Tax Administration’s Strategy

A Plan Instead of a Strategy

The tax code tightly controls tax administration activities. It outlines the tax system, tax regimes, rights and obligations of both taxpayers and tax authorities, as well as regulations that identify the purposes and objectives of the tax authorities. We frequently ask my colleagues in tax administration a simple question: “What is your strategy?”

They usually react with surprise, cite the legislation, mention the revenue collection plan in the state budget, and claim that the tax authorities’ strategy is to act in accordance with this plan. Sometimes the finance ministry creates a document that highlights areas for the development of the tax policy, but its main objective is to give tax authorities and taxpayers a general idea of the upcoming changes.

We can devote a separate article to tax revenue planning. In a brief, tax authorities usually plan tax revenues based on past collected revenues with adjustments for inflation, the national currency exchange rate, as well as the cost of oil, gas, or other commodities.

They have extremely limited motivation to take increased obligations to analyze budget indicators and investigate external factors influencing these indicators. Otherwise, they would have to fulfill those commitments. No state agency wants to establish any KPIs, since doing so allows the government and the public to assess its activities and performance.

Tax authorities are also virtuosos at creating the appearance of executing a plan. Since the tax revenue collection usually sources the plan, not tax accruals, the standard way to execute a plan is to force taxpayers to make prepayments, creating an overpayment in their accounts. As one classic author said, “formally correct, but essentially mockery”.

Why Do Tax Authorities Need a Strategy?

Tax administrations need a strategy to define long-term goals and develop a systematic action plan to achieve them. Obviously, tax authorities’ principal goal is to perform efficient tax administration and collect taxes for the state budget. However, it is crucial to analyze the tax gap across all tax categories to recognize the country’s full tax potential. The overall strategy should focus on minimizing the tax gap as a key function of tax administration.

The strategy may include additional goals, such as:

• Reducing taxpayers’ costs of the tax compliance; or
• Reducing the shadow market share in a certain sector of the economy.

But remember that each goal must have measurable indicators. The strategy should list the fundamental areas of work to achieve the stated goals and explain why they are important and how much they would cost for the budget.

The best solution is to create roadmaps for each planned goal. The result is a living working document for tax administration and auditors, not for an outsider who freezes it and puts it on a shelf in an archive next to other unrealized strategies.

An overall strategy can provide direction for many tax administration departments and signal organizational changes or the creation of resolute project teams. Building on the overall strategy, tax administration creates an IT strategy that establishes a portfolio of IT initiatives, programs, and projects. Implementing these projects can involve the modernization of tax administration methods, processes, architectures, and systems, including new infrastructure and communication channels, as well as a variety of other elements required for the operation of modern information systems.

The presence of the general tax administration’s strategy, core departments’ strategies, and an IT strategy enables a subsequent transition to management by objectives and key results (OKRs).[1] This enables all tax administration professionals to collaborate toward mutually understood objectives and expected results.

Tax Administration as a Service Organization

Tax administration often aims to improve the quality of work with taxpayers. They create service centers, hire and train fresh staff, introduce electronic queue management, online services, and mobile apps. By waving the flag of a service organization, tax authorities get more budgets and seem to help taxpayers.

Long time, I could not understand what disturbs me about this obvious and understandable approach. Recently, the following analogy came to mind. Imagine a stadium is the venue for a foot race. The athletes stand at the starting line, but the race organizers suddenly come out and transform the flat running track into an impenetrable obstacle lane. They set up barriers, dig holes and fill them with water, erect climbing walls, create pools of mud, and shout “Go!”

The organizer arranges employees next to the track, who help athletes overcome the obstacles: they provide drinking water, push, encourage, cheer, and finally offer a free shower to the survivors. Would it be better, instead of organizing such help for taxpayers, just not to build an obstacle lane in the first place?

[1] Objectives and key results (OKR, alternatively OKRs) is a goal-setting framework used by individuals, teams, and organizations to define measurable goals and track their outcomes. The development of OKR is attributed to Andrew Grove who introduced the approach to Intel in the 1970s. Wikipedia. URL: https://en.wikipedia.org/wiki/OKR