Reforming Tax Policies and Tax Administration

1. Reforming Tax Policies and Tax Administration International perspectives, lessons for Indonesia Bert Hofman, World Bank With Michael Engleschalk and Anna Monica Hansson

2. Reforming Tax Policies and Tax Administration • Why tax and tax administration reforms? • What reforms (I)—taxes • What reforms (ii)—administration

3. Indonesia’s tax ratio is—and was—low

4. ….but debt makes more taxes crucial…..

5. …since debt service takes more than half of revenues.

6. What taxes?it’s all in Smith • I.                    The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; • II.                 The tax which each individual is bound to pay ought to be certain, and not arbitrary. • III.               Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. • IV.              Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. Adam Smith (1776) The Wealth of Nations, Book V, Chapter II.

7. Indonesia’s tax structure is not highly biased biased

8. And rates seem within reason

9. The question • If Indonesia has a reasonable tax structure, and reasonable rate, Where’s the revenue?

10. What you see is not what you get • 50 exemptions in VAT • 19 exemptions in sales tax on luxury goods • 21 exemptions in Income Tax • 15 exemptions in land and building tax • ……….. Source: Barents Group

11. Reform Lesson • Lesson No. 1: Look at exemptions first

12. What taxes—international trends? • Rely less on trade taxes • Tax consumption rather than personal income—but do not forget equity • Avoid overtaxing capital—especially if you need it—but luring capital with exemptions is counterproductive • Build broad agreement on what to tax and how much

13. Reform Lesson • Lesson No. 1: Look at exemptions first • Lesson No. 2: The process of tax reforms is as important as the outcome

14. Reforms—tax administration “Tax Administration IS Tax Policy” Milka Casanegra de Jantscher, 1990

15. Principles of Good Tax Administration A good tax administration: • Applies the law in a fair, reliable and transparent manner; • Outlines and communicates to taxpayers their rights and obligations as well as the available complaint procedures and redress mechanisms; • Consistently delivers quality information treats inquiries, requests and appeals from taxpayers in accurate and timely fashion; • Provides an accessible and dependable information service on taxpayers rights and obligations with respect to the law; • Ensures that compliance costs are kept at the minimum level necessary to achieve compliance with the tax laws;

16. Principles of Good Tax Administration • Where appropriate gives taxpayers opportunities to comment on changes to administrative policies and procedures; • Uses taxpayer information only to the extent permitted by law; • Develops and maintains good working relationships with client groups and the wider community. OECD 1999

17. How to make these principles work? • Benchmark • Commit to improvement • Report regularly on improvement to public and Parliament

18. Reform Obstacles • Political interference • Lack of tax culture • Corruption • Lack of resources • Short-term revenue focus • Lack of support for reforms

19. Requirements for an effective reform process (1) • Sustained political commitment and support • Competent, committed and dynamic leadership. • A clear vision of the organization’s future state • Well-articulated strategies and comprehensive plans to realize the vision. • Change initiatives are introduced in manageable “chunks”, rather than a “big bang” approach. • Efforts are made to develop executive, middle management and institutional capacities.

20. Requirements for an effective reform process (2) • Adequate resources, funding and cash flow arrangements are in place. • A high level of accountability, founded on corporate governance and management structures and process, is enforced. • Good project management and budgeting processes are employed, with external oversight and supervision. • Staff and external stakeholders are fully involved and receive comprehensive and timely information. • There is a good level of cohesion within the administration, between those developing and implementing reform and those performing current operations.

21. Singapore: A Success Story • By 1990 the Inland Revenue Department had the lowest public satisfaction rating in the entire public sector • In 1992 the Inland Revenue Authority of Singapore (IRAS) was established • An integrated, computerized approach to tax administration along functional lines was adopted • A completely new administrative system was introduced step-by-step over the next eight years • Today 95% of taxpayers are satisfied with IRAS

22. How did Singapore do it? • Commitment from the highest levels of government • The tax administration was reorganized and given adequate resources • The system was well-planned and carefully implemented in a phased and monitored manner • …..and of course, it is Singapore!

23. Reform Lesson • Lesson No. 1: Look at exemptions first • Lesson No. 2: The process of tax reforms is as important as the outcome • Lesson No. 3: Tax Administration IS tax policy.

24. Want to know more? World Bank Tax Policy and Administration Web site: http://www1.worldbank.org/publicsector/tax/