INTRODUCTION TO PUBLIC FINANCE MANAGEMENT Module 4.1 -Revenue Administration

2.2 & 2.3 Planning and budgeting 3.1 The Budget Executio n Cycle 5.2 Decentrali sation 1.1 Introduction 2.1 Macroecon omics of the Budget 4.1 Tax Administrat ion 3.2 Payroll, Procurement & IT 1.3 Budget Classification 4.3 Accounting & Reporting 4.2 Treasury Management 1.2 The Budget 5.3 Assessing & Recapitulati on 3.3 Internal Control & Audit 5.1 External Scrutiny & Oversight Module map

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 3

Tax Authorities handle large amounts of money and considerable scope for waste & corruption if insufficient oversight & accountability: Effective internal & external audit & legislative oversight function. Fraud and Corruption needs to identified and assessed High risk of Fraud and Corruption 4

Tax policy determines The total tax burden The structure of tax revenue and the relative share of each tax The basis and the rate of each tax Revenue administration fulfils the following basic tasks:(all areas prone to fraud and corruption) Identification of the taxpayers Calculation of the tax basis, establishment of tax due by the taxpayer Tax collection Tax policy and tax revenue administration 5

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Clarity of tax obligations Effective measures for taxpayer registration & tax assessment Effectivene collection of tax payments Institutional arrangements Institutional arrangements for tax collection Organisational aspects of revenue agencies Revenue Forecasting Module outline 6

Direct vs indirect tax Direct tax: usually collected on the basis of a nominal enrolment, periodic, usually supported and paid directly by the tax payer (except wage tax/social security contribution) Indirect tax: linked to a specific event (e.g. the purchase of a consumption good), it is supported by the consumer but paid by the seller. Categories of revenue 7

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Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Institutional arrangements Revenue Forecasting Module outline 9

Conditions for effectiveness, transparency and due process Running Head 12-Point Plain, Title Case  Citizens have a clear understanding of their tax obligations and comply with registration and assessment requirements  Tax agency is able to collect all tax due Transparent tax liabilities (PEFA PI 13) Effective taxpayer registration and assessment (PEFA PI 14) Effective tax collection (PEFA PI 15)

Clarity & Comprehensiveness of tax liabilities Requirements (1)Clear and comprehensive legislation with limited discretionary power of tax agency (2)Easy access to understandable information on tax liabilities and administrative processes (3)Existence and functioning of tax appeal mechanisms Transparency of Taxpayer Liabilities 11

Controls in taxpayer registration system  those who should be registered, are registered. Registration then enables assessment. Unique tax payer identification system Database with linkage to other relevant government systems Occasional surveys Effective penalties for non-compliance Effective system to audit self-assessments Effective Tax Payer Registration and Assessment 12

Tax liabilities still unpaid at end of FY should be paid in next FY. Tax collections should be transferred to Treasury- controlled accounts (daily) Tax collections submitted to Treasury must be consistent with assessments. Any inconsistency needs to be checked Effective collection of tax payments (1) 13

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Clarity of tax obligations Effectiveness of measures for taxpayer registration & tax assessment Effectiveness in collection of tax payments Institutional arrangements Institutional arrangements for tax collection Organisational aspects of revenue agencies Revenue Forecasting Module outline 14

General directorate for customs and indirect taxes: bases the taxation and collects Taxes and duties on imports and exports VAT on imported goods Domestic taxes on fuel products Excise duties General directorate of taxes: assesses the tax due and sometimes collects Direct taxes Domestic VAT Land tax, etc. Example of institutional arrangements 15

1.Revenue administration establishes the tax base, the tax due and issue a request of payment. 1.1 In some countries (francophone), the Treasury collects the tax 1.2 In others the revenue agencies collect the tax 2.The taxpayer assesses the tax due and pays it, generally to the revenue agency Often the case for Corporate tax, VAT. Tax recovery: two main variants 16

Two models: Revenues are administered by administrative division of the ministry of Finance Autonomous, or semi-autonomous under MOF, revenue agencies/authorities have been established in the interests of efficiency; May have separate salary structure; Hiring & firing does not have to be approved by civil service MDA covering MDAs Not subject to same control regime as for MDAs; Organisational aspects of revenue administration (1) 17

Revenue administration usually organised along functional lines, particularly: Inspection, data processing, internal audit and administration. Common to have Large Taxpayers Unit (LTU), a small number of taxpayers may represent a large proportion of all tax collected. May include natural resourced-based companies, or these may be covered by separate unit. Customs Dept. may have Enforcement Unit (anti- smuggling). Organisational aspects of revenue agencies (2) 18

Tax policy and Revenue administration Main categories of taxes Conditions for effectiveness, transparency and due process Clarity of tax obligations Effectiveness of measures for taxpayer registration & tax assessment Effectiveness in collection of tax payments Institutional arrangements Institutional arrangements for tax collection Organisational aspects of revenue agencies Revenue Forecasting Module outline 19

Importance of acurate revenue estimates Legally the amount of revenue budgeted for year t is only a forecast For the preparation of the budget: determination of the expenditure ceilings depends on it For medium-term consistency (e.g. evolution over time of revenue in case of tariff reduction and introduction of VAT) Revenue forecasts and projections (1) 20

How to do it? Projections of revenue in the budget documents of the previous years may serve as a starting point If macro-economic determinants have changed they must be updated If changes in tax policies are proposed they must be incorporated Basis identity: revenue of tax i (TR) is tax base (TB) times tax rate (t): TR i = TB i x t i From one year to the next: TR i = TB i x t i + TB i x t i In many cases it is necessary to start from scratch (combine macroeconomic projections) Revenue forecasts and projections (2) 21

Narrow tax base Susceptible to market volatility Specialist tax departments High potential for corruption/fraud May use resource income from commodities other than taxation. Resource Rich Countries

Efficient revenue administration essential to mobilisation of resources necessary to finance public services. Taxpayers need clarity on tax obligations. Revenue agency needs to ensure tax payers are registered and comply with tax obligations, and that tax revenues are collected & deposited promptly in central treasury account. Large scope for tax evasion and avoidance, and corruption in revenue collection; care needed prior to devolving responsibility to an autonomous revenue agency. Main Messages 23