V. VAT Organizational Issues
- Alan Tait
- Published Date:
- June 1991
This chapter discusses some of the main organizational issues to be considered in the introduction of a VAT—staffing, training, and staff manuals.
Which Department Should Administer the VAT?
It is important to resolve this issue soon after it has been decided to introduce a VAT for a number of reasons:
- Although some preliminary work to develop VAT can start immediately, departments will be reluctant to commit resources until it is clear which department will be responsible for its operation.
- Legislation, operating systems, procedures, and organizational structures will vary depending on whether it is the income tax, the customs, or some other department that will administer the VAT.
- Traders and their representatives need to know which department will administer the tax so that initial discussions can take place.
In making this decision, policymakers generally have three options: (1) attach the VAT collection to the income tax department or (2) to the customs and excise department or (3) create a new department. Each of these options is discussed below.
Income Tax Department
There a number of advantages of having the VAT collected by the income tax department:
Similarity of Activities. Both income tax and the VAT are calculated by reference to the financial transactions and records of the enterprise. Skills developed by the income tax staff are therefore more relevant to the administration of VAT than are the skills used in the traditional customs and excise collection. This makes it easier for the income tax department to draft and implement appropriate legislation and to develop training, audit, and operating systems.
Relative Size of Departments. The income tax department is generally much larger than the other revenue departments which makes it more likely to be able successfully to absorb the new activity. Also, because of its size, it will be easier for that department to release staff for the key development and management positions.
Experience with Large-Scale Systems. Income tax administration is concerned with the management of systems involving large numbers of taxpayers. This gives them experience not normally gained in customs, excise, and narrow-based sales tax operations.
Dealing with All VAT Payers. Income tax departments should already be dealing with all taxpayers who will be liable for VAT (although experience shows that this is not necessarily true and in some cases many thousands of new taxpayers are found through the introduction of a VAT).
Distribution of Offices. The department will generally have a wide distribution of offices ideally located for VAT administration.
Joint Use of Information. The benefits of using taxpayer data for both VAT and income tax administration can be extensive.
On the other hand, there are arguments against the selection of the income tax department: (1) There have been cases in which the income tax staff were reluctant to commit themselves to the administration of a sales tax as this is considered to be a less sophisticated activity than direct tax collection. (2) The overall size of the combined income tax/VAT department may be too large for effective management. (3) Because the income tax department expects to have registered already all potential VAT taxpayers, this may make it less willing to recognize the many new VAT taxpayers who ought to be registered.
Customs and Excise Department
The factors favoring the collection of VAT by customs and excise are as follows:
Significant Revenue at Import. In developing countries between 40 percent and 60 percent of the total VAT revenue is likely to be collected by customs on the import of goods.
Machinery of Government. Concern about the size of the department which would be created if VAT were to be administered by the income tax department may be a reason for passing the task on to customs.
Experience with Indirect Taxes. The customs department will be knowledgeable about collecting indirect taxes and will therefore be familiar with issues such as the classification and valuation of goods.
Familiarity in Dealing with Taxpayers at Their Premises. This is an important advantage of the customs and excise department administering the VAT.
A New Department
The third option is the creation of a new department. The principal advantage is that a new department may provide the best opportunity to institute a modern approach to management and operating systems, by allowing the new tax to develop without the constraints of the existing taxes.
The final choice of department will need to take into account the above considerations as well as others not directly related to the VAT itself. For example, where the VAT is replacing an existing sales tax it may be more appropriate to allocate VAT to the department that previously administered the sales tax because of the numbers of staff becoming free and because of the organizational experience with indirect taxes. Also, if the department indicated by applying the above criteria is already struggling with its existing responsibilities, it would make little sense to ask it to take on the management of the VAT and so an alternative solution may be needed.
Number of Staff and Their Duties
Number of Staff
The number of staff required to administer a VAT depends on many factors, the most important of which are (1) the level of threshold adopted; (2) the treatment of agriculture; (3) the number of positive rates; (4) the number of exempted or zero-rated goods and services; (5) the general level of technology application and extent of computerization; (6) the organizational structure; (7) familiarity of the organization with large systems; (8) the absolute size of the operation; (9) the processing and compliance systems; and (10) geographic characteristics. Brief comments on each of these follow.
Level of Threshold Adopted. As mentioned in Chapter I, the staff needs are directly related to the number of taxpayers. A high exemption limit or threshold will remove many small traders from the tax system enabling staff numbers to be reduced and proper attention to be given to large businesses and more complex cases. Most countries will find that a very large proportion of their businesses have a low turnover and as a group contribute little value added. It will therefore generally be possible to set a threshold which relieves a substantial proportion of the businesses from VAT obligations, but which has only a small impact on revenue. Chart 1 demonstrates this for a small Pacific island economy. It shows, in what might be an extreme case, that while virtually all businesses had a turnover below $20,000, about 90 percent of value added was contributed by the few businesses with a turnover above $90,000.
Chart 1.Distribution of Taxpayers and Value Added: Companies and Self-Employed in a Small Pacific Economy
Source: IMF estimates.
Treatment of Agriculture. Broadly speaking, the treatment of farmers will affect the number of staff needed in two ways. First, farmers may represent a large proportion of total businesses and although many would be excluded by a general threshold, the number remaining can be significant. Second, farmers are as a rule among the less sophisticated of taxpayers and can, therefore, be expected to have greater difficulty in complying with the VAT law.
An example of the number of farmers who might be involved is given in Chart 2. This demonstrates the relatively insignificant effect that differing threshold levels would have had on the number of farmers to be registered for the goods and services tax (GST) in New Zealand. (New Zealand ultimately elected to tax all farmers and to bear the higher administrative and compliance costs of that decision.)
Chart 2.Impact of Farmers on the Number of Registered Persons in New Zealand, 1985
Source: IMF estimates.
Number of Positive Rates and Number of Exempt or Zero-Rated Goods and Services. The adoption of features such as multiple positive rates, extensive exemptions, zero rating, and special case treatments all lead to more complex legislation. The result is that taxpayers will exploit boundary issues and a disproportionate amount of staff time will be spent on interpretative issues and the identification and control of avoidance. No legislation can ever be totally simple, but limiting the exceptions and a general simplification of policy will assist in reducing staff needs.
Computerization. An effective computer system can greatly reduce the number of staff required for basic activities such as identifying stopfilers and nonfilers, tracking delinquent debt cases, and maintaining taxpayer registers. For more advanced countries, a high technology level among taxpayers can assist the administration by enabling the adoption of systems such as electronic filing, direct crediting, and debiting of payments and refunds.
Organizational Structure. The organizational structure adopted will affect the total staffing level. Highly hierarchical pyramid structures tend to encourage the development of unnecessary layers in the organization that will cause staff numbers to be higher than necessary and also lead to operational inefficiency.
Familiarity with Large Systems. The degree to which the organization is experienced in dealing with systems involving large numbers of taxpayers may through the adoption of effective taxpayer and file management systems have an impact on the level of staff needed.
Economies of Scale. Economies of scale can be achieved where there is a large taxpayer base because the numbers of staff needed for some functions are relatively fixed regardless of the numbers of taxpayers and because larger operations permit the use of more advanced technology, leading to greater overall efficiency. On the other hand, the same number of staff can be needed for a VAT with a base narrowed by exemptions as with a broad-based tax.
The Systems Adopted. The processing and compliance systems adopted can have a major impact on the number of staff required. Reducing the flow of paperwork by altering the frequency with which returns are furnished will have a significant effect on the staff needs, but possibly at the cost of increased debt collection problems and adverse impact on the smooth flow of revenue. Centralizing certain processing activities and reducing unnecessary letter writing and other contacts with taxpayers are other examples of streamlining which will minimize staff needs.
Typically, between 40 percent and 50 percent of total staff is engaged in audit activities—the number needed clearly being dependent on the method and frequency of audit. Highly targeted, quick audits will permit a relatively high frequency to be achieved with comparatively low staff numbers. The frequency of audit varies considerably among countries, with some reporting a 4-6 year cycle and others operating at 30-60 years. The trade-off is between higher staff numbers, high costs but greater compliance, and between savings on staff expenditure but higher evasion levels.
Geographic Factors. The location of taxpayers can influence the staffing levels—smaller countries or those with most of the business sector concentrated in a few major centers will probably be able to operate with slightly lower staff levels than those with a very diffuse taxpayer population.
As Table 1 shows, the ratio of staff to taxpayers varies widely among countries. The table includes both developed and developing countries, as well as old and new and relatively complex and relatively simple VAT systems.
|Cyprus (estimated)||1: 160|
|Pakistan (proposed)||1: 125|
Types of Staff
The types of staff needed and the numbers of each type will vary depending on factors such as the organizational structure adopted (e.g., flattened or hierarchical) and the underlying operating and management systems (e.g., centralized or decentralized operation; whether or not a regional office structure is adopted; and the choice between a classification based on function or tax). However, an examination of a number of VAT organizations shows that despite the variations in structure, there is some reasonable consistency among countries in relation to the type of functions performed and the proportion of staff needed for each.
The following gives an indication of the functions likely to be performed at each level, on the assumption that a typical three-tier structure (district offices, regional offices, and a national office—as shown in Chart 3) is adopted.
Chart 3.VAT Department: General Structure
District Offices. In broad terms, the main functions of a district office are return and payment processing, taxpayer services, and compliance control. Administrative functions will also be performed.
Return and Payment Processing. In some administrations (e.g., the United Kingdom and in the near future New Zealand), some or all of this activity is centralized at a single location while in others it is decentralized and managed from the district level. Centralizing this activity generally requires a high level of computerization and well-developed communication channels, both of which are normally associated with more developed countries. It is assumed here that a simpler, localized system may also be of interest to many countries.
However, wherever located, the functions will remain similar. The principal functions are to receive and check the VAT returns for completeness; obtain additional information required; enter data into the computer system; receive, provide receipt, and record payments (preferably the payments are made direct to the banks in which case only the recording is the responsibility of this office); prepare computer lists of stopfilers; prepare computer lists of debtors; receive, check, and record registrations; issue blank return forms; and issue routine reminder notices for late furnishing or payment.
Taxpayer Services. This covers the activities associated with direct taxpayer contact other than those associated with compliance functions. In departments not operating along such structured functional lines, the activity will normally be included with the processing functions outlined above. The main responsibilities of this group are to receive registration applications and conduct advisory/educational visits; handle taxpayer enquiries received by letter, phone, or visit to the office; identify potential new registrants; arrange local publicity; deal with changes of status, address, etc.; approve deregistration applications; and maintain a filing system.
Compliance. This division of the district office has three broad responsibilities: (1) manage delinquent debt; (2) conduct audits; and (3) conduct or assist with fraud investigations.
The debt control division is primarily responsible for managing arrears cases and should perform the following tasks: receive data on delinquent debt from the processing division (either in the form of listings, copies of payment reminders, or by accessing the database); interview taxpayers to establish their financial position; negotiate arrangements for payment; initiate legal action for the recovery of debts; maintain records of action taken; locate missing debtors; and liaise with the divisions responsible for audit and fraud investigations.
The audit division may well be the largest section of the district office as operating systems should enable the number of staff engaged on processing activities to be minimized and the numbers on audit increased. The auditor’s activities are dealt with more fully in Chapter VII, but include the following responsibilities: assist the taxpayer services section with educational visits; select cases to be audited (preferably on the basis of some computerized preselection system); conduct routine control visits; gather information from “third parties” to be used in future audits; identify cases where fraud is suspected and pass serious cases to the inspectorate for a full investigation; quantify any deficiency and arrange to issue an assessment where errors are primarily technical or where there is only minor evasion present; give evidence at the prosecution of defaulters; and assist inspectors with fraud investigations.
Where the VAT is being administered by the same department as that which collects income taxes, it is probable that there will be no separate VAT inspectorate. Instead, a single inspectorate will investigate and quantify evasion of both income tax and VAT as it is axiomatic that a taxpayer evading one of the taxes will also be evading the other. The duties of the inspector are as follows: receive suspected evasion cases from VAT audit; conduct full investigations of both income tax and VAT records; quantify the amount of evasion and prepare for assessment; gather evidence for possible prosecution; assist in the resolution of objections to findings; give evidence in court in prosecution cases; liaise with income tax department as appropriate; and advise and assist auditors on the more complex cases.
In addition to the above staff, the district office will have administrative and support staff to handle the following responsibilities: senior- and middle-level district management tasks; supervision; typing; clerical support and filings; training; and personnel and administration functions.
Chart 4 shows an organization chart for a district office performing the above functions.
Chart 4.VAT: District Office Structure
Regional Office. The regional office will be very much smaller than the district office. Its function is to coordinate the activities of a number of offices (possibly eight to ten) to provide high-level operational and interpretative support to them and to oversee the performance of the offices. The number of staff located at this level will be small and it may well be that in a small department it is inappropriate to have a regional structure. The main functions of a regional office are the following: receive and review district office output reports; conduct fraud investigations (the inspectorate, although a district function, may be centered at the region because of the small numbers of specialized staff required); provide legal interpretations of VAT legislation; review recommendations for prosecution or other penal action in cases of proven evasion; carry out internal control checks; and provide high-level support on personnel issues.
Head Office. The functions of the head office are to decide on national policy, to monitor national performance to ensure that organizational goals are being met, to coordinate national activities, and to provide support to regional and district offices. The specific activities conducted at the head office (where appropriate, using the same broad divisions as used for the district office) are listed below:
Policy and Legal. Research proposals for amendments to the law; review the effectiveness of existing law and policy and propose changes; prepare departmental draft of new laws; and prepare legal cases and give evidence in court.
Processing. Revise and amend operating procedures; prepare and revise staff manuals; ensure that procedures are being followed; and design forms.
Taxpayer Services. Manage publicity campaigns; oversee operations of taxpayer services sections in districts; and develop guides, pamphlets, and other explanatory material.
Compliance. Develop national policy for audit, investigation, and debt collection; monitor national audit performance; and analyze audit results and revise selection criteria as appropriate.
Organization of Administrative Services. Administrative services will require (1) a finance division to record expenditure, prepare the annual report, allocate budgets, monitor expenditure, and manage national accounting activities; (2) a personnel management division to develop national policy with regard to recruitment, staff issues, training, and staff development; (3) a computer services division to handle any centralized computer operation, systems analysis, and preparation of software; and (4) an internal audit division to monitor national performance and ensure that district offices, regional offices, and head office divisions are achieving objectives.
Chart 5 depicts a typical national or head office structure for VAT.
Chart 5.VAT: National Office Structure
Distribution of Staff
Practices regarding the distribution of staff among the above functions vary depending on a range of factors, including many of those relevant to deciding the absolute number of staff needed (see section on “Number of Staff” above). Particularly relevant to the distribution will be the level of computerization and the degree to which audit is to be emphasized. Chart 6 indicates the number of staff that could, as an example, be allocated to each of the tasks. It assumes a total staff of 500 and an organization with sufficient district offices to require a small regional structure.
Chart 6.Number of Staff Needed for the Main Functions of a VAT
At least two levels of training are needed for VAT staff: the initial training of new recruits and of those transferred to VAT duties and the ongoing training of staff. Other than the content of the course, ongoing training for VAT is no different from that required for other taxes and is not considered here. The management and content of the initial training of VAT staff are examined below.
Management of the Initial Training
Initial training differs from normal “maintenance” training in several ways: (1) large numbers of staff need to be trained; (2) the time available for the delivery is short; and (3) many of the staff will be new to the department. The existing training system has usually been designed and staffed to handle the normal training load associated with (1) regular levels of recruitment; (2) changes to legislation and procedures; and (3) retraining for changes to law and practice. It is, therefore, unlikely that either suitable organization or a sufficient number of staff would be available to handle the large initial training that implementing a VAT demands.
The management of training can be approached in two ways: (1) A centralized activity under which all major training is handled from an “institute” or from the head office, training material is produced at headquarters, and all trainees travel to that office to receive their instruction from the full-time and guest speakers. (2) A decentralized activity under which training is the responsibility of local management, that is, of the staff members’ own supervisors, in which case the head office or “institute” is responsible for preparing standardized material, while most courses are delivered in the local district office. Only high-level and specialized training would be delivered centrally.
The principal advantages of the centralized approach are that it ensures a greater degree of national consistency; permits close monitoring and control of the quality of the training given; and enables greater specialization to be developed. The main arguments against this approach are the cost of bringing staff to a central point for training and the fact that a very large number of trainers are required—probably far more than can realistically be made available.
The advantages of a decentralized approach are that it spreads the training load widely, thus effectively increasing the number of trainers; traveling is eliminated, thereby saving funds and also minimizing time wastage; and follow-up training and remedial courses can be arranged as soon as the need arises at the local level. The disadvantages are the greater difficulty of ensuring national consistency and the monitoring of standards.
The best approach to training is one that combines the most useful features of the two.
- Provide specialist training to managers and possibly supervisors at a central location. This would include sessions in “how to train.”
- Develop standard training modules or packages at head office to cover all technical aspects of the operation of the VAT and interpretation of the law.
- Give all basic VAT training to the bulk of staff at their district office, using the trained managers and supervisors as trainers.
- Require all training to be based on the centrally prepared material that will include some self-testing and programmed learning features.
- Monitor the training given at the district level through evaluation visits from head office and regional office, review of test scores, etc.
Training in the following topics should be required:
Management and Supervision. Officers newly promoted to management and supervisory positions should receive a basic course in management. This could be a one-week course.
Training the Trainers. As the managers and supervisors will be responsible for training their own staff, they will need proper guidance on how to train. This will be an extension of the management courses and may take only two or three days.
Registration Procedures. This is training on the requirements within the office to register taxpayers. It will be a simple, short course (one to two days) dealing with the processing of registration applications and the handling of basic enquiries.
Return Processing. This course will cover the processing of returns and payments and will include all the actions required of the processing staff. Depending on the complexity of the systems, the course could take up to a week.
Interpretation. A course will be needed on the technical aspects of VAT, covering the department’s interpretation of the law and the operating procedures. This is an important issue and the course is likely to take about a week or more.
Trader Education Visit. This course will train staff who will be primarily visiting vendors to explain the operation of VAT. This could take about one or two days.
Audit. This course covers the full audit function dealing essentially with the examination of vendor accounts and the detection of avoidance and evasion. The length of this course will vary depending on the experience of the officer. If the auditor has no experience, he will also need the training in basic bookkeeping and negotiating skills mentioned below and the whole package may need to be spread over one or two months. An experienced income tax auditor would need very little time to become familiar with auditing techniques specific to VAT.
Interviewing and Negotiation Skills. Most staff will be in regular contact with vendors through advisory visits, audits, counter enquiries, or telephone discussions. In each case, communication skills should be taught and encouraged, along with the ability to make effective use of the knowledge gained in other courses. A full course would take about a week and ideally all officers should receive this training.
Bookkeeping or Basic Accounting. All auditors need a basic knowledge of bookkeeping or accounting, and this course will meet these needs for those who have not already studied the topic. Depending on the depth of coverage, this course could take from one to three weeks.
Computer Appreciation. If the department has a low level of computer literacy, it will be wise to have some general courses on computers. Specific training in VAT computer applications will need to be included as appropriate. The general appreciation course may require only one to two days.
The preparation of manuals to cover all aspects of the interpretation of VAT legislation and of the operation of the system is a vital part of the development activity. Manuals are essential for ensuring the highest degree of consistency of decision making throughout the department and for developing an effective network of accountability. Manuals are particularly important at the time of introducing a new tax since wrong decisions can quickly become entrenched in practice. Without clear, unambiguous instructions staff will make up their own rules and each may be different.
Manuals will also be needed for the specialist courses that will be developed by the training unit.
Manuals should be developed for the following operations:
- Technical issues—covering the interpretation of the law and explaining the significance of and relationship between the various sections of the VAT act.
- Registration procedures—dealing primarily with the initial registration of taxpayers.
- Processing instructions—covering issues such as the handling of returns, taxpayer records, debt collection, and computerization.
- Audit—dealing with the nature and procedures of the audit activity.
- Educational visits—explaining what to do during such a visit.