How we can benefit from better tax administrations

Filling out tax forms. A new tool by the International Monetary Fund aims to help improve taxation efforts around the world. Photo by: AgriLife Today / CC BY-NC-ND

No one likes paying taxes. But everyone benefits when tax collection is efficient and fair. For almost all developing countries, building a more effective and trusted tax administration is critical. This not only helps finance much-needed social spending and infrastructure, but also reduces dependence on aid, now subject to its own pressures. It’s also a key pillar in building accountable, effective and respected government institutions.

Achieving this is partly down to good tax design. But it is also largely a matter of building strong tax administrations. This is not easy. A new instrument — the Tax Administration Diagnostic Assessment Tool, being developed at the International Monetary Fund with donor support and technical input from a wide range of experts — aims to help.

TADAT, welcomed in the communiqué of the First High-Level Meeting of the Global Partnership for Effective Development Cooperation, provides an independent, standardized, evidence-based, quality-assured, all-round assessment of the performance of a tax administration. All of these adjectives are critical, as will become clear. TADAT provides, in effect, a revenue-side analog to the highly successful Public Expenditure and Financial Accountability framework.

The technical design of TADAT will be completed in the next few months, while the tool itself will be posted on the TADAT website for public comment in a few weeks. It has already been piloted in high-income Norway, emerging South Africa and low-income Zambia. As these three countries differ greatly in circumstances, culture, and organizational and legal structures, the toll must be robust enough for use under a wide range of circumstances.

With several more pilots planned, results have been uniformly encouraging so far. All three pilot countries have found the tool extremely helpful. One striking regularity is that administrations often found that they were not performing as impressively in some areas as they had thought — but that they were also not doing as badly in others as they had feared. This is exactly the value of an independent, standardized assessment.

How it works

TADAT evaluates a tax administration in nine performance outcome areas. This starts with taxpayer registration — making sure all who should be in the tax net are there, and those records are up to date — and ends with how tax disputes are handled and whether the tax administration is working transparently. A score is given for each area, with 27 indicators forming part of 54 detailed dimensions.

This is all much simpler than it may sound. For instance, in the payment of obligations: Any tax administration wants to make sure that taxpayers pay on time and in full, so one of the indicators here is the timeliness of payments. TADAT evaluates whether VAT payments are made on time, recording an A if the proportion is above 90 percent, to a D if it’s below 50 percent.

This exercise doesn’t aim to reach some overall score or country ranking, nor does it come up with immediate recommendations or advice. This is diagnosis, not prescription.

The idea is to help countries themselves to identify their own tax administrations’ relative strengths and weaknesses, and develop reform strategies accordingly. TADAT’s standardization and rigid insistence on firm evidence for all assessments will make a major contribution to more effective development cooperation, helping donors and other stakeholders identify and agree on the areas where support is most needed, coordinate their efforts and debate the issues in an agreed framework.

And with repeat assessments, the tool will give a systematic and structured view of progress being made.

Everyone can improve on taxation

TADAT is not only for developing countries. Tax administrations in all countries face the same basic challenges. The years since the 2008 financial crisis have exposed weaknesses in many tax administrations in advanced economies, and lent renewed urgency to fair and effective tax collection in many more. At the same time, many have been asked to do more with fewer resources. For them too, a hard-nosed and independent assessment of their strengths and weaknesses can provide an invaluable perspective in deciding their own priorities for improvement.

Its implementation is being overseen by a steering committee of enthusiastic donors — the European Union, Germany, Japan, Netherlands, Norway, Switzerland and United Kingdom along with the International Monetary Fund, the World Bank and the South African Revenue Service. A technical advisory group provides advice. Day-to-day operations are overseen by a small secretariat within, but at arm’s length from, the IMF.

This secretariat will be responsible for developing the tool and — crucially — for assuring the quality of TADAT assessments.

These assessments will be undertaken by a wide range of organizations: regional development banks, international organizations, consultancy firms and others. A key element of the tool’s philosophy is that assessments should be undertaken only by tax administration experts specifically and extensively trained to do so. Over the next few months, a core goal is to build a highly professional pool of accredited assessors to undertake the substantial work ahead and ensure that the unique and exciting potential of TADAT is fully realized.

Join the Devex community and access more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.

About the author

  • Michael Keen

    Michael Keen is acting head of the TADAT Secretariat and deputy director of the Fiscal Affairs Department at the International Monetary Fund, where he was previously head of the Tax Policy and Tax Coordination divisions. Keen has as led taxation technical assistance missions to nearly 30 countries and consulted for the World Bank, the European Commission and the private sector.