TAX ADMINISTRATION

BTX 2

ZAHOR, TALIB
 INTRODUCTION
• What is a tax administration?
• It is a system of setting a framework that easy
role and objectives of tax authorities
• It involves setting direction, conduct and
management of tax law
• It includes assessment of tax, collection,
enforcement and publication of statistics
relating to tax revenue
Setting conduct
• Involves setting taxpayers’ service charter
– It explains taxpayers’ rights and taxpayers
obligations
• Involves setting employee codes of conducts
 Management of tax law is through
• interpreting tax laws and tax regulations
• What is a tax law?
• What is a tax regulation?
• Differences of tax law and regulation
– Who makes laws
– Who makes regulations
– Legal status of each
 Tax Administration in Tanzania
• It is a role of Tanzania Revenue Authority
• It was established in 1996
• Has mandate to administer tax laws effectively
and efficiently
• effective administration of tax law involves
correct interpretation of tax law and proper
determination of taxable income
• Efficient administration of law laws involves
raising voluntary payment of tax
• Minimize compliance costs and administration
cost
• It can be done through simplifying tax
payment procedures
• Enhance the use of technology on filing
returns and payment of tax
• Educating taxpayers on the need to pay tax
• Locating offices at convenient places
 Challenges of tax administration in
Tanzania
• Identifying and handling taxpayers
• Taxpayers are diverged everywhere. They are
in different forms and sizes
• Therefore it is hard to manage the scatted
taxpayers especially SMEs and informal
sectors.
• In 2005 TRA introduced Block Management
System
 Block Management system

• It was introduced to easy administration of tax

for SMEs……Y?
• SME contributed nearly 1/3 of GDP
• It employs several Tanzanians. However
• It has not sufficiently taxed
• Most of its income remains untaxed …...Y
• Most of them are not registered
• Poor knowledge of tax law
• Volatility of informal sectors makes it difficult to
tax
• It was an alternative technique of Physical survey
system.
• Survey was conducted when resources were
available.
• It was not cost effective and not sustainable
• Commonly was conducted when revenue
projection goal was not met
• BMS intends to overcome the weakness of
physical survey system
• The BMS focuses on the physical identification
and mapping of areas in which the SME
taxpayers are located and operate
• Each block is mandated to operate all the key
tax administration functions of registering,
assessing, collecting and accounting for
revenue collected
• The BMS requires constant monitoring and
evaluation
• The TRA collaborates with local authorities
that also have jurisdiction over small
taxpayers.
• They share information about the location and
nature of small taxpayers
 Objective of BMS
• The BMS helps to combat tax evasion
emanating from under-declaration of business
transactions.
• It enhances tax compliance through
permanent visits to business premises
• enables dissemination of taxpayer education
and prompt delivery of services.
 Assessment of BMS
• What are the effectiveness of BMS towards tax
collection?
• The evasion has been reduced?
• What are the existing challenges of BMS?
 Challenges facing TRA continue…
• Taxing digital economy
– The advancement of mode of conducting business
and know-how increase problem to determine
taxable income and jurisdiction to tax
– Capital is very mobile
– There might be no physical PE and entry point
• Taxing movement of capital. Example taxing
airlines companies. Values might be created/
generate in Tanzania, but its hard to be collected
in URT
• Determining the taxable values of related MNE
(transfer pricing)
• Valuing and taxing intangibles
• Taxation of tourism sector
• What is a tourism?
• The activities of persons travelling and staying
places outside their usual environment for not
more than one consecutive year for leisure,
business and other purposes not related to
the exercise of an activity remunerated from
within the place visited
• The tourism product can be sold to two main
categories of buyers: local residents (domestic
visitors) and foreigners (international visitors).
• Tourism is considered an export of
services….WHY?
• However unlike the export of other trade
commodities, the export of tourism services
requires the consumer to be in the country of
export.
• Secondly, tourists typically consume a bundle
of goods and services while in a destination.
• Hence, in making travel plans, they assess the
cost of the implicit travel package as a whole
• In individual goods purchasing, consumers
make individual decisions as to the purchase of
each good
• It is among the growing sectors/industries
• The sector depends largely on the flow of
human/ tourist in the attractions (beaches,
game etc
 Argument for and against taxing
tourism
• Argument for
• Internalizing externalities
– a. Internalizing negative externalities….HOW?
– b. Provision of public goods
• ii. Rent extraction
• iii. Government revenue generation
• Argument against
• May reduce volume of tourist hence reduce
foreign exchange earning and employment
• The reduction of volume of tourists may lead
to reduction of corporate tax to be collected
from tour operators.
• Reduction of tax from supplies to be
purchased by tourists
 Challenges of administration taxation
on tourism sector
• Package tourism may involve hidden
information, thus it might be difficult to obtain
exactly taxable value
• Contains high possibility of aggressive tax
planning through value chain.
• Practically it is hard to internalize the
externalities caused by tourism
• The sector contains several taxes to be levied at
different level
 Voluntary tax compliance
• Voluntary tax compliance (tax compliance) is a
tendency of a taxpayer to abide with tax laws
and regulations without being forced.
• It is a key towards efficient tax collection
Factors influencing tax compliance
• Simple and clear tax laws
• Tax paying culture
– Consider non paying tax is bravery or otherwise?
• Efficient administration of tax
– Penalizing default taxpayers
– Reward best compliant taxpayers
– Educating community on the need of paying tax

• Strengthen customer care

– Timely response on their problems
– Early information
 Compliance Risk Assessment &
Management
• Compliance risk management is a structured
process for the systematic identification,
assessment, ranking, and treatment of tax
compliance risks
• What is a risk?
• The threat or probability that an action or event
will adversely affect an organisation’s ability to
achieve its objectives
• It is uncertainty of outcome.
• What are possible risk? failure to register,
failure to properly report tax liabilities etc).
Therefore
• CRM is an iterative process that consists of
well-defined steps to support improved
decision-making
• Why compliance Risk management is
important?
• The complexity and innovations in business
structures
• New financial products
• Large numbers of taxable persons and
services,
• Development of digital economy
• Similarly tax, tax authorities are faced with the
need to work more efficiently both in the eyes
of public opinion and in view of reductions in
budgets and restrictions to hire new
personnel.
 Objectives of compliance risk
management
• Generally it intends to reduce the possibility of
bad outcomes.
• It is a way to give better answers to better
questions
• It is a techniques to provide value to tax
authority stakeholders….HOW?
• Generally value is created though better
decision making
• To enable a tax authority to accomplish its
mission(s) by facilitating management to make
better decisions
• It helps to identify the different steps in the
decision-making cycle and it makes it easier to
detect mistakes
• Achieve equal treatment of the taxpayers
• Focus the burden of audit to non-compliant
taxpayers
• Make best use of the available human,
financial and technical resources
• Increase the level of voluntary compliance of
taxpayers
• Adjust available resources to the levels of risks
• Weigh the possibilities that a compliant
taxpayer could become non- compliant
 COMPLIANCE RISK MANAGEMENT
PROCESS
OPERATING CONTEXT

IDENTIFY RISKS

ASEESS AND PRIORITIZE RISKS

EVALUATE
COMPLIANCE
• ANALYSE COMPLIANCE BEHAVIOUR OUT COMES.
MONITOR (causes and options to minimize)
PERFORMA •registration
NCE •filing
AGAINST •payments
PLANS DETERMINE TREATMENT STRATEGIES

PLAN AND IMPLEMENT STRATEGIES

• Process framework of this kind assists revenue
authorities to:
• Respond quickly to changing circumstances;
• Ensure that treatment strategies are applied
to activities of the highest priority, and that
those strategies have a high probability of
success;
• Influence the impact of compliance
interventions (such as audits surprise visits
etc)
• Optimize collections under the law while
maintaining community confidence in the
system).
 Description of the scheme
• OPERATING CONTEXT
• Practically, resources are very scarce
• Hence the compliance risk
assessment/management has to be
sufficiently done…….HOW?
• Clarifying organizational objectives
• The objectives should reflect the context in
which an authority operates.
• Risks within and outside tax authority have to
be considered in management of risks.
• For EXTERNAL context tax authority should
assess and monitor
• legislation,….Y? identify weaknesses and
threats that may need to be addressed or
mitigated through administrative practices.
• Suggest possible amendment of legislation
• Government policy, public opinion and
economic conditions
• Public opinion represents an important
consideration for revenue authorities.
• An authority is held within the community,
therefore
• The community attitude towards compliance
has to be assessed
• The community attitude towards the ability of
the revenue authority to successfully
administer the taxation system has to be
monitored
• The community attitude towards morale of
revenue authority staff.
• These factors all potentially impact upon the
compliance risks being faced
• The authority has to ensure is able to meet its
objectives of collecting the revenue in a
manner that sustains community confidence
• INTERNAL FACTORS
• Organizational culture;
• Organizational structure;
• Information technology and business systems;
and
• Staff and business capabilities.
• Organizational culture
• How the revenue authority reports, governs
and make decision?
• How managers perceive new strategies or
challenges?
• How quality service is controlled?
• Organisational structure
• It plays great role on the compliance risk
management
• Organisational structure may assist on
identifying existing and potential risks.
• It ensures that organisational strategies are
integrated
• All officials have to understand and accept
what they are doing and why they are doing
• The administration must fit their
contributions together, or the whole
mechanism will not work
• Information Technology and business system
• Compliance risk management is
fundamentally founded on the ability of the
authority to receive multiple pieces of
disparate information and to combine and
interpret them to form intelligence about the
environment
• The IT is crucial towards receiving large
volume of information and towards processing
• Intensive use of information technology
creates opportunities to improve the
performance of the Tax Administration.
• It affects factors such as reliable and updated
taxpayer files as well as databases with
crosschecking possibilities
 Identifying risk
• Tax risk can be identified from the objectives
of tax authorities
• If the objective is to raise voluntary
compliance, the risk will be that:
– Some new taxpayers will not be registered
– Some taxpayers will not file return/pay tax
– Some taxpayers will not declare correct taxable
income
• Therefore the identification of risk can be
applied at the strategic (top-down) or
operational/tactical level (bottom-up) or both
the level
• At the strategic level, compliance risk
management focuses on identifying non-
compliant behaviour that are likely to have
significant tax revenue consequences if left
untreated
• It needs to inform evidence-based policy making
and the development of legislative treatments
for risk as well as the quantification of revenue
risk.
• Practically it is impossible to create law that is
both clear and entirely unambiguous.
• The ambiguity provides scope for non-
compliance as taxpayers seek to operate in those
‘grey’ areas of the law
• Therefore to identify those loopholes is very
crucial towards proposing amendment of tax
legislation
• Strategic consideration needs to be given to
the consequences of policy expectations of
the government of the day and the risks of
non-delivery
• Risks identified at the operational level can
usually be dealt with as day-to-day business
• Generally risk identification will often entail
identifying matters that, if left untreated,
could pose a risk to the long term viability or
sustainability of the revenue collection
 Risk Identification Diagnostic
TECHNOLOGY
KNOWLEDGE Identification at this
Whole
level Prompt
market
systematic design to
proactive risk

intelligence Tax issue

Identification at this
advanced
level prompts
leverage strategies
segment
information intermediate
prompts case-by
case action after
industry
noncompliance
data
Has occurred basic

Case/transaction aggregated strategic

FOCUS
 Assessing and prioritizing risks
• Not all risks will necessarily be able to be
addressed
• Tax authority has to assess and treat risks that
have high impact on revenue collection
• Assessment and prioritizing risks depends on
the information available from the stage of
identification of risks
• It requires consideration of the sources of
specific risk identified,
• an assessment of its potential consequences
in terms of achieving corporate objectives,
and
• judgment as to the likelihood that the
consequences will occur
• Consequence is measured in terms of the
impact that a risk would have on the
achievement of organisational objectives
• This may be in the form of either qualitative or
quantitative measurement or both
• Likelihood is measured in terms of the
probability of the risk occurring at all
• Risk analysis must also involve the why
question: what is the reason for non-compliant
behaviour in the specific areas
• it contributes to the assessment and to the
choice of the most efficient and effective
treatments
• Risk analysis is carried out on the data
gathered from multiple sources. example
• Data supplied by taxpayers, for example the
data from the tax return(s);
• Tax data acquired by administrations, for
example the date of last compliance activity,
number of returns filed late or outstanding;
• Data supplied by a third party, for example a
bank or other state department;
• Information available on the Internet
• Generally factors that may be involved in risk
analysis are
• the amount of tax which is involved directly or
indirectly:
• the resources for treatment; this can be
expressed in staff days or hours or “tax per
hour” – the return on investment;
• social effect and political objective
• Some techniques of treatment of risks may
have positive or negative effects to taxpayers
and community.. therefore
• The image that the tax authority wants to
portray can play a role in the choice of what
specific risks are to be covered
• Tax authority has to put extra attention on
specific risk of new legislation and educating
the taxpayers
• Understanding those factors gives the tax
administration the opportunity to take the
correct approach, with the same resources
• Like wise it has positive indirect effects in the
areas of compliance levels, social support and
perception;
• The process of assessing and prioritizing risk
should use random approach, thus there
should be an opportunity for every taxpayer
• The approach may explore new risk
• Once risks have been analyzed, they should be
weighed based on the likelihood of occurrence
and consequence of the risk on the tax
revenue
• Weighing assist in the efficient allocation of
the resource
Compliance risk-rating matrix
• Consequence is measured in terms of the
impact that a risk would have on the
achievement of organisational objectives.
• The intention of any consequence model is to
provide the authority with a mechanism to
allow the comparative assessment of risks in a
manner that is repeatable
• Likelihood is measured in terms of the
probability of the risk occur
• Rare ‘May occur only in exceptional
circumstances’
• Unlikely ‘Could occur at some time’’ Likely to
occur once in 10 years’
• Possible ‘Might occur at some time’ ‘Likely to
occur once in the next three years ’
• Likely ‘Will probably occur in most
circumstances’ ‘Likely to occur more than once
in the next three years ’
• Almost Certain ‘Is expected to occur in most
circumstances’ ‘Likely to occur this year or at
frequent interval
• The result of prioritizing risk is the setting of
treatment plan
• Definitive risk ratings usually inform who in
the organisation is responsible for dealing with
the risk
• For example, the risks rated as highest on the
scale of consequence and likelihood (e.g. a
‘severe’ risk) will be managed at the highest
level of management in the organisation
ANALYSING COMPLIANCE BEHAVIOUR
• Understanding compliance behaviour is more
than guesswork
• There is no easy answer to what influences
taxpayer behaviour either towards compliance
or non-compliance
• There must be a research to explore the exact
factors that influence taxpayers behaviour
• Taxpayers adopt a range of postures in their
response to the demands of revenue
• Therefore tax laws and tax administration has
great influence on taxpayers behaviour
• Behavioural aspect on taxpayers compliance is
drawn heavily from concepts and research
from psychology and sociology disciplines
• Some of behavioural factors that affect
taxpayers behavior include
• individual differences. gender, age, education
level, moral compass, industry, personality,
circumstances, and personal assessment of
risk;
• perceived inequity. Taxpayers who believe ‘the
system’ is unfair or who have personal
experiences of ‘unfair’ treatment are less likely
to comply;
• perception of minimal risk. If a taxpayer has
the opportunity not to comply and thinks that
there is only a minimal risk of being detected,
he or she will take the risk.
• Risk taking. Some people view tax avoidance
as a game to be played and won: they like to
test their skill in avoiding their obligations and
avoiding being caught.
• Opportunity for non compliant taxpayers
• Social norms…If non compliance is wide
spread in the community, it motivates
compliant taxpayers to join the non compliant
camp
• Dissatisfaction with revenue authority.
There is a positive correlation between belief by
taxpayers that the revenue authority is
inefficient or unhelpful and the likelihood of
their non-compliance
• There are also economic factors that influecen
the non compliant behaviour. These factors
include
• financial burden…..there is a direct
relationship between amount of tax owed and
compliance behaviour
• if a taxpayer has a tax liability that can easily
be paid he may be willing to comply. However
If the tax liability if high that may threaten the
viability of the business, the taxpayer may not
pay full amount of tax
• The cost of compliance. The higher the
compliance cost, the higher the possibility that
taxpayers will not comply with tax laws and
procedures
• Disincentives. Investigations into the impact of
deterrents. The level of penalties, interest and
fine in case a taxpayers is found to violate tax
law has influence on the compliance
behaviour
• Incentives. Similarly, motivating the best
compliant taxpayers may motivate other
taxpayers to comply with tax law
• Therefore…. The taxpayers attitude towards
compliance may be expressed pyramidically