiting the autonomy of local authorities, which can result in an increase in compliance costs for taxpayers.

Regional tax administrations should be based on a hierarchical structure, and they must be compatible in size with the maintenance of direct contact with taxpayers. This is important because the administrative functions of collection and audit are complex and require a high level of ability and skill.

In order to be effective, tax administrations need to promote and support a culture of honesty, integrity, and excellence. They should also work closely with other agencies to reduce burdens for taxpayers and prevent evasion and fraud. Co-operation is particularly crucial with other national agencies in terms of the exchange of information, joint processes for avoiding double taxation and the recovery of debts.

Subnationalization

Whether tax administration should be centralized, allocated to one level of government other than the central level, or spread across several levels is as much a political question as a technical one. Many factors, including historical trends and balance of power among different governmental levels, are likely to play a role in this choice.

However, the trade-off between administrative ease and local autonomy can create difficulties, especially when a centralized model requires the national administration to provide subnational levels of government with taxation powers and rules. This can result in confusion and frustration for taxpayers, who may be forced to comply with multiple sets of rules. In addition, this type of arrangement can increase the number of disputes and thereby lead to a loss of trust in the tax system.

In contrast, a decentralized model allows for some degree of autonomy and can help promote citizen engagement and participation in the governance of extractives. This approach also increases accountability, as it puts tax officials closer to the communities they serve and encourages citizens to monitor extractive activities and influence decision-making processes. It can also improve efficiency and reduce costs by allowing local governments to focus on revenue generation and spending.

Another way to increase the effectiveness of a tax administration is by allowing citizens to access information and payments through digital tools. These digital services can make the filing of taxes easier and support compliance, as well as prevent taxpayer fraud and money laundering. Furthermore, they can also reduce administrative costs by streamlining the process and reducing manual processing time.

Regardless of the organizational structure, a key component of effective tax administration is cooperation between tax authorities. This includes sharing of data, exchange of best practices, and joint processes to avoid under- or overpayment of taxes. This co-operation can help to build a more efficient and resilient tax administration that is able to respond to changes in the economy and other external challenges.

Increasingly, subnational governments are demanding more autonomy in the area of taxation. Nevertheless, it is important to remember that a transition to a more autonomous tax administration must be undertaken in the context of the overall capacity and capabilities of the subnational governments. In order to be effective, subnational tax administrations must be able to perform all major functions of the tax administration, such as taxpayer services, collection, audit, and penalties. Moreover, they should be able to provide a consistent service throughout the country.

Organization

A tax administration is a complex organization with multiple levels of responsibility. Its structure may be influenced by the type of taxes collected and how they are distributed. The choice of an organizational model is a crucial decision for a tax authority, and it can have a significant impact on the cost and efficiency of the operation. There are four main organizational models: central government administration, shared or nationalized administration, revenue sharing, and tax assignment (Rubinfield, 1983).

A function-based approach focuses on core administrative functions – registration, taxpayer services, returns and payment processing, tax audit, and enforcement collection of tax arrears. These activities are managed by dedicated employees at HQ and in service delivery sites. At the service delivery site, employees are organized into functional units that manage each of these segments of the administration.

This approach also requires effective communication between HQ and field managers to ensure that policies reflect operational reality and to identify issues where further training is needed. It is important for HQ managers to provide clear direction to field managers about how processes should operate and legislation should be applied. It is also important for HQ to know what problems they are encountering and whether field managers are following the guidance provided.

It is critical for tax administrations to understand the expectations of their taxpayers and to provide a level of service that meets those needs. This is especially important in a global economy where a high degree of trust can lead to voluntary compliance, as illustrated by TAS 2024 results on taxpayer satisfaction surveys.

In order to maintain trust in the tax system, it is important for a tax administration to implement effective dispute prevention tools. This can be achieved by offering a wide range of taxpayer assistance programmes, including public and private rulings, advance pricing arrangements, and co-operative compliance programmes.

It is important for a tax administration to foster international cooperation and exchange of good practice. This can be done through a variety of mechanisms, including hosting international experts to conduct workshops for NTOs and staff exchanges between NTOs. NTOs can also join informal Networks and Communities of Interest to share information and experiences, and engage in dialogue with other tax administrations on topics of common concern.