One area that has not been reviewed in developing countries is the growing focus on different segments of the taxpayer population-including the large taxpayers-as a way to encourage greater stability in public revenue flows, improve the effectiveness and efficiency of tax administration, and introduce innovations in the public sector. Based on a sample of about 40 countries, this paper provides an overview of country practices in terms of the organization, systems, and procedures used by tax administrations to monitor the compliance of the large taxpayers. The paper also reviews the effectiveness of large taxpayer operations in selected developing and transition countries where the IMF has recommended their establishment.

Appendix I Summary Tables of LTU Survey Responses

Table A1.

Main Reason for Establishing a Large Taxpayer Unit

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Main reasons listed, but no priority given: to secure revenue, to improve management of arrears, to provide better services to large taxpayers.

Also, to improve audit effectiveness, to provide better taxpayer services.

Both Inland Revenue and HMC&E reported “securing revenue” as the most important reason for setting up their large taxpayer operations.

Table A2.

Legal Framework for LTU Operations

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Administrative decree establishing LTU.

There are specific ordinances regarding the structure and functions of the National Audit Office. There are also specific ordinances outlining the obligations of the large taxpayers (e.g., location and deadlines for filing tax returns).

Relevant for both HMC&E and Inland Revenue.

The IRS Restructuring & Reform Act of 1998 prescribed certain procedures and responsibilities for the Large and Mid-Size Business Division but also required that certain large taxpayer issues be handled by other pares of the IRS (i.e., appeals, criminal investigation, etc.).

Table A3.

Taxes Administered by the LTU, 1999

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Local excise taxes.

The LTU does not administer the equivalent of the VAT the goods and services tax. It only administers the turnover tax, which is limited to the financial sector.

National Security Levy.

Stamp tax.

Corporate income tax only.

LTU administers excise tax on insurance. All other excises are administered by customs.

HMC&E administers the VAT and excises, and Inland Revenue administers personal and corporate income taxes and social security contributions.

Table A4.

Criteria Used to Identify the Largest Taxpayers

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Other criteria used: amount of tax refunded, value of fixed assets.

Other criterion used: amount of VAT refund claim.

Other criteria used: taxpayers with complicated structure and several subsidiaries, taxpayers with annual balances higher than a certain amount.

Another criterion used: if taxpayer is a corporate taxpayer.

For purposes of determining the corporate income tax.

Other criteria used: amount of tax assessed, annual purchases.

Other criteria used: whether or not the taxpayer belongs to a conglomerate or a corporate group, or has significant asset holdings.

Another criterion used: whether or not the taxpayer is a withholding agent.

Another criterion used: if taxpayer is in the mining and hydrocarbons sector.

Other criterion used: taxpayer is “high wealth.”

Criterion used: corporations with capital of ¥100 million or more.

Other criterion used: share capital.

Other criteria used: importance of taxpayer within economic sector, whether taxpayer is member of a corporate group, complexity of operations, whether operations span a large geographic area.

HMC&E uses the following criterion: amount of tax paid throughout the previous year. Inland Revenue use the following criteria: annual turnover, whether the taxpayer is a public enterprise or financial sector enterprise, and with respect to the corporate income tax, whether there are significant international tax aspects to the enterprise’s operations.

Criteria used: corporations and partnerships with assets of over $5 million. While corporations with assets in excess of $5 million are now considered customers of the Large and Mid-Size Business Division, a “pointing” system is used to identify the largest and most complex taxpayers within this population, which corresponds to the Large Case Program the IRS had in place prior to its reorganization.

Table A5.

Number of Large Taxpayer Offices/Branches, 1999

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There is not a single, unified LTU. Rather, the “LTU” in Colombo is separated into two offices, one for collection and enforcement, and one for audit, each reporting to different commissioners.

Large taxpayer audit units are not autonomous, but rather are part of the regional tax office structure.

In addition to the main corporates segment office in Wellington, there are two main offices that handle corporate operations: one in Auckland and one in Christchurch. There are also a few corporates segment staff in other locations around the country, but they handle relatively few corporate cases.

There are for practical purposes two large taxpayer units; (1) the National Audit Office, which carries our. audits of the large taxpayers; and (2) the Central Unit for Management of Large Enterprises, which is responsible for all collection and monitoring functions. A third unit, the National Collection Office, was established recently as a national unit responsible for enforced collection of large tax debts, which generally correspond to the large taxpayers. The National Audit Office has 17 branches at the regional office level that perform audits of the large taxpayers.

Inland Revenue has a single LTU with 32 branch offices (an increase in relation to the 25 branches that existed in 1997, because of the expansion of the unit’s work to include the administration of national insurance contributions). HMC&E reports having 12 autonomous LTUs.

There are five industry groups that report to the Large and Mid-Site Business Division at headquarters: Retail, Food, and Pharmaceuticals: Natural Resources; Financial Services and Healthcare: Heavy Manufacturing. Construction, and Transportation: and Communications, Technology, and Media.

Table A6.

Supervision/Reporting Lines for Large Taxpayer Office

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Reporting fine from the LTU to the commissioner is through the deputy commissioner for revenue.

Large taxpayer collection and enforcement office reports to headquarters enforcement department, and large taxpayer audit office reports to headquarters corporate tax department.

The large taxpayer offices are part of the regional tax office network. As such, they report to the national operations office at headquarters.

The LTU in Montevideo reports to the collection department at headquarters, and the LTUs in the interior of the country report to the headquarters division in charge of supervising operations of tax offices in the interior.

The LTUs report to a headquarters office responsible for supervising all large taxpayer operations.

Large taxpayer units are primarily audit units and report to the headquarters audit department.

The LTUs report to a headquarters office responsible for supervising all large taxpayer operations.

There is a headquarters unit that supervises the operations of the Central Unit for Management of Large Enterprises. The National Audit Office, which carries out audits of the large taxpayers, reports to the headquarters audit department

In the case of both HMC&E and Inland Revenue, there is a special headquarters unit in charge of supervising the large taxpayer units’ operations.

The Large and Mid-Size Business Division at headquarters is responsible for supervising all large taxpayer operations.

Table A7.

Organizational Structure of the Large Taxpayer Office/Operation

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The LTU does nor carry out the enforcement function.

Functions are limited to audit and enforcement.

LTUs are in the process of being implemented, and the intention is to set up function-based structures.

The LTU is separated into two offices performing different functions (i.e., one office carries out collection and enforcement activities; the other, audit activities).

Initial functions were only collection and enforcement.

LTUs carry out only collection functions.

Neither function- nor tax-based. Large Business and International is a matrix of industry segments and “topic” segments (international, capital gains, privatization, etc).

The National Audit Office focuses on auditing large taxpayers; the Central Unit for Management of Large Enterprises carries out collection and monitoring functions.

The Central Unit for Management of Large Enterprises is partially organized by tax. It has a separate VAT unit. The unit is responsible for administering all the major taxes as regards the large taxpayers, with the exception of customs duties and excises, which are administered by customs.

The units in HMC&E focus on VAT and excises and perform the audit function. The units in Inland Revenue administer the direct taxes and national insurance contributions, and perform the following functions: with respect to the corporate income tax, the Large Business Offices perform all the main tax administration functions; with respect to the national insurance contributions, the Large Employer Compliance Offices conduct audit work.

The IRS’s Large and Mid-Size Business Division is organized by industry type. Other divisions in the IRS are organized around the following functions: prefiling, filing, and postfiling (compliance).

Table A8.

Tax Collection and Payment Procedures Used by the LTU, 1999

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The large taxpayers pay their taxes through the banking system. Payment information is sent to the LTU electronically directly through the clearinghouse system of the banks (also referred to as the GIRO system). The large taxpayers can also pay their taxes electronically.

LTU performs only audit and enforcement functions. Large taxpayers file their returns at the local offices, and pay taxes through the banks.

Large taxpayers file their returns and make their payments centrally at the offices of the respective revenue departments (e.g., income tax department, value-added tax department, and customs and excise department).

Electronic filing and payment envisaged for 2001.

Payment is electronic (e.g., electronic bank debit).

No electronic filing yet.

No electronic filing yet.

Large taxpayers file their returns at the tax collection department of the Tax Administration Service (SAT), where returns are processed. Large taxpayers make payments through the banking system.

The large taxpayers have always paid in bank branches located on the premises of the large taxpayer offices of the SUNAT.

Filing is done electronically.

Tax collections are managed through the ATO Small Business client segment to avoid unnecessary duplication and reviewed by the Large Business and International client segment, or LB&I For example, the banking and finance segment within LB&I closely monitors its clients’ payments and debts. However, the taxes are paid through a common system administered by the Small Business segment, The ATO has electronic refund transfer arrangements with many large corporations, particularly the “pay-as-you-go” employee deductions remitted on a bi-weekly/monthly basis.

Not applicable, as the large taxpayer units in Japan only perform audit functions.

Large taxpayers submit their returns to the LTUs, but the final processing is carried out by a central processing unit.

Applies to both HMC&E and Inland Revenue.

Large corporations must file with the IRS. Payments can be made through banks or to the IRS directly. Electronic filing is available for some but not all returns. Electronic payment to banks and the IRS is available.

Table A9.

Types of Audits Undertaken by the LTU, 1999

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No significant audit activity is currently undertaken by the LTU. Because of limited resources, the decision was made to concentrate on monitoring large taxpayers’ compliance with filing and payment obligations, as well as enforcing the collection of arrears. The tax administration authorities intend to develop the LTU’s audit capacity in the future.

Audits are organized according to different sectors of economic activity (financial, government, others) as well as by type of issue (fiscal consolidation, related parties, transfer pricing, etc.).

In addition, other criteria are used to classify taxpayers with a view to minimizing their noncompliance.

Large taxpayer unit only performs tax collection function.

Comprehensive audits are carried out by the national audit office; single-issue audits are carried out both by the national audit office and by the large taxpayer office, and desk audits are carried out by the LTO.

Applies to both HMC&E and Inland Revenue.

Desk audits are generally not conducted in the LMSB Division, except for a limited number completed in the international examination program.

Table A10.

Collection Enforcement Functions of the LTU

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Another department in the state tax ministry is responsible for this function. The ministry of the interior also carries out some enforcement functions.

The financial police also carry out some collection enforcement work, which leads to duplication of activities and complicates the recovery of overdue tax.

The LTU tax police unit carries out enforcement work.

The tax police perform some enforcement activities.

Initially, the treasury was responsible for enforcing payment of tax arrears. This function was subsequently transferred to the LTU.

The LTU refers cases of enforced collection to the treasury, which is Legally responsible for enforcing payment of tax arrears. In case the treasury is unable to recover the refunds, the case is transferred to the public prosecutor’s office for further action.

The local tax offices have the authority to initiate collection enforcement action until such time as an Agreement of Initiation of Activities by the large taxpayer offices is published in the Official Diary of the Federation.

The tax revenue unit, and not the LTU, enforces collections.

Industry segments monitor and assist with debt collection.

Audit work only.

In the case of Inland Revenue, the Large Business Offices enforce collections with respect to the corporate income tax only. The Large Employer Compliance Offices perform audit work only.

The large taxpayer units in HMC&E are not responsible for enforcing collections.

The collection enforcement function is “contracted out” to the IRS’s Small Business/Self-Employed Division.

Table A11.

Number of Staff in LTU/Large Taxpayer Audit Unit, 1999

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Audit function only.

HMC&E (indirect taxes).

Inland Revenue (direct taxes and national insurance contributions).

Figures are based on an initial plan for staffing of Large and Mid-Size Business. Actual staffing at the time of the survey was around 500 fewer staff members, who are largely planned headquarters staff.

Table A12.

Salaries and Benefits of LTU/Large Taxpayer Audit Unit Staff, 1999

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Salaries are same as in other tax offices but individual bonuses are higher.

Salaries are 26 percent higher than rest of tax administration staff.

Bonuses are higher starting end of 1999. Amount of bonus is determined on the basis of performance indicators for the LTU.

The tax administration authorities noted that in their view, “higher salaries and/or benefits would be a very good incentive for LTU personnel who were selected under higher qualification standards.”

At the time of LTU establishment in I9$B, LTU staff salaries were 100 percent higher than average salary in rest of tax administration.

By virtue of higher qualifications required to deal with the level of complexity of the large taxpayers.

Performs audit functions only.

Salaries are 20 percent higher.

Salaries are around 5 percent higher.

For both HMC&E and Inland Revenue, there is a slightly higher overall job grading, and there is a move to establish greater salary differentiation.