Revenue reform can facilitate government stability and independence
Revenue reform can facilitate government stability and independence as governments collect more revenue to finance essential public services and other expenditure needs without recourse to external assistance.
A transparent, fair and efficient revenue system provides certainty and confidence for domestic and international businesses, catalyses private sector development and increases investment, employment and income.
A transparent, fair and efficient revenue system provides certainty and confidence for domestic and international businesses
Areas of expertise
Assessment of Revenue Potential
The first step in revenue reform is often to identify revenue potential in the economy, as this influences revenue policy, law and administration reform.
In less developed countries, revenue potential assessments are usually conducted from the top-down. This is an easier, more general assessment, based on readily available macroeconomic data that can be used to provide an idea of the size and type of economy, what revenue should be expected, and from which sources.
A more complex method of revenue potential assessment is from the bottom-up and this is generally applied when an existing revenue system has a problem of low compliance. In this method the focus is on, for example, analysing the quality and quantity of tax returns to understand how much higher revenue could and should be.
Revenue policy is the framework and foundation of the revenue system. It translates a government’s philosophy and outlook into practice regarding the distribution of income and wealth, the promotion of investment, the use of natural resources, the alleviation of poverty, the development of basic infrastructure and the overall sustainability of public finances.
Revenue policy formulation determines which revenue measures to apply and at what rates, including thresholds and exemptions. Policy formulation can also occur at a sub-national level, particularly in decentralised systems where states or provinces may have substantial revenue autonomy.
Policy formulation requires widespread consultation and agreement with stakeholders, including beneficiary government institutions involved in economic management, such as finance, planning and natural resources. It also involves donors and international finance institutions, especially the International Monetary Fund, which generally regards effective and fair revenue policy as a condition of its support.
Changes to revenue policy should be adopted in law, either in amended versions of existing laws or in completely new drafts. These laws should minimise ambiguity and be simple and straightforward, in order to keep the burden of administering and following them as low as possible.
Developing a reformed legal framework requires skilled drafting, excellent translation and widespread consultation. It also requires support for parliamentary scrutiny and approval of amended laws, which can be a complex and lengthy process.
New laws should be accompanied by manuals which explain them to revenue officials and show how to implement the law in practice.
Revenue administration reform enables a reformed revenue system to be implemented effectively and efficiently in practice. These reforms can be complex, often taking several years in low-capacity environments.
International best practice is for administration to be based on risk-based approaches to voluntary compliance and self-assessment, with the emphasis on keeping tax administration and taxpayer compliance costs as low as possible.
Administration reform often focuses on treating taxpayers as customers through improved taxpayer services, which requires intensive support for human resource development, infrastructure and equipment modernisation, improved processes and procedures and an organisational structure that mirrors taxpayer structure and is based on functional specialisation.
Developing effective revenue administration requires hands-on work with revenue officers. Being embedded with beneficiary counterparts enables intensive support for both strategic and tactical development.
Reforms generally begin in areas of the administration that collect most revenue, such as establishing and developing a large taxpayer office, followed by medium taxpayer offices. Similarly, administration reforms in geographic areas often begin with those that have most revenue potential, such as major service or industrial centres or busy borders.
IT & Automation
In less developed countries, systems are often paper-based, or if there is some computerisation, it lacks integration. It can be tempting to think that automation of administration processes can be delayed, but the fact is that automation materially changes the way the revenue administration will be organised and the work it will do.
Other reforms may quickly become redundant if automation is not the basis for the reforms in the first place. The benefit to the revenue administration and taxpayers of automating is enormous over time and where it has not already been achieved, automation should be a key component of most revenue administration reform programmes.
Automation also has the potential to tackle corruption because it reduces discretion and leaves a clear record of transactions with taxpayers that leads to accountability.