In recent blogs, we have talked about the importance of taxation and compliance. Now it is time to take a closer look at the tax administration itself. Regardless of whether countries are in the developed or developing phase, revenue agencies are a highly sensitive component in most of them. They are relied upon to provide the resources that will enable a public spending plan, which in turn is based on the country’s strategy to ensure minimum standards of health, education, safety, social security, or infrastructure. In addition, a weak tax administration compromises the development, growth, and trust in government. As a central – and defining – function of government, it is therefore essential for countries to continuously strengthen their tax administration.
Although the focus of tax administrations will vary from country to country, the common denominator for all revenue departments is that whatever they are pursuing, they do it in an efficient manner. Just like other government agencies, they are financed by taxpayers’ money and thus hold a moral obligation to conduct their operations efficiently. That is why it is appropriate for a revenue department to measure its efficiency.
In the corporate world, organizations oftentimes use key performance indicators (KPIs) to measure their performance. These indicators are then used to compare against a set of benchmarks within the same sector. For a tax administration, the KPIs can be taxpayer-focused, tax clerk-focused, or management-focused. For example, when looking at indicators of the quality delivered to the customer you could look at the number of complaints or the ease of finding information. Every administration will have performance indicators that are important to them and that reflect what is expected politically and by the public. But how can these be benchmarked? Political and public expectations differ from country to country and even between different municipalities. This is where TADAT comes in.
The value of TADAT
TADAT is an internationally acclaimed tool that offers an effective approach to assess the relative strengths and weaknesses of a tax administration. The TADAT framework is designed to deliver a standardized assessment of the most critical outcomes of any country’s system of tax administration. The assessment pinpoints relative strengths and weaknesses, providing an invaluable perspective in deciding priorities for improvement. Herein lies the greatest value of TADAT: it provides an objective view of the tax administration system’s health and areas that need reform or strengthening, which facilitates a shared view among stakeholders. In doing so, it provides the basis for discussions about reform goals, implementation strategies, and the prioritization and sequencing of interventions. In addition, revenue agencies benefit greatly from the methodology when it is embedded in regular performance monitoring, reporting, and accountability frameworks.
The TADAT framework
TADAT – short for the Tax Administration Diagnostic Assessment Tool – was established in 2015 by the IMF in collaboration with other organizations. It provides an objective and standardized performance assessment of a country’s system of tax administration. Thus, allowing tax administrations to have an objective standard which is applicable to all administrations and therefore enables benchmarking. However, it must be noted that the benchmarking is not necessarily directly comparing the outcomes of the assessment to other countries. Instead, the TADAT framework applies a scoring mechanism that is based on tax administration’s best practices around the world. For instance, scoring an A means that the administration is performing strongly and follows internationally accepted good practices on that particular dimension. Subsequently, scoring a B indicates that the administration is performing fairly close to the standards of international best practices, and so on. This way, the scores themselves serve as a benchmark for revenue departments without having to directly compare to other administrations around the world. It is worth mentioning that no country scores straight A’s, but C’s and D’s are more common scores. The scores are not meant to be used for competition purposes with other administrations. Instead, the main objective of scoring is to enable the administration to prioritize its initiatives going forward.
Methodology of the TADAT assessment
TADAT assesses the performance of a country’s tax administration system by looking at its key components. The framework is comprised of nine outcome areas, which are called the Performance Outcome Areas (POAs).
The nine Performance Outcome Areas of TADAT are:
- Integrity of the Registered Taxpayer Base: Registration of taxpayers and maintenance of a complete and accurate taxpayer database is fundamental to effective tax administration.
- Effective Risk Management: Performance improves when risks to revenue and tax administration operations are identified and systematically managed.
- Supporting Voluntary Compliance: Usually, most taxpayers will meet their tax obligations if they are given the necessary information and support to enable them to comply voluntarily.
- On-time Filing of Tax Declarations: Timely filing is essential because the filing of a tax declaration is a principal means by which a taxpayer’s tax liability is established and becomes due and payable.
- On-time Payment of Taxes: Non-payment and late payment of taxes can have a detrimental effect on government budgets and cash management. Collection of tax arrears is costly and time consuming.
- Accurate Reporting in Declarations: Tax systems rely heavily on complete and accurate reporting of information in tax declarations. Audit and other verification activities, and proactive initiatives of taxpayer assistance, promote accurate reporting and mitigate tax fraud.
- Effective Tax Dispute Resolution: Independent, accessible, and efficient review mechanisms safeguard a taxpayer’s right to challenge a tax assessment and get a fair hearing in a timely manner.
- Efficient Revenue Management: Tax revenue collections must be fully accounted for, monitored against budget expectations, and analyzed to inform government revenue forecasting. Legitimate tax refunds to individuals and businesses must be paid promptly.
- Accountability and Transparency: As public institutions, tax administrations are answerable for the way they use public resources and exercise authority. Community confidence and trust are enhanced when there is open accountability for administrative actions within a framework of responsibility to the minister, legislature, and general community.
The POAs are linked to a set of 32 high-level indicators that are each built on 1 to 5 dimensions that together add up to 55 measurement dimensions.
The integration of TADAT
To date, TADAT has performed a total of 118 assessments of revenue departments worldwide and many tax administrations have already incorporated TADAT into their KPIs or use it to measure efficiency and progress. As a response, BearingPoint Caribbean has configured the Multi Tax Solution (MTS) to produce TADAT-related monitoring metrics. Our more than 30 TADAT-certified consultants use their knowledge to help strengthen our clients’ system of tax administration.
Moreover, we are currently developing the TADAT Dashboard in collaboration with the IMF TADAT Secretariat. The dashboard is designed exclusively for the TADAT methodology and can be connected to our Multi Tax Solution or any other revenue management system. The TADAT Dashboard helps revenue departments to continuously monitor their progress by visualizing the effect of each initiative taken to improve performance. During the first half year an East African and a Caribbean revenue department will be piloting the dashboard with other jurisdictions showing interest to start using the dashboard later this year.
For more information about TADAT and the implementation of the TADAT principles into your system of tax administration, feel free to contact us.