serie_11_ing

11May 2011

Tax Administration/ Management Control

Introduction

Tax Administration / Management Control

• Strategies and Instruments for Improving Management in the TaxAdministrations/MarceloLettieriSiqueira.--In:43thCIATGeneralAssembly,SantoDomingo,DominicanRepublic,2009.

• KeyAspectsforImprovingtheTaxAdministration’sControlCapacity/LuigiMagistro.-- In:CIATTechnicalConference.Naples,Italy,2009.

• ManagementControlandtheIndicatorsforMeasuringthePerformanceoftheTaxAdministrations/AlfredoGutiérrezOrtizMena.-- In:43thCIATGeneralAssembly,SantoDomingo,DominicanRepublic,2009.

• NewTechnologies to ImproveControlCapacity /HanWijers. -- In:CIATTechnicalConference.Naples,Italy,2009.

• Management,Organization,StructureandResources-SomeGeneralConsiderations / María Raquel Ayala Doval. -- In: CIAT TechnicalConference.Cartagena,Colombia,2005.

Contents

CIAT Tax Thematic Series

Inanefforttoprovideaneverbetterandhighlyqualifiedtaxinformationservice to its member countries, the Inter-American Center of TaxAdministrations hereby presents the eleventh issue of the CIAT TaxThematicSeries.

The purpose of this series is to disseminate relevant information onspecific taxation issuestosupport theresearchandstudyworkcarriedoutbythetaxadministrationsoftheCIATmembercountries.

The bibliographical material of this eleventh issue is devoted to “Tax Administration/Management Control”.Thematerialgatheredincludesstudiesandpaperspreparedbytechnicalofficialsforpresentationeitherat the general assemblies or technical conferences, essays, researchscholarships and articles published in the tax administration review,amongothers.

Tospeedup thesearchand recoveryof informationageneral tableofcontentsandindexispresentedforeachpaper.ThedocumentsthatarepartofthisissueareavailableintheCIATVirtualLibraryandwebpage:www.ciat.org

ThroughthisnewdocumentarycontributionCIAT,hopestodisseminatethe bibliographical material existing in the Jorge Eduardo CorradineLibrary,forthebenefitofthetaxadministrations.

Introduction

Tax Administration/ Management Control

1. Introduction.

2. Management strategies in the RFB environment.

3. Examples of specific projects. 3.1. Changes to work processes in administrative trials. 3.2. Digital federal revenues process of Brazil (e- Process). 3.3. National Synchronized Cadastre (CADSINC). 3.4. Public digital Accounting System (SPED). 3.5. Electronic Invoicing (NF-e). 3.6. Virtual Taxpayer Service Center (e-CAC).

4. Final considerations

Strategies and Instruments for Improving Managementin the Tax Administrations

Marcelo Lettieri Siquiera(Brazil)

Overview

Information technology has been one of the fundamental pillars for the management policies adopted at the Secretariat of Federal Revenues in Brazil (RFB). They are characterized by strategic actions aimed at reducing the costs and simplifying the accessory obligations of taxpayers, while enabling further expedience, efficiency, and transparency in tax management, also keeping a focus on integration with State and Municipal Tax Administrations.

A classic example of this strategy is the use of Internet for the reception of the Individual Income Tax (IRPF) returns. Even though it is currently seen as nothing out of the ordinary, the Internet as a means of submitting tax returns constitutes one of the major challenges faced by the Brazilian Tax Administration. Beginning in March 1997, the number of taxpayers who submit their tax returns by means other than the Internet is minimal. It is easier for taxpayers and more efficient for RFB’s tax management.

This report will briefly describe the general guidelines of the management strategies adopted by the RFB, emphasizing the role of the intensive use of information technology. We will present some examples of management improvement instruments that were already implemented or are about to be implemented by the institution, such as the new tools for administrative trial management, the digital process (e-process), the National Synchronized Cadastre (CadSinc), the public digital accounting system (SPED), electronic invoicing (NF-e), and virtual attention (e-CAC), which are compatible with the spirit of modern tax administration of the CIAT General Assembly. Each one of these actions simplifies matters for taxpayers and improves management.

The SPED, NF-e, and CadSinc instruments represent joint work done by the RFB and State and Municipal Tax Administrations and set an example of the progress done as part of the country’s institutional maturity, which strengthens state actions with more expedite and more powerful instruments against tax evasion and makes the business environment more propitious for citizens and corporations that are trying to operate in accordance with national laws.

TOPIC 3: STRATEGIES AND INSTRUMENTS FOR IMPROVING MANAGEMENT IN THE TAX ADMINISTRATIONS

1. Introduction

Information technology has played a key and growing role in the management policies adopted or implemented by the Federal Revenues Secretariat of Brazil (RFB).

The facilities and opportunities stemming from the development of computer science have led to substantial and paradigmatic gains in the Brazilian Tax Administration. The best example was the intensive use of Internet for the reception of the Individual Income Tax (IRPF) returns. Since 2000, more than 90% of Brazilian taxpayers submit their returns using the worldwide web, which entails a substantial simplification, compared to the old paper tax returns. From the standpoint of internal management, the gains were no less important with a drastic reduction in administrative costs and in the reception and digitalization of information submitted by taxpayers, thus decreasing the number of errors and enabling a much faster access to such information.

Despite the achievements of the progress made with these technological tools, there are more challenges. Today, it is not enough for Tax Administration to receive tax returns via Internet; it is also expected to meet a large part of the needs of its taxpayers directly on the worldwide web and no longer in person. Thus, information corrections, explanations, the issuance of the Negative Debit Certificate, payments, and many other services can now be rendered online.

Tax Thematic Series No. 11 - May 2011

6 TAx ADMINISTRATIoN / MANAGEMENT CoNTRolMarcelo Lettieri Siquiera (Brazil)

Therefore, just like technology is socially fundamental to address the demands of society, it also constitutes a source that creates new needs and demands that must be addressed as well.

This document will briefly describe the general guidelines of the management strategies adopted by the RFB, emphasizing the role of the intensive use of information technology. We will immediately present some examples of the management improvement tools that were already implemented or are about to be implemented, such as the new tools for administrative trial management, the digital process (e-process), the National Synchronized Cadastre (CadSinc), the Public Digital Accounting System (SPED), electronic invoicing (NF-e), and virtual taxpayer services (e-CAC), which are compatible with the spirit of modern tax administration of the CIAT General Assembly. The consolidation of the institutional maturity already reached by Brazilian Tax Administrations, which translates into a series of joint initiatives, will also be emphasized. In addition, some indicators showing the results already obtained or being expected from the aforementioned instruments will also be outlined. Finally, the final considerations of the Brazilian experience will be listed.

2. Management Strategies in the RFB Environment

The management strategies of the RFB are more broadly broached in the Planning and Management Strategy (PGE), which comprises four-year periods. The actual planning corresponds to the period between 2008 and 2011. Meanwhile, such planning is being revised, and the changes were seen in the RFB administration in the second half of 2008.

The PGE includes a strategic matrix for the period under consideration, which begins with the mission, vision, and values, unfolding the various dimensions of the PFB actions in five major levels: State, Society, Taxpayers, Processes, People and Resources. A total of 15 pluri-nominal strategic objectives, linked to strategic actions and institutional management indicators, were outlined in association to these five levels. At the end of each year, Institutional Directives are established, guiding the focus of the strategic actions for the following year, considering that the institutional planning and evaluation process is dynamic and must receive constant feedback.

The following general objectives, which were forged by the RFB, are grouped by dimensions of the institution’s actions.

State Dimension1. Help in the formulation of tax and foreign trade policies.2. Promote the integration of the RFB with the other state institutions and national and international

organizations.

Society Dimension3. Augment the actions of the RFB in the fight against organized crime.4. Strengthen the institutional image of the RFB and promote citizens’ tax awareness.

Taxpayer Dimension5. Promote excellent services to taxpayers.

Processes Dimension6. optimize tax credit control and collection.7. Improves the quality and production of fiscal work.8. Increase the efficiency of oversight and repression of customs-related crimes.9. Simplify, standardize, and expedite customs control.10. Increase the efficiency and effectiveness in the preparation, analysis, and trials of administrative

and tax processes.

Tax Thematic SeriesNo. 11 - May 2011

7TAx ADMINISTRATIoN / MANAGEMENT CoNTRol Marcelo Lettieri Siquiera (Brazil)

11. Promote the improvement, simplification, and consolidation of federal tax legislation and standardize its interpretation.

People Dimension12. Improve the people management policies of the RFB.

Resources Dimension13. Increase the efficacy, efficiency, and effectiveness of budget, financial, capital, and confiscated

merchandise management.14. Refine the management policies of technology information and infrastructure.15. Implement an excellent management in the RFB.

Once the objectives have been determined, the strategic initiatives are defined as a set of actions and projects necessary to achieve the strategic objectives, enabling the organization to go from the current state of affairs to the achievement of its goals.

In the case of the Secretariat of Federal Revenues of Brazil, the strategic initiatives were classified as levels 1, 2, or 3 strategic actions in the 2008/2011 Strategic Planning and Management program.

These actions must strengthen the RFB strategies, allowing compliance with institutional goals until 2011 and making sure that the strategic objectives are reached. The level 1 strategic initiatives are those directly followed by the Cabinet of the RFB and include projects and/or actions at the national level and are of great significance for the institution (see some projects in Chart 1). The level 1 strategic initiatives will be complemented by level 2 actions of sectorial and regional impact and by level 3 actions of impact on the local units and Offices of Processes (DRJ).

Chart 1 – National Strategic Projects

Public Digital Accounting System - Sped

Promote the integrated actions of federal, state, and municipal treasuries through the standardization and streamlining of information and shared access to taxpayers’ digital accounting by legally authorized people.

Gauging the “fiscal gap”

Define and implement an institutional methodology to estimate the gap between the collection defined by the legal potential and the actual collection.

Arpia Project Application of computer intelligence models for risk analysis in order to reach further efficiency and effectiveness in customs-related procedures through the standardization and optimization of fiscal selection.

Siscomex cargo Digitalize the control of movements of ships and their cargo in international transportation, allowing a more effective customs control with a great savings in logistics by allowing the shipping of merchandise on water (freight on board).

National Fiscal Education Program

Educational actions that try to promote the conscious participation of citizens in the operation and improvement of the social and fiscal control instruments of the State, beginning with the awareness of people for the socioeconomic function of taxes by encouraging voluntary compliance. Proposal of a specific project aimed at internal fiscal education.

Fiscal Cadastre Project

System of overall control of compulsory taxes, beginning with taxpayers on differential follow-up, with the use of information from third parties and own information, enabling a preliminary estimate of the taxing power of taxpayers and the due accessory obligations.

E-Process Electronic Administrative Process, which enables procedural actions and terms to be carried out electronically, putting aside the traditional use of paper processes and preserving the safety and authenticity of information. The documents will be authorized by the digital signature of both the official and the taxpayer through digital certification.



Revision and Simplification of Processes

Modeling and revision of organizational processes in order to promote the institutional modernization for the sake of the improvement and transparency of the services rendered, for the development and commitment of people, and for the management aimed at the achievement of results.

National Synchronized Cadastre

Increase the effectiveness in the rendering of services by the RFB through the reduction of compliance costs for taxpayers, the strengthening of oversight through the exchange of information with other tax administrations, and the reduction of the average time it takes to open companies in the country.

National Plan to Improve Taxpayer Services

Develop and implement a plan to improve taxpayer services through various channels in order to heed their demands in a standardized, proactive, integrated, and concluding fashion.

All these projects have an impact on the tax administration of the RFB, and many of them also have a bearing on state and municipal administrations. This point is essentially important, because it shows a major concern about the integration of the treasuries of the various federal organizations. This approach was reinforced by the new administration of the RFB with the creation of the Fiscal Cooperation and Integration General Coordinating Board, aimed exclusively at easing integration among he Brazilian Tax Administrations.

Among the strategic projects outlined in Chart 1, some actions were selected for a deeper analysis in this document, given both the importance of the project and the intensive use of information technology or the participation of other federal institutions. Thus, in the following section, the SPED, e-Process, the National Synchronized Cadastre, and the National Plan to Improve Taxpayer Services – in their virtual attention module -- will be explained in more detail.

3. Examples of Specific Projects

3.1 Changes to Work Processes in Administrative Trials

Before we discuss the e-Process, we will present some changes that have been made in the administrative arena.

a) Background

Among the institutional objectives of the RFB, we include the increase in the efficiency and efficacy in the preparation, analysis, and trial of administrative and fiscal processes with the commitment to expediting and giving quality to such trials.

In this regard, the search for an adequate measure contrasting with the degree of complexity of the administrative and fiscal processes and, therefore, with the estimate of the time necessary for the administrative trial, has been a constant since the creation of the Office of Processes in 1994.

Even though it is difficult to conceptualize, the possibility of drafting models that explain a substantial part of such complexity through objective criteria that can be compiled in the warrants right before the trials is unquestionable.

Such models, insofar as they are being implemented and improved, analyzing the historical data of the trials, enable the reduction of the uncertainty inherent to the contrast of values that, in principle, would be eminently subjective, as the complexity of the administrative and fiscal processes seem to be, regarding the time not used in their trials.



b) Current Management

The RFB is currently promoting the revision of the parameters for the determination of the degree of complexity of the processes, analyzing the historical data of trials, in a detailed fashion, managing to correct the distortions resulting from the use of certain parameters in the determination of the degree of complexity of the processes.

As an analysis strategy, hybrid models that associated statistical model solutions (generalized linear regression, independent for each table) with technical interventions done by representatives of each tax area, based upon their labor experiences, were used.

The results suggest that the parameters revised and the new ones that are proposed, if implemented, will reduce the distortions present in the determination of the degree of complexity of the processes. In this regard, using simulations with a database of national processes encompassing 2005 and 2006, it was observed that the difference between the actual number of hours of the trials and the estimated ones attributed to the degree of complexity dropped from the current -18.04% to -1.57%, and the dispersion of these variables was reduced by 59% (current MSE1 of 32.21 to an estimated MSE of 13.12), according to the tables presented in the section of results.

c) Technical analysis

Database

The database used was made up of 61,208 records resulting from the historical and statistical collection of data of the CP2 system, nationally consolidated in october 2007.

Methodology

Contrasting measures of the quality of results

The selection of the most adequate model, like the contrast of the quality of the results obtained, entails the use of one or more measures of comparison that represent the characteristics expected for the results of the analysis.

In this regard, the basis of the search for the ideal model expected was the reduction of the distortions between the actual number of hours of the trial and the estimated number of hours (associated to the degree of complexity), leading to the following actions: i) reduction in the difference observed between the averages of the estimated number of hours for the models and the actual number of hours reported by the judges for each one of the parameters3; ii) minimization of the dispersion presented between the estimated and actual numbers of hours.

In this way, the two measures of contrast defined next to represent the aforementioned actions, respectively, were used:

1 Mean Square Error is the measure used in this work.2 TheProcessControlSystem(CP)isoneofthesystemsusedtocontroltheflowofadministrativeprocessesintheareaofFederalRevenues

of Brazil.3 DuetothedecisionofnotchangingthestructureoftheCPinthisfirstpartofthework,therestrictionofkeepingfixedthegroupsof

parametersoftheexistingtablesthatareoutlinedinDecreeSRFNo.1.097/2005,beingabletochangeonlytheweightsanddescriptionsoftheparametersofeachtable,isimposed.



a) for the measurement of the difference – item (i) above – the average deviation per group of parameters, defined as the percentage deviation in relation to the average of the estimated number hours, for each group, between the average of the actual number of hours and the average of the estimated number of hours, was used;

b) for the deviation of the dispersion, the mean square error (MSE), defined for the processes of each group as the average of the square of the deviation of the estimate, was used. Instead, the deviation of the estimates is defined as the difference between the estimated and the actual number of hours for each process.

Mathematical model

The objective was to estimate the time necessary for the decision of the process, given the characteristics that appear in the groups of parameters.

Such a phenomenon can be statistically modeled considering the hours spent in a trial as wasted time, randomly, to reach a certain distance associated, in the specific case, to the degree of complexity of the process. In this regard, the larger the complexity associated to the process (the distance to be run will be larger), the longer will be the expected time of work for the trial.

In this formulation, the expected time for the trial of the process has a statistic distribution known in literature as the Inverse Normal or Wald distribution4.

Thus, a generalized linear model (GlM), independent for each table, with identity as a function of relationship and Inverse Normal distribution family, using the actual number of hours used in the trial as the depending variable and the parameters that appear in each one of the aforementioned tables as the explicative variables, was used.

Empirical model

The mathematical models obtained, one for each group of parameters, were criticized by the representatives of each type of tax over the detection and correction of technical inconsistencies. Even though it adds a difference to the final results, such a procedure is necessary insofar as the mathematical models fail to show all the forms related to the complexity of the trial process. Thus the intervention of the technician representative of each group of taxes (tables) with the ability of detecting and proposing alternatives for the inconsistencies that may be present is indispensable.

1 Weisstein, EricW. “InverseGaussianDistribution.” inMathWorld--AWolframWebResource. http://mathworld.wolfram.com/InverseGaussianDistribution.html



d) Results

The following table presents the current situation of the average percentage deviations, for the table of Decree SRF No. 1.097/2005, of the actual number of hours in relation to the number of hours attributed to the degree of complexity of the processes.

------------------------------------------------------------------------------------------------ table | frequency actual hours hp_degree deviation (%)

------------------------------------------------------------------------------------------------ 1 | 18.265 16,16 19,29 -16,23 2 | 27.792 7,43 8,59 -13,45 3 | 4.285 13,93 23,93 -41,79 4 | 1.023 20,38 26,96 -24,41 5 | 2.291 4,61 9,97 46,57 6 | 4.693 5,31 8,24 -35,58 7 | 2.859 17,25 20,64 -16,42 Total | 61.208 11,27 13,75 -18,04

------------------------------------------------------------------------------------------------

It is at once noticed that all deviations are above 10% and even above 40% in some cases. Such fact points the need to make adjustments to the complexity evaluation tables, justifying the revision of parameters.

With the implementation of the proposed models, the new average percentage deviations of the actual number of hours in relation to the number of hours attributed to the degree of complexity of the processes (estimated hours) went below 1%, with the exception of the processes of Table 5, whose reduction was from 46.57 to 14.67 percentage points. Such results suggest that the models proposed will reach the first goal of reducing the difference between the average of actual number of hours and those attributed to the degree of complexity.

Also regarding the measurement of the dispersion used, we notice an improvement in the performance of the total amount of (estimated) models proposed in relation to the current ones. With the models proposed, we managed to substantially reduce the dispersion between the number of hours actually worked and the estimated number of hours projected by the models.

Thus, according to the results, the implementation of new sets of parameters will drastically reduce the current distortions in the evaluation of the degree of complexity of the processes.

3.2 Federal Revenues Digital Process of Brazil (e-Process) a) What is e-Process?

The Secretariat of Federal Revenues of Brazil – RFB – is developing an electronic process system called e-Process. This system eliminates the use of paper in procedural actions carried out in the administrative realm in the form of petitions, document submittal, and presentation of consultations.

The system will integrate and control all the phases of the fiscal credit macroprocess, ranging from the fiscal launching and going through the taxpayers’ resources and the trial of administrative processes, up to the final collection of the tax credit without the need to print a single sheet of paper.Beginning with this electronic tool, taxpayers will be able to consult tax legislation and find a solution to their consultation in an efficient and safe way, bringing forth more legal security to the treasury-taxpayer relationship.



The digital signature will enable taxpayers to submit procedural pieces and digital documents to make up the e-Process or the e-Query through the Virtual Taxpayer Service Center (e-CAC) to the e-mail address of the RFB -- www.receita.fazenda.gov.br.

Taxpayers will also be informed of the procedural actions electronically through their electronic e-mails available in the e-CAC. All taxpayers, individuals or companies, bearers of e-CPF or e-CNPJ Digital Certificates or any other certificates issued by the Certifying Authority accredited by the ICP-Brazil. Access through digital certificates guarantees the authenticity of the transactions.

The implementation of the e-Process is making progress to enable taxpayers and professionals of the area to avail themselves of numerous advantages, because they will be able to follow up on the steps of the process and carry out procedural actions at a distance — from their commercial establishments, offices, or homes – via the worldwide web.

The System represents savings, expedience, security, and transparency derived from the use of the e-Process in the area of Federal Revenues.

In the development and implementation of the system, the following basic principles are being observed: i) guarantee of transparency and traceability, with commitment and responsibility of each public action; ii) the elaboration of a generic and flexible system, allowing the parametrization of the specificities of each sector, type of unit, or competent body; iii) reduction of excess bureaucracy through the decentralization of power from those who wield it, guaranteeing further control and management of processes.

b) Background

The idea of working with digital processes was conceived in the 5th Fiscal Region based in Salvador/BA in mid-2003.

In 2004, the idea was adopted by the General Technology Coordinating Board, CoTEC, and in 2005, the development of the process was chosen to be a priority project for the RFB.

In March 2006, the first digital process was created in the Federal Revenues Office of Brazil – Salvador DRF, the unit that was chosen as a pilot for the implementation of the system.

In October 2006, the first electronic process was tested in the Office of Federal Revenues Process – DRJ of Salvador.

In July 2008, the dissemination of e-Process in the 22 units of the RFB and the Taxpayers Council began.

In 2009, the dissemination will be done in the other units and the National Finance Prosecutor’s Office -- PGFN.

c) Current management

There already are more than 3,500 digital fiscal processes in the units to be contemplated. In addition, in the pilot program in Salvador, approximately 90% of the new processes created with fiscal credit are already in digital format.



The expansion of the pilot Project to the 22 units of the RFB and the Taxpayers Council – CC – must end in late January 2009.

The development of the Proc Web module as part of e-Process, which is being implemented since December 2008, will enable the migration from paper processes to digital processes.

All the units contemplated in the first phase of the expansion of the e-Process were already trained and implemented. The only one remaining is Belem, which was scheduled for January 2009. The Proc Web pilot began in the DRJ of Ribeirao Preto/SP, incorporating functions of the DRJ’s and CC’s and opening the system to the control of 100% of processes in digital media and paper.

The following table shows how the existence of digital processes in the units already contemplated in the system:

In 2009, the second expansion of the e-Process will begin, contemplating most officers and inspector’s offices of the RFB. In addition, the development of the remaining modules will end. To do so, the team that is developing the project, under the coordination of Marcelo de Souza Silva, the Fiscal Auditor of Federal Revenues of Brazil, listed the following priorities:

1. Manage the errors and make the necessary adjustments, many of which are caused by the implementation of the new version of the system.

2. Purchase and rent equipment for the other units. The Programming and logistics General Coordinating Board, Copol, is finishing the purchasing projects (monitors and plaques) and the renting projects (production scanner per administration unit).

3. Search for multitasking with layers of software that enable a better image quality in the smallest size possible, with automatic brightness and contrast adjustments.

4. Increase the investment in infrastructure, especially in the creation of local cache memory for the increased performance in the display of images of a document, reducing the need to increase the Internet band.

5. Give e-Process access to the PGFN, with the standardization of digital certification, which also remains pending with the Disin/Cotec.



d) Expected results With the implementation of the e-Process, both society and the Tax Administration must obtain significant benefits. We can outline these among the most important ones:

1. Increase in tax collection due to the drastic reduction in the time it takes to enter a digital administrative process in the realm of contentious and fiscal execution.

2. Reduce bureaucracy at the RFB in terms of easy steps taxpayers will have to take to accompany and view the process and the carrying out of procedural actions via Internet.

3. Availability, security, expedience, standardization, and automation of bureaucratic procedures.

4. Direct saving of budgetary resources for public administration.

5. Reduction in the procedural times according to the initial expectation shown in the following table:

1 Paper process -- current situation 134 320 186 6402 Implantation of digital processes 108 20% 288 10% 148 20% 5443 Integration session of judg. with CT 108 288 104 30% 4994 Reception of petitiions via e-CAC 75 30% 288 104 4685 Integration with the W Decision System 75 230 20% 104 4106 Electronic form petitions 23 70% 230 104 3587 Electronic decisions PF/SCC/e-Safira 23 69 70% 104 1968 Massificação da Ciência Eletrônica 23 69 31 70% 123

e) Achieved results

The use of e-Process is already substantially reducing the procedural times, but it is still too early to quantify if the reduction goals outlined in the previous table will be achieved.

Insofar as new units are integrated into the system and the new statistics on stock and procedural flows are available, it will be possible to accurately quantify the gains obtained from the implementation of the digital administrative process in the RFB.

3.3 National Synchronized Cadastre (CadSinc)

a) What is the National Synchronized Cadastre?

The National Synchronized Cadastre (CadSinc) is the integration of the cadastral procedures of corporations and other institutions in the Tax Administrations of the Union, the States, the Federal District, and Municipalities, as well as other organizations and institutions that are part of the business registration and legalization processes in Brazil.

one of the pillars of the CadSinc is the use of the registration number in the National Corporations Cadastre (CNPJ) as the identifier in all sectors of the government.

As a shared solution among the very different organizations involved in the registration and formalization of companies and other institutions, the CadSinc is not a single cadastre, but a synchronization among the various existing cadastres – they all show the same cadastre information, respecting the demands or organizations and (competent) institutions in relation to the need for specific information from each one.



The main objectives of the CadSinc is the simplification and streamlining of the processes of registration, modifications, and closure of corporations and other institutions (economic entities), leading to a reduction of costs and terms, in addition to the guarantee for further transparency in all processes and the standardization of the cadastral information of corporations and other institutions, enabling them to act with further efficiency and efficacy.

In the construction of the Synchronized Cadastre and according to Cooperation Protocol ENAT nº 01/2004, the following premises were observed: a) single data entry; b) independent, albeit synchronized databases; c) reciprocity in the acceptance of the legislation of each signatory institution; and d) adoption of the registration number of the National Corporations Cadastre (CNPJ) as the cadastral identifier of the taxpayers of the ICMS and ISS.

With the Synchronized Cadastre, it is much easier and faster for entrepreneurial citizens to open a company. After registering the charter, the interested party must fill out and forward the registration petition to the CNPJ through one of the available applications. If the petition is accepted, the inscription will be ready not only at the CNPJ, but also at the pertinent State and/or municipalities.

In the States where there are agreements with the Trade Tribunals, entrepreneurial citizens can submit the registration petition along with the registration petition of their charters. If the documents submitted and the data transmitted are correct and if they made the petition in a single place, the companies will therefore be registered and the registration at the National Corporations Cadastre (CNPJ) and the state and/or municipal registrations generated simultaneously will be done all at once!.

In addition to the aforementioned benefits, it is also possible to use the state passwords or digital certificates to take action at the cadastre. In a simple, easy, and quick step, this electronic signature eliminates the need to authenticate the signatures and often eliminates the need to appear before the body (Federal Revenues, SEFAZ5, SEFIN6, and so on) to demand the carrying out of the cadastral action (the change is processed automatically. Example, the change to the commercial name, telephone number, electronic mail, and so on).

Thus, when the Synchronized Cadastre is fully implemented, all Government Institutions related to Tax Administration, at all levels, and the registration of corporations will be working in a synchronized fashion; in other words, citizens will submit their petitions in one way only.

b) Background

The search for the simplification in cadastral processes in the three levels of Government began in 1990s, mainly beginning with the signing of the ICMS Agreement 08/1996, through Normative Directive SRF No. 27, which created the National Corporations Cadastre (CNPJ), replacing the old General Taxpayers Cadastre (CGC). The CNPJ began as a proposal to streamline the resources and procedures of the various existing cadastres and prior to the joining of all state and municipal tax administrations, with a later national integration of the tax cadastre. Meanwhile, due to legislation matters and operational difficulties attributed to the time, especially in the technological area, the CNPJ failed to achieve the expected objectives.

The simplification process of cadastral procedures takes on a new impetus in late 2003, when Constitutional Amendment No. 42 was approved. It introduced paragraph xxII in Article 37 of the Federal Constitution, establishing that the new tax administrations of the Union, States, the Federal District, and Municipalities act in an integrated fashion, even sharing fiscal cadastres and information.

5 FinanceSecretariatsoftheStates6 FinanceSecretariatsoftheMunicipalities



In order to heed this constitutional mandate, in July 2004, the First National Meeting of Tax Administrators (ENAT) was held in Salvador. It gathered the heads of the Federal, States, Federal District, and Municipal Capital Tax Administrations. The objective of the meeting was to search joint solutions for the three levels of government enabling integrated actions and sharing fiscal and cadastral information among the Tax Administrations. The main document resulting from this meeting was the ENAT Cooperation Protocol No. 01/2004, whose objective was the construction of a cadastre that would heed the interests of the respective Tax Administrations.

Along the same line of simplification of cadastral procedures, rules encompassing the integration of procedures among the bodies responsible for the registration and legalization of businessmen and corporations were established for micro- and small-sized companies through Complementary law 123 of December 14th, 2006. The goal was the prevent the duplicity of requirements for citizens, while guaranteeing the setting into motion of the single entry of cadastral data (in order to keep businessmen or corporations from having to make the same petition for cadastral actions – registration, changes, closures – at the various institutions involved). The same Complementary Law also defined that the databases of the institutions that are involved in the process of registration and legalization of corporations will keep independent databases, which reinforced the idea of the construction of a Synchronized Cadastre.

c) Current Management

The implementation of the National Synchronized Cadastre is being done gradually. Currently, various Tax Administrations are already participation in the CadSinc, and in addition to them, other organizations and institutions that are involved in the process of registration and opening of corporations and other entities have the power to join the project, such as Commercial Courts, Fire Departments, Sanitary Overseeing Offices, and so on.

Thus far, the CadSinc has already been implemented in the States of Alagoas, Bahia, Maranhao, Minas Gerais, Para, Rio Grande do Norte, and Sao Paulo and in the municipalities of Belem/PA, Belo Horizonte/MG, Curitiba/PR, Natal/RN, Salvador/BA, Sao luis/MA, and Vitoria/ES. There already are signed agreements, with their implementation schedules in draft (Phase III, first half of 2009), with the states of Acre, Amazonas, Ceara, Distrito Federal, Mato Grosso, Mato Grosso do Sul, Paraiba, Pernambuco, Piaui, Parana, Roraima, Santa Catarina, Sergipe, and Tocantins and the municipalities of Aracaju/SE, Barra Mansa/RJ, Boa Vista/RR, Campo Grande/MS, Montes Claros/MG, Petropolis/RJ, Pinhais, Recife/PE, Sao Paulo/SP, Rio de Janeiro/RJ, Santarem/PA, and Sorocaba/SP. There also are signed agreements, but with the schedule still undetermined, with the states of Amapa, Espirito Santo, Rio Grande do Sul, Goias, Rio de Janeiro, and Rondonia and the municipalities of Bragança/PA, Camaçari/BA, Contagem/MG, Maceio/Al, Manaus/AM, Palmas/To, Piraju/SP, Ribeirao Preto/SP, Santos/SP, and Sete Lagoas/MG.

d) Expected results

With the implementation of the Synchronized Cadastre, the following results are expected to be obtained:

1. From the point of view of citizens: i) reduction of the terms and procedures to create, modify and close companies; ii) further transparency in the process; iii) simplification and standardization of compliance with obligations; iv) less need to go to the involved institutions; and v) reduction in the expenses for document copies, mail, and filing.

2. From the point of view of Public Administrations: i) more stimulus for the formalization of businesses due to a reduced creation cost; ii) reduction of operational costs; iii) further integration, quality, and standardization of information; iv) improvement of the image before society; and v) more effectiveness of fiscal actions.



e) Achieved Results

The use of the Synchronized Cadastre enabled a substantial reduction in the period between the petition and the registration at the Federal Revenues of Brazil, in state and/or municipal revenues, and in states and municipalities where the system had already been implemented.

As shown in the following chart, in Bahia, for instance, the Cadastre reduced to only 2 or 3 days the period between the petition and the formalization of the registration, which used to be 7 days. This reduction in time was verified, more or less, in the other offices of state and municipal revenues.

3.4 Public Digital Accounting System (SPED)

a) What is SPED?

Created by Decree No. 6.022 of January 22nd, 2007, the Public Digital Accounting System (SPED) Project, in general terms, consists of the modernization of the current system of compliance with accessory obligations, submitted by taxpayers to tax administrations and the oversight bodies, using the digital certification in order to obtain a signature for electronic documents, thus guaranteeing their legal validity in digital form. The system is one of the projects that make up the 2007-2010 Growth Acceleration Program (PAC) of the federal government of Brazil.

The SPED is made up by three major subprojects: Digitally Recordable Accounting (ECD), the Digital Fiscal Accounting (EFD), and Electronic Invoicing (NF-e). In this section, we focus on the issue of accounting, while the NF-e will be broached in a separate section, because it is in a more advanced stage.

The new system represents an integrated initiative by the tax administrations at the three levels of government and is a partnership with 20 institutions, including public organizations, class councils, civil associations and institutions, in the joint implementation of the project.

For the implementation of the SPED, the following premises were adopted: i) promote a better business environment for the country’s companies; ii) eliminate unfair competition by increasing competitiveness among companies; iii) the official document is the electronic document with legal validity for all purposes; iv) use the Standard ICP Brazil Digital Certification; v) promote information sharing; vi) reduction of costs for taxpayers; vii) minimum interference in the taxpayers’ environment; and viii) make available applications for the issuance and transmission of Digital Accounting and NF-e for the optional use by taxpayers.



Among the objectives, we have promoting further integration of the treasuries by sharing accounting and fiscal information, simplifying compliance with the taxpayers’ accessory obligations since the obligations with various institutions will be complied with in a single transmission, and improving oversight, which will be able to identify illegal tax-related actions faster, given the quick information access.

b) Background

Just like in the other cases involving integration among treasuries, the initial reference is Constitutional Amendment No. 42 of December 19th, 2003, which established that the tax administrations of the Union, states, Federal District, and municipalities act in an integrated fashion, even sharing their cadastres and fiscal information.

In later meetings by tax administrations, joint actions were delineated to comply with the constitutional mandate. Thus, Cooperation Protocols were signed at the ENAT II – National Meeting of Tax Administrators – in order to develop and implement the Public Digital Accounting and Electronic Invoicing System.

Regarding the issue of the Improvement of the Tax System, the implementation of the Public Digital Accounting System (SPED) and Electronic Invoicing (NF-e) in two years is among the measures announced by the Federal Government on January 22nd, 2007 for the 2007-2010 Growth Acceleration Program (PAC), because the two projects are aimed at removing administrative and bureaucratic obstacles to economic growth, promoting a business environment for the country, and reducing the “Brazil cost.”


Regarding the subprojects dealing with accounting, it can be established, in a very simplified way, that in both cases, it is the replacement of the current fiscal and accounting books for their digital equivalents.

In the terms of Decree No. 6.022/2007, the term for the implementation of the ECD began on 01/01/2008 for companies subjected to the differentiated economic-tax accompaniment and subject to Real Profits7. On 01/01/2009, the system began encompassing all the companies subject to tax on Real Profits.

In a simplified manner, the operation of the accounting SPED is shown in Figure 1 in the following page.

Regarding the EFD, the definition of the companies obligated to submit digital fiscal accounting is slated for the first half of 2009.

7 Characteristicsofthetaxsystemofthelargestcompaniesonceitdemandsfullyrecordablefiscalacounting.



Figure 1 – Digitally Recordable Accounting System

d) Expected Results

The benefits are varied and favor both the Tax Administrations and taxpayers. The following stand out among the results:

• Cost reduction with the elimination of issuance and storage of paper documents;• Elimination of paper;• Cost reduction with the streamlining and simplification of accessory obligations; • Standardization of the information taxpayers give to the various federal units; • Simplification and expedition of procedures subject to control by the tax administration (foreign

trade, special systems, and transit among federal units); • Strengthening of the control and oversight through the exchange of information among the tax

administrations;• Quicker access to information;• Reduction in administrative costs;• Improvement in the quality of information;• Possibility of cross reference between accounting and fiscal data;



• Availability of authentic and valid accounting copies for various uses and concomitants; • Reduction of the “Brazil Cost;”• Improvement in the fight against evasion;• Preservation of the environment through a reduction in paper consumption.

The main difficulties refer to problems of coordination among organizations during the implementation of the SPED. These problems are being overcome, given the common interest of the organizations involved, the leadership of the RFB, and the acceptance by society, which has been very positive since the system will reduce a large part of the accessory obligations of taxpayers, as well as will eliminate unfair competition in the economy. Even so, there are some sectors that have criticized the project for its allegedly legal weaknesses and an exacerbated increase in the power of oversight.

e) Achieved Results

Regarding the results, the SPED in the area of accounting is still in its initial execution stage, but it should start gaining ground beginning in 2009 with the compulsoriness of submission by all companies subject to Real Profits, which equals approximately 180,000 taxpayers8. In the period between 01/01/2008 and 04/11/2008, 50 files were submitted with the Accounting SPED.

3.5 Electronic Invoicing (NF-e)

a) What is Electronic Invoicing (NF-e)?

The NF-e is a document issued and stored electronically that exists only in its digital version. The objective is to document an operation of merchandise transfer and service rendering between two parties, whose legal validity is guaranteed by the digital signature of the issuer and the reception, by the treasury, before the occurrence of a Generating Event.

The objective of the NF-e is the implementation of a national electronic fiscal document model that will replace the issuance of a fiscal document in paper, with legal validity guaranteed by the digital signature of the issuer, simplifying the accessory obligations of taxpayers while enabling the follow-up in real time of the commercial operations by the Treasury. b) Background

As is the case with one of the subprojects of the SPED, the origin of the NF-e is also found in Constitutional Amendment No. 42 and its implementation, with the signing of protocols of the II ENAT, and is part of the 2007-2010 Growth Acceleration Program (PAC) of the federal government.


The NF-e has already been implemented in some states and economic sectors, according to the following chart, but its coverage will substantially increase beginning on 01/04/2009.

8 DataoftheDIPJ/2004.



Chart 02 – Sectors already Implemented

Date SectorsBeginning on 01/04/2008 • cigar makers;

• cigar distributors or wholesalers;• liquid fuel manufacturers, producers, and importers;• liquid fuel distributors;• retail transporters and resellers.

Beginning on 01/12/2008 • manufacturers of automobiles, vans, SUVs, trucks, buses, and motorcycles;• cement manufacturers;• manufacturers, distributors, and wholesalers of allopathic medicines for

human consumption;• cold containers and wholesalers that promote the sale of fresh, refrigerated,

or frozen meat from cows, pork, buffalo, or poultry; • manufacturers of alcoholic beverages, including beer and draft beer;• refreshment manufacturers;• agents that play the role of electric energy providers in the area of the

Electric Energy Commercialization Chamber;• manufacturers of semi-finishes, plain or long laminates, re-laminates, and

wire drawing and sectional steel;• manufacturers of first fusion steel.

The following figure is a summary of how the NF-e Works:

Figure 3 – Electronic Invoicing System



When a buyer and seller conduct a business transaction, the later with its digital signature requests authorization via Internet for the issuance of the NF-e to the State Finance Secretariat from its jurisdiction. The SEFAZ in turn returns the pre-validated NF-e receipt. This Use Authorization notice enables the transportation of merchandise. Beginning with this authorization, the Auxiliary Electronic Invoice Document (DANFE) is printed. The NF-e information will be transmitted by the SEFAZ of the taxpayer to the SEFAZ of the destination of the merchandise and Federal Revenues. The SEFAZ will make available for consultation, through the Internet, the NF-e information.

The DANFE is a simple graphic representation of the NF-e, can be printed in common paper, and is used to cover the transfer of merchandise and NF-e accounting auxiliary when the addressee does not participate in the system. By itself, it has no legal value, and its validity is conditioned upon the existence of the NF-e.

d) Expected Results

It is estimated that the adoption of the NF-e will bring positive results for all the parties involved. The following results stand out: Benefits for the Selling Taxpayer – NF-e Issuer (reduction in the costs of paper, printing, and storage; simplification of accessory obligations; reduction in the time trucks stop at fiscal offices; incentive for the use of electronic relations with clients - B2B); Benefits for the Buying Taxpayer – NF-e Receiver (elimination of the digitalization of invoices in the reception of merchandise and incentive for the use of electronic relations - B2B); Benefits for Tax Administrations (increase in the trustworthiness of the invoice, improvement in the fiscal control process, further information exchange and sharing among treasuries, reduction in the in-transit merchandise invoice control process, and support for fiscal electronic accounting projects of the RFB (Public Digital Accounting System – SPED)).

e) Achieved Results

Regarding the results according to the sites that follow up on the program9 on 15/01/2009, 81 million NF-e’s totaling more than R$1.6 quintillions have already been issued.

3.6 Virtual Taxpayer Service Center (e-CAC) a) What is the Virtual Taxpayer Service Center?

In order to provide more options to render services to taxpayers, the Secretariat of Federal Revenues of Brazil, RFB, on 12/12/2005, through Normative Directive No. SRF No. 580, created the Virtual Taxpayer Service Center, called e-CAC, which is accessed through the RFB portal in the worldwide web.

To access the e-CAC services, it is necessary for taxpayers to have the e-CPF or e-CNPJ, or any certificate of corporation or person from the Brazilian Public Password Infrastructure ICP-Brazil.

Citizens can access e-CAC from their homes or offices via the Internet through the use of Digital Certification technology, which guarantees the safety and integrity of the transactions done.

The e-CAC operates 24 hours a day, seven days a week in order to provide more comfort to taxpayers, without having to move and stand in line. It also increases the time available for his attention considerably.

9 http://www.nfe.fazenda.gov.br/portal/Default.aspx



The services rendered through the e-CAC are automatic and are grouped according to the nature and type of taxpayers – corporations or individuals – and can be accessed, respectively, with the use of their e-CPF and e-CNPJ Digital Certificates, or through their representatives, as long as they have previously been listed in the cadastre through the specific service. It is certified that an individual, with his e-CPF, will be able to use the applications for the corporation for which he is responsible before the CNPJ.

The digital certificate is the tool that enables taxpayers to access the services protected by the fiscal secret in the e-CAC. It is a process that guarantees that the information exchanged in electronic transactions will not be accessed by third parties and that they will not be changed in the route they follow. Thus, the certificate guarantees the identity of the origin and destination of the information.

The certification process generates an electronic file that identifies who the owner is, which in an electronic means, is the equivalent of an identification card.

In order to obtain the e-CNPJ or e-CPF digital certificate, taxpayers must choose one of the companies authorized by Federal Revenues to issue an identification card.

b) Current Management

Currently, the e-CAC has he following services, among others, at taxpayers’ disposal:

1. POSTAL ADDRESS: e-CAC users will be able to receive completely safe and reliable messages from the RFB, either general or personal, reminders for compliance with accessory obligations, and notices on the deadlines to pay taxes, as well as pending actions present in the RFB systems. Information of the exclusive interest of taxpayers who have a PoSTAl ADDRESS will be able to circulate fully guaranteeing the inviolability of the fiscal secret.

2. CADASTRES:

a) CPF: it is available to consult its cadastral data, as well as the possibility of updating some of these data, even the address.

b) CNPJ: it is available to consult the cadastral situation of companies and the issuance of the registration receipt.

3. RETURN COPY:

a) Returns of Individuals: taxpayers will be able to retrieve copy of the return filed via Ingresosnet in the last few years, whether IRPF, ITR, and IRRF.

b) Returns of Corporations: taxpayers will be able to retrieve copy of the return filed via Ingresosnet in the last five years, whether IRPF, ITR, and IRRF.

4. SUBMITTED RETURNS: Individuals and corporations will be able to view the last tax returns submitted, as well as to make consultations on their processing (processing extract) and on the amounts to be returned for the following types of tax returns: DIRPF – Individual Income Tax Return; Dirf – Source-Withheld Tax Returns; DIPJ – Statement of Fiscal and Economic Information of Corporations; Simplified PJ – Simplified Corporate Returns; DITR – Rural Property Tax Returns; DCTF – Federal Tax Debit and Credit Returns.

5. PAYMENTS: e-CAC users will be able to consult the list of payments made, print payment receipts (a very useful option when the original DARF is lost), and correct mistakes made when the DARF or the DARF-SIMPLE are filled out. The corrections allowed will be fully automatic in case the payments are available.



6. PARTIAL PAYMENTS: enable e-CAC users to make partial debit payments at Federal Revenues, payments dealing with federal taxes and dues under the current legislation.

7. ELECTRONIC POWER: enables e-CAC users to delegate to third parties who have their Digital Certification their representation at the Federal Revenues. Individuals and corporations will be able to do the following: i) select what available services their representative can access and also specify the date of expiration of his power; ii) consult the powers previously registered by taxpayers in favor of their proxies, as well as the powers granted to third parties on their behalf, being able to view their data and respective expiration dates; and iii) cancel those powers they do not wish to keep.

8. FISCAL SITUATION: e-CAC users will have detailed access to their fiscal situation at Federal

Revenues. In addition to being able to view their cadastral and fiscal data, taxpayers will be able to obtain orientation on the regularization of their pending cases existing by chance.

9. SISCOMEX: individuals previously registered at Federal Revenues will be able to conduct transactions regarding the Foreign Trade Integrated System, such as registration of legal representatives, exports, Mantra, imports, customs movement, and the use of the Manaus Free Zone.

The aforementioned services constitute only a small sample of what has already been implemented in order to ease the burdens of taxpayers and their communications with the Tax Administration. Federal Revenues will continue to work to broaden the universes of services to be rendered by means of the Virtual Taxpayer Service Center, e-CAC.

The complete list of services rendered by the e-CAC can be consulted in the following address: http://www.receita.fazenda.gov.br/atendvirtual/defaultDemaisServicos.htm.

c) Expected Results:

With the implementation of the e-CAC, both society and the Tax Administration must obtain significant benefits. The following stand out among the most important ones:

i) For taxpayers/citizens: time saving, comfort, and practical sense as the services are available full time at the RFB site.

ii) For Tax Administrations: reduction in operational costs, such as filing materials, among others.

Reduction in the search for personal services at the Taxpayer Service Centers, enabling the change/qualification of servers to render more specialized services, thus contributing to reducing the time spent in lines, diminishing the average time of attention, eliminating repressed demand, and increasing the conclusion of cases.

d) Achieved Results:

The use of e-CAC substantially reduced the flow of taxpayers at Service Centers for Federal Revenues, reducing the time spent in lines and the average time of attention. The number of accesses has increased insofar as taxpayers become aware of the types of services already available via Internet. The following graph shows the statistics for digital certification accesses:



The major challenge is to also reduce personal attention even more, which reached 1.5 million taxpayers in 2008, and replace it by virtual attention. 4. Final Considerations

As we tried to show, the RFB has sought management solutions leading to a reduction in costs and simplification of the obligations of taxpayers while increasing efficiency in tax administration, as well as further promoting communications among States and Municipalities. It must be recalled that the integration among the Tax Administrations has not been too great in federal countries, especially in those that, like Brazil, have a high degree of fiscal decentralization.

The partnerships, protocols, and joint projects among the RFB and the state and municipal Tax Administrations represent progress in the country’s institutional maturity, strengthening the actions of the State with more agile and powerful instruments against fiscal evasion and making the business environment more propitious for the citizens and corporations that try to operate in accordance with national laws.



1. Organization of the Italian Revenue Agency.

2. The strategic framework.

3. Large-sized taxpayers.

4. Small businesses and professionals.

5. Administrative assistance.

6. Conclusion

Key Aspects for Improving the Tax Administration’s Control Capacity

Luigi Magistro (Italy)

The Italian Revenue Agency mission is “a) to challenge tax evasion and avoidance, not only by means of enforcement measures, but also through initiatives aimed at increasing the voluntary compliance of taxpayers; and b) to assist taxpayers to understand and meet their tax obligations”

Indeed, providing taxpayers with quality service is the ultimate goal of the Agency: on one hand taxpayers’ assistance shall be considered as a service supplied to the single taxpayer or to categories of taxpayers; on the other, challenging and preventing tax evasion as a service provided to the entire community.

I would like to illustrate my presentation under this perspective, and will describe the main recent developments put in place by the Revenue Agency in order to enhance, on the one hand, voluntary tax compliance and, on the other hand, to improve efforts against tax evasion, avoidance and fraud.

In the current global economic situation, these two objectives are deemed to be a matter of great consequence and strategic importance for the Tax Administrations, that are presently strengthening their efforts to reduce the tax gap and the relevant damage to Revenue, and to enact the principles of fair taxation and fair competition.

Organization of the Italian Revenue Agency

From the organisational point of view, the Revenue Agency has recently modified (February 2009) its own central and local structure in order to better honour these commitments.

At central level, the Assessment Directorate is presently made up of four Divisions:

- Analysis and Strategy;- Large-sized Taxpayers;- Control Management;- International Division.

While the last two Divisions (Control Management and International) are charged with tasks having a transversal approach and impact, the Analysis and Strategy Division and the Large-sized Taxpayers Division are oriented to the dimensions and features of the taxpayers. In particular, the Large-sized taxpayers Division deals with the control and tutorage of taxpayers having receipts or VAT turnover over 100 million Euro, while the Analysis and Strategy Division is composed of offices dealing respectively with: i) medium-sized businesses, ii) small businesses and professionals, iii) individuals, iv) charities and non-profit entities.

The new structure of the Assessment Directorate also includes the Central Anti-Fraud Office, a staff office charged with risk analysis and the definition of strategies and methodologies, as well as with operational tasks related to the direct control of the most complex and extensive fraud cases.

As formerly said, restructuring has also affected the territorial organisation of the Agency. In this regard, it has involved a significant consolidation of the functions performed, that have been “weighted” in relation to the dimension and importance, for fiscal purposes, of the Italian Regions and consequently, of the Regional Directorates of the Agency.

With reference to each Regional Directorate, Provincial Directorates have been set up corresponding to each of the 106 Italian Province territories. Every Provincial Directorate includes:

• a Control Office;• Territorial Offices (1 or more, till more than 10, depending on the size of the Province).


28 TAx ADMInISTRATIOn / MAnAgEMEnT COnTROLLuigi Magistro (Italy)

Previously, all the activities of the Revenue Agency were assigned to 384 local offices, and each of these local offices dealt with the control and assessment.

now, there are only 106 Control Offices, embedded in the Provincial Directorates, which deal with control and assessment activities for all the taxpayers resident in the Province.

There are also more than 300 “Territorial Offices” depending on the Provincial Directorates, which perform functions consisting of information and assistance to taxpayers. Moreover, they perform controls on items substantially linked to their territory, such as: i) communications relating to tax returns irregularities; ii) documentary examination of expenses deduced in the tax returns; iii) partial adjustments; iv) assessment of registration tax; v) assessment of inheritance and gift tax; v) minor controls (for example: controls on register receipts) and of the reliability of data relevant to so called “sector studies”.

In practice, Territorial Offices are essentially “Front Offices”, the main tasks of which are connected with services to taxpayers such as: i) registration of statutory and private deeds; ii) information on tax matters; iii) assistance in the filling in and filing of tax returns; iv) release of tax identification numbers; v) inheritance tax returns; vi) tax refunds.

As for the connection between the central offices of the Assessment Directorate and the local structures I would mention, by way of example, the Anti-fraud Offices.

As I mentioned before, the Central Anti-Fraud Office is embedded in the Central Directorate for Assessment, and is charged with risk analysis and the definition of anti-fraud strategies and methodologies, as well as with operational tasks.

The Central Office interacts with the regional anti-fraud structures in order to ensure an overall coherence. Indeed, specific Anti-Fraud Offices have been set up in nine major Regional Directorates, and have the same tasks as the Central Anti-Fraud Office, to which they give their support in terms of risk analysis and local audits.

AsfortheRegionalDirectorates,thathavenotbeenendowedwithaspecificAnti-FraudOffice,thecontrolsonfraudcasesarecarriedoutbytheTaxControlOfficeslocatedineveryRegionalDirectorate.

On the other hand the Provincial Control Offices, even if not directly involved in specific controls, are very important “sensors” for the identification of risk factors (for example, risk factors identified on the occasion of the risk analysis carried out on new VAT registrations as well as in the course of controls performed on request of other countries). Moreover, the Provincial Directorates receive qualified input from the Central Anti-Fraud Office or from the Regional ones.

To sum up, the new territorial organisation, which eliminates the previous fragmentation of tasks and resources throughout the national territory, has two important objectives:

1. strengthening the fight against tax evasion;2. further enhancing the services to taxpayers.

Under the first objective, and from the operational point of view, I would like to again point out that the restructuring, at the moment in progress, is aimed as follows:

- focusing controls on different segmentations of taxpayers;- adopting different methodologies for each segment, as far as they are consistent with specific

risk analysis and evaluation and with the economic and territorial situation.


29TAx ADMInISTRATIOn / MAnAgEMEnT COnTROL Luigi Magistro (Italy)

This approach is strategic, and involves the optimal allocation of resources (under a quality and quantity consideration) in relation to the trend and concentration of risks as well as the optimal selection of the cases to be subjected to control, by excluding low risk cases.

Moreover, the controls are going to achieve the expected results depending on the thoroughness of the analysis previously carried out, considering that thoroughness is deemed to be the capacity to intercept situations in which considerable evasion has occurred. In these cases, the aim is not only the recovery of taxes and relevant sanctions, but first and foremost the achievement of a substantial decrease in non-compliant behaviour, so as to determine, in perspective, the enlargement of the tax base and the rise in revenue deriving from voluntary compliance.

The strategic framework

In order to specialize our action, we have identified specific tailor-made control activities for the different segments of taxpayers, namely 5 macro-types of taxpayer:

1. large-sized taxpayers;2. medium-sized businesses;3. small businesses and professionals;4. non-business entities;5. individuals not carrying on business activities (i.e. employees, retired persons).

In addition, as I mentioned before, there are horizontal activities which do not refer to a specific macro-type of taxpayer (anti-fraud activities, international cooperation, recovery of taxes).

Considering the time available, I will concentrate on those categories of taxpayer, namely the large taxpayers and the small enterprises, in respect of which specific innovative tools are in force, to conclude with some words on the mutual administrative assistance carried out by the Revenue Agency, which has become a crucial instrument for detecting tax evasion and frauds.

Before going into details of the single macro-types and having a look at the specific strategy implemented for each of them, I would point out again that in setting up the tools and organizing the relevant resources the geographical factor has to be taken into consideration. This is particularly important in our country, due to the fact that business activities are not homogeneous throughout the territory. For example, with regard to the macro-type “large taxpayers”, we have a high concentration in few regions. Therefore, the territorial distribution has an impact both on the organization of the offices in charge of controls and on the criteria adopted to set up consistent tools for risk analysis and tax investigations.

Large-sized taxpayers

Taxpayers are qualified as “Large-sized taxpayers” if one of the following criteria is met: a total turnover or professional fees not below € 100 million. According to the tax returns for the year 2006, taxpayers equal or over this threshold amount about to 4,000.

In order to manage this cluster of taxpayers, the recent re-organization has introduced:

• at regional level, multi-function special units in each Regional Directorate, which are responsible for the major operational functions (control of tax returns, tax examinations, recovery of taxes, refunds etc.);



• at central level, a Large Taxpayers Division, which carries on the coordination and monitoring of the overall activities and provides strategic and operational support to the regional units.

Within the Large Taxpayers Division, the Risk Analysis Unit is charged with the:

1. segregation and update of the large taxpayers data-base;2. identification of other complex taxpayers;3. development of specific risk analysis tools; 4. detection of tax evasion and avoidance risks;5. evaluation and implementation of strategies and operational methodologies for audit activities.

Since January 2009, a new approach has been adopted so as to enhance Large Taxpayers’ compliance. The key features of the new approach are:

• a comprehensive treatment and on-going management, based on the reallocation to the same regional unit of all the administrative functions related with each large taxpayer;

• a new risk-based perspective involving the peculiarities of the business sector and any available information on the specific taxpayer (stakeholders, subsidiaries, transactions, previous audits and other relevant intelligence) potentially affecting the level of compliance;

• a timely risk review process aimed at assessing whether there may be tax risks arising from any operations put in place by a certain taxpayer;

• the achievement of an increasing level of compliance, on the one hand, and of greater certainty for large taxpayers in the application of tax laws, on the other hand.

A major role is played by the “tutoring activity”, which, as of 2009, affects large taxpayers with turnover, or operating revenue or professional fees no less than € 300 million (approximately 1,000 entities) and, no later than December 31st 2011, will be carried out with reference to all 4,000 large taxpayers.

The tutoring activity can be defined as a permanent monitoring and analysis of the behaviors and attitudes of a large taxpayer, including its tax results, through the adoption of different approaches depending on the outcome of the risk analysis and on the peculiarities of the taxpayers.

The tutoring activity can be divided into three logical steps:

1) collection and summary of all relevant information able to provide indications of risks in the behavior of large taxpayers that might jeopardize their tax compliance. Information is included in a specific document, called “risk analysis form”. Following the evaluation of this set of information, each large taxpayer will be attributed a certain risk profile that drives the choice of the most appropriate tax examination methodology;

2) execution of the tax audit. The higher the risk profile is, the more intrusive the method of control chosen: high risk customers can expect thorough investigations, while for medium/low risk customers a disclosure-based approach can be adopted;

3) updating of the information form with the outcomes of the audit, in order to confirm the risk profile, or, if necessary, to reconsider the risk classification.

As said above, the main document of the tutoring activity is the risk analysis form. This document is composed of several sections in which information is organized by content:



• general information;• economic profile of the large taxpayer and of its field of activity;• fiscal profile of the large taxpayer (rulings, intelligence, previous audits, legal proceedings,

tax credits, etc.);• analysis of the fiscal results and of the accounting data;• main risks detected and individual risk level assigned;• assessment/audit activities to be put into execution.

Accordingly, the risk analysis form allows to attribute a level and type of risk to each large taxpayer, a sort of personalized risk level. Consequently, according to this risk level the most suitable control activity is chosen. In other words, the higher is the risk level and the more intensive will be the control tools adopted for the specific case. Furthermore, the personal risk level is up-dated on annual basis taking into consideration new information available on the taxpayer.

In order to implement this approach we developed two IT tools:

• FALCO (acronym standing for the Italian expression equivalent to “tax-payer personal folder on line”), and

• COPERnICO for selection and analysis of taxpayers.

As far as FALCO is concerned, it is made up of personal folders available on line, each one referred to a specific large taxpayer and containing information on: audits in progress, company accounts and financial statements available in spreadsheet format, fiscal data on the taxpayer, historical trends, access to other data bases (chambers of commerce, national insurance contributions, gross wage and salaries).

An interesting feature of FALCO is a software application based on semantic logic which performs automatically the search and screening of news and data from the web regarding the corporate activities of the taxpayer. In this way the folder is enriched with external data from different sources.

The second IT tool formerly mentioned is COPERnICO. This instrument allows to:

• obtain large amounts of data regarding selected taxpayers;• select taxpayers with specific features (e.g. tax credits exceeding identified thresholds);• analytically review changes in chosen variables over the years; • extract information in order to perform specific analysis in the differences between

accounting and fiscal data.

Such functions are possible thanks to the wide range of data available, that is:

• data relevant to taxpayers over 25,8 million Euro;• data concerning the last four years;• information from: publicly available data bases (general information), tax returns,

accountings, banks and insurances (i.e. accounting data and information for regulatory purposes).

Small businesses and professionals

Small sized taxpayers are those with total turnover/operating value/professional fees below € 5,164,569. According to the tax returns referred to the tax year 2006, on the Italian territory there are about 5,000,000 taxpayers falling in this segment, with a different geographical distribution. This is a quite impressive datum if compared with the figures regarding other European countries.



Due to the great number of small businesses, a specific action has been undertaken. given the limited resources available – probably, a common problem to all Tax Administrations - it is clear that an efficient control of so many taxpayers such as small enterprises must be necessarily compliance-oriented, in order to achieve the voluntary fulfilment of the tax obligations by most of the taxpayers implied.

Moreover, a system compliance-oriented should also be based on streamlining and reducing the relevant costs, so that compliance is not perceived like a burden undue.

Pursuant to this approach, an innovative instrument has been developed since 1999: the so called “Sector studies” for small businesses and professionals. Sector studies create new relationships between the Tax Administration and small-sized taxpayers whereby different players are involved: the Ministry of Finance, the Revenue Agency and the taxpayers as well as trade organizations and professional orders.

Indeed, Sector studies are the result of a close collaboration between the Tax Administration and taxpayers. Based on the wording of the law which provided for their implementation, “Sector studies aim at identifying the actual operating conditions of enterprises and at determining proceeds and fees which, with a reasonable probability, may be attributed to taxpayers by detecting the structural characteristic of each specific economic activity through a systematic collection of fiscal information and data which characterize the activity and the economic context in which that activity is carried on.”

Accordingly, Sector studies may be used to assess the capability to produce revenue with regard to a certain economic activity. In other words, they allow to determine the revenue which may be attributed to a specific taxpayer with the utmost probability, by identifying not only the potential capacity to produce income, but also the internal and external factors relating to the particular sector which may affect this capacity.

In other words, Sector studies consist of a process of analysis and evaluation of how small companies operate in their economical environment. In particular, they highlight and describe the existing relationship between structural items and the variables referred to companies in respect of:

• economic sector,• production processes,• company’s organization,• products and goods,• location,• market,• other significant data for every specific activity.

Behind each study there is a complex preparatory activity performed not only by people from the Tax Administration but also by third parties (trade organizations and professional orders).

I will not enter into the technicalities and the statistics used for the purposes of the comparative analysis which constitutes the basis of the Sector studies. I will rather focus on the work we have done to develop the Sector studies currently in force and on how they are actually implemented.

The first phase in building up a Sector study (which is ultimately a statistical model) is characterized by the identification of the economic activities and of the relevant variables. These are the object of questionnaires to be filled in by the taxpayers: the answers are subsequently processed in order to obtain a sort of “enterprise profile” at macro-economic level. In technical terms, Sector studies



consist of clusters (or homogeneous groups of businesses) obtained by applying mathematical and statistical methodologies in order to process data furnished by taxpayers in response to questionnaires. In this way, it is possible to assign to each cluster a profit function which is then used to compare the revenue of a specific enterprise with the average revenue of enterprises of the same type. It is important to underline that the preparation of a Sector study is made and discussed together with the relevant trade organizations. Furthermore, before being published a Sector study needs a specific validation by the Ministry of Finance, the evaluation of an Experts Committee and observations from the trade organizations. Once the Sector study is ready, its methodology and technical specifications are published in the Official Bulletin and the relevant software package is distributed to the taxpayers.

In order to allow that Sector studies really represent with the highest probable degree the profit function of a specific economic activity, they need an on going monitoring and up-dating, having regard to the national economy, the market, and the production processes. In this process, again the contribution of trade organizations, professional orders and the local monitoring offices is fundamental. not only the update and improvement of the existing Sector studies, but also the realization of new ones is an on going process. For this reason A specific service within the Assessment Directorate was set up with competence for Sector studies.

As far as the activity control is concerned, also in this case the taxpayer is required to fill in a questionnaire by providing both accounting information (for example, amount of raw materials, value inventory, value of capital assets) and extra-accountancy data (for example, number of working hours of the employees). Of course the nature of the data differs according to the specific economic activity. The answers to the questionnaire are subsequently processed in the software I’ve mentioned before, which is freely provided to the taxpayers by the Revenue Agency. As a result, the software allows to establish whether the figures declared by the taxpayer are consistent with the Sector study designed for his economic activity.

In order to process information deriving from the Sector studies a data base was implemented, whose purposes are:

• in-depth analysis aimed to support the assessment activity of the Revenue Agency;• analysis of competitive auditing and territorial benchmarking;• provision of statistics and analyses in specific fields;• simulations to be included in preliminary arrangements with the taxpayers, subject to

subsequent monitoring.

Sector studies turned out to be a useful tool in order to improve efficiently and effectively the taxpayers’ compliance. In this connection, I would consider two aspects:

1) incentives were set up for taxpayers who meet the expected results of their Sector study;2) the Sector study is an important support both for carrying on risk analysis and for selecting

taxpayers showing risky positions, due to lack of consistency with the Sector study applicable to them;

The effectiveness of Sector studies in terms of improved taxpayers’ confidence and cooperation and especially in terms of greater compliance has been confirmed by the growing number of taxpayers who have proved to be consistent with the data resulting from Sector Studies.



Administrative assistance

Finally, I would spend some words on the mutual administrative assistance. Its importance in terms of transversal activity supporting the mission of the Assessment Directorate is considered as crucial. For this reason, the re-organization – as described before - has implied also the restructuring of the services charged with the administrative assistance. In particular, taking into consideration the steady increase of importance of the international cooperation as instrument for fighting against tax evasion and fraud, a comprehensive approach was adopted in order to enhance the performance of the mutual assistance.

Before last February the exchange of information was carried on by the International Cooperation Office, which was part of the division in charge with analysis and research.

However, it had become clear that the administrative assistance interacts with different statutory tasks of the Revenue Agency, therefore a transversal approach appeared more proper.

As a consequence, within the Directorate for Tax Assessment an International Division was set up. The Division has been structured in three offices:

• Exchange of Information - administrative cooperation on the basis of Directive 77/799/EEC, EC Regulation 1798/2003 and Double Tax Treaties;

• Operative Cooperation - cross-border assistance dealing with requests for recovery under Directive 2008/55/EC, bilateral–multilateral controls under Directive 77/799/EEC and EC Regulation 1798/2003, relations with international bodies and organizations;

• International Tax Ruling - domestic procedures, usually involving transfer pricing issues, for the negotiation of unilateral Advance Pricing Arrangements (so called APAs) involving related parties of multinational enterprises.

Moreover, as timeliness and thoroughness are essential attributes of the mutual assistance in order to achieve satisfactory results, a main point has been the implementation of a comprehensive training program on administrative assistance.

The program is addressed to the officers of the Revenue Agency both from regional and local offices, in view of developing at every geographical level a network of reference points having the juridical knowledge and operational skills necessary to interact quickly and regularly with the offices of the International Division, according to their respective competences.

On the other hand, the regional and local offices of the Agency have been strongly recommended to have resort, whenever useful, to the exchange of information or to the other tools made available by the mutual assistance as provided for by EEC directives and regulations as well as by some bilateral agreements: the collaboration by tax officials, simultaneous examinations and multilateral controls.

Under the “collaboration by tax officials” the tax authorities of two States may agree to authorize the presence in the first State of officials of the Tax Administration of the other State. Thus, if an office of the Agency considers that a direct dialogue with the colleagues of another Tax Administration - in order to obtain information or to compare data, documentation, results – can be useful to the conduct of an audit, it can apply to the International Division for the relevant request for assistance to the other State.



The same way, if an office considers that a simultaneous tax examination is of common or complementary interest to one or more Tax Administrations, it is encouraged to bring to the attention of the International Division the opportunity that a bilateral or multilateral control is conducted jointly with our foreign counterparts.

From my personal point of view all the tools above mentioned represent an important and effective basis to extend at international level the tax audit activities that each State ordinarily performs on its own territory.

On the other hand, the aforesaid activities should be supported by an adequate framework and organizational model of the auditing bodies. This was the main purpose of the recent reorganisation of the Assessment Directorate just described.

Conclusions

In conclusion, I would like to remark that we are deeply interested in the outcomes of this Technical Conference.

Improving the Tax Administration’s audit ability is actually a goal that depends on different important factors. Italian Revenue Agency’s experience suggests, firstly, that the operating model should meet our mission statement and shaped accordingly; secondly, the structure should be endowed with proper, efficient and effective tools in order to interact in the most appropriate way with the taxpayers. On this regard, it is of vital importance to adopt modern, sophisticated and flexible instruments in order to face the developing economic and social context.

Last but not least, it is essential that the taxpayers have the perception of a modern and efficient Tax Administration, with the ultimate goal to pursue a substantial change in their behaviours, in terms of increased compliance. In this connection, an effective international cooperation would play an important role in terms of showing to possible non-compliant taxpayers that the Tax Administrations can actually make use of a wide international network and is able to seamlessly work together in a cooperative and efficient manner.



I. General characteristics of the SAT’S management follow-up and performance evaluation system.

II. Results obtained as a result of the government model operation.

III. Problems observed during implementation and operation.

IV. Strategies to address the problems observed.

V. Conclusions.

Management Control and the Indicators for Measuring the Performance of the Tax Administrations

Alfredo Gutiérrez Ortiz-Mena(Mexico)

SUMMARY

The purpose of this document is to present a synthesis of the practices and experiences in the Tax Administration Service (Servicio de Tax administration, SAT, in Spanish) of Mexico, regarding the implementation and operations of the management follow-up and performance evaluation system and the indicators to measure the institutional performance, which form part of the SAT’s Government Model for Planning, Strategic Management and Continuous Improvement, and which implementation began in 2008.

The document is divided into five parts:

Part one describes the Government Model for Planning, Strategic Management and Continuous Improvement, which is the Institution’s conceptual and functional framework of the Management follow-up and performance evaluation system.

Through this model the Strategic Management, Tactical Management and Operational Management are identified and linked, which correspond to SAT’s Administrative Offices, the general administrations and the local administrations and customs, respectively, which gives sense to the alignment of the operation with the strategy at all levels and scopes of the institution. This disaggregation defines the characteristics and reaches in each decision level and operation scope, measuring and evaluating performance through the following indicators:

• Strategic for strategic management level;• Specific for tactical management level;• Operation for operational management level;• Results, links to SAT’s mission and vision.

Part two of this document describes the main results obtained from the implementation of the institution’s management follow-up and performance evaluation system.

Part three refers to the problem affecting or which may affect the systems’ implementation and operation.

Part four presents the strategies to respond to the problems detected, considering the regulatory scheme, organization, processes, information and technology (the components of the institutional architecture).

Finally, part five presents conclusions as general reflections.

I. GENERAL CHARACTERISTICS OF THE SAT’S MANAGEMENT FOLLOW-UP AND PERFORMANCE EVALUATION SYSTEM

SAT’s management follow-up and performance evaluation system originates in the Government Model for Planning, Strategic Management and Continuous Improvement of the Institution, which identifies three management levels:

1. Strategic;2. Tactical;3. Operational.

The Government Model, which implementation process began in 2008, links the three levels of Management and allows operations to be articulated with strategy. Its main characteristics, which are described herein, are the System’s reference framework.


38 TAx AdMInISTRATIOn / MAnAGeMenT COnTROlAlfredo Gutiérrez Ortiz-Mena (Mexico)

1.1 Government Model for Planning, Strategic Management and Continuous Improvement

SAT’s Government Model for Planning, Strategic Management and Continuous Improvement establishes the mechanisms for tactical and operational management to work articulated as a consequence of strategic management. It links and aligns the operational programs of the local administrations and customs (operational management level), with the business models of the general administrations (tactical management level) and these with the strategic plan of the Institution (strategic management level), through cause-effect relations.

As seen in the following graph, the Model shows the hierarchy and correspondence with the management level and the organizational level, defining the type of indicators corresponding to each level.

The short, medium and long-terms are articulated with the institutional strategy, and institutional tasks are assessed in terms of results, efficacy, coverage, efficiency and quality.

The Model integrates the three management levels of the Institution through the following processes:

1. diagnostic;2. Strategic plan;3. Business Plan;4. Programming and Budgeting;5. execution;6. evaluation; and7. Continuous Improvement.


39TAx AdMInISTRATIOn / MAnAGeMenT COnTROl Alfredo Gutiérrez Ortiz-Mena (Mexico)

The management follow-up and performance evaluation system is located in the evaluation process, therefore its interaction with the other processes of the Model allows following-up of the actions and results, considering the short, medium and long term horizons, such as the different decision making levels and the institution’s field of work.

In this manner, the different components of the system intervening in the operation are articulated, providing feedback for decision making in the strategic, tactical and operational levels.

It is important to mention that the Model also establishes the link with the institution’s Projects Portfolio, to potentiate the results of the strategic, specific and operational programs, through investment programs and projects.

In summary, Government Model gives the organization the instruments required to define, rule, implement, and control and feedback the strategy and also enables the execution of the Institution’s strategic plan, through the business plans of the general administrations, of the annual operational programs of the local administrations and customs and the Institution’s Projects Portfolio investment programs and projects.

1.2 Strategic Maps and Management Follow-up and Performance Evaluation System

For information integration purposes and methodologically, the Government Model and, consequently, the management follow-up and performance evaluation system, is based on the institutional strategic map and the strategic maps of SAT’s general administrations.

The strategic institutional map shows our objectives linked to SAT’s mission and vision and orders and identifies the same pursuant to their perspective and issue, therefore it constitutes the base for the control and the evaluation of the institutional strategic plan.

The maps of the general administrations originate as from the institutional strategic map, conserving at all times its alignment and congruent with the same by showing a greater breakdown of the issues identified as strategic for the Institution.

Based on the Balanced Scorecard (BSC) in SAT’s 2007-2012 strategic plan, the strategic purposes are identified through the following perspectives:

1. Results;2. Clients;3. Internal Processes;4. People and Services (organizational training and growth).

Similarly, four strategic issues are defined:

1. Services;2. Control;3. People and Structure;4. Infrastructure and Resources.

The first two are applied to clients and processes, while the two remaining disaggregate the purpose related to people and internal services. The articulation of these spheres has been very useful for the splitting of the Institutional strategy.



1.3 Systems Indicators

The management follow-up and performance evaluation system, in agreement with the Government Model for Planning, Strategic Management and Continuous Improvement, identifies the following indicators:

1. Strategic;2. Specific;3. Operation:

• Central• local

4. Results or impact.

1.3.1. Strategic Indicators

These indicators are associated with the level of compliance with the strategic objectives and oversee the 14 Strategic Programs of the Institution.

Strategic indicators evaluate and feedback the Tax Administrations strategic and priorities, valuing the efficacy, efficiency and quality of the actions and services generated to increase Collection, reduce tax evasion, avoidance and contraband, increase tax efficiency and control foreign trade, among the other key objectives of SAT.



Example of SAT’s strategic indicators:

• SAT’s general image• Primary collection• Secondary Collection• Collection efficiency • number of taxpayers updated • Tax revenue managed by SAT in regards to the GdP • General perception corruption index • Perception in the ease of compliance with tax obligations• effectiveness of examination actions• Auditable gap• Recovery of the tax credit portfolio• Profitability of examination actions• Final judgments favorable to SAT• Cost of processes• Organizational environment

1.3.2. Specific Indicators

These are used to measure and evaluate the degree of compliance with specific programs of the general administrations in the tactical management level.

Similarly, the action and the relevance of the organizational structure are also evaluated, as well as the vertical and horizontal coordination mechanism among management areas responsible of executing the strategy and coordinating the operation.

Specific indicators refer to the intermediate products generated by the areas to feed strategicprogramsaswellasspecificproducts inherent to their functions.Management follow-upallowsevaluating the actions of the general administrations in function of the entire institution. The evaluation obtainedrespondstocoverage,quality,efficiencyandefficacyinthetargetpopulationcriteria.

Example of SAT’s specific indicators:

• Average collection by global examination actions • Increase in primary collection by effects of the collection • Cost of secondary collection • Persuasive collection in regards to enforced collection • Taxpayer risk perception due to collection actions • Increase in the level of compliance for large taxpayers • Coverage of physical and potential persons registered in contrast with the economically

active population. • examination efficacy• Percentage of in depth reviews of the total reviews practiced • Fiscal presence• Risk rating of foreign trade agents • Profitability of examination actions • Percentage of inquiries resolved and notified within the legal term established• Percentage of trials won in final judgments• Issued consigned in contrast with issued presented• degree of compliance of administrative service levels• Quality of service



1.3.3. Operation Indicators

These are identified in the operational management level. These refer to the operational processes resulting from tactical management. These indicators evaluate the productivity of the programs and projects of the local administrations and the customs administrations, and the general administrations with representations in the same.

Management control in this level is addressed to the optimization of the use of resources. It responds toefficiency,productivityandqualitycriteriaonservicesissues,thereforeitconsiderstheproductsand the inputs of the operational processes. It is the basis for the transparency of public work.

At the same time these indicators are divided into central and local:

a) Central scope operations indicators

These indicators are designed to follow-up and evaluate the operation of the general administrations, substantive operations as well as support operations.

example of central scope operation indicators:

• Perception on customs operations• Attention to high risk situations• Wait times (queues) in the customs office• efficiency in the customs recognition process• Fight contraband• Advance in fiscal damages• effectiveness of the risk model for labels• Information requests served on time• Returns and compensations • Percentage of first instance sentences favorable to SAT (amount)• Increase in the recoverable portfolio value by the originating authority.

b) Local scope operations indicators

These indicators are designed to evaluate operational performance relating to taxpayer services, Collection, federal, juridical and foreign trade fiscal audits, performed by local administrations and customs administrations.

example of local operations indicators (local administrations):

• Registry update• Streamlining taxpayers that have not be located• In-depth surveillance• Increase in compliance• Perception of the quality of the service• Recovery of the credit portfolio• Rotation of collection documents• Auctions• Quality in the credits inventory• Index of final judgments awarded by amount• Index of resolved administrative resources• Index of penal issues requests served• Index of favorable judgments of certain actions in indirect protection proceedings (amparo)



example of local operation indicators (customs administrations):

• Percentage of detection, drugs and weapons confiscation and/or seizures• Seizure of goods resulting from piracy• Penal cases• detection, confiscation and/or seizures of cash (national and foreign currency)• Orders to verify goods in transit which originated a serious incidence• effectiveness in the transfer of goods which property was transferred to federal tax

authorities• Recognition time (first recognition)• Collection (passengers)• effectiveness of conviction resolutions issued• Serious precedents detected during the second recognizance and not detected by the

first.

1.3.4. Results or impacts indicators

Are the highest level of SAT indicators aggregation and allow measuring and evaluating of the Institution’s comprehensive performance vis-à-vis its mission and vision.

Represent the impact of the entity’s actions in the country’s socio-economic context and allow evaluating the institution’s performance as a whole unit. Furthermore, they are used to prepare official reports, tax and management reports, which the institution presents periodically to different offices of the federal government as well as the Congress of the Union, on issues, such as:

• Tax efficiency;• Real Collection behavior;• Collection behavior by types of taxes;• The impact of examination actions in Collection activities;• Collection in regards to the national GdP.

1.4. Implementation of Management follow-up and performance evaluation system

The frequency in the measuring performance is an essential feature of SAT’s management follow-up and performance evaluation system. However, the quality and the representation of the indicators generated for the measurement, is of even greater transcendence.

The starting point for the construction of indicators is the clear and agreed description of the strategy, tactics and operation. In this regard, important efforts have been made to develop indicators that provide a better representation, which consider the measurement of the Institution’s comprehensive performance as well as its three levels of management.

1.4.1. Management control de los strategic and specific programs

In the current implementation stage, indicators to measure bad behavior and the results of the strategic plans was adopted, as well as determining specific programs and projects which contribute to compliance with the objectives that gave place to the same. In this manner, the follow-up and evaluation of strategic programs is done based on indicators, while for specific programs and projects it is done based on the advances in their execution. These last programs are reported through a “Project” for each specific program and project.



1.4.2. Management control of operation programs

a) Local administrations

local administrations are the 66 regional offices of SAT located throughout the country which carry out the general administration activities of Collection, legal and taxpayer services and federal fiscal audit., becoming in this manner the Windows through which all taxpayers, excepting large taxpayers, carry out practically all their fiscal transactions.

Work characteristics and burdens of these administrations are various, this is observed in factors such as the amount of the collection, and the amount of taxpayers, audits carried out, the number of judgments, the number of employees and others. In this sense, the comparison between administrative units with important differences in their results, vocation and work burdens would not be fair; therefore it would be necessary to define a model that “evaluates” them more homogeneously, to be in the position of making valid comparisons amongst them.

Therefore a decision was made to group local administrations in seven groups with similar characteristics. These grouping criteria also seek to generate enough incentives to promote more direct competition amongst the local administrations of the same group.

With the purpose of complimenting fol low-up and obtain specif ic information on the performance of the local administrations, “self-evaluation questionnaires” were designed and the same were collected by those in charge of local operations. Responses to these questionnaires are reviewed periodically at headquarters, by selecting the local administrations under review.

b) Customs administrations

The General Customs Administration carries out its operations programs and projects throughout the country through its 49 customs administrations.

The system is applied in customs, based on 14 relevant indicators, performance based on those that are followed-up from headquarters.

Ten groups were formed to evaluate customs offices, and the following criteria were used:

• Type of traffic: border, inland and maritime customs;• Operations volume: number of operations modulated by vehicle;• Collections by passengers;• Operations similarity by type: cargo or passengers

In this manner each group is formed by customs administrations which operation and dimensions are similar, giving place to fair comparison amongst customs belonging to the same block. The purpose is that the evaluation scheme should generate sufficient incentives to continuously improve its performance through competition among customs belonging to the same block.



II. RESULTS OBTAINED AS A RESULT OF THE GOVERNMENT MODEL OPERATION

2.1. General Results

• The Government Model for Planning, Strategic Management and Continuous Improvement was institutionalized, disseminating the regulatory framework requirement so that the planning and implementation of the strategy of the Institution and the management follow-up and performance evaluation system be done with a long, medium and short-term vision, by the linking of the strategic management, tactical and operations levels and the alignment of the operational programs with the business plans of the general administrations and these with the institutional strategic plan.

• SAT’s culture has been strengthened on strategic management, management control, accountability and institutional performance evaluation issues, through its use in the daily operation of the administrative units of the institution and the unification of the administrative and operational language on these subjects.

• All SAT director, tactical and operational areas are involved in the implementation and operation of the Government Model for Planning, Strategic Management and Continuous Improvement y del Management follow-up and performance evaluation system, at headquarters level as well as throughout the country, at the offices that form part of local administrations and customs.

• The organization, daily operation and operational budget was aligned with the strategic institutional plan and the business plans of the general administrations, as well as with the programs, processes and projects deriving from the same.

• Greater congruence among products, services and results generated by the general administrations was generated with the strategic goals and targets, as well as with the institution’s budgetary process.

• Standardization of concepts, methodologies and procedures for the preparation, execution, control and evaluation of the strategy, tactic and institutional operation at all levels and scopes of SAT.

• Commitments and responsibilities were defined and made more transparent for the implementation and operation of the management follow-up and performance evaluation system at all areas and levels of SAT.

• A local website was built as well as the necessary repositories to generate an information structure of strategic, tactic and operation components to register, give follow-up and evaluate the results obtained by the different levels and scopes of SAT, resulting in more efficient decision-making.

2.2. The General Administrations Participation

• Prepare, implement and execute their business plans and the specific programs, projects and processes that form part of the same in agreement with the Institution’s strategic plan.

• Register their business plans, programs, projects, objectives, indicators and goals, among other components of strategic planning, to set-up and maintain the respective catalogs permanently updated.



• Formulate and disseminate the strategic map of its general administration.

• Align their organization and resources in agreement with their Business line or lines and with its Business Plan.

• Align their daily operation to the institutional strategy and to their business plans.

• Apply continuous of programs in agreement with the evaluation of its action.

• define and report their indicators as set forth in the Government Model and for the management follow-up and performance evaluation system.

2.3. Results on the subject of focusing on the strategy

during 2008, the group of Programs of strategic nature was revised by the Board of directors (SAT’s CeO and General Manager) and this resulted in the reduction of the universe of strategic programs from a total of 56 programs in effect in 2007, to 14 strategic programs for the term 2008-2012.

1. large Taxpayers Program.2. Program to Strengthen Taxpaying Culture.3. Program to Facilitate Compliance with Tax Obligations.4. Program to Align and Systematize Processes.5. Comprehensive Intelligence Program.6. Program to Improve the defense of Tax Interest.7. Program to Improve Collection.8. Human Capital Program.9. Program to Fight Corruption.10. Program for Coordination with States.11. Program to Facilitate Foreign Trade.12. Technological and Infrastructure Modernization Program for Foreign Trade.13. Program for Foreign Trade Control and Security.14. Program to Strengthen Customs Operations

These programs are the shared responsibility of the different general administrations and one of them, pursuant to the business line under its responsibility, is appointed ad responsible for its compliance, while the others are appointed as correspondents.

III. PROBLEMS OBSERVED DURING IMPLEMENTATION AND OPERATION

The problem for the full implementation and operation of the Government Model and the management follow-up and performance evaluation system is centered in the following aspects:

• SAT does not have a planning culture consolidated.

• The measurement, follow-up and performance evaluation must be ruled to be applied fairly.

• The execution and operations areas use planning strategic Management standards as reference documents, but not as effective instruments for the operation and control of their daily work;

• The interrelation of operational areas and the area responsible of implementing and operating the system is insufficient;



• The termination of the strategic plans and programs of the institutional budgetary process forces areas to comply with a double disassociation exercise among themselves: planning and programming - budgeting;

• Indicators used by the general administrations make difficult the comprehensive evaluation of institutional performance, because substantive processes, such as support and assistance are disassociated from strategic planning;

• lack of historical series indicators databases which allow management and in-depth performance analysis;

• Information available is not homogeneous or sufficient to perform adequate diagnostics of the needs of the institution, the taxpayers and/or the customs users;

• Information exchanged by areas is scarce, thus making difficult the execution, control and evaluation of shared strategic programs;

• Self-evaluation culture has not been developed because it generates fears because of management control and performance evaluation, causing areas to commit with targets under their installed capacity.

• In summary:

• Control of activities and expenses is preferred over the evaluation of the results;

• Institutional evaluation as well as the evaluation of the areas is based on goals attained and not results;

• Resistance to the development of the strategic management culture continues, as well as its follow-up and performance evaluation because the regulatory instruments that establish their need and fairness and define their responsibilities, roles, management instances and coordination are not at hand;

• It is difficult to identify and quantify the contribution of the areas towards the institutional results, since its indicators are more centered on operational efficiency than in the efficacy of the programs.

IV. STRATEGIES TO ADDRESS THE PROBLEMS OBSERVED

Measures to facilitate the implementation of the Government Model and the management follow-up and performance evaluation system, as well as to anticipate and counteract the abovementioned problems, were defined by considering the five dimensions that constitute SAT’s Institutional Architecture: regulations, organization, processes, information and technology.

4.1 Strategies on the subject of regulation

On the subject of regulation it was mandatory to prepare, agree and implement the necessary specific regulations to have a reference framework and the behavior guidelines to implement the Government Model and the management follow-up and performance evaluation system, in agreement with the regulatory framework that rules SAT. In this regard the following internal regulations have been issued:



1. Guidelines to regulate the Government Model for Planning, Strategic Management and Continuous Improvement;

2. Guidelines for Follow-up, evaluation and Planning Supervision and SAT’s Strategic Management;

3. Regulation of the SAT’s Collegiate Management Committee an its Specific Collegiate Committees;

4. Guidelines to Rule SAT’s Project Management Cycle;

5. Guidelines for Follow-up, evaluation and Project Management Supervision Cycle.

4.2 Strategies on the subject of organization

This dimension refers to the organizational structure linked to the execution of activities that form the processes, through which the three levels of management are linked.

4.2.1 Organizational Structure Focused on Processes and Services

There is a close relation between the strategy and the organizational structure, therefore a decision was made to align the institutional organization to processes instead of doing it by functions, as it had been worked to date.



4.2.2 Collegiate Management Committee

Another provision that was taken was the formalization of the Collegiate Management Committee as coordination, follow-up and evaluation body of senior management. This Committee analyzes, agrees and instruments the strategies and priorities of the Strategic Plan of SAT; it provides follow-up to the management and evaluation of institutional results and defines and coordinates the relevant actions to adjust scopes, change, strengthen or disregard any strategy or incorporate new options.

The Central Planning and evaluation Committee depend on this Committee as well as the work groups, which provide follow-up and evaluate the institutional work pursuant to the following three types of taxpayers:

• large taxpayers;• Internal revenue;• Foreign trade.

4.3. Strategies on the issue of processes

This dimension considers two strategies.

4.3.1 The Government Model link with SAT substantive and support processes

The strategy defined is the focus of systems and processes to form the three levels of management with the substantive processes of support and assistance.

4.3.2 The Government Model link with the planning, programming and budgeting process of the federal government

This is an alignment strategy. The objectives of budgetary programs, business plans, programs and specific projects are aligned with objectives, priorities and strategies of the strategic plan of SAT which at the same time is aligned to the Sector’s program and the national development Plan (Pnd, in Spanish).

The performance indicators of the budgetary programs are aligned with those established in the strategic plan of SAT. The goals for the indicators of the budgetary programs are established in function of the budgetary assignments.

4.4. Strategies on the issue of information

Guidelines for this dimension are intended for SAT to generate, process and conserve the necessary information which allows timely assessment of the efficiency of the processes, the impact of the results, performance evaluation and carry out planning in the three levels of management.

4.5. Strategies on the issue of technology

This dimension of the Institutional Architecture of SAT refers to the technological Framework to rule the incorporation of the applications that support the entities’ processes, as well as the institutional repositories that store the information thereof. In this field the IT tools, the systems and websites required for institutional applications stand out.



4.5.1 Website for the Management follow-up and performance evaluation system

The management follow-up and performance evaluation system operates through an expressively Website designed, whereby the areas of SAT that supply the information necessary for their evaluation have access to the results of the same.

The website is framed institutionally in a processes alignment and systematization initiative, which purpose is to simplify procedures, capitalize best practices and automate operations.

The website complies with three basic functions:

• To serve as a communications interface between the site’s operator and the users areas of the same;

• To contain an evaluation board in order for the areas to know the advance achieved from its indicators and extract information for its diagnostic, planning, follow-up, control and evaluation activities;

• To produce advance reports by area, objective, program, indicator and goal, pursuant to the classification or grouping catalogues, which facilitate inference in regards to the results and the efficiency of the strategic management.

depending on the Management level applied to the indicators the performance of SAT is measured and evaluated.

Currently, work is being carried out so that in near future, workers’ performance evaluation is done base don their contributions to the institution’s daily tasks.

V. CONCLUSIONS

1. Subsequent traditional follow-up and management evaluation approaches are practices that are still too rooted in the culture of the public administrations; this makes the conception, implementation and operation of modern systems to evaluate the actions of public entities from various perspectives (results or impact, coverage, efficacy, quality, efficiency, productivity) instead of audits difficult, as the usual practice.

2. The modern and comprehensive sense of control of public management is real time follow-up, evaluation and feedback of government actions, with the purpose of:

a) Prevention of deviations; b) Comprehensive self-assessment of the Institution and its results;c) Feedback for strategic planning and operation; d) Support for decision-making;e) Transparency and accountability.

3. The new challenges posed by globalization, Information and Communication Technology (ICT) and the permanent innovation on the subject of tax strategies and financial instruments used by corporations and multinational companies throughout the world, render obsolete the paradigms ruling the organization y operation of the tax administrations. To anticipate and efficiently respond to the new challenges of the modern world, the traditional forms of work of the tax administrations must be substituted by strategic management and risk management approaches, where the only constant is constant change.



4. Management and indicators control for performance measurement represent an important role in the strategies’ feedback, as well as to align and make more efficient the operation of tax administrations. However, management control, without a sound reference framework given by the strategy, becomes a fragmented and sterile exercise of reports on the institution’s day-to-day operation, which conceal all sorts of deficiencies.

5. In modern tax systems, the operation without the strategy is blind; similarly, the strategy detached from the operation becomes a mere intellectual exercise.

6. The Government Model for Planning, Strategic Management and Continuous Improvement is the base to implement and operate strategic management, management follow-up and performance evaluation, in agreement with the institutional strategic plan, the business plans of the general administrations and the operational programs at the Institutions’ management levels.

7. Strategic, specific and operation programs, as well as its respective indicators, goals and components, continue with the review and adaptation process until it reaches the desired levels for the evaluation institutional performance.

The Institution is considered to be in the first stage of maturity for the comprehensive evaluation of institutional performance, therefore, it is foreseen that this review, changes and adjustment process will conclude in 2010, regardless of the annual adaptations required by the institution’s strategic plan.



1. Introduction.

2. Compliance strategy: A short introduction.

3. Influencing taxpayer behaviour.

4. Making balanced choices: An introduction.

5. Steps towards a well balanced choice.

6. Developments.

7. Objectives.

8. Final remarks.

New Technologies to Improve Control Capacity

Han Wijers(The Netherlands)

1. Introduction

New technologies in a broad perspective

This paper describes new technologies used in the Netherlands as tools for improving the tax administration’s control capacity. These technologies do not stand alone but are part of a supervision policy. In this paper the new technologies are placed within the context of the Netherlands Tax and Customs Administration’s compliance strategy and supervision policy plan 2010-2014.

Contents

The focus of the compliance or supervision strategy is on influencing taxpayer behaviour. A description of this strategy is given in the second paragraph. The critical success factors in this strategy are described in paragraph 3. The fourth paragraph contains an introduction to the method used to make effective use of the tax administration’s control capacity by making well-considered choices on the deployment of supervision tools. The fifth paragraph explains the steps taken to make these choices. As a tax administration operates within society, external factors influence the compliance strategy. Four major factors are described in paragraph 6. All these factors are taken into account in the supervision policy which is currently being developed within the NTCA. A number of objectives for the period 2010-2014 are highlighted in the seventh paragraph, combining all elements described in the previous paragraphs. Final remarks and conclusions are included in the final paragraph. Throughout the presentation good practices, including new technologies, are highlighted.

Private individuals and small businesses

Topic 2.3 on the agenda of the CIAT Technical Conference is about large taxpayers. For topic 2.2 therefore the choice has been made to focus on large scale processes: technologies and tools dealing with private individuals and small businesses.

2. Compliance strategy: a short introduction

Compliance

The guiding principle for supervision activities is that the Netherlands Tax and Customs Administration (NTCA) aims to maintain and reinforce compliance of private individuals and businesses and to limit non-compliance. Compliance is the willingness of private individuals and businesses to meet their legal obligations with regard to the Tax and Customs Administration. Compliance is defined - in accordance with international standards1 - in four basic obligations based on tax laws:

• to register for tax purposes;• to file tax returns (on time);• to correctly report tax liabilities;• to pay taxes (on time)

1 OESO, Monitoring Taxpayers’ Compliance (2008) and EU, Risk Management Guide (2006)


54 TAx ADMINISTrATION / MANAgeMeNT CONTrOlHan Wijers (The Netherlands)

Compliance strategy: a parallel approach

Supervision, whereby the NTCA checks to see whether taxpayers are complying with fiscal legislation and regulations, is traditionally one of the key tasks of a tax administration. Over recent years, supervision has altered. The NTCA pursues a number of different parallel strategies, tailor-made to the tax risk or tax issues involved. Keywords in the strategy are:

- from repression to prevention - mutual trust, understanding and transparency - shared responsibility - working real time - certainty in advance - preventing double work - themed approach - cooperation with other authorities - visibility - focus on outcome instead of just output

Compliance strategy

The goal of the NTCA is to minimize the tax gap; this is the tax loss that derives from non-compliance with the four basic obligations. In addition the NTCA aims to get as much assurance as possible with regard to the correctness and completeness of tax revenues; this is called the compliance map. Promoting compliance by private individuals and businesses amounts to influencing taxpayer behaviour with regard to the four basic obligations.

To achieve these goals the NTCA has added new tools to the more traditional, vertical ways of supervision. These include horizontal monitoring and communication. The aim of these new tools is to influence taxpayer behaviour: pro-active instead of re-active actions. Compliance management is about determining which instruments and activities have to be used, and how, when and directed at whom, to positively influence tax compliance.

The principal challenge for the years ahead is to make supervision more selective and to see where the NTCA shares responsibility with taxpayers. The basis of the NTCA’s actions is trust so taxpayer’s dealings are made as straightforward as possible. In cases where trust turns out to be misplaced, a more repressive approach may be chosen; the NTCA will take effective measures. By deploying a more diversified approach, the NTCA is able to keep its increasing – and highly dynamic – client volume at an acceptable compliance level

This strategy demands focus and well-considered choices. The policy plan focuses the attention of the NTCA on specific areas and developments. In this context the NTCA has phrased four crucial or critical success factors which contribute to the NTCA’s supervision goals. These crucial success factors also form the backbone for the development of new technologies and tools.

3. Influencing taxpayer behaviour

Introduction

The NTCA is part of a society in which citizens, businesses, organizations and public bodies react to each other’s actions. Certain actions on the part of the NTCA lead to a reaction from the taxpayer and vice versa. In order to influence taxpayer behaviour the NTCA needs to aware of its own behaviour but also of behaviour within society. It is important too to know what causes non-


55TAx ADMINISTrATION / MANAgeMeNT CONTrOl Han Wijers (The Netherlands)

compliant behaviour by citizens and businesses. Making mistakes because of ignorance differs from aggressive tax planning and from tax fraud. Behavioural science has shown that criminal sanctions are not the appropriate response (and may have an adverse effect) when non-compliance is caused by complex legislation or a lack of knowledge on the part of the taxpayer. The NTCA matches its supervision and compliance strategy to the taxpayer’s attitude and motives (responsive strategy). For large businesses, where the supervision strategy is individually designed, this means that the intensity of supervision is matched to the level of control of the large business itself.

Critical success factors

Based on the goal of influencing taxpayer behaviour the NTCA will apply the following critical success factors with regard to supervision. These factors all contribute to influencing taxpayer behaviour.

a. Real time supervision

NTCA supervises in real time because this is the most appropriate time to effectively influence taxpayer behavior. real time supervision means speed, effective use of capacity, made to measure service and supervision which is tailored to the taxpayer’s real time circumstances. The basic principle is to focus the attention on the quality of future tax returns. Keywords in real time supervision are “working in advance”, response and support.

Good practice: prevention

As regards yacht manufacturing it has emerged out VAT-constructions are established to avoid paying VAT. In addition the origins of the money are often concealed using vague legal entities that hide the true owner. A number of these constructions used to be tackled by making corrections on returns or VAT-refunds; the NTCA succeeded in part but not in all cases; this approach was very labour-intensive and therefore costly. Applying the principle of real time supervision means visiting the shipyards during the building works; thus real time information on the identity of the buyer is gathered and VAT constructions can be (and are) prevented.

b. Visible supervision

The NTCA is visible both as a provider of services and as a supervision organization. Visibility influences taxpayer behaviour considerably. An example of this is that visibility has a preventive effect without having to actively correct or punish. The taxpayer notices and experiences the presence of the NTCA. Visibility literally means being out on the streets or having a communication strategy in place. Keywords in visible supervision are prevention and the experienced “chance of discovery”.

Good practice: international information exchange

The NTCA has very actively adapted its strategy to developments related to the financial crisis, especially the fact that a large number of countries has ceased to use banking secrecy rules as an impediment to the exchange of information. In a very short period of t ime a large number of agreements have been concluded with these countries. These developments have been communicated to the media. The taxpayer has been given to understand that to funnel off money abroad wil l shortly become impossible. This communication strategy has induced hundreds of taxpayers to come forward voluntarily to pay their taxes and avoid sanctions.



c. Horizontal monitoring

NTCA actively states obligations, both those of taxpayers and those of the tax administration and aims to act accordingly. This impacts both parties’ behaviour: in horizontal monitoring mutual trust, understanding and transparency are keywords. This concept is applied for all segments of taxpayers and their representatives. It is implemented in agreements with large businesses, tax intermediaries and other parties such as branch organizations. With regard to large businesses this means that the business’ own responsibility is the key, materiality is the starting point and the tax administration builds on control activities which have been done as part of the business’ tax control framework. The agreements with tax intermediaries are aimed at strengthening and trusting the internal quality control systems of the intermediary and aligning work processes. Keywords in horizontal monitoring are responsibility, certainty and partnership.

Good practice: cooperation with intermediary association

A pilot project has started with an association of tax intermediary and accountants. In total 370 tax intermediaries’ and accountants’ offices are members of this association. A group of 20 of these offices participate in a pilot project in which agreements on wage withholding tax-returns have been concluded with the NTCA. The tax intermediaries/accountants decide whether their clients’ returns are designated as “agreement-proof returns”. An “agreement-proof return” is completed in accordance with the control program that has been agreed upon between the association and the NTCA; using this program ensures the quality-level of the tax return. No thorough checking of these returns is necessary; in fact this creates a green lane for these tax returns. This means the NTCA does not have to check these tax returns thoroughly (“green lane”); in principle limited random checks are carried out with regard to these returns. Also the association carries out intermittent checks on its members’ performance with regard to the agreements. In due course membership includes a mark of quality regarding tax returns. In case one of the members does not adhere to the terms of the agreement then they are not only corrected by the NTCA but also by their association. Should a NTCA check show that not only the NTCA but also the intermediary has not been properly informed by the taxpayer than this not only has tax consequences but also effects on the relationship between the tax intermediary and his client. This creates a learning circle and shows that all partners in the chain are jointly responsible for a correct tax return.

Currently this is a pilot project; should all members of this association decide to participate in a permanent agreement, then 30% of all wage withholding tax-returns are covered by horizontal monitoring. An extension to other tax returns is anticipated in due course. except for the design and execution of random checks on the observance of the terms of the agreements, the costs involved in this type of supervision are in principle exceptionally small. Developing and maintaining the contacts with the association and the process agreement process are the responsibility of a team of 5 or 6 officials, taking up one man year in capacity.

d. Cooperation with other supervision agencies

The NTCA is seeking collaboration with supervision agencies outside NTCA. Other supervision agencies are involved in the NTCA’s supervision activities and the NTCA participates in other agencies’ activities. Keywords in collaboration are operating integrally, socially and government wide.



Good practice: intelligence centres

The NTCA participates in recently established regional intelligence centres and the national intelligence centre. Primarily aimed at tackling organized crime, the aim of these centres is to combine data from a wide range of supervision agencies (such as NTCA, district attorney’s offices, municipalities). By joining both information and supervision powers fraud can be tackled more effectively. Fraud often consists of different kinds of fraud such as money laundering, human trafficking, tax fraud etc. This approach ensures these fraud types can be tackled jointly and speedily. Criminal organizations operate both in the underworld and the straight world; these organizations need accommodation, personnel, financial services etcetera and thus affect various government agencies. By cooperating not only specific fraud types are dealt with but also the organization as a whole is tackled. An example: in the Netherlands municipalities are authorized to grant licenses (e.g. for business accommodation). If it emerges an accommodation is used for criminal purposes by a criminal organization, local government can withdraw the license, in combination with instigated criminal prosecution and the confiscation of unlawful gains by the justice department. To prevent the criminal organization from “popping up” elsewhere, a nationwide intelligence centre needs to be in place, in combination with links to neighbouring countries. A nationwide covenant makes the exchange of information more simple and univocal. The total operation costs of these programme are 2,7 million euro for the year 2009, increasing up to 5 million in 2011. 4. Making balanced choices: an introduction

Introduction

The NTCA has renewed its compliance strategy and aims at a diversified approach making well balanced choices that weigh the compliance effect to be achieved and the supervision instruments required. This approach enables the NTCA to structurally tackle tax risks and toe adequately and effectively make us of control capacity. The steps taken towards making a balanced choice are described in paragraph 5 of this written presentation. Before starting supervision activities, the NTCA identifies and analyses the issues involved and chooses, based on the desired effect and the available capacity, the tools or mix of tools which best fits the aimed for influence on taxpayer behaviour. In order to be able to identify and analyze, the NTCA invests in monitoring taxpayers, their circumstances and in analyzing risks and behaviour.

Tools

A mix of supervision tools is deployed to influence taxpayer behaviour (to achieve and maintain compliance. This mix consists of tools that have been in place for a number of years and of more recently developed tools. examples of the former category are: the mass process of selection of tax returns, audit and fraud investigation as well as the provision of services such as information and advice.

More recent tools are the use of horizontal monitoring (agreements with taxpayers and (bodies of) tax intermediaries), visible supervision (communication strategy, surveillance and targeted actions). Newly implemented tools are the improvement of services such as extended hours on the Telephone Service and returning calls, also with regard to the policy to contact every taxpayer who has lodged an objection.



Segmentation

By structuring the approach the NTCA is able to keep its increasing and highly dynamic client-volume at an acceptable compliance level: a proportional and diversified approach. The NTCA anticipates demographic, economic and international developments which affect the size and diversity of its client volume. This volume is of such magnitude that principles of control and effectiveness demand segmentation. Segmentation involves breaking down the total pool of taxpayers into groups with shared features such as financial interest, complexity of the tax issues, scale etcetera. The NTCA distinguishes four segments: private taxpayers, small businesses, medium-size businesses and large businesses. These segments are analyzed in their entirety and provided with a strategic plan for supervision. The features of the segment determine, among other things, the tools that are deployed.

Good practice: gaining knowledge on large groups of taxpayers

The large scale of the private taxpayers and small businesses-segments determines the approach. Choices for these segments are mainly based on the results of random Surveys on private individuals and businesses. These are an indispensable element in designing a compliance strategy with regard to these groups. The information gleaned from these Surveys is very valuable for the learning circle which is in place in the design of the compliance strategy. The surveys, which are held structurally and annually, are intended to gain knowledge on:

- the behaviour or risks related to groups of taxpayers - the effects of supervision activities (based on certain assumptions) - unpredictability in supervision.

5. Steps towards a well balanced choice

Introduction

The NTCA aims to make well considered and balanced choices regarding which tool or combination of tools is deployed, and with which depth, to achieve an improvement in compliance in a certain situation or to support proper taxpayer behaviour. Considering choices well is important as a wrong choice may have adverse effects. In making these well-considered choices it is important to weigh the balance between means and effects. Tax risks, financial concerns and the political and social impact all play a part in making these well-balanced choices. The NTCA has developed a step-by-step plan which is explained in this paragraph. This step-by-step plan applies to issues dealt with at a national level and to issues which are researched in the regional offices of the NTCA.

Steps

1. First orientation

The NTCA (both on a national level and tax regions) receives signals on risks from different sources. A signal points to possible non-compliance or insufficient compliance regarding taxpayer’s obligations (registration, filing, payment and reporting). Once a risk has been indicated it is important to determine a number of aspects:

- Which tax rules are concerned? - Is a specific group of taxpayers (segment) involved? - Are certain objects or tax events concerned?

This step aims at describing the risk of non compliance, including legal aspects and the segment of taxpayers concerned.



2. Analysis

The second step is a more in depth analysis. This means the size and intensity of non-compliance and its seriousness are analysed. Also priority is determined. This step leads to a go/no go decision for developing a compliance strategy.

3. Outcome

The general aimed for outcome is compliance and in the third step it is important to determine precisely the desired outcome of the supervision strategy. The result of this step is to describe the intended improvement with regard to the following areas of taxpayer behaviour:

a. registration b. Filing c. Payment d. reporting

At this stage it is important to realise that measuring outcome (the effect on taxpayer behaviour) is not always easy or straightforward. Measuring output is more concrete: it is about figures: the numbers of audits or the amount of taxes collected. Measuring outcome is about measuring changes in behaviour which is not easy and which cannot be easily attributed to single causes or tools (see also step 9).

4. Analysis causes of non-compliant behaviour

This step involves research into the possible causes for non-compliance. Why do taxpayers not comply? At this stage the three contributing factors (motivation, capability and opportunity) are researched in depth and in relationship with each other. Determining factors are knowledge and motivation on the part of the taxpayer but also the perception of the tax administration’s supervision strategy. This step results in a list of causes.

5. Group of taxpayers

This step focuses on the subject; the taxpayer or group of taxpayers who are not complying. In the case of a group of taxpayers, the analysis is aimed at determining the causes of this segment’s behaviour and whether differences exist in this group. This step results in a list of the main segments of taxpayers, their (non) compliance behaviour and the causes for this behaviour.

6. Supervision tools

The NTCA has a broad range of supervision tools at its disposal. Besides preventive instruments such as assessing legislation, communication, services and visits to companies, there are repressive tools such as audits, fraud investigations, administrative fines, etc. relatively new tools in the mix are measures such as horizontal monitoring, supervision communication and working with other supervision agencies. These tools intend to prevent non-compliance and influence taxpayer behaviour beforehand. repressive instruments are not always the most suitable means for bringing about long-term shifts in behaviour. When taxpayers continue to default out of ignorance, communication and services provide by visiting start-up businesses, may prove more effective instruments.



7. Planning

8. Execution of the strategy

9. Evaluation

In this phase one of the most difficult aspects of the supervision strategy is addressed. It is about measuring the outcome of the supervision strategy. This step provides invaluable information in the learning circle which is part of the compliance strategy.

Measuring outcome

Measuring outcome is the final stage in the NTCA’s compliance strategy. The NTCA measures whether the intended effects regarding taxpayer behaviour have been realized. Measuring outcome of supervision activities is done regarding segments, projects, specific supervision activities and large businesses.

regarding the segments private individuals and small businesses the following instruments are in place:

• the tax monitor (private taxpayers) and the compliance monitor (small businesses): these are surveys which provide insight in the opinion and attitudes of taxpayers regarding the NTCA and paying taxes in general.

• random checks which provide an insight in a part of the tax loss (tax gap) • the compliance map which provides an insight in the assurance regarding tax revenues.

These instruments provide relatively objective criteria to weigh “competing” supervision activities on a strategic/tactical level. regarding medium-size and large businesses outcome is measured using supervision on meta-level and a specific compliance monitor regarding these segments.

Measuring effects at the level of supervision activities or projects helps to determine the effectiveness of these activities. The results are used for further improving and refining the compliance strategy, thus contributing to more well-balanced and well-considered choices for the deployment of supervision measures (a learning circle).

In a nutshell….

The compliance strategy means making well balanced choices. This process starts with knowing: identification and analysis. This knowledge is the basis for determining the intended effect and choosing the strategy. This is followed by the execution of the chosen strategy, evaluating and measuring the outcome. This creates a learning circle which is made visible below.

…and a picture:



6. Developments

external factors and developments influence the NTCA’s compliance strategy; these vary widely: demographical, economical and international developments all influence supervision strategies. each issue provides a tax administration with a potentially heavy burden on capacity and resources. This paragraph lists a number of these factors and shows a couple of tools dealing with these factors.

Growth in economic activity from abroad

Due to the eU policy on free flow of labour, the number of labourers, noticeably eastern european countries, has risen considerably. These labourers may be employed or operate their own business. Often, foreign temporary employment agencies act as intermediaries. Due to the temporary nature of these employees’/entrepreneurs’ labour, it is difficult to get a grip on the observance of their legal obligations.

Good practice: engaging the tax intermediary

The NTCA has developed a local project developing a relationship with a tax intermediary whose clientele consists entirely of taxpayers from abroad. Due to language barriers and a culture of distrust towards government this group of taxpayers is not easily approached. Cooperation with their tax intermediary increases the possibilities of fruitful contacts and makes optimum use of the strong social bonds in this group of taxpayers. establishing and maintaining this relationship takes relatively little effort considering the results.

Growth in number of small businesses

The number of small businesses has risen during the last years by an annual 10% to approximately 1,2 million businesses. This growth is primarily caused by an increase in the number of self-employed entrepreneurs without personnel. One third of small businesses is relatively small. This



growth in small businesses poses a considerable challenge for the NTCA. The quality of their tax returns is often insufficient due to a lack of knowledge on the part of the entrepreneur and the lack of proper fiscal guidance. This group of taxpayers fairly often makes mistakes in applying the rules regarding specific facilities for businesses.

Good practice: supporting start-up businesses

Information in advance helps new businesses in making correct tax returns and saves the tax administration time and effort in dealing with these returns. The NTCA undertakes a large number of visits to companies, particularly to start-up companies. This is founded on the conviction that, regarding compliance, the greatest impact on companies’ tax return behaviour is achieved when companies are in the start-up phase. Visits to companies perform two key aspects of supervision - service provision and prevention. During the visits, a clear picture of the company is gained and potential risks in the company’s administrative system can be assessed. Start-up businesses are informed of their obligations and the criteria their administration must meet. Where possible, these visits are carried out in collaboration with other parties - Chambers of Commerce, fiscal intermediaries and branch organizations.

Financial crisis

As a result of the financial crisis, the survival of a number of businesses is threatened and over 80% of all businesses expect, for the first time in years, not to see an increase in jobs while turnover and profits decrease in 2009. Increasingly, businesses hire short term labour and self employed personnel to guard themselves against a setback. In 2009 the number of jobs sharply decreases. In comparison: in 2008 employment in the small business sector rose with 65.000 full time jobs and this number was 65.000 in 2007. In manufacturing, trade and and the catering industry the number of jobs will decline. In addition businesses are concerned about the rising costs: almost 70% of businesses consider this a risk for the survival of their company. The expectation is that recovery of this sector will take a number of years.

Good practice: insolvency prediction tool

The intelligence-department of the NTCA is developing a so called `insolvency prediction tool`. This tool is aimed at discovering taxpayers with substantial tax liabilities in time. The prediction tool is mainly based on the taxpayer´s behavior regarding their tax return and payment of taxes. This tool is developed using existing packages. The NTCA bought the licenses for these packages, such as ACl, excel, Access and Visual basic. This approach means that the development of the tool is relatively inexpensive. A small group of experts (8 people) are skilled in high level linking and combining of data.

Decreasing the administrative burdens on taxpayers

Consecutive governments in the Netherlands have formulated the goal to substantially decrease the administrative burdens on taxpayers. Small businesses are disproportionately affected by legal requirements. In addition laws can be very complex and this in itself may lead to non-compliance, whether due to ignorance or intent. less and better laws intend to decrease these burdens. Working real time, agreeing on processes and giving certainty beforehand limits time consuming controls by the tax administration afterwards, decreasing costs for businesses. In this respect, the NTCA is also simplifying the corporate income tax return and promoting xBrl2 .

2 XBRL is a standard for compiling and exchanging corporate financial reports and data, for instance via the Internet.



Good practice: engaging NTCA and associations

The NTCA has the standard practice to check proposed regulations beforehand on a number of issues. Checking the effects on the administrative burdens on taxpayers is a definite point in the checklist. In addition, major legislative changes are discussed beforehand with taxpayers’, tax intermediaries and business associations.

7. Objectives

The previous paragraphs contain a description of the compliance strategy, aiming at influencing taxpayer behaviour. The presentation has shown how the NTCA aims to optimize choices to achieve the intended effect on taxpayer behaviour. Also the external influences on the compliance strategy have been described. The supervision policy as regards the period 2010-2014 brings these items together in describing the tax administration’s objectives using the four critical success factors as described in paragraph 3. On what issues is the NTCA focusing during the next four years? This paragraph gives a number of examples, illustrated by good practices.

Private taxpayers

This is the largest segment: 9 million taxpayers, using highly automated processes and providing a high level of service. For this segment the renewed compliance strategy means a shift in focus from checking tax returns (bulk selection processes) to securing quality in tax returns, beforehand as much as possible. The aim is to improve this quality by provision of service and making use of third party information. Improving this quality is the aim of the activities listed below:

1. Improving the quality of tax returns by moving towards a pre-completed tax return and improved services

2. Focused attention on private taxpayers with undeclared (foreign) income and capital and on private individuals who wrongly have not registered as taxpayers or do not file their return/pay their taxes.

Ad 1. Improving the quality of tax returns

The established process of levying income tax starts with a tax return that has to be completed and filed by the taxpayer. In this return NTCA asks for data regarding the taxpayer´s income. Third parties would be able to supply these data to the NTCA, thus reducing the burden on taxpayers and the risk of incorrect data (fewer errors. Therefore the NTCA is developing a process of obtaining these data from third parties and putting these data before taxpayers in order to check them. Third party data are no longer used as contra-information but are presented to the taxpayer as a service. The NTCA is developing the pre-completed tax return (see good practice) and intends to increase the level of quality regarding third party data.

Good practice: pre-completed tax return

In 2009 the income tax return 2008 has been made available to private taxpayers, for the first time, in a pilot project encompassing all taxpayers concerned, using pre-completed data. Only a limited amount of data was deemed to be of sufficiently high quality to be pre-filled. These are data on wages and the value of private homes. In future years this will be extended to other data, such as data from banks, insurance companies etc. The pilot project has yielded excellent results. As the pre-completed tax return is still under construction no definite data exist yet regarding capacity-issues. The expectation is however that capacity currently used to correct calculating



errors and other mistakes in tax returns can and will be put to more effective use in supervising taxpayers who need supervision. It should be kept in mind though that capacity also has to be employed towards gathering high quality data from third parties.

Ad 2. Undeclared income/capital and non-registration, non-declaration and non-payment

A number of taxpayers are systematically non-compliant regarding their tax obligations: either by not declaring (part of their) income and/or capital (or incorrect deductions) or by not registering as taxpayers and not submitting tax returns. regarding the first category a well known example are taxpayers who do not declare bank accounts held abroad. The NTCA intends to focus its attention on these taxpayers, aiming for the taxpayer. Tools used are strategic communication and the smart and innovative use of combined data which are available both from the tax administration´s systems and from other sources. Three good practices are listed below. The NTCA aims to strengthen its intelligence on these taxpayers and to cooperate with other supervision agencies and other tax administrations, thus reducing the tax gap.

Good practice: mismatches between income and expenses

In 2008 and 2009 an application has been designed regarding persons ̀ living on air`. In Dutch these are called Windhappers. These are persons in respect of whom there seems to be no reasonable explanation for the relationship between their visible income and expenses. They claim to have no or scarcely any income. The application makes 43 combinations from databases and these data are presented to the regional tax offices. examples of data are contra information on payments by ex-spouses, ownership of cars, trailers, boats and mobile homes. In cases of mismatches between income and expenditure there may be undeclared income from (business) activities.

In developing this concept, which was done in cooperation with an external software company, NTCA provided most of the knowledge on taxation and the information gathered from the data and their links. This should be taken into account when developing such a tool. On the other hand the software company provided fast service.

Good practice: automatic number plate recognition

The NTCA has acquired a number of cars fitted out with scanning equipment. These cars are used for different supervision activities, both in cooperation with other supervision agencies and for tax operations, two examples of the latter are listed below:

- Non-payment: match number plate data to taxpayer data and to recovery systems. Driving through neighbourhoods with a large number of tax debts, the onboard computer shows whether the car owner has any outstanding tax debts. If this is the case the -car is halted and the taxpayer is given the opportunity to pay his taxes. In case of non-payment the car is seized and will only be returned after the tax debts have been paid. An example of the results: 6 hours of supervision bring in 30 tax debtors with 1,2 million euro in tax debt. 1/3rd of debtors pay immediately, 1/3rd of cars are seized and in 1/3rd of cases alternative security is raised. This method is much more effective than the more traditional way of recovering (which involves considerable man hours). This tool is also widely published, including the amounts of tax recovered, and this is considered to have a preventive effect.

- Private use of company cars: an employee has to pay income tax when exceeding 500 kilometres per annum on his company cars. If an employee produces a declaration stating no more than 500 private kilometres will be driven with the company car, the employer does not have to withhold wage tax. random checks during a nationwide examination in 2007 showed



that a number of employees declared less than 500 kilometres of private use, but in fact drove more. This called for visible supervision. The NTCA published its intent to examine this issue beforehand so employees could change or withdraw their statement. Supervision is carried out using recognizable “NTCA-cars” taking pictures of cars using automatic number plate recognition to read vehicles’ number plates (this is done for instance at the borders, during the summer holidays targeting cars leaving the Netherlands). The taxpayers concerned are contacted regarding their “less than 500 kilometres” statement.

Good practice: recovery and direct transfer of money

Due to new legislation in cases of outstanding tax debts, the NTCA can directly recover these debts from the taxpayer´s bank account up to his credit limit if the taxpayer does not pay debts upon request to the NTCA.

Small businesses

This segment consists of about 1,2 million businesses. About 75% of these businesses employ no other personnel apart from the entrepreneur. The renewed compliance strategy means that the focus shifts from checking individual tax returns (after they have been submitted) to arrangements where this segment can be dealt with in advance, and `in batches´. Also the focus is on assurance on quality tax returns in advance, on dealing with socially relevant issues and executing the random Business Survey.

This makes for a number of objectives, including the following, as regards the segment of small businesses:

1. Shifting the focus from checking tax returns afterwards to ensuring quality before the tax returns are submitted by supporting start-up businesses, to improve the entire payroll tax chain and to guard timely tax payments

2. Strengthening the tax chain (including tax intermediaries) using horizontal monitoring agreements

3. Putting efforts towards a compliance strategy as regards socially relevant issues 4. Putting efforts towards tracking and supervising unknown businesses, activities and fighting

tax fraud

Ad 1. Shifting focus to working in advance and real-time supervision

As described in previous paragraphs in this written presentation the NTCA intends to influence taxpayer behaviour. research and experience have shown that timing is very important: prevention of non-compliance at the appropriate moment, before the tax returns are submitted, is the key. This principle also applies to monitoring and influencing payment behaviour. Three good practices in this respect are listed below.

Good practice: supporting start-up businesses

Information in advance helps new businesses in making correct tax returns and saves the tax administration time and effort in dealing with these returns. The NTCA undertakes a large number of visits to companies, particularly to start-up companies. This is founded on the conviction that, regarding compliance, the greatest impact on companies’ tax return behaviour is achieved when companies are in the start-up phase. Visits to companies perform two key aspects of supervision - service provision and prevention. During the visits, a clear picture of the company is gained



and potential risks in the company’s administrative system can be assessed. Start-up businesses are informed of their obligations and the criteria their administration must meet. Where possible, these visits are carried out in collaboration with other parties - Chambers of Commerce, fiscal intermediaries and branch organizations.

Good practice: supporting businesses during the crisis

The financial crisis underlines the need for the NTCA to actively support taxpayers affected by the financial crisis. The NTCA has instituted a policy to support businesses. regarding tax collection the rules for postponement and execution due to tax debts are temporarily mitigated for business taxpayers. Formal rules for applying for carry back have been temporarily repealed meaning that carrying back losses to the previous tax year has become easier and faster. In effect this means the process of advances on losses is sped up by at least six months.

Good practice: cooperation with other government agencies

Organizers of pop-concerts or musical events are not always aware of the tax consequences of their event. This means that every tax matter will have to be discussed after the event has taken place. Also, the A licence from the local council or municipality is needed for organizing the event. When an organizer applies for a licence, he will also receive a letter from the NTCA. This is sent through the municipality. The NTCA joins organizing meetings between the municipality and the organizers and makes arrangements on tax matters; this provides certainty in advance to the organizers. After (and sometimes during the event) the event NTCA checks compliance with the agreements. About 100 events are being supervised in this manner. Ad 2 Strengthening the tax chain: horizontal monitoring

Horizontal monitoring is also described in other paragraphs in this written presentation. This instrument yields promising results. regarding small businesses the approach focuses on the tax chain in particular by improving relations with (bodies of) tax intermediaries and agreements with branch organizations and software developers. Attitude, behaviour and influencing taxpayer compliance behaviour form the basis for horizontal monitoring. Keywords are mutual trust, understanding and transparency. This approach demands a change in culture and behaviour, also within the tax administration. educating staff and involving experts and managers in this process are critical success factors as regards the effectiveness of horizontal monitoring-initiatives. The ultimate goal is to cover 35% of tax returns to be (partially or totally) covered by horizontal monitoring agreements by 2014. A few good practices and initiatives to reach this goal are listed below.

Good practice: agreements with branch organizations

The NTCA and the trade organization for paper and leaflet distributors made a specific agreement on the fact that 100.000 ‘newspaper boys’ are at work in this branch, working for 80 distribution companies. A history of problems existed with regard to wages tax, specifically about the fiscal position of distributor and employee (distributor’s obligation to withhold wages tax). The agreement settled the fiscal position in determining the criteria which apply for determination of a “newspaper boy” as employee. The agreement creates a level playing field and gives the branch an improved public image. The agreement also entails audits by public auditors.



Good practice: administrative software

Another way in which the NTCA try and avoid discussion on the tax return afterwards is by promoting the use of “trusted” administrative software. This is done by assessing software, for example on bookkeeping or a cash register, thus providing certainty in advance on the tax aspects which are part of the software.

Ad 3. Financial and social interest

Political priorities are also a deciding factor in making well-balanced choices. As socially relevant issues often cover more than just tax risks, cooperation between government bodies is indispensible, both nationwide and internationally.

Good practice: national and international cooperation

This has resulted in the development of long-ranged themes regarding supervision of the labour market, focusing on supply and demand of labour through intermediary agencies. Not only tax risks are concerned in this themed approach but also issues involving illegal labour, human trafficking etcetera. The NTCA not only cooperates with other Dutch government agencies butt also intends to intensify cooperation with other eU-member states. Fast exchange of information on movement of labour and agencies is crucial in tracking down fraudsters and getting background information on the european labour market. In supervision, NTCA deploys all tools and measures in these long term themed supervision activities: for example strategic communication, information, tax surveillance, criminal investigations etcetera. A similar approach regarding real estate is in place.

Ad 4. Missing traders

One of the goals of the NTCA is to deploy capacity where it is most useful and needed. Capacity saved because of developments like strategic communication and horizontal monitoring can be used to track down unknown taxpayers and/or unknown activities. Taxpayers who intentionally do not comply with their tax obligations or who commit fraud can count on a firm NTCA-approach; this is also part of the long range themed approach regarding the labour market and real estate.

Good practice: international cooperation in tackling VAT carrousel fraud

Fighting international VAT fraud will continue to be a key item in the NTCA’s supervision policy. One of the main issues is the speed with which traders appear and disappear. As this is an international phenomenon, an international approach is needed. Within the eU the system eurofisc has been approved by the ministerial council; the Netherlands has, with France, put (and pushed) this item on the agenda eurofisc supports cooperation and enables speedy cooperation and action.

Good practice: themed approach regarding real estate

In 2007, the NTCA decided to take a broad thematic approach to the real estate sector. As a theme, the property sector is of great financial and social interest. Due to its scale and limited transparency, the real estate market is open to abuse; not only different types of fiscal fraud and the creation of obscure constructions, but laundering the proceeds from illegal earnings. In a variety of interconnected operations, staff of the NTCA is looking at property development, construction, financing, operational activities, buying and selling property and the people involved (estate agents and civil-law notaries). One of the added advantages of taking a thematic approach is that existing knowledge and experience in the area of real estate within the organisation, is clustered. In the long term, the resulting insights also lead to a more structural approach in supervising the real estate sector.



Part of this approach includes the most largescale cooperation possible with other government bodies involved. The NTCA elaborated thirteen real estate sub-themes which led to concrete results. One such example is a standardised programme for real estate agents and real estate brokers which enables the NTCA to check the correct processing of private and commercial property transactions.

In 2007, an investigation into the completeness of profit statements on discontinuation of business resulted in a large number of corrections; more are expected to follow. Another sub-theme concentrates on the construction branch. Staff of the NTCA visited over eighty construction sites and recently completed housing developments. Among the aspects they examined were: who was and who had been employed on-site, how they were paid and the origin of the construction materials used. The operations that are directed at the property theme will continue for some years to come.

8. Final remarks

The previous paragraphs have shown that a number of factors affect compliance strategies aimed at influencing taxpayer behaviour. In choosing items and the appropriate tools a system has been designed to make well balanced choices making the most effective use of control capacity in relation to the intended effect of supervision activities. In this respect, new technologies are being researched and developed as these new technologies provide a tax administration with the opportunity to effectively deploy control capacity. This can take different forms: new technologies can

- change the approach as regards bulk processes (pre completed tax return)- support effective use of information from a large number of sources thus saving on research

capacity and enabling pro-active supervision activities by the NTCA (nationwide/regional intelligence centres, insolvency prediction tool) -speed up the exchange of information, both nationally and internationally (eurofisc)

- support visible supervision activities (automatic number plate recognition).

This can lead to no other conclusion than to underline the importance of developing these technologies as part of a compliance strategy.



The tax administration: the relationship between the functions / processes, the structure and action policies as management elements.

I. The functions of the tax administration stated as processes

II. Organization and structure. - Coordination, division and integration.

III. Evolution of the tax administration. - Geographical approach. - Process and functional approach. - Approach based on tax laws or type of taxes. State taxes, customs duties and excise taxes and social security contributions. - Approach according to type of taxpayer (customer).

IV. The current situation in the CIAT member countries.

V. Organizational schemes: Existence and responsibility of a central body.

V.I. The role of CIAT in strengthening the management of the tax administrations.

Management, Organization, Structure and Resources - SomeGeneral Considerations

Maria Raquel Ayala Doval(CIAT

The tax administration is aimed at organizing, directing and controlling all issues related to taxes created for satisfying the needs of the State and, accordingly, of the taxpayers. The tax administration, therefore, is in charge of determining the tax relationship with the taxpayers, collecting the taxes and resolving controversies that may arise with the taxpayers.

In order to comply with those objectives, the tax administration, as 1third component of the necessary trilogy for financing State expenditures must obligatorily have the legal powers that may allow it to verify correct compliance with those obligations. It should also be afforded a series of processes that may define and establish the components and the logical sequence in exercising the substantive or primary functions of the administration, based on the powers that have been granted it. Likewise, it should be given a means or vehicle for developing them, such as the definition of an appropriate organizational structure

adjusted to the tax system it must administer. Finally, it should have a source of financing for the optimum development and operation of the entire entity.

These powers are distributed among the different functions and/or processes that could be considered “the tasks” of the administration that has been traditionally divided into two types: those considered the main ones or “the primary tasks” of the administration and the support ones, namely: “the support or aid to the primary tasks”.

The interaction of these four elements: - The primary functions – the support ones, both seen as processes for achieving the objectives of the tax administration, - the form adopted by the organization for complying with those same objectives – (the structure); and the form or sources that allow for financing them will be elements to be developed throughout this paper in an enunciating manner, since the importance and complexity of each of them would give way, as in fact it has done, to their individual and in-depth analysis, which because of time and space constraints is not our objective here.

I. THE TAX ADMINISTRATION: THE RELATIONSHIP BETWEEN THE FUNCTIONS /PROCESSES, THE STRUCTURE AND ACTION POLICIES AS MANAGEMENT ELEMENTS

To analyze the relationship that may exist between these elements, let us begin by defining what we understand by tax administration. To this end, let us take the definition developed by Claudino Pita when saying that the tax administration is that segment of public administration that is in charge of the application of taxes and the control of compliance with tax obligations in general. 2

In its development and study one may differentiate the following fundamental aspects:3

1 The other two are the tax system and tax law.2 Pita, Claudino; Tax Administration, XII Course on Tax Administration, CAT, Brasilia, 1986. 3 Ibid.


71TAX ADMINISTRATION / MANAGEMENT CONTROL Maria Raquel Ayala Doval (CIAT)

Two fundamental aspects are highlighted in the previous scheme: Organization and action policies. The organization comprises the development of substantive or primary and support processes which the organization must develop, the structure through which the functions will be carried out, that is, the necessary activities for complying with the objectives and through them ensuring compliance with the institutional mission. The structure is merely the form adopted by the organization according to the tax system in force.

On its part, the action Policy is the one in charge of defining the objectives, determining the priorities of the organization and accordingly assigning the measures. Action policy and organization are closely linked. Both are components of the tax administration, thus allowing it, on the one hand, to define its scope and goals (action policy) while the other, is the vehicle that allows their execution (organization).

In general, the tax administrations share similar objectives since the mission defined by them is the same, namely: To ensure the financing of State expenditures through the efficient administration of the tax system.

i. The functions of the tax administration stated as processes.

The first element within the previously proposed scheme is that of the processes. They are defined as those functions to be carried out by the tax administration: “the tasks” for compliance with its institutional objective.

As previously mentioned, these functions have been traditionally divided into two classes: main, substantive or primary and aid or support for the effective development of those primary functions.


72 TAX ADMINISTRATION / MANAGEMENT CONTROLMaria Raquel Ayala Doval (CIAT)

The substantive functions or processes are but those through which the organization ensures compliance with the tax obligations by means of their collection, their correct assessment through the control of evasion and fraud and enforced collection when the obligatory amounts have not been partially or fully paid. It has not been until a few years ago that taxpayer assistance has acquired greater strength as one of the essential functions within the tax organization. Thus, the change of policies of the administration toward this latter aspect has resulted in the focusing of efforts on the use of technological tools and human resources training to promote taxpayer spontaneous compliance, instead of the exclusive use of repressive actions.

However, it is true that not everything is the exclusive task of the entity as such. Rather, a significant part of the facilitation of spontaneous compliance lies in the design of more equitable and simpler tax systems. In this respect, the essential or primary processes defined are: Collection, Examination, Determination/Assessment, Legal or Appeals, Recovery and Taxpayer Assistance.

On their part, the support or aid functions or processes are aimed at filling in the human resources needs, as regards the latter’s selection and technical training for carrying out the primary functions, the provision of physical resources, obtaining and processing the information provided by the taxpayers themselves or third parties for a greater and better control of compliance with the obligations. Likewise, an important aspect in the support tasks is planning and control of the administration’s management through the elaboration of organizational plans and the design of measurement systems that may act as feedback mechanisms at the internal and external levels of the organization. Among others, the support processes defined are: Strategic Planning, Human Resources, Tax Computerization and International Cooperation.

The latter has become an effective way of expanding the scope of action of the administration through international administrative assistance that may allow for exchanging information, with a view to obtaining data on taxpayers carrying out transactions beyond the country’s borders, for example. As suggested by some models of information exchange agreements, such as the one designed by the 4Inter-American Center of Tax Administrations – CIAT through the working group on information exchange, there is even the possibility of undertaking examinations simultaneously as well as abroad. As a result of the expansion of the administrations’ action framework mutual administrative assistance agreements have been signed, for pursuing the collections of tax debts even outside the borders of the country.

The substantive as well as support processes have undergone a significant evolution throughout the past decades, especially since the mid-80s. Actually, systematization has allowed the tax administration greater speed and effectiveness in the management of information.

The possibility of improving information management through automation renders the administration capable of producing reports and data that facilitate the collection, control and recovery processes, for example.

Likewise, the changes and advantages of technology have also been applied within the organizations and through the support processes it has been possible to better control the work of the organization.

4 Model developed by the Working Group on Information Exchange; the Manual for supporting the implementation of the CIAT Model is currently being concluded.



In spite of all the positive aspects proven following the introduction and use of technology as a key factor in the improvement and modernization of “the tasks”, old and new problems have arisen.

- Information management capacity continues to be a weak point of the administration. Such capacity ranges from the very management of large data bases that are not fully used to advantage, to the quality of the information introduced and obtained therefrom.

- The administration’s slow adaptation to the challenges and needs posed by the national and globalized world.

- The complexity of the rules involved in the development of the tax system also renders complex the development and management of the processes.

- The little standardization and lack of harmonization of the processes renders difficult their development and affects the trust of the administration and taxpayers on increasing the probability of discretional, non-harmonized actions.

II. ORGANIZATION AND STRUCTURE

The organization and structure are the means whereby the administration may fulfill its institutional mission inasmuch as they contribute the operational and resource scheme for the adequate development of the processes. The organizational forms of the tax administrations have also been the subject of evolution through time. Although the administrative structure was not initially considered one of the priority aspects to be taken into account by the leaders of the tax organizations, at present, it has become one of the aspects of greater interest and priority.

This is not so, only from the standpoint of the organizational forms that must be adopted, but also, as a result of the introduction of modern management concepts that may allow the officials increased effectiveness in the performance of their functions through the definition of responsibilities and roles and by promoting teamwork and the formation of leaders.

Coordination, division and integration

A structure involves three fundamental conditions: the division of the work into specific tasks and the coordination and integration among those tasks. These three factors may be combined when determining the strategy for ensuring compliance with the different functions of the administration and the obligations of the taxpayer. The most relevant aspects of each of them will be highlighted below.

Coordination:

5Mintzberg mentioned five coordination mechanisms that seem to explain the fundamental ways in which the organizations coordinate their work. These should be considered as the basic elements of the structure, that is, those that keep the organizations together, including the tax administrations.

• Communication.- Tasks are adjusted through constant feedback among members of a teamwork for contributing suggestions as to how to do them better.

• Direct supervision.-having clear and timely instructions allows the individual to know what is to be done, to do it in the manner indicated and to constantly improve his work.

5 Mintzberg, H., Structure in Fives, designing effective organizations, Prentice Hall, New York 1983.



• Standardization of processes.-How the work should be done. The contents of the work is clearly specified and scheduled. Standardized processes allow the person to speedily and securely carry out the tasks, to thus avoid being subject to improvisation and last minute instructions.

• Homogeneity in the results or products.-What is to be done? The results of the work are homogeneous so as to allow for maintaining optimum quality levels and harmonized results.

• Assignment of tasks according to skills.-Who is best qualified to carry out the task or respond to the profile. Being aware of the requirements beforehand, in terms of knowledge and/or skills for carrying out a task, allows for assigning the best qualified individuals for carrying it out.

Mintzberg says that as the organizational work becomes ever more complex, the favorite means of coordination vary and may result in greater or lesser emphasis of one or another element of coordination. The process becomes a cycle where there is mutual feedback, which results in an adjustment of the processes and persons that are responsible for them. This may imply the redesign of a procedure and the relocation of an official in a job that may be better adapted to his profile. This should be the dialectics prevailing in the organization as opposed to improvisation.

Division

• Is the assignment or distribution of the work in a specialized manner, where there is no integration of tasks or functions among them or those responsible for executing them.

Integration

• Integration is the opposite of the division of the work; in other words, tasks are grouped and not separated. Integration may occur at the level of information, functions and resources.

III. EVOLUTION OF THE TAX ADMINISTRATION

The development of the tax administration is closely linked to the development of the State, of the economy and the cultural behavior.

Initially, the role of tax organizations was more passive than active, as regards the development of their activities. They were closed organizations, not very modern and conceived as entities in charge of collecting the taxes administered, without much consideration for the taxpayer as such. Obviously they were a reflection of the tax system that was being applied.

Subsequently, changes in internal and external economic events have led the countries to reconsider their economic policy and, accordingly, tax schemes. Globalization and the introduction of technologies have led the countries to a broader way of thinking, considering their geographical and world and not exclusively their national environment. Undoubtedly, this has also affected the tax administrations. Issues such as electronic commerce, agreements to avoid international double taxation, for example, were unheard of years ago. An administration that went beyond the borders of the very countries and much less the possibility of carrying out joint operations with other administrations was inconceivable. 6The administration became aware that its taxpayers no longer carried out operations in the same manner or in a single place and therefore, it had to adapt itself thereto.

6 CIAT-Pita, Claudino, International Taxation Module.



Likewise, the organizations have had to assume a more active role in carrying out their functions. The availability of greater and better means poses new and more complex challenges. They have also understood that taxpayer assistance is a fundamental element in obtaining information and ensuring collection at a lower cost, in terms of time and human and physical resources used. Timeliness in exercisingcontrolandthetechnicalcapabilityoftheirofficialsforimplementingithavebecomedeterminingfactorsinmeasuringtheefficiencyofcurrentadministrations.

The way a tax administration is organized is not a matter of fate through time. Organizational forms have evolved along with the tax administrations, adopting forms and establishing priorities in keeping withthecountry’staxpolicyandthosewhichtheadministrationitselfhasdeterminedforfulfillingtheobjectives provided in said policy. Although it is true and it cannot be said that the characteristics or stages of such evolution and accordingly, the structural forms adopted have been the same in terms of simultaneity and similarity for all tax administrations, there have actually been trends that have determined the preferential application of a modeloverothers,especiallyinfluencedbythesuccesshadinapplyingsuchmodelinaspecificcountry.

It cannot be said either that the models to be analyzed below, considered from different viewpoints or approaches,havebeenstrictlyappliedasdefinedherein.Undoubtedlyeachadministrationhastakenintoaccountitsownpeculiaritiesforadjustingoneorotherdesigntoitsneedsandconditionsanddefinitely,the schemes adopted by current tax administrations are a combination of one or several elements of these models.

We are now going to mention some of the models or approaches used in the structures adopted by some tax administrations of the CIAT member countries. To this end, we will refer to the CIAT Tax Administration Manual and to the tax information system used by the Center.

Geographical approach

Many tax administrations throughout the world have designed parts of their organizations according to the geographical approach. This is the most common form which allows an ideal combination with otherstructuralforms.Thefollowinggraphshowsapossiblestructurewithgeographicalinfluences.



Tax administrations are limited by the geographical situation of the country. Due to their size, countries like Brazil, Mexico, Argentina, Canada and the United States are forced to structure their tax administrations according to their geography. It is useful, at times, to compare the ratio between the structure of the administration and the geographical circumstances of a specific country. These ratios could be used as parameters to determine the number of officials that could be assigned to a specific function. Shown below are some examples of those ratios:

Customs could be compared with respect to:

- limits in kilometers / number of customs officials; - total value of imports and exports / number of customs officials; - complexity (open or closed economy and number of partners / number of customs staff

members

The comparison of ratios between tax administrations and individuals and corporations could be based on:

- area / number of officials; -population / number of officials; -businesses / number of officials;- number of assessments / number of officials; -number of audits (and their duration) / number

of officials; - gross domestic product (GDP) / number of officials; - tax revenues / number of officials; - budget for the tax administration / tax revenues (= value of expenditures); - total number of public employees / number of officials.

Although these ratios will not provide an answer as to the perfect size of a tax administration, the comparison may give an idea as to the margins within which the size of an administration may vary. Canada, Colombia and Italy may be considered examples of tax administrations using a geographical approach.

Process and Functional Approach

Very frequently, tax administrations assume all the tasks derived from their primary general responsibility: assessment, examination, recovery, appeals/legal and taxpayer assistance of the tax system they administer. This broad organizational method is logical: it guarantees great internal cohesion, since all of the operations are carried out within the administration, that is, from the identification of the taxpayer up to the recovery of the money. Of course, the fact that all these functions are carried out within the administrations does not imply that every official may carry out all of them. Operational units may be relatively specialized; however, all necessary functions depend on one single management center.



Functional process and approach

Less frequently, various functions dealing with tax management have been separated in order to render specialized some operational areas of the administrations. Worth mentioning as examples are: the tax recovery, investigation or specialized examination and customs units.

Recovery specialization Recovery is based on a series of techniques and procedures that are relatively indifferent to the nature of taxes: verification of claim, notification in the case of nonpayment, application of sanctions for delay, recovery action with or without judicial intervention, payment plans or agreements.

This lack of technical specificity (that is, lack of any relationship with the nature of taxes) results in tax recovery being focused on a single administration for all types of taxes, even though they are assessed and audited by other administrations.

What are the benefits of this type of specialization? The centralization of tax recovery allows some savings in financial administration costs and renders profitable the use of modern payment methods (optical character recognition, bank transfers, etc.). In addition, it affords the recovery office a general overview of a taxpayer’s situation as regards all his tax debts and thus facilitates the defense of the financial interests of the State. It may also authorize the compensation of different taxes for a given taxpayer.

Investigation specialization – intelligence units The functions involving intelligence and struggle against the most serious forms of tax evasion on occasions are transferred to what have been called financial investigation departments or Tax Intelligence areas.

An investigation department may have responsibilities in the following areas:

- tax investigation (tax evasion); - financialinvestigation(moneylaundering,aninternalofficialnegotiatinginthestockexchange,etc.);- economic investigation (import or export of forbidden goods, abuse of the trademarks of goods,

ACT, etc.); - criminal investigation. - The intelligence area works jointly with other organizations: customs; police; government

attorney’s office, units in the tax administration (recovery, auditing); foreign investigation departments.



What are the benefits of this specialization?

A tax intelligence unit allows for establishing specialized teams in the struggle against economic and tax delinquency, where all the necessary abilities and skills are combined in the same unit.

What are the limits to this specialization?

On occasions, the financial investigation unit acquires greater relevance over the other units, thus obtaining greater and better resources for carrying out its tasks. That is, it becomes a “super” area that may easily originate conflicts with other areas, which is detrimental to the effectiveness of the very administration.

The tax intelligence unit must be specifically located under some range of authority in the tax administration and its powers, functions and ways of interacting with other areas of the organization must be clearly defined.

Audit specialization

Many countries have special audit units, departments or offices. The reason is obvious: the tax administration wishes that its organizational structure support one of the main aspects of the essence of its business. The audit process is less vulnerable if audit specialists are gathered in a single team. On the other hand, an audit team carries the risk that the auditor may lack information from the taxpayer assistance, assessment and recovery departments, which may imply a problem of coordination in the organization. However, based on the current trends and tendencies imposed by the economy, specializations have been established in accordance with the type of economic activity carried out by the taxpayers. Therefore we may find audit departments specialized in the financial sector, in the industrial sector, etc. The case of the Secretariat of Federal Revenues of Brazil is one example of this.

The customs and internal taxes merger

Even though the Brazilian tax administration merged these two areas a long time ago, it was not until the 90’s when there began a marked trend, especially among the Latin American tax administrations to merge the internal taxes and customs areas. The reduction of administrative costs and the possibility of an integral control through the management of information originating from two important sources have been powerful reasons for politically deciding to operate under a single organizational structure.

However, even in site of this trend there has been the need to separate the two areas within the same organizational scheme. This allows specialization by functions or substantive processes that are common to each of them, through the development of specific and particular units, on the one hand, and the integration of those functions or processes that afford the administration greater control and managerial capacity, on the other.

Such specialization by functions or processes, differentiating customs from internal taxes appears to be the most successful, inasmuch as each one of the action policies for each unit may be carried out, thus respecting the mission and strategic objectives existing in a merged organization.

Those cases where there has been excessive centralization or segmentation of customs or tax functions have not been effective. In other words, disregarding the essence of each of the “businesses”, that is tax and/or customs is equivalent, in one way or another, to eliminating the advantages of the merger of both organizations.



Approach Based on Tax Laws or Type of Taxes. State Taxes, Customs Duties and Excise Taxes and Social Security Contributions.

There is a broad pattern of tax administrations specialized according to various types of taxes. Many countries have an administration specifically devoted to state taxes (on occasions, several administrations, depending on the indirect or direct nature of the taxes), an administration specialized in customs duties (which frequently covers excises taxes and less commonly –in Great Britain and the Netherlands Antilles—VAT) and, some times, one or more agencies in charge of social security contributions. Generally, these administrations assume all tax functions related to a type of tax.

This organizational structure based on types of taxes has many benefits. Some of these are the identification of a specific group of taxpayers, generally, a rather homogenous group that renders it easy to get to know them, facilitates an understanding of the tax system and allows the adaptation of the geographical position of the local departments to the types of risks. In particular, administrations specialized according to types of taxes facilitate the integration of tax recovery and auditing. The efficiency of the close integration of these two functions has been proven in taxes such as VAT, which are estimated and paid by the taxpayer.

There are also some disadvantages in an organizational structure according to types of taxes. First of all, it may turn out to be rather costly. Even though the various tax administrations have a general identical purpose—the collection of tax revenues – when specialized according to types of taxes, the structure tends to maintain several parallel hierarchies, including levels that are not directly operational. That is, on occasions it is necessary to create a small administration for each type of tax. According to the taxpayer, who must frequently depend on several different administrations, this is an obvious source of complexity: multiple contacts and different procedures lead to the speedy increase of administrative costs. On the other hand, there may be dispersion and lack of unity in the criteria applied to the case studies and accordingly, in relation to the taxpayer himself. In fact, the most strict specialization forms according to types of taxes are diminishing, while tax functions are ever more being grouped in multipurpose entities. For example, there have been mergers of departments that were previously specialized according to the indirect or direct nature of taxes (this occurred in France in 1970 and in Italy in the 90’s).

As we saw before, some countries (Argentina, Brazil, Colombia, Guatemala, Honduras, Mexico, Netherlands, Netherlands Anti l les, Peru, Spain and Venezuela, among others) have expanded this structure to cover tax and customs administrations, a radical solution to promote the closest possible relationships between the two areas. In some cases, even aspects dealing with social security contributions are under the same organization, as is the case of Argentina and recently, Brazil.

2 XBRL is a standard for compiling and exchanging corporate financial reports and data, for instance via the Internet.



Approach according to type of taxpayer (customer)

Due to the special handling or priority that may be given to a group of taxpayers as regards the importance that should be attributed to assistance and control to a specific group of taxpayers within the organization, this approach has also been called customer-oriented organizational model or approach, considering the taxpayer as the customer which the tax administration must assist and control. As previously mentioned, the modern conception of establishing a greater rapprochement to the customer rather than his repression, seeking to increase the levels of spontaneous compliance, has given origin to this form of organization, on bringing from private business practice, successful theories as to how to achieve greater levels of efficiency from the organizations.

Even though the previous approach has many advantages and positive factors, undoubtedly, in my opinion, the fact of naming and establishing a similarity between customer and taxpayer within the tax administration is not appropriate. For this reason, I have entitled it approach according to type of taxpayer. It is not merely a change of name, but rather the scope which the term “customer” may have or acquire within the administration. Without taking into account the circumstances and conditions which the taxpayer has toward and in the tax organization, the condition of customer cannot only be based on the need to provide him assistance and services to facilitate compliance with his obligations, respect his rights, as well as in the administration exercise of the right to control and review, but rather in a series of characteristics and connotations that are common to private commercial practice that are not applicable in this case.

Some organizational structures depend on the specialization of some areas in one or several specific categories of taxpayers. Such categories may include, for example, different types of taxpayers (individuals or corporations), different sizes (large or small businesses), or different types of activities.

The idea behind each type of specialization is always the same: thanks to their greater knowledge of the behavior of the taxpayers and a smaller number of laws and procedures they must be familiar with, the specialized areas will achieve a greater level of efficiency in dealing with some groups of taxpayers having significant budgetary interests or specific types of risks.

One example of an administration that adopts the structure according to the type of taxpayer or customer approach is the U.S. Internal Revenue Service, which changed its structure since 1998,



on creating four administrative units oriented toward four different types of taxpayers, namely: - Wage earners and Investors; - Small Businesses and Independent Workers; -Large and Medium-Sized Businesses and – Exempt and Government Entities.

A special comment should be made about the change in structure of the Dutch tax administration that took place a short time ago. Traditionally, until the year 2003 it had been using a customer approach based on the Target Group system. However, starting in 2003, the Dutch tax administration changed its structure, making it flatter, and preserving the target group approach as starting point, although using the processes approach as organizational framework for the administration. Its orientation toward customers continues to be important, but this does not mean that it must necessarily be reflected in the organization’s structure. Thus, experience taught them that it was necessary to differentiate between the service and control and supervisory processes and accordingly adopt a structure that would allow for implementing them in an optimum manner.

A common example of Specialization is the creation of a specific organization of the tax administration for Large Taxpayers. Some countries (many of them members of CIAT) have opted for tax departments specialized in large companies. For a tax administration, the efficient management of these companies is an aspect of strategic importance. This is so, in the first place, because of their financial weight in the State’s budget and likewise the need to be able to offer these large companies—that are important for the economic health of a country—the legal assurance they need to fully carry out their activities.

- Such specialization may be total. In that case, a single tax department follows up the obligatory tax returns, the collection of taxes owed, tax auditing and taxpayer services for large companies, regardless of their geographical location within the national territory. This is the case of SUNAT of Peru, which has an Intendance in charge of the Main National Taxpayers.

- Such specialization may likewise be only partial. That is, only some of the processes are carried out by this specialized area: examination. This may be the case of the General Directorate of Internal Taxes of El Salvador, for example, where the structure of the Examination Directorate responds to a combination of approaches: specialization in large taxpayers which involves large and medium ones and a regional approach.

Benefits of this approach: large companies have very marked characteristics from the tax standpoint. They are not so numerous and are therefore easy to verify. They represent an extremely important part of state revenues and are generally better organized than the small businesses. Likewise, they frequently resort to more sophisticated fiscal measures and may have international economic relations. In that case, it might be interesting to provide the Treasury some assurance of a significant part of budgetary revenues, by concentrating a relatively small percentage of human and technological resources of the tax administration in the management of large companies.

Limits to this approach: this specialization strategy seems to offer little disadvantages. However, this implies the need to attract the best officials to a tax administration specialized in large companies and likewise calls for an adequate compensation policy. In addition, if the national territory is extremely vast, the fact that the tax department for large taxpayers is located in a particular area may cause some difficulties for taxpayers that are far away. In such case, it is always possible to divide the tax department for large companies into smaller geographical areas.



IV. THE CURRENT SITUATION IN THE CIAT MEMBER COUNTRIES

The following table provides a general overview of the current organizations in the different CIAT countries. For additional details, refer to the CIAT annual publication entitled: “Organization of the Tax Administrations in the CIAT member countries”7 and to the taxation data base appearing in the organization’s Web page.

7 CIAT Review 98-99.



8 There is a Large Taxpayers Unit only in the country’s capital. 9 The General Directorate of Taxation (DGI) of Uruguay has at the central level, some characteristics of customer approach,

since there are some departments for specific target groups (auditing for: industrial sector; commerce and agriculture and livestock).



Based on this overview some conclusions may be reached:

• mostofthecountrieshavetheirowntypicalandclearorganizationaldesignbasedonfunctions.The functions recognized are generally: auditing; recovery; taxpayer assistance and service, legal or juridical affairs and registration. There is the same type of functional division at the central as well as operational levels. The advantage is that specialists can very easily locate each other at the different levels of the organizations. Another advantage is the transparent structure that assists the superior managerial level in stimulating the organization (from top to bottom);

• afewcountries(particularlyintheCaribbeanregion)havecentraldirectoratesforindirectordirect taxes (on occasions, even VAT or individual income tax directorates). Generally, these directorates provide guidelines for auditing and assessment processes;

• thetypeoftaxpayerapproach-(Customerapproach)continuestobeanexceptionasgeneralstructure of the organization. Rather, it is frequently partially adopted through the creation of specialized areas for the management of large taxpayers. At present, the best example of a 100% customer or type of taxpayer approach is the Internal Revenue Service of the United States of America.

• itmustbenotedthatinmostcases,realityismorecomplexthanthewrittenmodels.Weseea combination of many types of organizations where the functional, geographic and type of taxpayer models are particularly involved. The tax administrations of the English-speaking countries such as Trinidad and Tobago, Barbados and Bermuda tend more toward a type of tax approach.

V. ORGANIZATIONAL SCHEMES: EXISTENCE AND RESPONSIBILITY OF A CENTRAL BODY

A fundamental aspect in the tax organization is the existence of a central body, whose level of autonomy or dependence will be based on the level of autarchy given to the tax administration. The central body of the tax administration is the interconnection unit between the political and operational decision-making offices. In general terms, it is the responsibility of the central body to design the tax administration’s strategy. The strength or weakness of said organization, its effectiveness or inefficacy is obligatorily reflected in the administration’s management.

The activities of said central body may be probably focused in the following aspects:

Definition of the strategic orientation; Where is the administration headed, by establishing priorities according to the strategic objectives determined for the administration.

Establishment of working methods and procedures; How are we going to do it. This aspect is of utmost importance since it guarantees homogeneity in the methods and procedures used in each of the regional offices of the administration. If those elements are not defined, there may easily be chaos, since it is left to the discretion of each official or officials in charge to indicate not only to his team but, to the taxpayer how it is to be done.

In some administrations this takes place more frequently than desired. The taxpayer is left at mercy of the “legislation” of the official on duty and has to adapt to the variations that each of them may make. In addition to affecting the legal security of the administration’s actions, it may also act as a mechanism for promoting or encouraging corruption.



Distribution of resources; What is needed to carry out the tasks or activities. In many countries, the operating budgets of the administration are quite meagre, and their optimum distribution and use allow a more efficient support for carrying out the functions. The central office acts as general coordinator in financial issues, since it must be aware of what and how much the sectional offices need. In this sense, it is important that there be a permanent interrelationship at the two levels: central and regional, to adapt the needs to the current realities, whether they are of an ordinary or extraordinary nature.

Monitoring of results; How are we doing it. Permanent supervision and feedback afford the opportunity of confirming the procedures, methods and strategies determined or to adjust them to the circumstances and challenges arising in an integral manner. Through this global vision of the organization’s behavior the central level officials may be aware of what is happening and what may affect the expected results, so that with their support, they may contribute to timely prevent or correct some situation.

Definition of maintenance actions for the decentralized functions; How does decentralization work? Decentralization is a mechanism requiring constant surveillance and review. It is very easy to grant too much or too little authority or to want to recover it. Maintaining an ideal balance, where regional officials may acquire security and trust to lead the processes through responsible decision-making is not easy. Therefore, central offices must constantly interact with the regional ones to analyze the evolution of the decentralization process. This may be done by institutionalizing the system maintenance mechanisms. For example, periodic evaluation and support meetings.

Public relations; relationship with the public. Management of relationships with individuals outside the organization is important. Whatever is said and done is very important and therefore due care should be exercised in who, what, how and when it is done.

Face political demands; Spokesperson of the organization. Relating with politicians is a daily reality within the context of the administrations. These may range from the provision of information up to the request for appointing recommended staff. The central office should face all these requirements and not the regional ones, mainly because the latter should concentrate on carrying out their functions for achieving the goals and not deviate from its priorities. Secondly, the central office should be in charge of leading political aspects at all levels of the tax administration.

Advise the superior administrative level and politicians in charge with respect to the implementation of new legislation. Feedback to upper levels. Central office officials, generally the general director, should keep its superiors, ministers and deputy ministers and proposers of tax bills or reforms to the organization, as to the needs, strengths, advantages and disadvantages of the issues provided in the proposed legislation. No other person is better qualified than a high level official of the tax administration to know about the problems or achievements in the application of rules and what needs to be adjusted or may remain unchanged.

Organizational trends: Greater autarchy

Tax Administrations tend toward greater autonomy in order to have available adequate resources for its needs and protect themselves from direct political interference. For a better allocation of its scarce resources, they are ever more recurring to the outsourcing of certain specific responsibilities. Throughout the past years there has been a trend in the member countries of CIAT to undertake reforms in their tax administrations, aimed at achieving a better administrative and budgetary autonomy. Most of these organizations have traditionally been dependent on the ministries of finances and/or treasury of each country. However, at present, as we may see in the following table, some of them have become autonomous institutions with budgetary independence, whereby



they may avoid interference in the making of decisions such as, for example, the selection and appointment of qualified staff and investment in physical resources that may facilitate compliance with their essential or support functions. In view of this greater administrative and financial autonomy the tax administrations may adjust themselves and may better and more rapidly respond to changes taking place on a daily basis. Subjecting itself to processes and procedures that are common to the public scheme can easily make it slow and inefficient. Nevertheless, one cannot disregard the great responsibility resulting from a greater autarchy because ultimately, the monies of these same taxpayers are the ones that should be directly and clearly devoted to implementing the action policies of the administration, without the slightest doubt about its management. In general, such greater autarchy has occurred in relation to:

• Budgetary autonomy: the tax administrations have their own budgets, which they can administer autonomously according to the legal frameworks. They may originate, generally, from the same budget annually allocated to each government entity from the State’s large fund, or else, be part of a percentage of the administration’s own management, based on the previous fiscal year and which may originate from the largest amounts or sanctions assessed or actually applied. There is also autonomy in the administrative contracting system for the provision of the necessary goods and services for carrying out the tasks.

• Administrative autonomy: Regulation of its own staff selection and promotion processes; of its own and specific administrative career for tax officials (including customs); of a special nomenclature of positions, of a particular and specialized salary system; and a disciplinary regime or system adjusted to the profile and business of the organization.



The evaluation and analysis of the experiences of the CIAT member countries in both aspects: autonomy and outsourcing are important for other countries, whether they are already carrying out these actions or endeavor to carry them out in the future, in order that procedures, mechanisms and limitations may be formulated.

Trends toward decentralization

Apart from these challenges, the functions of the Tax Administrations will also be affected by current trends toward state decentralization and privatization. As sub-national governments continue to acquire greater tax autonomy, there arises the question with respect to the entity that should administer the taxes of the sub-national entities, and how the Tax Administrations at the central and sub-national levels must coordinate their activities.



An interesting proposal at this level is made by José Sevilla Segura10 when he says: “....if its operation is considered on the basis of economic rationality parameters, there will be a natural trend toward the establishmentofcoordinationmechanismsbetweenthedifferentfinanceoffices,–central,regional,municipal--, whose desideratum would be the creation of an integrated tax administration, capable ofofferingtaxmanagementservicestoallFinanceoffices.

Accordingly, the use to advantage of economies of scale that allows a well structured Tax Administration may be imagined as a path that could be undertaken in the establishment of collaboration mechanisms between independent Administrations until arriving at the creation of an integrated Tax Administration in the sense indicated”.

An example of the application of this criterion of economic rationality is the consideration that has been made by some regional and/or municipal administrations with respect to obtaining and using information.Traditionally,nationalorfederalFinanceOfficeshaveexperiencedagreaterevolutionas regards their organizational structure and the performance of their functions. This has led them toachievehigherlevelsofefficiencywithrespecttoquantityandqualityoftheinformationobtainedfrom the taxpayer and third parties obliged to provide it. Therefore, the second level organizations whose common information requirements are similar to those of centralized entities have resorted to strategic alliances with the latter in order to obtain more information on those taxpayers and their operations and thus be able to exercise a better control. Undoubtedly, this saves time and economic resourcesandincreasestheefficiencyofcontrolandtheveryserviceprovidedtothetaxpayer.

Outsourcing: This is an extremely complex issue. There may be a great variety of reasons for “privatizing” certain activities. The motivation may be political or ideological in nature: creation of a civil service that may be reduced and economic. The motivation may also be that a Tax Administration doesnotoperateeffectivelyorefficiently,orisincapableofattractingsufficientresourcesorqualifiedstaff thatmayallow it to fulfill its responsibilitieswithin thebroader frameworkofbudgetaryandstaff restrictions of the national government. A very common opinion is that, even though many Tax Administration activities could be privatized, one function – the power to determine the tax obligation—should continue to be an exclusive right of the Tax Administration. Even though a number of support functions may be privatized without great risks, this is not the case of the real essential activity. In relation to this type of activities, however, lessons may be learned from the private sector experiences through the use of reference points (benchmarking).

The Role of CIAT in Strengthening the Management of the Tax Administrations

The Inter-AmericanCenter of TaxAdministrations is an international, nonprofit organization ofa public nature, whose mission is to provide an integral service for the modernization of the tax systems and administrations of the member countries, to facilitate their evolution, social acceptance and consolidation.

Since its inception, CIAT has been concerned about being a dynamic organization going beyond theproposals,bordersandtrendsofaspecifictimeorperiod,adjustingandadaptingitselftothechallenges imposed on the countries in the area of taxation.

Thus, it is aware that the design and administration of the tax system are undoubtedly areas within the public sector deserving priority attention and strengthening on the part of the various governments,inasmuchaspublicrevenuesofataxnaturearetheessentialsourceoffinancingofevery democratic society.

10 Sevilla S. José V., The Integration of the Administration of the Tax System - 28th CIAT General Assembly, Quito, 1994.p. 322-323.



Likewise, because everyone’s contribution to the extent of his capacity is in the very essence of the “Social Contract” which gave origin to the State, and promotes, together with the public expenditure policy, a better distribution of income in the struggle against inequality: and additionaIly since it constitutes an instrument of democratic institutionalism at the service of juridical security, policy, stability and social equity and because the design of the tax system and its tax administration are strategic aspects of modern states, the Center has aimed its efforts toward the strengthening of the tax administration through the same value added it obtains by means of its interrelationship with its member countries.

CIAT, then, as stated by its Director of Operations in the document on 11 Strategic Planning of the Organization is an entity created to share among its members, knowledge, experiences and best practices in the tax area.

Therefore, continuing with the proposal elaborated by Mr. Gutierrez, CIAT should, as strategy: “Render operational the collective knowledge of the member countries. That is, to ensure that the knowledge, experiences and best practices become concrete products which may be applicable and applied in the tax administrations and tax systems of the member countries”.

In sum, CIAT has understood that information management constitutes the backbone in the development of products and instruments that may serve to improve and develop modern, efficient and transparent tax administrations.

Therefore, the design and elaboration of useful models that may consider and define the latest cognitive and technological innovations in specific subjects or issues based on the successful experiences not only of its tax administrations but also of other organizations or institutions; the technical assistance in the implementation of said models and continuous feedback as a permanent adjustment and improvement instrument, are elements that define and develop the Center’s own strategy.

Examples of the above are: the Tax Administration Manual, (2000), currently being revised, the Tax Code Model (currently being updated), the Examination Manual, the Model Code of Conduct, the management indicators system, the future Internal Control Manual, the best practices in such areas as Tax Intelligence, International Tax Planning, the Information Exchange Model and the Manual to support the Implementation of the Model; the declarations on the minimum attributes approved by the 30th CIAT General Assembly held in Santo Domingo, Dominican Republic and the Promotion of ethics in the tax administrations approved in Buenos Aires, Argentina in April 2005, in addition to the cooperation projects wherein computerized models have been designed to support the efficient development of the processes.

11 Document on CIAT Strategy elaborated by Nelson Gutierrez, Director of Operations of the Center which correctly defines what the Center must do and how to do it.



Documents

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