Chapter 2. Special feature: Tax administration operations

There is a common set of functions that must be undertaken by revenue bodies to fully carry out their mandate, regardless of the taxes or the economy in which they are levied. These include registration and identification of taxpayers, taxpayer services, tax return and tax payment processing, verification programmes, dispute resolution, and tax payment collection including enforced return filing and debt collection. The conduct of these functions is increasingly being supported by modern technology systems.

This special feature is based on Chapter VI of Comparative Analysis of Tax Administration in Asia and the Pacific 2018 Edition ADB (2018[1]). It provides a summary of recommended and observed features of key aspects of revenue body operations, including the use of electronic services.1

Figure 2.1. Functions of tax administration
Figure 2.1. Functions of tax administration

Source: Based on ADB 2018.

2.1. Registration and taxpayer identification

The identification and registration of taxpayers, both individuals and entities, are fundamental to a revenue body’s system of managing all aspects of taxpayers’ tax affairs. The systematic recording of taxpayers’ identifying and updating of details, and the allocation of a unique high-integrity taxpayer identifier enable the efficient conduct of all downstream administration processes.

Good practices in taxpayer registration and identification are often associated with a number of features including (i) the use of a taxpayer identification number, ideally all numeric and with a check digit, which enables routine and systematic identification of taxpayers for all administrative actions, (ii) the availability and operation of an information technology system which support all aspects of registration and identification, and related administrative processes, (iii) the establishment of risk assessment processes which ensures that non-authentic applications for registration as a taxpayer are detected and actioned upon as needed, (iv) maintenance of a database of sufficient, accurate, and reliable identifying information (e.g. name, address, contact details, nature of business activity, and tax obligations by tax type), (v) the establishment and operation of processes which identify and flag dormant registrations (e.g. taxpayers temporarily residing in other countries), and keep the database clean of inactive (i.e. deceased persons and defunct businesses), invalid, and duplicate records.

With minor exception, all revenue bodies2 reported the use of a taxpayer identification number (TIN) for their main taxes. However, some revenue bodies (e.g. China, Singapore and Thailand) reported that issuance of the TIN for some or all the main taxes is the responsibility of another body. This suggests that the TIN has other uses, for example, as a national identification number or business registration number, and is not primarily in place for tax administration purposes.

For the case of identifying large taxpayers such as big business entities or high profile individuals, the majority of Asia-Pacific’s revenue bodies has implemented a specific unit or a sub-division within their tax administration. Some examples of this unit could be found in Myanmar with its Large Taxpayers Unit (LTU) introduced in 2015 and in Papua New Guinea with its Large Taxpayer Office (LTO). However, until 2018, absence of the unit can still be found in some economies such as Brunei Darussalam; Hong Kong, China; and Korea.

In general, various criteria such as economic sector, number of employees, turnover level, assets, capital invested and tax paid are used by the unit as measure of identification. The Malaysian LTU, which is nationally referred to as Large Taxpayer Branch (LTB), uses turnover level as its main criteria. Meanwhile, the LTU within the Philippines’ Bureau of Internal Revenue (BIR) uses the size of collected tax as its identification criterion. Three sectors that mainly contribute to the BIR’s LTU are banks, tobacco, and wholesale and retail stores. In some countries, LTUs provide services with largely a full range of functions such as end-to-end processing of taxpayers’ affairs (as seen in Bangladesh, Mongolia, and New Zealand) to setups where the LTU provides only service and audit functions.

In addition to the routine identification of taxpayers, the taxpayer registration database provides valuable information for the conduct of compliance-checking programmes. For these and other administrative processes, ensuring the quality (i.e. accuracy and currency) of taxpayer identity and location details is necessary.

2.2. Taxpayer services

To achieve high levels of voluntary compliance, it is crucial that revenue bodies provide a comprehensive, well-targeted, and accessible range of services for taxpayers, their representatives, and other intermediaries that have a role to play in tax administration. Tax laws are inevitably complex, and citizens and business owners are often unfamiliar with the technical jargon of tax-related topics as well as changes in tax policy and administrative requirements that impose new and, at times, onerous obligations.

Good practices in taxpayer service delivery often include (i) providing taxpayers with information through a variety of user-friendly products and public education programmes, (ii) customising information to meet the specific needs of particular taxpayer segments, and tax intermediaries such as tax professionals regularly update products to reflect changes in the law and administrative procedures, (iii) delivering cost-effective services through means that are convenient to taxpayers, (iv) issuing binding tax rulings (public and private) to provide taxpayers with certainty as to how the tax administration will apply the tax law to particular transactions, (v) committing to service delivery standards and publicly account for the results achieved, (vi) monitoring frequently asked questions and common misunderstandings of the law detected through service and verification activities, and ensure remedial actions are taken, (vii) monitoring perceptions of service quality and administrative performance, and seek feedback on products and services from taxpayers and important intermediaries (e.g. tax professionals).

Reducing taxpayers’ compliance burden and improving their satisfaction with the services delivered, improving certainty for taxpayers, and reducing operational costs are some of the objectives of having a formal strategy for improving service delivery in many revenue bodies. Service delivery standards are publicly available in a large majority of revenue bodies. The Client Charter of the Inland Revenue Board of Malaysia, for example, is publicly available, mentioning the standard of the delivery of each service, along with its monthly achievement status. The Inland Revenue Department of Hong Kong, China also has a taxpayers’ charter, setting out the standards for 25 specific types of services. They publish the results of achievement in an annual report.

A system of public rulings that are binding is available in all revenue bodies, some revenue bodies also provide access to non-binding private rulings. Most revenue bodies provide both public and private rulings, and in the vast majority of cases, where rulings are issued, they are binding on the revenue body. Bangladesh, China, Fiji, Mongolia, Myanmar and Uzbekistan report that they do not currently issue public or private rulings, but Fiji advised that a framework is being developed. Only Tajikistan and Thailand issue non-binding rulings.

Electronic services such as information on websites, online transactions, and tools and calculators are commonly offered, while other services including integrated taxpayer accounts and electronic invoices (VAT) for businesses are less frequently offered. In China, the use of information system has been implemented through an individual income tax (IIT) withholding App. This aims to facilitate the filing of tax for taxpayers. Further improvement will be made to facilitate settlement by using payment platforms (PwC, 2019[2]).

Tax professionals play a significant role in the operation of the tax system in many economies, and most revenue bodies report that there are laws that regulate activities of tax professionals. Many revenue bodies offer services to support tax professionals such as (i) the provision of regular updates on legislative and administrative changes; (ii) specific contact points (e.g. client or relationship managers); (iii) a dedicated section on the revenue body’s website; and (iv) online access for authorised agents to clients’ tax data. Revenue bodies in Australia, Brunei Darussalam and Malaysia appear to have the most comprehensive suite of service offerings for tax agents. In each of these economies, tax agents are legally obliged to register with the revenue body.

2.3. Tax return and tax payment processing

Tax returns and payments constitute the most basic and important elements of data that taxpayers are required to provide to revenue bodies. Guidance for achieving effective and efficient tax return and payment processes typically draws attention to a range of desirable strategies and approaches, including providing a legislative framework for taxpayers’ filing and payment obligations that balances the competing demands of key stakeholders (i.e. government revenue goals, revenue body workloads considerations, and taxpayers’ compliance burden); designing tax returns that require the minimum level of data required from taxpayers to accurately calculate their tax liabilities, to properly assess the risk of incorrect reporting, and to satisfy other essential government requirements; providing easy-to-follow and accessible information products to assist taxpayers in meeting their return filing and payment obligations; prompting taxpayers on their immediate return filing and payment obligations; providing taxpayers with secure access to user-friendly systems for electronic filing of tax returns and electronic payment of taxes and actively promote their use; providing taxpayers with secure online access to their tax accounting records and other important items of personal taxpayer information.

Regarding the use of electronic filing of tax returns, considerable progress has been made for major taxes by a number of developing and emerging economies, such as India, Kazakhstan, Malaysia and Singapore). Since 2017, Sri Lanka has been putting into practice the electronic filing of tax returns through an automated system called Revenue Administration and Management Information System (RAMIS) (PwC/World Bank, 2018[3]). Recently, data centre maintenance has been done several times by the Sri Lanka Inland Revenue in order to improve the system’s performance. The New Zealand Inland Revenue also implemented an automatic tax system for the first time in April 2019. The system allows New Zealanders to get their tax assessment online which includes refunds and bills to pay (IRD, 2019[4]). However, for quite a few other developing economies (e.g. Cambodia, Indonesia, Kyrgyzstan, Papua New Guinea and the Philippines), little progress has been made or these services are yet to be offered.

2.4. Verification activities

Revenue bodies typically carry out a large variety of activities to verify taxpayers’ compliance with the laws. The primary verification activity undertaken by revenue bodies is usually called a “tax audit” or “tax control”. Across revenue bodies, audit activities vary in their scope and intensity, and indeed in the precise nature of actions taken by officials that are deemed to constitute an audit. Revenue bodies also carry out various other activities, including in-depth fraud investigations, income-and-document matching checks, phone inquiries, computer-based audit and mathematical checks, and inspections of books and records that can result in changes to taxpayers’ reported liabilities.

In Indonesia, for example, the Directorate General of Taxes (DGT) has been implementing a policy regarding the law enforcement on tax audit in order to revitalise the audit process. One of the outcomes has been a list of priority targets for tax audit which consists of non-compliant taxpayers (Whitehead, 2019[5]).

Verification activity could also be in the form of a voluntary disclosure mechanism, which is regularly applied to facilitate tax compliance by encouraging taxpayers to disclose their past non-compliance. Fulfilment of the past non-compliance usually passes through an incentive mechanism. This includes penalties reduction, interest cut, freedom from audit and prosecution burden, as well as tax evaders’ publicity in the case of Cook Islands.

Malaysia’s Inland Revenue Board (IRB) is currently implementing special voluntary disclosure programmes (SPVD) that offer a seven-month period of lower penalty rates ranging between 10% and 15%. These rates are much lower than the 80% to 300% penalty rates that will be applied after the SPVD period (Whitehead, 2019[5]). The voluntary disclosure programme is being implemented in several economies of the region such as Afghanistan; Australia; Bhutan; Hong Kong, China; Indonesia; Japan; Korea; New Zealand; Singapore; and Thailand. Economic benefits from such programme are notably known in Australia and New Zealand.

A reduction or waiver in the primary tax liability of a taxpayer, which is generally complemented by other conditions and concessions, also constitutes a form of incentive for fulfilling the past non-compliance. This programme is usually referred to as tax amnesty and has already been put into practice in countries such as Indonesia, Fiji, Papua New Guinea and India. In the Philippines, a Tax Amnesty Act was signed by the President on 14 February 2019, leading into a tax amnesty programme which includes general tax amnesty, estate tax amnesty, and tax amnesty on delinquencies (KPMG, 2019[6]).

Guidance for achieving effective verification programmes typically draws attention to a range of desirable strategies and approaches, including:3

  • Designing and implementing a programme of verification activities with an objective to maximise its impact across the broader taxpayer population. Programmes of this kind, which aim to improve accurate reporting across the board, focus on the highest compliance risks.

  • Supporting audit operations with (i) a robust and comprehensive automated case management system; (ii) centralised audit case selection using analytics to select the highest risk cases within a target population of taxpayers; (iii) computer-assisted audit tools that enable the extraction, analysis, and cross-checking of large volumes of data from taxpayers’ accounting system; and (iv) a uniform set of administrative penalties across all taxes for inaccurate reporting and judicial penalties for tax offenses, such as falsification of tax records.

  • Building capacity in systematic cross-checking of third party information (e.g. from banks, stock exchanges, and government agencies) with amounts reported in tax declarations.

  • Adopting co-operative compliance approaches to manage risks of inaccurate reporting.

  • Developing benchmark economic performance parameters for key industries, business activities, professions, and occupations to identify taxpayers who file out-of-pattern tax declarations.

  • Monitoring the overall level of correct reporting through various methods; for example, (i) tax gap analysis, (ii) use of advanced analytics using large data sets to determine the likelihood of taxpayers making full and accurate disclosures of income, and (iii) surveys monitoring taxpayer attitudes toward the accurate reporting of income (IMF, 2015[7]).

Taxpayer verification activities typically account for a major share of revenue body resources. Allocations to verification-related functions and processes often represent a substantial share of a revenue body’s overall staff resources. For this reason, how these resources are used and the contribution they make to revenue collections and improving taxpayers’ compliance are key considerations for all revenue bodies.

2.5. Taxpayer disputes

When revenue bodies review taxpayers’ returns and make adjustments to assessments raised, or provide rulings on specific issues as a result of taxpayers’ requests, taxpayers should be entitled to a review if they disagree with the decisions made. For this reason, establishing a process for reviewing a revenue body’s decisions before seeking recourse through a judicial procedure is generally expected to lead to more efficient dispute resolution, benefitting taxpayers, revenue bodies, and governments.

The IMF’s Field Guide for its diagnostic tool provides a useful set of guidance on good practices in the administration of tax disputes. These include:4 establishing a dispute resolution mechanism that is simple, transparent, and graduated; and codifying the dispute resolution process in a general tax administration law that has uniform application across all the main taxes; publishing clear explanations of taxpayers’ rights and legal avenues for review of decisions made by the revenue body; ensuring that taxpayers receive clear explanations of adjustments made to tax liabilities following an audit, the reasons for any penalties, and their rights and avenues of review; having processes in place to ensure that the main reasons for successful taxpayer disputes are identified and remedial actions taken; allowing taxpayers to escalate a dispute directly to the second stage where the revenue body fails to complete an administrative review within a reasonable time frame; allowing suspension of collection of all or some of the disputed amount for the duration of the appeal process, if recovery of the debt is not considered to be at risk; making prompt refunds of overpaid tax where a dispute is resolved in the taxpayer’s favour; making public the conditions under which the revenue body may reach an out-of-court settlement in respect of a tax dispute; having an effective and efficient case management system within the revenue body (IMF, 2015[7]).

An administrative review is generally compulsory in all surveyed economies before a taxpayer can seek legal recourse. For example, the Australian Taxation Office (ATO) can pay a discretionary compensation regarding small business tax disputes. This programme is part of the Compensation for Detriment Caused by Defective Administration (or the CDDA Scheme), which implementation within the ATO is currently under review to ensure its improvement (Australia Government, 2019[8]). However, there were exceptions where such reviews are not carried out by the revenue body, such as in the PRC. Some revenue bodies report that disputes can be resolved on a “risk basis”. In some revenue bodies, disputed tax can be collected where a case is under administrative or court review. The main judicial forums used to resolve disputes are specialised tax courts, civil commercial courts, and criminal courts.

2.6. Collection of tax payments, including enforced debt collection

Tax laws typically prescribe the due date(s) and basis of computation for taxes to be paid, and it is generally the responsibility of revenue bodies to specify the precise payment requirements: (i) when to pay, (ii) who should pay, and (iii) the methods available for making payments. To encourage the payment of taxes on time, tax laws also generally provide an interest sanction for late payment and, in some cases, a penalty. Given the importance of meeting government revenue targets, revenue bodies must also have effective processes for ensuring timely follow-up action for overdue tax payments.

The features of tax system design and administration that contribute to high levels of effectiveness in collecting taxes on time and their enforcement where liabilities become overdue are specifically addressed in the IMF’s diagnostic tool (TADAT) (IMF, 2015[7]) and in other publications of international bodies.

Good practices in the collection of tax debts include:5 (i) aiming for optimal use of tax withholding at source and advance payment regimes. For advance payments, ensure that taxpayers can readily determine the amounts that they are expected to pay and provide advance notice of payment due dates, (ii) promoting the use of electronic payment methods, (iii) providing an appropriate legal framework, including comprehensive debt recovery powers and suitable late payment penalties and interests that are common across the main taxes, (iv) establishing dedicated debt collection enforcement units with full-time specialist staff; make use of outbound call centers and other communication facilities to contact debtors during and outside regular business hours, (v) managing the arrears inventory by reference to value, age, and collectability of cases; give priority attention to newer debts, noting that recovery rates on older tax arrears tend to decline over time, (vi) ensuring prompt write-off of established uncollectible arrears, and (vii) having an efficient and effective system of case management (IMF, 2015[7]).

Other practices also existed in form of withholding at source and voluntary disclosure mechanism. Within the tax withholding at source method, intermediary bodies such as employers and financial institutions are involved. They are imposed to withhold tax from the payment of income so that taxpayers could fulfil their tax obligation on time. For example in Viet Nam, employees’ income taxes are withheld by employers and are deposited before the 20th of the following month. On the other hand, Hong Kong, China and Singapore are not implementing this method, thus employers have to make advance payments and file returns.

In addition to the employment income, tax withholding at source also applied for other categories of personal income such as dividends, interest, rents, royalties and patents, share sales and purchases, and another income of resident and non-resident taxpayers. Tax withholding on other categories of income are reported by revenue bodies in Bangladesh, China, Indonesia, Kazakhstan, Mongolia, the Philippines and Thailand. Meanwhile, limited use of this method can be observed in Australia; Hong Kong, China; Malaysia; Maldives New Zealand and Singapore. Moreover, tax withholding can also be applied on specific income from several goods such as marine products and cocoa that are subjected to tax withholding by the Solomon Islands’ revenue body.

Some of the most commonly used powers of revenue bodies for enforced debt collection were to grant taxpayers further time to pay, to make payment arrangements, to collect debts from third parties, to offset tax debts against tax credits or refunds, and to require taxpayers to obtain a tax clearance certificate before entering into government contracts. While the least frequently used or available powers were the ability to close a business or cancel a business license, denial of access to government services, imposition of liability on company directors, and publication of the names of debtors. A number of revenue bodies, including Brunei Darussalam; Cambodia; Hong Kong, China; Indonesia; Japan; Kazakhstan; Kyrgysztan Maldives; Mongolia; New Zealand; China; Tajikistan and Thailand reported what appeared to be a more limited set of enforced debt collection powers.

References

[1] ADB (2018), Comparative Analysis of Tax Administration in Asia and the Pacific 2018 Edition, Asian Development Bank, Manila, http://dx.doi.org/10.22617/TCS189264.

[8] Australia Government (2019), Review of the CDDA Scheme in relation to the Australian Taxation Office and Small Business, Australia Government Department of Finance, https://www.finance.gov.au/resource-management/discretionary-financial-assistance/review-cdda-scheme/.

[7] IMF (2015), TADAT: Tax Administration Diagnostic Assessment Tool Field Guide, International Monetary Fund, Washington, DC.

[4] IRD (2019), Automatic tax system off to a smooth start – more than $80 million of refunds issued in the first week, New Zealand Inland Revenue Department, https://media.ird.govt.nz/articles/automatic-tax-system-off-to-a-smooth-start-more-than-80-million-of-refunds-issued-in-the-first-week/#.

[6] KPMG (2019), InTax, R.G. Manabat & Co., https://home.kpmg/ph/en/home/insights/2019/02/intax-february2019-issue1-vol1.html.

[2] PwC (2019), 2019 Spring Breeze Action: implementing the reduction of taxes and fees as well as innovative services for Large Business Entreprises, PricewaterhouseCoopers Consultants (Shenzhen), Shenzhen, https://www.pwccn.com/en/china-tax-news/2019q1/chinatax-news-mar2019-7.pdf.

[3] PwC/World Bank (2018), Paying Taxes 2019: Fourteen years of data and analysis of tax systems in 190 economies: how is technologies affecting tax administration and policy?, PricewaterhouseCoopers Consultants and World Bank, https://www.pwc.com/gx/en/paying-taxes/pdf/pwc-paying-taxes-2019.pdf.

[5] Whitehead, S. (2019), The tax disputes and litigation review: Seventh edition, Law Business Research, London, https://assets.kpmg/content/dam/kpmg/no/pdf/2019/The-Tax-Disputes-and-Litigation-Review-7th-Edition.pdf.

Notes

← 1. Details of the underlying source material and the data used in this special feature can be found in ADB (2018[1]).

← 2. All revenue bodies included in the ADB (2018[1]), A Comparative Analysis of Tax Administration in Asia and the Pacific 2018 Edition.

← 3. This list is adapted from IMF, 2015: TADAT, Tax Administration Diagnostic Assessment Tool Field Guide, Washington DC. Please see box 19 of ADB, 2018.

← 4. This list is adapted from IMF, 2015: TADAT, Tax Administration Diagnostic Assessment Tool Field Guide, Washington DC. Please see box 20 of ADB, 2018.

← 5. This list is adapted from IMF, 2015: TADAT, Tax Administration Diagnostic Assessment Tool Field Guide, Washington DC. Please see box 21 of ADB, 2018.

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