Reform challenges for revenue administrations in developing countries: Lessons for Africa
08 September 2015
Posted by: Author: Faith Mazani
Author: Faith Mazani (IMF)
Faith Mazani discusses the African revenue collection landscape, its challenges and proposes a possible way forward.
Different countries have implemented revenue administration reforms to improve the efficiency in collecting domestic revenue needed for poverty reduction and state building over the past few decades. Creating an enabling environment for rapid and sustainable growth requires macro-economic stability which can be developed through public sector reform1.
African revenue administrations are expected to be more efficient and to reduce the cost of collection while promoting voluntary compliance and reducing the cost of compliance for taxpayers. The biggest challenge is the dichotomy presented by the fact that developing countries have serious shortages of funds, have the widest fiscal gaps and cannot, in most cases, afford to implement the required reforms that would provide more revenue and create the much needed fiscal space. As a result, different revenue administrations in developing countries depend on reforms that are recommended and funded by international organizations and donor agencies to support improved generation of local revenue resources. These reforms have been implemented through the injection of donor funding and other technical assistance for capacity building.
A number of revenue reform models have been developed by different international organizations and delivered to recipient countries through developed country or multiple donor programs like the Topical Trust Funds (TTF). Some reform programs are delivered through regional blocs to support regional integration and trade facilitation. Where these are implemented under the right conditions they have translated into improved revenue contribution to GDP, increased voluntary compliance, better trade facilitation, lower costs of collection and motivated staff.
Revenue reforms are usually delivered through technical assistance and capacity building programs from the funding agencies and involve the attachment of experts to the recipient administrations, outsourcing of private institutions to develop specific systems or processes, attachment of recipient administration staff to countries that have implemented desired reforms, funding specific academic programs that support the reform initiatives, and workshops to discuss issues relating to specific administrative reforms, among others.
A number of revenue administration reform results have not been as encouraging to the recipient Governments and sometimes frustrating to the funding governments and development partners. The lack of traction of reform initiatives has been a subject of many studies and different programs have been instituted to ensure higher value and tangible outcomes from the different reform initiatives. This paper seeks to identify some of the challenges that inhibit the delivery of positive outcomes and outline ways to improve the methods of reform delivery to ensure better results for the revenue administration and the recipient country.
Key Revenue Administration Reform Initiatives
The following are some of the reform programs that have been implemented as effective instruments to improve revenue generation for development2.
- Formation of efficient integrated and autonomous revenue administration agencies operating to maximize stakeholder value with a proper balance between the rights of taxpayers and the administrative powers of the agency;
- Segmented approaches to service and compliance management;
- Introduction of Self-Assessment;
- Use of risk-based compliance management and enforcement strategies;
- Implementing multiple channel taxpayer service and education programs;
- Improved human resource and support functions, and IT based operational processes and payment systems;
- Implementation of broad-based tax systems like Value Added Tax; ;
- Accession to international conventions and cooperation agreements to promote exchange of information and trade facilitation;
- Implementing anti-avoidance reforms like transfer pricing and Base Erosion and Profit Shifting (BEPS) action plans.
Reform Challenges for Developing Countries
1. Reforms cost money and take time to implement. A number of reforms are a result of years of research and investment in the country of initial implementation. They are based on impact assessment studies in the implementation environment which indicate the chances of success and risk mitigation required. Such studies are not usually done before implementation in the recipient country. Developing countries rely on limited funding from development partners. Revenue administrations are under pressure to focus on collecting revenue and less on the needed reforms. Where reform funding is secured administrations find it difficult to strike a balance between revenue collection and reform implementation, especially if the results of the reform take time to deliver.
2. The levels of literacy and development in most African countries are very low. Reforms take time and stakeholder and taxpayer education is required before implementation. The business community with the necessary resources have moved faster and engage in tax avoidance and planning initiatives that the revenue agency cannot detect or question.
3. Most revenue reforms are IT based and require infrastructure support which may be outside the scope or financial means of the revenue administration. The world has turned into a global village operating on electronic business platforms and doing business no longer requires physical presence in a particular country. Issues of taxing at source and origin are becoming complex and confusing presenting major challenges to the revenue administration.
4. A number of revenue administrations in Africa battle to implement revenue policies that are in conflict with other economic policies and political aspirations of the Government of the day. Revenue reforms need to be supported by clear policy guidelines and a transparent operating fiscal environment.
5. A number of revenue administration operations are mainly paper-based and do not have reliable data sources required for compliance improvement reforms like risk management and taxpayer segmentation. The level of informal business and other shadow economic activity is high, making compliance management strategies difficult and results in an inequitable tax system.
6. Reform programs priorities are usually determined by donor countries with little input from revenue administrations on where financing is channelled. Donor agencies focus on what gives them positive results for home country benefit. Chances of reform methods and priorities between the donor and recipient countries matching are limited, reducing the level of traction.
7. Revenue administration systems and processes in a number of African countries are still underdeveloped because of weak organizations and management. (IMF 2011:p13). Management principles like strategic and operational planning, performance measurement and management, staff accountability and integrity management, project management and change management are taken for granted.
The following are some of the considerations that can help in delivering desired outcomes from revenue reforms:
1. Revenue reforms should be demand driven and based on what works for the recipient country. Reform priorities should be set collectively after a thorough needs and impact assessment that informs the setting of the reform goals and program outcomes. The program design should take the interests of the recipient country. A clear understanding and agreement on reform outcomes and deliverables with all interested parties ensures ownership and so faster implementation.
2. Reforms should aim to strengthen implementation capacity and reform management structures with analytical and decision making skills that support institutional change. Reform programs should involve hands-on imparting of skills, learning by doing and other experiential learning and not just the short term training and workshops by developed country experts.
3. Revenue reforms should involve stakeholders like other government institutions, tax practitioners and agents who work with taxpayers to improve voluntary compliance and reduce compliance costs. Reform programs should determine and address necessary capacity needs from national institutions and target other supportive stakeholder groups, government agencies, researchers, civil society groups and service providers.
4. Development partners should try to use local expertise where available and peer support from other developing countries that have successfully implemented desired reforms. The reform implementing environments are different in terms of technology and infrastructure development, culture, management capacity, literacy and social development. Experts from developed countries may not be able to adapt the recommended methods to local conditions within the limited implementation time. Experts from the region or developing countries where reforms have been successfully implemented may find it easier to relate to local conditions and provide an environment for peer-to-peer learning. It may also be cheaper to use local tax or customs practitioners or private companies who have invested in the desired reforms. Better results can also be derived from partnering with local institutions like colleges and universities which can be funded to give the needed reform support. Results can be achieved at lower costs by developing a small group of reform champions within the revenue agency as trainers and change agents and giving them the needed knowledge and skills with the requisite structures to deliver reforms.
5. The donor community should be willing to support infrastructure development for the reform implementation. Some donors limit their assistance to giving technical assistance or training and do not have budgets for infrastructure.
6. Development partners should provide support and coordination of reform programs to avoid duplication. A coordinated approach ensures that all necessary reform areas are supported to deliver the desired outcomes. Those with infrastructure support can put resources to the appropriate areas at the right time.
African countries need to implement the reforms that help them to be more efficient and to generate much needed revenue for government. Most African revenue administrations are keen to implement recommended reforms with the expectation of improved revenue collections, but a number find themselves disappointed with the results. In some countries where donors and other development partners have committed to support revenue reforms, there has been an apparent donor fatigue and frustration as the outcomes have not been delivered as expected. Governments which have enthusiastically gone out to negotiate support get impatient with the administration when the results do not show.
The success of reform programs depends to a greater extent on understanding that the reform is for mutual benefit and so is a collective responsibility between the development partner and the recipient country government and implementing agency. While the development partner provides the funding and technical expertise, the Government has the responsibility to design policies that support the implementation of the proposed reform. The implementing agency should be able to provide the human resources, be aware of and participate in the defining of the desired outcomes they should implement. Revenue reforms should be worthwhile for all interested parties and the ultimate goal of reform programs should be to sustain a process of individual and organizational change and to enable organizations, groups and individuals to achieve their goals3.
1 See IMF West Africa Regional Technical Assistance Center 2 (AFRITAC West 2) Program Document July 2014. Page 21
2 Some reform recommendations are based on principles of effective revenue administration outlined in the IMF "Tax Policy and Administration – Topical Trust Fund” Program Document April 2011. Page 22
3 Extracted from a United Nations Environment Program (UNEP) discussion paper on "Ways to Increase Effectiveness of Capacity Building for Sustainable Development” presented at the Concurrent Sessions 18.1
This article first appeared on the July/August 2015 edition on Tax Talk.