In Focus: IMF Tax Administration Advisor about his Work in SEE Region

The main theme of IMF Tax Administration Advisor Norman Gillanders` work is to help the countries in the region to follow a pathway towards modern European tax administration.The basic model proposed is the EU’s Fiscal Blueprints which are very much in line with the IMF’s own recommendations on tax administration. Of course, each country has its own distinct background which has to be taken into account.

IMF Tax Administration Advisor Norman Gillanders says: The question for me has been where to begin. Drawing on the IMF’s policies and my own previous personal experience in tax modernization I have concentrated on moving countries towards the adoption of the EU/OECD compliance risk management model, known as the CRM. The CRM asks tax administrations to consider whether their resources are aligned with the risks they face.

For example, Figure 1 above shows a simplified view of tax risk and is a useful framework for starting to think about matching resources to risks. Large multinational taxpayers, it can be argued, belong in the bottom right quadrant; they have a high tax value but the risk that they deliberately evade tax is relatively small. However, there is a risk that they can make technical errors in interpreting tax law that are very difficult to detect and costly in terms of lost tax. Nowadays, modern tax administrations react to this risk by developing specialist units called Large Taxpayer Offices (LTOs) to closely manage the tax business of the several hundred biggest companies that usually pay around half of all taxes in each country. The LTO typically examines major events in a company’s commercial life to determine what tax risk is present. It stays in regular contact with the company and offers it quick and reliable ‘rulings’ on tax law. This kind of work requires the use of a small percentage of the tax administration’s staff – people who tend to be the best tax law experts and auditors. But traditional audit is not the main compliance tool. Instead, in the language of the CRM, the risk of error by large taxpayers is ‘treated’ by the creation of a well-resourced LTO where quality service and technical advice is the main tool of compliance management. The IMF has devoted a lot of time since 2011 to advising countries on the creation and improvement of LTOs. This theme has been included in all five training events that I have run in conjunction with the CEF on modern methods of tax administration.

On the other hand, the low risk/low value quadrant in Figure 1 represents the very large number of micro-businesses that each tax administration has to manage. It is easy to allow this segment to devour resources, usually by over-auditing the businesses for relatively little return in each case. The CRM approach suggests that these businesses should be monitored to ensure that they make returns and pay a credible amount of tax. The main task for a tax administration is to make it easy for the business to understand its tax obligations and to meet them. The minor risks that micro-businesses represent can be assessed using third party information and by including them in a modest random audit program with some risk-based desk audits.

The upper quadrants are a problem for tax administrations. Together they contribute a significant proportion of all taxes but it is impossible to check them all or to audit them all. The CRM suggests that tax administrations take a careful look at these businesses by assessing what are the main risks in a systematic way:

• What are the most risky economic sectors?
• What taxes or procedures are riskiest?
• Where is tax law weakest?

Such an analysis should be based on real data and can be as simple or as complex as a country’s circumstances permit. Usually, this work is done in a risk management unit in the tax administration HQ. The risk management unit identifies a number of risk areas. Management must have a procedure to prioritize the response to the risks identified and a governance mechanism to make sure that the tax administration follows through in a structured way on the sectors or risks prioritized. Typically, the risk projects involve:

• Doing analysis to see who the riskiest taxpayers in each risk cluster are.
• Auditing a very small number of them to make sure the risk analysis is correct.
• Telling every business in the sector that particular risks have been identified.
• Inviting each business in the sector to review its tax payments and to correct any errors before a specific date and using publicity and the media to get out the message.
• If possible, offering the taxpayers who are prepared to correct any wrong declarations an incentive in the form of reduced interest or penalties – but they must pay the tax, of course.
• Auditing those who don’t come forward when the disclosure period has expired – they will pay full tax, a higher interest rate and higher penalties.

Note again how the CRM reduces audit to a supporting role.

Experience has shown that in the SEE region the CRM method can and does work. Three of the six countries in which I work have implemented the CRM or are starting to do so in 2013. The CRM reduces the use of audit and focuses it on the businesses that most need it.

Most of the training I do with the CEF is about getting started with the CRM – and that means all six countries I work in are aware of its potential through direct contact through my country visits but also through participation in CEF events.

However, the CRM is a new way of working. Tax administrations have concentrated on improving their processes. But the CRM requires skill in running large and dispersed projects. That in turn requires skill in project management and a decision-making body at senior level to decide which projects are most important. Even more difficult, in many countries, is the task of managing these complex national projects from the tax headquarters. Good decision-making bodies and strong lines of accountability are essential. The HQ must be adequately–resourced and must have a small number of analytical professionals to help with risk analysis.

Because the success of CRM depends on good governance, the second main strand in the IMF program will continue to be working with senior colleagues in tax administrations to strengthen their ability to control their organizations at operational level. We will continue to work with countries in 2013 and 2014 to improve corporate governance so that they can implement the CRM.

My work, since 2011, has been challenging but interesting. The CEF has been excellent at turning the IMF analysis of key problems into well-designed and run training seminars and this very valuable partnership will continue in 2013. I must also thank my Netherlands revenue administration colleague Ms. Lisette Van der Hel, who is also a professor at Nyenrode University and a superb teacher. She has shared with me the tutoring tasks at the CEF for the past two years. Everyone who has been to her lectures in the CEF will share my appreciation.

My work continues to be funded by a grant from the Japanese government.

Notes to editors:

Norman Gillanders joined the IMF's team of locally-based tax administration reform advisors in South Eastern Europe on 10 January, 2011. He works on behalf of the IMF with the tax authorities in Albania, Bulgaria, Croatia, Moldova, Montenegro and Romania. Norman is attached to the Center of Excellence in Finance (CEF) in Ljubljana, Slovenia.

The CEF hosts two IMF FAD advisors and their support staff, whose efforts are funded by the Japanese government. Our organizations’ efforts in the region are complementary and mutually reinforcing. IMF technical assistance missions help pinpoint needs for learning and knowledge sharing among practitioners. The CEF can design workshops that address these needs, bringing together peer institutions and experts from the region and beyond. Many of the courses are delivered by the IMF’s advisors, who contribute content that is strongly informed by their missions. Our learning events are highly participatory, with an evaluation process that ensures we capture input to inform and strengthen future activities. This learning deepens the benefits of technical assistance while helping the IMF advisors prioritize areas that need further work. These unique synergies have contributed to a steady rise in our member countries’ demand for help with capacity development.