Pre-RMS

13. Little formal strategic planning was undertaken. While a GDT strategic planning document was prepared for the period 2012–14, it was not institutionalized within the GDT and did not drive developments over that period.

Current situation

14. The GDT’s strategy for the period 2014 to 2018 has been drawn directly from the RMS. The GDT did not prepare its own strategic plan for this period, and the organization does not currently have a dedicated unit that is responsible for strategic planning and monitoring.

15. Many RMS measures are based on actions and outputs to be delivered, rather than outcomes or results to be achieved. GDT has succeeded in delivering most of the required actions and outputs by managing them on a piecemeal basis through a series of working groups and committees. The RMS monitoring and evaluation was done by a team working part time under the direction of a Deputy DG.

16. GDT has focused on revenue collections as its main target, with few other performance targets set or measured.⁶ While the GDT has achieved a high rate of growth in recent revenue collections, as noted above, there are concerns that the revenue growth to date is unsustainable and new approaches to tax administration are now required, together with tax policy changes, and potentially significant investment, particularly in technology.

17. The GDT has also improved services and compliance, mainly in the large taxpayer segment. In addition, the audit function has increased its activities through the deployment of additional staff. This has provided the foundation for the high rate of recent revenue growth, but this heavy reliance on audit cannot continue indefinitely. Future strategy will therefore need to focus on: (i) targeted parts of the large taxpayer population; and (ii) the medium and small taxpayers. The medium and small segments are likely to be harder to reach, harder to tax, less capable of meeting basic compliance requirements, and yield less revenue.

18. The GDT has developed a draft Strategic Plan for 2019–23. This was developed by a working group approach that deployed various good practices, including a “Strengths-Weaknesses-Opportunities-Threats” analysis. The Plan will be finalized later under the umbrella of the objectives of the Government’s new revenue mobilization strategy for 2019–23.

Targets by 2023

19. GDT will be responsible for developing its own strategic plan to support the achievement of next phase of the Government revenue strategy 2019–23. This is expected to be a period of significant change in the GDT policy and operating environment. The likely introduction of new taxes and more sophisticated technology, in combination with a broader segment focus and industry specialization, and increasing engagement in international taxation issues, will present a complex range of challenges to which a carefully coordinated and prioritized set of strategic responses will be required. The establishment of a unit with the specialist expertise required to prepare, coordinate and monitor the strategic plan should be considered to meet the challenge presented by this new responsibility.

20. The GDT has identified three Strategic Goals and associated Objectives in its draft Strategic Plan for 2019–23—see Figure 2. Although at this stage these are in draft form, it is apparent that there will be a strong taxpayer service focus. This represents a strategic shift from the past, which has placed greater emphasis on audit and compliance enforcement. The draft Goals and Objectives should be reviewed in the light of the advice in this report and to ensure they support the aims of the Government’s final revenue strategy 2019–23.

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General Department of Taxation Draft Strategic Plan—Goals and Objectives

Citation: IMF Staff Country Reports 2018, 305; 10.5089/9781484383148.002.A001

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21. After the Strategic Plan is finalized, the organization structure and staffing levels should be reviewed to ensure that they support the future GDT strategy. Questions to be asked should include:

• Does the organization structure support the goal of providing quality taxpayer services, through the inclusion of a headquarters function to develop service policies and national service programs?

• How will the Department of Finance and Personnel be able to determine the allocation of staff between service and compliance activities to reflect their relative importance in the Strategic Plan?

• How to design, develop and deploy a new integrated IT solution to enable the delivery of the goals of the Strategic Plan? Including the acquisition of the requisite funding and the development of the business requirements.

Pre-RMS

22. The organization structure of the GDT did not reflect good practice in planning, functional definition, reporting, or governance. The principal reason for this was the lack of a strategic vision and goals beyond the achievement of revenue collection targets. The absence of clearly set out goals and objectives resulted in there being no perceived need for a specialized planning and monitoring capability.

23. The role of a tax headquarters was not clearly understood or defined.⁷ Many headquarters staff were largely engaged in operational level activities, and clear ownership of the core tax functions (taxpayer service, registration, filing, collections, audit) in headquarters was missing. Responsibilities for administrative policy development, and program planning and direction were not established. The roles and responsibilities of the Deputy DG’s were not clearly defined.

24. The headquarters structure grouped together some unrelated functions and did not include others. Service and compliance functions were combined in the Department of Taxpayer Services and Arrears; while there was no provision for tax investigations to be undertaken.

25. The internal audit function had been suspended. As noted in Section VI.C below, there was no internal mechanism for assessing and reporting on process and systems effectiveness, procedural compliance, and integrity.

Current situation

26. GDT has designed and implemented a new organization chart, with effect from December 2017. This structure addresses some of the shortcoming of the previous arrangement. In particular:

• The Department of Small and Medium Taxpayers (DSMT) has been created to provide headquarters’ oversight of the non-large taxpayer segments. Under this Department, the Phnom Penh Municipality Tax Division acts as a regional oversight office for the city’s tax Khan branches.

• The tax crime investigation function has been elevated to the level of a Department.

• Internal audit has been re-established as a headquarters function.

• The importance of various headquarters functions has been recognized, including the role of:

  • Training and staff development to the future of the GDT with the establishment of the National Taxation School at Department level.

  • Taxpayer communication and engagement to support compliance with the establishment of Bureaus responsible for Consultation and Public Relations under the Department of Administration and General Affairs.

  • International taxation issues with the establishment of the International Tax Cooperation Bureau under the Department of Law, Tax Policy and International Cooperation.

27. Some concerns still exist in relation to the new headquarters structure. The importance of risk assessment as a basis for planning across the range of compliance functions is still understated, and no business owner for risk or compliance has been established. In addition:

• Some core tax functions do not have a single business owner at headquarters, while for others, including audit, their national role in terms of setting strategies and providing oversight, is very limited.⁸

• The audit function remains fragmented, with responsibility divided between the Department of Enterprise Audit (DEA) and Large Taxpayer Department (for large taxpayers) and between the DEA and the Khan and Provincial Tax Branches (for small and medium taxpayers).

• Units with responsibility for strategic planning, monitoring, and project/change management are not included in the new structure.

• Specific responsibilities for the Deputy DGs are not defined in the new organization chart, and it was reported that each Departmental Director reports to two Deputy DGs.

• Internal audit does not fall directly under the office of the DG.

28. Operationally, many day-to-day decisions and approvals are routinely routed through the DG’s office. This slows down operational work and response times, and risks disempowering lower levels of the organization.

Targets by 2023

29. The GDT strategic plan will also require a vision of what the ideal organization to support the strategy will look like. This will involve considering issues such as:

• How to build capacity to implement and monitor major strategic initiatives, separately from the management of day-to-day operations?

• How to deliver effective delegation of duties to provide a clear pathway to good governance and transparent decision-making? This will enable the head of the GDT and senior management team to focus on strategic issues, while allowing the responsibility for decision-making about the administration’s day-to-day dealings with taxpayers to be managed by regional and local heads.

• The assignment of formal ownership of the core tax functions to business owners at headquarters level to take responsibility for the development and management of the core tax functions, and work on cross-cutting risk issues.

• The implementation of organizational performance management to direct and manage the tax administration at all levels. The GDT should determine a set of key performance indicators that will enable each of the core business functions to measure their success.

• How to establish a central risk assessment function as the basis for operational planning, and the need to establish technical expertise in this area?

• What will be the impact of technological developments on the organization structure?

Pre-RMS

30. The GDT had not adopted comprehensive good practices for compliance risk management (CRM). There was little systematic information gathering, nor the consistent use of a wide range of analytical indicators to assist the development of understanding, identification, and risk assessment of more complex issues, nor the controlled testing of emerging findings on “new” risks. The absence of an integrated IT system constrained risk analysis activities, which were basically performed using manually-generated spreadsheets. Data for risk assessment was very limited and not supplied automatically by other parts of the GDT.

31. Limited risk analysis was undertaken to select audit cases across the GDT. Although the DEA, LTD, and the tax branches used risk as the basis for audit case selection, none of the offices operated from formal case selection guidelines. Audit selection and programs were not coordinated between the functions, and audit outcomes were not routinely shared to feed back into the risk assessment process. Most audit selection was based on cross-checking of VAT and customs transaction data, with other risks identified through experience-based “sift” processes.

Current Situation

32. The GDT has not transitioned to a comprehensive “risk-to-revenue” approach that recognizes that cross-functional strategies need to be employed across the core functions. Consequently, there is limited understanding and analysis of compliance risks among key taxpayer segments and sectors, and of their impact on revenue performance. There is no central GDT risk assessment function, and the use of risk-based approaches is mainly restricted to audit case selection, and not yet applied across other core tax functions. An ongoing RMS measure does highlight the need for a computerized, automatic risk analysis system. The DEA and each tax branch continue to undertake their own independent risk analysis work to select their audit cases, with little interaction or sharing of results. The LTD is using basic risk assessment techniques for improved audit and debt case selection, mainly using “tax income losses” and “high value” as priority criteria for case selection. The “risk-to-revenue” approach and the type of compliance improvement model the GDT should be aiming for is set out in detail at Appendix 1.

33. The STA is providing advice and support to develop the GDT’s risk capability. Work to undertake a general risk overview has commenced. A small list of high risks has been identified and the cash sector selected for priority follow up action. STA will support a project to install cash registers in selected cash-based businesses to improve their reporting compliance.

34. The need for approaches to identify and address institutional risks are recognized but in their infancy within the GDT. A good example of addressing institutional risks is the establishment of the GDT’s new data management center to better secure taxpayers’ data held by the GDT.

35. The GDT is well-positioned to leverage opportunities from advancements in technology to move to a more strategic risk-to-revenue approach. The GDT has made significant progress over the last years in IT capability and further enhancements are expected.

Targets by 2023

36. The GDT will establish compliance and enforcement strategies that are fully based on risk management:

• The GDT will move to a modern CRM approach in the short-term. Sustainable increases in tax revenue could be obtained over time through increased voluntary compliance using compliance and enforcement strategies that are fully based on risk management. As set out in detail in Appendix 1, this will include development of:

• Formal structure (including central risk assessment function as noted at subsection B above) and governance arrangements and key functions at senior management level to approve risk mitigation strategies and monitor progress with implementation.

• A structured approach to identifying, assessing, prioritizing and mitigating compliance risks within a framework of taxpayer segments (with fully documented procedures). Increasing the LTD’s understanding of the segments of the taxpayer population and their behaviors is fundamental.

• A “GDT Compliance Improvement Plan” to address the underlying causes of non-compliance, not just the symptoms. The Compliance Improvement Plan should outline the most significant risks to the tax system, as well as how the GDT intends to respond to those risks through “mitigation strategies” (to be delivered by each of the core tax functions outlined in Section V below). The Plan should also explain the process to monitor and evaluate the mitigation strategies put in place enabling the GDT to measure their performance.

• A “Business Continuity Plan” to mitigate institutional risks where tax administration functions may be interrupted if certain external or internal events occur. Institutional risks that potentially pose a threat to the continuity of GDT are documented in an institutional risk register. Staff will be trained in disaster recovery procedures.

Large taxpayer management

Pre-RMS

44. Registration arrangements met few of the good practice requirements. There was no centralized registration database that captured essential taxpayer details. Consequently, there was no meaningful baseline for measuring performance across the range of core tax administration functions.

45. Separate registration was required for different taxes and the register was inaccurate. Registration was cumbersome and inefficient for taxpayers, and did not provide a base for GDT officials to access a single view of a taxpayer’s net tax position. Authentication checks on registration details provided were weak. The completeness and accuracy of details for those entities who were registered was therefore questionable, and provided a poor basis for taxpayer compliance management.

46. Enforcement of registration obligations was weak, and the number of taxpayers who should have been registered was unknown. There was some regular expansion of the taxpayer register, but this did not reflect the known growth in business registrations. Larger taxpayers who should have been registered in the ‘real regime’ were believed to be hiding the true value of their business activities, and operating under the ‘estimated tax regime’ intended for small taxpayers.

Current Situation

47. The GDT has made significant improvements in the registration process. In particular:

• A centralized national registration database has been established.

• An online registration portal has been launched (2014).

• A single, simplified registration form for all taxes has been introduced.

• More rigorous authentication checks were introduced to improve the accuracy of the register, including identification and place of business checks.

• A national street survey is underway to identify unregistered businesses.

48. The GDT still does not have full knowledge of, or complete records for, the taxpayer base. An exercise to update the taxpayer register is underway under the RMS, but the Registration Bureau informed the mission that, to date, only 32,364 taxpayer records have been verified as complete and transferred to the central database; a further 3,906 taxpayers have provided updated details. The taxpayer population continues to appear very small in relation to the visible economic development in Cambodia.¹¹ The ‘estimated tax regime’ was abolished in 2016, but it is not clear how many taxpayers who should now be registered under the real regime have yet to submit their registration applications. To encourage estimated regime taxpayers to move to the real regime, they were granted a transitional 2-year concession. The results of the street survey to identify new registrations were not made available to the mission.

49. The new Registration Bureau is not yet setting national registration policy and procedures. With the abolition of the Department of Taxpayer Services and Tax Arrears, which had earlier national responsibility for registration, the Registration Bureau is now part of the Department of General Affairs and Administration.

Targets by 2023

50. The management of taxpayer registration will be strengthened to ensure that all entities required to register are included in the database and that the database is complete and accurate. Improvements will include:

• Registration Bureau will take full responsibility for maintaining the national registration database and setting formal registration and de-registration policies and procedures.

• Single taxpayer register will contain complete information for all taxpayers, which will support effective risk analysis of the tax base. It should integrate the registers for all revenue types, including the property and vehicle ownership registers.

• Registration IT sub-system will interface with other core tax administration sub-systems, to support front-line GDT staff by providing a single, consolidated view of the taxpayer, their net tax position, and compliance history.

• Formal procedures will be documented and in use at all offices to maintain the accuracy of the taxpayer register.

• GDT will be able to detect unregistered entities who will be pursued through a variety of means, including the use of third party data (such as business registration and labor force data, and the issuance of government contracts).

Pre-RMS

51. There was a lack of organizational focus on taxpayer service. While the Department for Taxpayer Service and Tax Arrears was responsible for taxpayer services, limited resources—staff and budget—were allocated to the service work. Only six staff worked on service issues centrally, and, at the field office level, taxpayer service staff were routinely the first to be reassigned to other duties considered to be of a higher priority.

52. While taxpayer service initiatives were undertaken, these were not developed or delivered under the umbrella of any centrally-driven taxpayer service strategy. As a result, service responses were ad hoc and reactive and the content varied widely across each office.

Current situation

53. GDT has increasingly recognized the importance of taxpayer service and its role in supporting voluntary compliance. National staffing levels for the taxpayer service function increased from 150 in January 2015 to 215 in January 2017.¹² Taxpayer service has been the focus of earlier and ongoing technical assistance support from the US Treasury Office of Technical Assistance (OTA), JICA, and STA. STA is delivering staff attitude and behaviors training, and supporting a study to determine taxpayer perceptions about the tax system and the GDT. JICA will also support a taxpayer satisfaction survey.

54. Efforts have been made to increase service and education offerings, and reduce the compliance burden for taxpayers. Achievements include:

• New taxpayer service halls with formal queuing systems.

• Enhancement of the GDT website, including an increasing range of information, outreach, and updates, and a new Live Chat option.

• Delivery of a range of targeted seminars and workshops to different taxpayer segments and industry groups nationally.

• Establishment of a Public Relations Bureau to manage media relations.

• Development of a wider range of taxpayer education materials and frequently asked questions, with the support of JICA and OTA.

• Launch of a new call center, with specially-trained customer service staff to handle taxpayer enquiries, supported by GDT technical officials (with STA support).

• Simplification of tax forms and procedures, e.g., for registration and filing.

• Launch of downloadable forms and online services, including for registration and tax returns.

• Launch of e-payment options to facilitate taxpayers’ capacity to pay their tax on time.

• Launch of user-friendly smartphone applications to support voluntary compliance.

55. GDT is also working to enhance the role and quality of tax agents in the tax system. There is now a formal registration process for tax agents, which is managed by the LTD, along with the design and delivery of training courses, including examinations, specifically for tax agents at the National Tax School.

56. While taxpayer service is cited as an area of future focus, the function no longer has a central business owner. The abolition of the Department of Taxpayer Services and Tax Arrears, means that the taxpayer service function no longer has a formal business owner at GDT headquarters. There is no taxpayer service strategy in place; many initiatives remain ad hoc and locally driven, increasing the risk of a lack of uniformity in content and messaging. Budget constraints continue to hamper the delivery of service initiatives. The LTD has, however, made efforts to deliver more targeted services and education to support its taxpayer population.

Targets by 2023

57. The GDT will focus on improving voluntary compliance through the delivery of enhanced taxpayer services. Taxpayers will have the necessary information and support to voluntarily comply at a reasonable cost to them, and the broader population will be better informed about the role of taxation in society. Improvements will include:

• The GDT will have a structured and systematic approach to the development and delivery of comprehensive national service and broader educational initiatives, implemented through a national Taxpayer Service strategy.

• Service initiatives will be designed to help taxpayers obtain information and meet their tax obligations in an easy and cost-effective manner, thus supporting their ability to voluntarily comply. Taxpayers will be made aware of changes in the law or administrative policy through general communication, using a range of media, well in advance of the law or policy taking effect.

• Implementation of documented and consistent procedures and service standards across all tax branches and dedicated technical staff assigned to ensure current information is available on the main areas of taxpayer obligations and entitlements in respect of all core taxes. This information should be tailored to the needs of taxpayer segments, industry groups, and tax intermediaries to support their ability to voluntarily comply.

• GDT will continue to conduct surveys—based on a statistically valid sample of key taxpayer segments—through an independent third party, at least once every three years to monitor trends in taxpayer perceptions of tax administration services and products.

Pre-RMS

58. The management of tax return filing was not a high priority. Given the challenges with the taxpayer register (see Section V.A above), there was no easy way for the GDT to determine the expected filing or on-time filing rates, leaving staff to undertake follow-up activities in an ad hoc manner. Overall VAT filing rates provided to the early FAD missions had filing rates of 50.5 percent, but with no capacity to measure on-time filing.

59. The tax return filing function had no business owner at headquarters. Filing was not subject to a coordinated risk management methodology, meaning that taxpayers were followed up on a needs basis. In the absence of automation, the GDT’s approaches to manage non-filers were labor-intensive and unstructured. Most filing obligations were managed locally, providing limited line-of-sight capability to headquarters, to measure the relative performance of taxpayers in meeting their obligations.

Current Situation

60. Progress to improve the management of taxpayers’ filing obligations has been limited. This is in part due to the ongoing challenges with the underlying registration system and lack of full automation—without a clear idea of the expected filing rates, active management of taxpayer filing obligations remains difficult.

61. The LTD has achieved improved on-time filing rates through the adoption of more structured filing management approaches. The RMS set filing targets of 75 percent for the LTD, 70 percent for Khan tax branches, and 80 percent for provincial tax branches. The mission was not provided with data on national on-time filing rates. In 2017, 83.6 percent of active large taxpayers filed on-time, an increase from 78.2 percent in 2014 (see Table 1 in Appendix 3). LTD filing management approaches include formal reminder processes, using letters and SMS to routinely follow up with non-filers. The significant number of large taxpayers (35.2 percent in 2017) who are identified as “Did Not File” is problematic, as there is no reliable estimation of the status of these taxpayers.¹³ In addition, the LTD is not yet tracking the effectiveness of its follow-up techniques or monitoring the successes.

62. The availability of downloadable return forms on the GDT website eases taxpayers’ administrative and cost burdens, and is an important step on the electronic filing path. While e-filing options are being developed, the current inability to accept electronic forms creates inefficiencies. A great deal of staff time is spent processing tax returns, with nearly 200 staff involved in this function nationally.¹⁴

63. There is no central GDT function responsible for the management of tax return filing on a national basis. The general management of filing below the LTD level is weakened by the distributed management and lack of central oversight of this core tax function. Local offices do not have easy and automatic access to lists of late or non-filers, and there is no systematic follow-up action taken against all non-compliant taxpayers.

Targets by 2023

64. The GDT’s management of return filing will be strengthened through the active management of filing compliance for all segments. This will be achieved through:

• Filing obligations will be linked to the taxpayer register. This will enable the GDT to effectively manage filing based on expectations and to implement risk-based priorities for follow-up, including the need for specific actions for non-filers under the LTD. Specific Taxpayer Role Types (e.g., VAT, Income Tax, etc.) will be developed so expected filing can be managed centrally and the filing patterns for tax products should be based on the need for information and the relative risk for the sector.

• Specific strategies will deal with stop and non-filing behavior of taxpayers. These actions need to be linked to the taxpayer registration function to ensure that taxpayers who no longer have a requirement to file are accurately recognized in the register.

Pre-RMS

65. Tax payments were nearly all made manually. Electronic payment options were not available and many tax payments were made in person at the tax offices. All tax returns submitted had to be accompanied by payment.

66. The level of debt in the GDT was very high by international standards.¹⁵ The main reason for the high debt level was ineffective debt collection techniques being used across the GDT. The GDT applied recovery procedures uniformly to all tax debts and to all taxpayers, regardless of size or risk. Under this standardized approach, all tax debts proceeded through each step of the recovery process. In addition, there was no provision to write off uncollectable debt.

67. The law provided for a range of escalating debt collection powers, but the GDT was not using them systematically. Among the factors for this, were concerns about the accuracy of the debt data and reluctance to initiate the cumbersome administrative processes involved. There were no provisions for taxpayers to arrange to make payments by instalment and so partial payment was not an option for taxpayers without the capacity to pay in full.

Current situation

68. The GDT has benefited from OTA assistance to improve arrears management. This has included efforts to computerize the national debt data, while improving its accuracy, develop a tax arrears collection manual, and deliver a range of staff training to implement the revised procedures. The LTD is using the arrears manual procedures and actively managing its arrears cases. The GDT continues to rely on softer follow-up approaches through reminder letters and invitations to pay. More graduated collection techniques are being employed, but not on a systematic basis for all cases. The introduction of procedures to accept payment by instalment has helped with arrears case management where capacity to pay is an issue.

69. While the GDT has worked to analyze the arrears inventory, the mission was not provided with national debt data. With the abolition of the Department of Taxpayer Services and Tax Arrears, the tax payment and arrears management functions no longer have a central owner at GDT headquarters. Data compilation remains a challenge; only the LTD could provide arrears data for its taxpayer population.

70. There is still no route for the regular identification and write-off of uncollectable debts. The GDT is aware of this challenge; any solution requires the full cooperation of the MEF to ensure higher level approvals.

71. Electronic payment processes and options have steadily improved. Taxpayers can now pay electronically through certain banks and payment is allocated directly to the due amounts in the taxpayers’ ledger. This is a significant improvement and a highlight of recent IT developments to reduce the burden of tax compliance. There is still improvement necessary, as in many cases, electronic payment still requires a “receipt” to be attached to the return to prove payment.

Targets by 2023

72. The GDT’s management of payment and arrears will be strengthened through:

• Expansion of e-payment options available to taxpayers nationally.

• Ability to identify and track late or non-payment and report on its payment and debt situations in detail. Priority debt cases will be selected centrally, using analytics to select the highest risk cases within a target population of tax debtors. Special attention should be given to new, high value debts as the rate of recovery of tax arrears declines as arrears get older.

• Development of an overall collection strategy to focus on early engagement with the debtors, using preventative-type messaging and interventions and ‘lighter touch’ assistance interventions to assist debtors to become compliant with timely, engaging and consistent intervention for those who do not comply. It should include formal write-off procedures for uncollectable arrears.

• Active management of the arrears inventory by reference to value, age, and collectability of arrears cases by dedicated collection enforcement units with full-time specialist staff, trained in collection techniques, debtor relationships, and negotiation.

Pre-RMS

73. The GDT audit program was fragmented across multiple functions. This resulted in taxpayers being subject to almost continuous auditing due to the differing timeframes being adopted by each function. The LTD, DEA, and local tax branches all undertook their own case selection and conducted a range of audit types (desk, limited, and comprehensive audits), with almost no interaction or sharing of information.

74. There was no national audit plan, and audit and compliance data was incomplete. The lack of a consolidated audit plan identifying risks and case numbers made it difficult to determine the level of effectiveness of the overall audit function.

75. The GDT audit processes were focused mainly on revenue raising with cross checking as the major focus of audit attention. Risk analysis was limited to basic ratio analysis and identification of high value transactions to determine case selection. The audit processes were manual and had limited guidance as to best practice in audit techniques.

Current Situation

76. Audit capacity has improved. The number of auditors has increased, from 337 in January 2015 to 443 in January 2017.¹⁷ Targeted training has been conducted by JICA and OTA to develop field audit capacity. OTA assistance has provided the GDT with detailed audit technique manuals for a selection of high-risk sectors and industries. The GDT have continued to make the training material available to staff and encouraged its use, although, operationally, the GDT audit units are not structured around industry segments or risks. Excluding the Transfer Pricing Bureau, all other audit teams are generalist teams with limited specialization.

77. While there is continuing reliance on audit to generate revenue, there is no clear central oversight of national audit operations and the audit function remains fragmented.¹⁸ The DEA does not have responsibility for overall management of the national audit program. There is no centrally-developed audit program and each unit selects its own cases. The DEA continues to undertake comprehensive audits of all taxpayers, including LTD taxpayers. The LTD and local tax branches undertake desk and limited audits on their own taxpayer populations. There is little evidence that audit work is being coordinated nationally, or targeted around improving specific taxpayer compliance behaviors. While a guide on taxpayers’ rights and obligations in relation to audit has been developed, the audit fragmentation and the resulting overlapping and duplicate audits continue to be raised by the private sector as one of their main challenges when dealing with the GDT.

78. Case selection is based on an audit plan that has been developed using basic analysis of transactional data and without the benefit of an overarching compliance plan. There is currently no comprehensive audit plan focused on key taxpayer risks and designed to change taxpayer behavior and improve voluntary compliance. Risk assessment work is constrained by the lack of access to third party data and limited automation. Audit planning is undertaken by each office on a quarterly basis, with individual case lists sent to the DG for approval. There is little evidence that the data currently being captured by the LTD is being used to determine relative levels of compliance and to derive treatment strategies.

Targets by 2023

79. The GDT will develop the audit function to include a national audit plan covering the highest compliance risks and covering all core taxes and key taxpayer segments. The improvements will also include:

• The audit function will be organized by taxpayer type and relative risk:

  • The DEA will become the formal headquarters owner of the core audit operations, with national responsibility for development and management of the audit function, including strategic audit and risk issues and the national roll out of standardized audit procedures.

  • The LTD will be responsible for all large taxpayer audit activities and will be structured along industry lines and specific tax functions, including transfer pricing functions.

  • The DSMT will be responsible for the management of small and medium taxpayers—focusing the regional and local audit plans around the national compliance plan (see Section IV.C above). Future development would include specialized teams focused on specific risks, rather than generic regional audit teams.

• Development of an audit case management system that enables the central audit business owner to oversee the effectiveness of the audit program.

• The GDT audit staff will begin to move to becoming industry specialists using the existing training and audit guidance to develop a focus on specific industry risks and issues.

• Development of audit tools to improve the quality and capability of audit staff to deal with the growing complexity of the taxpayer base. It will also look to acquire auditing software packages to enhance its auditing capability.

Pre-RMS

80. All VAT refunds were subjected to 100 percent checking and cross-matching before the issue of any refund. The GDT had a process designed to ensure that refunds were not paid without being “verified.” This created a pool of unclaimed credits along with taxpayers waiting long periods for the processing of refund claims.

Current situation

81. The VAT refund process has improved slightly, but it still takes an average of 63 weeks to receive a refund.¹⁹ Compared to other tax administrations in the region, this is an unreasonably long delay in processing. An audit is still undertaken on almost all claims. Detailed refund statistics were not made available to the mission, however, during discussions with LTD staff, it was suggested that at least 80 percent of all claims were allowed in full, with approximately 65 percent of the value of the remainder being refunded. Based on the information provided, the long delays are due to a combination of factors, including:

• All claims above $5,000 must be audited. It usually takes a minimum of 3 months to finalize the audit, longer when a taxpayer has purchases from taxpayers managed by other offices.

• After completion of the audit, there is an internal GDT process to approve each refund, including approval of all cases at the level of the DG.

• The GDT then refers the case to the MEF to seek ministerial approval for the refund payment.

• Payment is made manually by the MEF based on budgeted amounts and government timing processes.

82. Taxpayers are routinely disallowed claims for VAT credits where the counterparty has failed to file a return. The main reason cited by LTD for refund claim adjustments is due to the counterparty to the transaction not having filed a return and paid the tax due, rather than taxpayer error or fraud. This practice penalizes the honest taxpayer, who keeps good records and manages their affairs effectively, and rewards the unrelated non-compliant business by allowing them to keep VAT amounts until, if ever, the GDT follows up and finds them.

Targets by 2023

83. The GDT will implement practices whereby legitimate tax refunds are paid promptly, with appropriate safeguards in place to identify fraudulent refund claims. This will include:

• Development of a mandatory electronic recording system for VAT and VAT counterparty transactions to enable real time cross-checking at the filing stage. This would eliminate the long delays in post-filing verification and allow for faster processing of refunds.

• Development of a comprehensive refund risk module that would allow for rapid refunding of low risk claims. The development of a risk-based refund management approach, as outlined in Appendix 4, would enable the GDT to develop a methodology to fast track refund processing for low risk taxpayers.

Pre-RMS

84. The GDT did not have a ‘serious’ investigation capability for tax fraud.²⁰ There was no standard process for escalating the scope of an audit when serious deficiencies and potential fraud were found. Where evasion was discovered, cases were generally concluded at the same level at which they started within the audit function.

Current situation

85. There have been significant improvements in fraud investigation capacity. The GDT has established a Tax Crime Investigation Department to focus on tax evasion. With assistance from FAD, basic procedures were established and investigation staff trained. While it is early days, the Department has completed some “simple” investigations and achieved results.

86. The GDT does not have clear guidance on what constitutes serious fraud, and how such cases should be escalated to the Tax Crime Investigation Department. Formal criteria for selection and transfer of cases from other Departments have not been implemented.

87. No cases have been referred for criminal prosecution to the prosecutor’s office. However, there is management support to pursue cases through to prosecution. There appears to be a focus on raising revenue through investigations. However, investigation functions traditionally focus on identifying taxpayers for prosecution, rather than raising revenue.

Targets for 2023

88. The Tax Crime Investigation Department will focus on bringing the most serious fraud and evasion cases for criminal prosecution. This will also include:

• Development of detailed policy and procedural manuals for case investigations, and formal criteria for selection and transfer of cases from other departments and how such cases should be escalated to the investigation department.

• Attendance by fraud investigators and their supervisors at criminal investigation training courses, to develop adequate skills in the application of indirect methods, investigative techniques, evidentiary requirements, etc.

• Building good relationships with the prosecutor’s office, the Ministry of Justice, the judiciary, GDCE, and police agencies, and active participation with other agencies on important investigations of economic crimes.

Pre-RMS

89. The full dispute resolution process contemplated by law had not been implemented. While provided for in Article 123 of the Law on Taxation, the Committee for Tax Arbitration had not been established. Many taxpayers were unaware of the appeal system and the procedures to follow to lodge an appeal, and the number of appeal cases finalized annually was low (65 cases in 2011).

Current situation

90. A more modern three stage dispute resolution process is now in place. Taxpayers now have access to three levels of formal appeal: (i) administrative review within the GDT; (ii) appeal to the Committee of Tax Arbitration;²¹ and (iii) appeal to the Court. Prakas 1470 on the rules and procedures for settling tax complaints was launched in 2015, supported by the issuance of a detailed instruction in 2017. The Committee of Tax Arbitration has been established under the chairmanship of the Minister of Economy and Finance, and has heard several cases during 2017. Very few cases move forward to the Court, and, with so few cases, officials raised concerns about the Court’s ability to adequately consider the technicalities of detailed tax cases.

91. Taxpayers are more aware of and informed about the full range of appeal processes available to them and how to access them. The taxpayer’s right of appeal and procedures for appeal are now clearly stated on tax reassessment forms. The new Prakas and appeal instructions have been publicized, and there were several media reports and events focused on this issue. Concerns remain in the private sector about the independence and fairness of the dispute resolution system.

92. An increasing number of appeals are being lodged and processed. The Department of Law, Tax Policy and International Tax Cooperation has added more staff to the Litigation Bureau and its efficiency is increasing. The Bureau is processing an increasing number of cases annually (112 in 2017), and the year-end balance of cases is steadily decreasing (see Table 2 in Appendix 3). Of note, is the recent improvement in the quality of taxpayer appeals; in 2016 and 2017, no appeals were rejected, while 10 cases were rejected in 2015 and 11 in 2014.

Targets by 2023

93. The tax dispute resolution process will be increasingly fair, independent, and accessible to taxpayers. This will include:

• Monitoring dispute outcomes of a material nature on a regular basis and take account of these in determining tax policy, legislation, and administrative procedural updates. And ensuring that risk identification and compliance actions are updated to reflect the insights provided from decided cases.

• Making outcomes of disputes public, at a global level, while maintaining confidentiality of individual taxpayers.

Pre-RMS

94. HR management practices were largely beyond the control of GDT. There were significant delays in filling vacant posts due to cumbersome approval and recruitment procedures, and training opportunities were limited. There was no automatic process to fill vacancies as they arose, which could lead to posts being unfilled for more than a year. Performance evaluation was under the broader civil service procedures.

Current Situation

95. GDT has established greater control over staffing and a sound HR management function.²³ The GDT has made great improvements in this area, exemplified in the following areas of strength:

• Implementation of a formal Human Resources Strategy for 2014–18.

• The exercise of greater control cover staff recruitment, training, and performance management, as evidenced by the quality of new recruits.

• The application rate for GDT vacancies is high, at around 50 applicants for every position.

• Employment is at full establishment level—the mission was informed that there are currently no vacant positions within the organization. The establishment numbers increased from 1,391 positions in January 2015 to 1,902 in February 2018.²⁴

• Launch of Staff Code of Conduct.

• Staff turnover is very low (between 2–3 percent), and is mainly attributable to retirement.

• The retirement schedule to 2023 is already prepared, and planning for succession in place.

96. In addition, the GDT has strengthened its HR management and development through:

• Implementation of an IT-based HR management system, which includes an employee database, fingerprint scanning for attendance, and daily performance reporting.

• Establishment of a GDT performance management and evaluation system, independent of the civil service performance management system.

• Development of position descriptions and standard operating procedures for each tax unit.

• Development of a Personnel Management Manual, to be adopted from 2018 onwards.

• Conduct of Training Needs Assessments, with results linked to the National Training School training program, and other available local and foreign training opportunities.

• Introduction of a staff incentive scheme, increasing the attractiveness of the GDT as an employer.

Targets by 2023

97. The HR management strategy, policies, systems and procedures in place will fully support the tax administration’s business strategy and the development of staff. This will include:

• A competency framework, which will be the basis for recruitment, promotion and succession. And linked to standard operating procedures for all GDT functions. Including:

  • development plans linked to the competency framework, and providing a framework for the development of internally-focused National Training School training programs.

  • risks being identified and addressed as part of institutional risk assessment, and assessed under the internal audit program.

• Active workforce rebalancing, taking into consideration the changes in practices, policies and procedures as the GDT develops and linked to the outcomes of regular authorized personnel studies.

• National Training School programs that are constantly responsive to changes in skills requirements resulting from developments in the use of technology-based systems within the GDT.

• Staff behaviors being managed within the framework of an updated ethics policy and code of conduct to ensure the maintenance of high standards of professional and ethical behavior, visible to all stakeholders.

• The current incentive scheme being further developed to incentivize the full range of staff behaviors and achievements required to support the GDT’s planned strategic outcomes. The scheme should apply to staff across all GDT functions and with targets set beyond just revenue collection.

Pre-RMS

98. The general systems focus of the GDT was on the capture of transactions, and business processes were largely paper-based. Most processes were focused on personal engagement with taxpayers and there was limited capacity for electronic dealing with the GDT. Except for the LTD, which had some basic IT systems, there was a high level of paper-based processes, practices, and procedures.

99. The database structure was disparate with no real integration in systems, making it extremely difficult to extract data for decision-making purposes. The GDT did not have an integrated IT infrastructure, meaning management reporting was a collation of individual regional reports. The lack of an integrated system also created many difficulties associated with management the tax base and taxpayer risks.

Current Situation

100. The GDT have made improvements to the functionality of the IT systems and the interface between the taxpayer and the tax system. An IT Masterplan is being implemented and the GDT has focused efforts on the development of system capability and the deployment of a range of smartphone “Apps” or tools to assist both taxpayers and the GDT in improving compliance. In addition, the provincial offices are now linked to headquarters through a wide area network.

101. Due to funding constraints, development is being done in a staged approach. However, work completed has already improved some of the operations of the GDT; increased management information, particularly on revenue performance; and enabled both taxpayers and the GDT to benefit from improved processes. The GDT reported that 22 new IT systems have been implemented, including for taxpayer registration, single invoice payment management, human resource management, audit and debt management, document tracking and management, and vehicle tax management.

Targets by 2023

102. The GDT will have a fully integrated technology-driven tax system that supports all aspects of taxpayer administration and service. This will include:

• Establishment of a business case for the GDT to source appropriate funding for a new, fully integrated system that will meet all the requirements of a modern tax administration.

• Development of the business requirements of an integrated technological solution to support the GDT in administering the tax system. The new technology solution needs to be designed to enable the GDT to meet changes in policy and changes in the taxpayer base. Appendix 5 sets out the specific requirements for any good tax processing system. For the GDT, it would also require the development of:

  • an information collection strategy focused on identifying the data required on each form to enable the GDT to effectively determine and manage risk.

  • real time links with other government agencies and third parties to enhance taxpayer management.

  • capacity to deploy across multiple platforms allowing electronic interactions with the GDT for all tax types and online maintenance of the associated tax obligations.

Pre-RMS

103. The GDT’s internal audit function was not in formal operation. While the Controlling Department was nominally responsible for internal controls, it did not undertake the typical internal audit function expected within a tax administration.

Current situation

104. The GDT’s internal audit function has been formally re-established. The Internal Audit Bureau has been established within the Department of Administration and General Affairs. The location of the Bureau appears to be due to administrative constraints; the Bureau chief noted that the Bureau gets its authority directly from and reports its work outcomes directly to the DG. The Bureau has responsibility for internal audit and internal affairs (the investigation of professional misconduct of tax officials).

105. The capacity of the internal audit function has been strengthened through support from the OTA. This support included the development of instruction manuals and staff training. Unfortunately, while the Bureau currently has 15 staff, only a few benefited from the earlier OTA training, and the impact of the assistance has been diluted.

106. 106. An annual plan of routine work is developed and implemented. In addition to the routine auditing of the 33 tax branches, the Bureau also identifies emerging risks and can undertake unannounced visits for investigative purposes.

Targets by 2023

107. The internal audit and internal affairs function will be strengthened by reporting directly to the DG, in recognition of the sensitive nature of its responsibilities. It needs to be empowered to contribute to the checks and balance required within a revenue administration. This will include:

• An annual internal audit plan comprising internal control checks, operational performance audits, information technology systems audits, and financial audits. The program providing wide coverage and scrutiny of key operations, revenue accounting, and internal financial management.

• Internal affairs establishing and managing the integrity and ethics policy ensuring that everyone within the organization adheres to it. This includes:

  • Providing leadership to the formulation of integrity and ethics policy including codes of conduct.

  • Cooperating with relevant enforcement agencies (e.g., anti-corruption agency, police, and public prosecutor).

• IT system controls will be in place to detect incidents that threaten the confidentiality and integrity of tax administration data. Specifically, audit trails of user access and changes made to taxpayer data exist, together with effective surveillance by internal audit, including through use of system-generated reports and other audit tools.