## IMF FAD Mission Report on Romania — Large Taxpayer Office (LTO) review (_cr16284)

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### Mission and engagement
- Mission requested by Mr. Eugen Orlando Teodorovici, Minister of Public Finance; visit to Bucharest from July 22–August 4, 2015 to review LTO under NAFA.
- Mission leadership and team:
  - Led by Mr. Allan Jensen (FAD).
  - External FAD experts: Messrs. Norman Gillanders and Keith Cartwright.
  - Overlap with Mr. John Buchanan (external FAD expert) on HWI/high income compliance.
- Principal meetings included Minister of Public Finance, NAFA leadership, Romanian Court of Accounts, World Bank, and representatives of major accounting firms.
- Report structure: executive summary and seven sections (LTO Reform Context; Improving Large Taxpayer Criteria; Improving Compliance Risk Assessment; Strengthening Audit Selection and Focus; Improving VAT Refund Procedures; Improving Tax Arrears Collection; Other LTO issues).

### Main findings — scope and performance
- Tax system and gaps:
  - VAT collection gap: 44 percent (highest in the EU).
  - Tax revenue collection: 18.8 percent of GDP in 2014 (excluding social contributions).
- LTO performance constraints:
  - No modern compliance risk management (CRM) approach; taxpayer compliance picture insufficiently analyzed and no strategy guiding operational activities.
  - Resource distortions:
    - About 46 percent of annual LTO audit resources used on VAT refund issues with material results only in about 10 percent of audits.
    - Around a third of total annual audit resources used on audits requested by the Court of Accounts, other parts of NAFA, and other authorities.
    - Remaining 20 percent mainly focused on “bottom up” audit plans with meager outcomes.
  - VAT refund audits: take half a year on average in Romania; in advanced administrations such audits typically take a day or less.
  - LTO manages about 2,392 taxpayers who account for less than 50 percent of total tax revenue collected by NAFA.
  - Suggested reallocation based on turnover would assign 1,200–1,400 taxpayers to the LTO who would account for up to 60 percent of total revenue.
- Enablers and constraints for reform:
  - Legal and organizational shortcomings require high-level support and legislative changes.
  - Significant organizational, cultural changes and major training efforts needed.
  - LTO requires autonomy similar to regional offices to implement tailored procedures.

### Major recommendations (summary)
- Overarching recommendation: LTO must pursue a coherent compliance strategy and be equipped with skilled personnel and material tools.

Short term (6–12 months)
- Replace LTO inclusion criteria to be primarily based on turnover (sales); apply criteria throughout Romania as the primary mechanism.
- Maintain or increase LTO staffing even if taxpayer population is reduced.
- Commence upgrading personnel skills through training and exchange programs; replace personnel as appropriate.
- Government decision to commence implementation of the CRM model outlined in the report.
- Change the Tax Procedure Code and relevant regulations to establish NAFA mandate to prioritize compliance addressing major revenue risks.
- Revise VAT refund procedures (risk assessment and audit) to reduce excessive audit resource use.
- Remove from law/regulations:
  - NAFA’s obligation to audit taxpayers for statute of limitation purposes only;
  - personal liability for revenue shortfall upon auditors and other officials;
  - auditors’ obligation to review all tax periods since the last audit.
- Reach a protocol with the Court of Accounts to allow its role within a modern, quality-assured compliance-management framework.
- Establish within the LTO a strong Risk Management Unit (RMU) to facilitate high-level risk analysis, prioritize risks for treatment, coordinate compliance strategies, and facilitate audit case selection.

Medium term (12–36 months)
- Provide appropriate accommodation, sufficient transport, and modern technical tools including laptops and IT software to undertake e-audit.
- Reorganize the LTO structure along suggested lines (industry-based units, RMU, technical support).
- Provide industry-competitive salaries to LTO managers and key personnel, especially auditors and legal and IT experts.

### Fiscal context and key statistics
- Tax revenue, selected series (in percent of GDP): Taxes: 2009: 26.7; 2010: 26.0; 2011: 27.6; 2012: 27.8; 2013: 27.2; Prelim. 2014: 27.3; Proj. 2015: 26.7.
- VAT (percent of GDP): 2009: 6.7; 2010: 7.4; 2011: 8.5; 2012: 8.5; 2013: 8.1; Prelim. 2014: 7.6; Proj. 2015: 7.9.
- LTO monetary shares (2014 figures): LTO collected RON 91,091 million out of total NAFA collection RON 182,546 million.
- LTO arrears (end-June 2015): accumulated stock RON 5,905.2 million (including social contributions) — represents 12.8 percent of the LTO’s total collections for the period or 6.1 percent of national tax revenue.
- Comparable total NAFA debt (June 30, 2015): Total debt RON 19,250.1 million or 20 percent of collections (mid-year figure).
- SOE debt managed by LTO (June 30, 2015): RON 3,563.8 million — about 60 percent of LTO debt or 18.5 percent of national tax debt.
- LTO staffing and caseload (Appendix I): 598 officers in place from an authorized establishment of 641; 332 tax inspectors; LTO currently manages 2,392 large businesses; LTO uses about 2.5 percent of NAFA’s personnel.

### Improving large taxpayer selection criteria
- Current basic criterion aggregates two indicators 50/50:
  - volume of tax liabilities declared by the taxpayer—50 percent; and
  - turnover reported in financial statements as of December 31 of the prior year—50 percent.
- Other criteria: inclusion of all banking, insurance, and financial institutions; new businesses self-declaring investment of EUR 10 million or more; the first 2500 legal entities meeting criteria selected.
- Observed issues:
  - Current criteria changed multiple times; LTO population nearly tripled since 2006 without commensurate increase in share of collected revenue.
  - Using taxes paid as a criterion misses taxpayers reducing liabilities via aggressive planning or transfer pricing.
- Recommendation:
  - Replace existing basic criteria with a turnover criterion set at RON 100 million.
  - Apply turnover test to grouped/controlled companies.
  - Retain inclusion of all financial entities and new businesses self-declaring EUR 10 million investment.
  - Apply new criteria consistently and retain taxpayers who fall below threshold in LTO for at least two years (except those removed purely because of new criteria).
- Example impact (turnover RON 100 million threshold):
  - LTO population: 1,241 taxpayers.
  - Share of all taxes: 57.5 percent.

### Compliance risk assessment, RMU and risk differentiation
- Current LTO risk priorities (NAFA HQ guidance): 1) VAT refund audits (top priority); 2) audits nominated/requested from other parts of NAFA or other governmental bodies; 3) LTO-nominated cases if capacity remains.
- Consequences: overemphasis on VAT refund and external nominations distorts risk identification and audit program.
- Audit resource allocation reported: 46 percent to VAT refund audits; 32.5 percent on checks required by others; about 20 percent spent on high risk non-VAT refund cases.
- Recommended CRM and risk framework:
  - Carry out tax gap analyses to understand causes and allocate resources.
  - Extend risk management to identify tax-specific risks across industries; appoint senior “risk owners” for major taxes or tax-code parts.
  - Develop industry-based approaches and national industry-based compliance strategies with industry leaders.
  - Adopt a Risk Differentiation Framework to profile taxpayers and determine audit intensity.
  - Establish a dedicated RMU within the LTO to identify emerging risks, prepare annual audit plan, develop selection techniques, introduce new audit techniques, and conduct quality assurance.
  - Work with NAFA training unit to up-skill staff for the new approach.

### Strengthening audit selection and focus
- Current audit approach and distortions:
  - Audits driven by statute-of-limitation and time-since-last-audit rules; full audits conducted beyond identified issues.
  - Personal liability risk for auditors and Court of Accounts’ emphasis on procedural checks create incentives for exhaustive audits.
  - Consequences: substantive risks undetected, longer audits, more appeals, higher taxpayer burden.
- Audit performance (Table 4 — amounts in millions of RON):
  - Number of audits completed: 2012 — 245; 2013 — 241; 2014 — 343.
  - Additional taxes identified: 2012 — 944; 2013 — 2,559; 2014 — 2,630.
  - Additional taxes collected: 2012 — ...; 2013 — 879; 2014 — 865.
  - Penalties: 2012 — 0.2; 2013 — 0.27; 2014 — 0.23.
  - Number of auditors deployed: 2012 — 210; 2013 — 225; 2014 — 317.
- Recommendations to improve audit selection and focus:
  - Substantially reduce or remove statutory/administrative requirements around VAT refund audits and external audit requests.
  - Follow up with Court of Accounts to align monitoring approach and agree a NAFA/Court protocol.
  - Remove personal liability for auditors or overrule/disapply it in the NAFA/Court protocol.
  - Adopt the Risk Differentiation Model and audit only risks identified through risk assessment.
  - Introduce pragmatic materiality guidance and discontinue full audits where initial risk is minor.
  - Avoid auditing solely for statute-of-limitation reasons unless risk assessment indicates major risks.
  - Provide enhanced case management systems and audit support tools (laptops, special audit applications containing tax return data, manuals, checklists, and guided workflows).

### Improving VAT refund procedures
- Current situation:
  - NAFA HQ guidelines prioritize VAT refund audits; around 90 percent of refund claims assessed as low risk and paid without audit; high-risk refunds trigger full audits.
  - VAT refund audits are full, time-consuming, costly, and typically take six months.
  - LTO strike rates for refund audits (senior managers’ reports):
    - 70 percent produced no change to the amount claimed;
    - 20 percent resulted in minor adjustments of less than 10 percent;
    - 10 percent produced adjustments of more than 10 percent.
- Recommendations for VAT refund procedures:
  - Change planning assumption that VAT refund audits are primary LTO priority.
  - Enhance VAT refund risk-identification rules to reduce high-risk classifications and number of pre-refund audits.
  - Amend laws/instructions to remove requirement that an audit cover the entire period back to the last audit.
  - Perform refund verification audits only on material issues to the claim and streamline audits to align with international good practice.

### Arrears, debt management and move to self-assessment
- Arrears statistics (selected figures):
  - Revenue total (RON): 2013 = 173,533.5; 2014 = 182,546.1; 2015 (June 30) = 96,069.3.
  - LTO total collections (RON): 2013 = 79,459.3; 2014 = 91,090.6; 2015 (June 30) = 46,168.4.
  - Total debt (RON): 2013 = 14,941.8; 2014 = 16,988.3; 2015 (June 30) = 19,250.1.
  - LTO debt (RON): 2013 = 3,719.1; 2014 = 5,203.5; 2015 (June 30) = 5,905.2.
  - LTO share (percent of total debt): 2013 = 24.9; 2014 = 30.6; 2015 (June 30) = 30.7.
- Excluding social security (selected figures):
  - All NAFA tax debt: 2013 = 10,620.2; 2014 = 12,878.8; 2015 (June 30) = 14,682.6.
  - LTO debt: 2013 = 2,725.3; 2014 = 4,295.4; 2015 (June 30) = 4,871.1.
  - LTO share (percent): 2013 = 25.7; 2014 = 33.4; 2015 (June 30) = 33.2.
- Causes and recommendations:
  - Much arrears workload due to an outdated tax assessment system; NAFA still administratively assesses taxes rather than relying on full self-assessment.
  - Recommendation: move to a full self-assessment system as part of WB RAMP implementation.
  - Improve installment policies: implement modern installment system with bank guarantees required only in exceptional risky cases; automate consistent decision rules for installments.
  - Use minimal resources on highly indebted SOEs as these cases require political solutions.

### Organizational design, account managers, training and IT
- Organizational weaknesses:
  - Insufficient taxpayer services section.
  - Lack of separation between staff selecting taxpayers and staff conducting audits.
  - Absence of specialist technical support for international tax/anti-avoidance and lack of industry specialization.
- Proposed structural changes:
  - Strengthen taxpayer services and phase in “account manager” posts organized by industry, serving as single points of contact and proactive liaisons.
  - Establish RMU, technical support unit and in-house legal section.
  - Re-organize compliance sections along industry-sector lines to build specialized knowledge.
- Training and skills:
  - Auditors often enter with economics or legal degrees but lack practical tax and audit experience.
  - Training path recommended: basic before first audit; intermediate and advanced (including international tax and anti-avoidance); link career progression to training modules and examinations.
- IT improvements:
  - LTO currently reliant on paper; only 12 licenses for the Access Control List package.
  - Recommendations:
    - Specify operational and functional IT needs for WB RAMP redevelopment.
    - Create a small in-house IT unit (systems and business analysts).
    - Clearly specify functional requirements for the new IT system and involve LTO in design.
    - Train more audit staff in e-audit techniques and increase number of licenses.

### International good practice examples and appendices
- Box 1: Examples of compliance risks related to international activities (offshore accounts, shell companies, transfer pricing manipulation, VAT carousel fraud, cross-border e-commerce).
- Appendix III: Australia — Risk Differentiation Framework (RDF) example placing taxpayers in four quadrants based on likelihood and consequences; RDF used to determine review intensity and periodicity.
- WB-financed RAMP modernization project: value US$92 million, began implementation August 2013; IT reform major component; gap exists between current processes and those needed for modern COTS IT system.

*Source: IMF Fiscal Affairs Department mission report (July 22–August 4, 2015) reviewing the Large Taxpayer Office of the National Agency for Fiscal Administration (NAFA), Romania.*

### PREFACE __________________________________________________________________________________________  6

### PREFACE

### Mission and engagement
- Requested by Mr. Eugen Orlando Teodorovici, Minister of Public Finance, a revenue administration mission from the Fiscal Affairs Department (FAD) of the IMF visited Bucharest, Romania from July 22–August 4, 2015 to review the performance of the Large Taxpayer Office (LTO) under the National Agency for Fiscal Administration (NAFA).
- Mission leadership and members:
  - Led by Mr. Allan Jensen (FAD).
  - External FAD experts: Messrs. Norman Gillanders and Keith Cartwright.
  - Overlapped with Mr. John Buchanan (external FAD expert) providing technical assistance on taxpayer compliance programs for high-wealth-individuals (HWI) and high income earners.
- Principal meetings:
  - Minister of Public Finance: Mr. Eugen Orlando Teodorovici.
  - NAFA: Mr. Gelu Stefan Diaconu, President; Mr. Mihai Gogancea-Vatasoiu, Vice President; Mr. Octavian Deaconu, Secretary General; Mr. Adrian Cucu, Director of the LTO; and other managers and staff including the LTO.
  - Romanian Court of Accounts: Ms. Elena Doina Dascalu, Vice-President; Mr. Dan Firtescu, Counselor; and other officials.
  - World Bank: Mr. Ismail Radwan, Country Program Coordinator Central Europe and the Baltic States.
  - Representatives of major accounting firms in Bucharest.
- A draft report was provided to the authorities at the end of the mission and finalized at IMF headquarters. The report consists of an executive summary and seven sections: (i) Large Taxpayer Office Reform Context; (ii) Improving the Large Taxpayer Criteria; (iii) Improving Compliance Risk Assessment; (iv) Strengthening Audit Selection and Focus; (v) Improving Value-Added Tax Refund Procedures; (vi) Improving Tax Arrears Collection; and (vii) Other Large Taxpayer Office issues.

### Main findings (Executive summary)
- Scope for reducing the tax gap:
  - The value-added tax (VAT) collection gap is 44 percent (highest in the EU).
  - Tax revenue collection is 18.8 percent of GDP in 2014 (excluding social contributions).
- The LTO, as currently configured, will not be able to significantly reduce the tax gap caused by large businesses. Key reasons include:
  - No modern compliance risk management (CRM) approach is in place; the taxpayer compliance picture has not been sufficiently analyzed and there is no strategy guiding operational activities toward major compliance problems.
  - About 46 percent of annual LTO audit resources are used on VAT refund issues with material results only in about 10 percent of audits.
  - In advanced administrations, VAT refund audits occupy less than 5 percent of LTO resources (provided for comparison).
  - VAT refund audit concerning a large taxpayer takes half a year on average, largely due to burdensome obligations placed on the administration; in advanced administrations such audits typically take a day or less.
  - Intense attention to audit activities by the Court of Accounts—and personal auditor accountability for undiscovered revenue shortfalls—are key reasons for lengthy audits.
  - Around a third of total annual audit resources are used on audits requested by the Court of Accounts, other parts of NAFA, and other authorities; these audits often produce very small results.
  - The remaining 20 percent of total annual audit resources is mainly focused on audit plans developed “bottom up” (with minor NAFA Headquarters input), yielding meager outcomes.
  - Shortcomings also exist in taxpayer services and collection enforcement.
  - Assignment of taxpayers to the LTO is done incorrectly: the LTO manages 2,392 taxpayers who account for less than 50 percent of total tax revenue collected by NAFA; a better selection based on turnover would assign 1,200–1,400 taxpayers to the LTO who would account for up to 60 percent of total revenue.
- Enablers and constraints:
  - Shortcomings in organization and legal framework are essential enablers requiring high-level support for change (examples: changes to the tax code and tax procedures).
  - Significant organizational and cultural changes and major training efforts are needed to equip LTO staff with necessary skills.
  - The LTO needs a degree of autonomy similar to regional offices to devise and implement appropriate and codified procedures for controlling its share of the tax base.

### Major recommendations (summary)
- The LTO must consistently pursue a coherent compliance strategy and be equipped with skilled personnel and material tools.

Short term (6–12 months)
- Change the criteria for inclusion in the LTO so it is primarily based on turnover (sales); criteria should apply throughout Romania and be the primary mechanism to establish “in or out.”
- Maintain or increase the current number of employees in the LTO even if the taxpayer population is reduced.
- Commence upgrading LTO personnel skills through training and exchange programs with advanced tax administrations; replace personnel as appropriate.
- Government decision to commence implementation of the compliance risk management model outlined in the report.
- Change the Tax Procedure Code and relevant regulations and instructions to establish sufficient mandate for NAFA to prioritize compliance efforts addressing major revenue risks.
- Revise procedures for VAT refund (risk assessment and audit) to cut excessive use of audit resources.
- Remove from law and regulations:
  - NAFA’s obligation to audit taxpayers for statute of limitation purposes only;
  - personal liability for revenue shortfall upon auditors and other officials;
  - auditors’ obligation to review all tax periods since the last audit.
- Reach a protocol with the Court of Accounts to allow it to continue its role within a modern, quality-assured compliance-management framework (NAFA adopting the compliance risk model of the EU).
- Establish within the LTO a strong Risk Management Unit (RMU) to facilitate high-level risk analysis, prioritize risks for compliance treatment, coordinate development of compliance strategies, and facilitate audit case selection.

Medium term (12–36 months)
- Provide the LTO with appropriate accommodation (as already planned); sufficient transport means; and appropriate modern technical tools, including laptops and information technology (IT) software to undertake e-audit.
- Reorganize the LTO organization structure along the lines suggested in the report.
- Provide industry competitive salaries to LTO managers and key personnel, in particular auditors and legal and IT experts, to attract and retain exceptionally skilled personnel.

### I. Large Taxpayer Office reform context — Fiscal context (selected facts)
- Table 1. Tax Revenue, 2009–15 (in percent of GDP):
  - Taxes: 2009: 26.7; 2010: 26.0; 2011: 27.6; 2012: 27.8; 2013: 27.2; Prelim. 2014: 27.3; Proj. 2015: 26.7
  - Corporate income tax: 2009: 2.6; 2010: 2.1; 2011: 2.0; 2012: 2.0; 2013: 1.9; Prelim. 2014: 2.0; Proj. 2015: 1.9
  - Personal income tax: 2009: 3.6; 2010: 3.4; 2011: 3.4; 2012: 3.5; 2013: 3.6; Prelim. 2014: 3.5; Proj. 2015: 3.7
  - VAT: 2009: 6.7; 2010: 7.4; 2011: 8.5; 2012: 8.5; 2013: 8.1; Prelim. 2014: 7.6; Proj. 2015: 7.9
  - Excises: 2009: 3.1; 2010: 3.2; 2011: 3.4; 2012: 3.4; 2013: 3.3; Prelim. 2014: 3.6; Proj. 2015: 3.6
  - Customs duties: 0.1 each year 2009–Proj. 2015
  - Social security contributions: 2009: 9.4; 2010: 8.6; 2011: 9.0; 2012: 8.7; 2013: 8.5; Prelim. 2014: 8.6; Proj. 2015: 7.8
  - Other taxes: 2009: 1.2; 2010: 1.3; 2011: 1.2; 2012: 1.6; 2013: 1.7; Prelim. 2014: 1.8; Proj. 2015: 1.7
- Recent tax policy changes (from 2016) adopted by parliament: lower VAT rate, lower excises, lower taxes on dividends, and cancellation of the tax on non-building constructions. The government expects improved taxpayer compliance (including by the LTO) to partially offset the fiscal impact of these changes.
- VAT collection gap: 44 percent (Figure 1; highest in the EU).
- Tax revenue collection: 18.8 percent of GDP in 2014 (excluding social contributions) (Figure 2).

### I. Large Taxpayer Office reform context — LTO prospects
- Large businesses often present sophisticated noncompliance risks involving international activities, related party transactions, and structured financial arrangements which may have severe revenue implications and contribute considerably to the overall tax gap.
- Effective administration of large taxpayers is critical for tax collection and the investment climate; laws’ application affects profitability and investment decisions in Romania.
- Box 1 in the report provides examples of compliance risks related to international activities.

*Source: IMF Fiscal Affairs Department mission report (July 22–August 4, 2015) reviewing the Large Taxpayer Office of the National Agency for Fiscal Administration (NAFA), Romania.*

### Box 1. Examples of Compliance Risks Related to International Activities

### Box 1. Examples of Compliance Risks Related to International Activities

### Examples of compliance risks (international activities)
- Individuals concealing taxable assets or income using offshore accounts, offshore trusts or shell companies often located in tax havens or other countries that do not exchange information for tax purposes.
- Small or closely-held businesses using tax haven based shell companies to shift profits abroad, often using fictitious invoices or over (or under) charging for related party transactions.
- Large (often multinational) corporations engaging in any number of sophisticated transactions ranging from cross-border financial schemes that are profitable only due to embedded tax benefits, to the misuse of treaties, to the manipulation of transfer pricing to artificially shift income into low tax jurisdictions and expenses into high tax jurisdictions.
- Various forms of VAT “carousel fraud.”
- The development of business-to-consumer cross-border trade (e.g., through e-commerce based services).

### Current Large Taxpayer Office (LTO) capacity and mandate (paragraphs 5–7)
- LTO must be a very strong unit:
  - Well equipped: sufficient and highly skilled resources, adequate accommodation, sufficient transport means, and technical tools.
  - Tasked and mandated: through legislation, regulations and instructions to pay attention to large taxpayers and address major risks to overall revenue collection.
- Observed shortcomings:
  - No certainty LTO’s compliance efforts address major revenue risks.
  - LTO uses compliance methods (taxpayer services, audit, collection enforcement) that need further development (see Section II–VII).
  - No strategy to guide operational activities towards major compliance problems or to ensure the most effective mix of service, audit, and enforcement is used.
  - Taxpayer compliance has not been sufficiently analyzed; efforts are not part of a coherent strategy.
- Specific resource allocation issues (Section IV examples):
  - About 46 percent of annual LTO audit resources are used on VAT refund issues with material results only in about 10 percent of the conducted audits.
  - In advanced administrations, VAT refund audits occupy less than 5 percent of LTO resources.
  - VAT refund audit duration example: in Romania a VAT refund audit concerning a large taxpayer takes half a year on average; in advanced administrations such audits typically take a day or less.
  - Around a third of total annual audit resources are used on satisfying audit requests coming from the Court of Accounts, other parts of NAFA, and other authorities.
  - The remaining 20 percent of total annual audit resources is mainly focused on audit plans developed “bottom up.”
  - Taxpayer services are reactive (responses to enquiries) rather than tailored to areas of major risks.
  - LTO currently manages about 2,392 taxpayers who account for less than 50 percent of total tax revenue collected by NAFA.
  - A more correct selection would assign 1,200–1,400 taxpayers to the LTO, who would account for up to 60 percent of total revenue.

### International approaches to prioritizing compliance efforts (paragraphs 8–12)
- Advanced administrations’ objectives and methods:
  - Key objective: reduce the tax gap using the most economical means.
  - Emphasis on measurable and improved compliance outcomes rather than number of audits or extra tax assessed.
  - Prioritize resource allocations to ensure inputs produce desired outcomes.
- Analysis and planning:
  - Determine the size of the tax gap and analyze composition by major risks (taxpayer segments with low compliance; misunderstood law paragraphs; tax avoidance schemes; transfer pricing issues; weaknesses in tax administration).
  - Develop and implement compliance plans that:
    - Prioritize identified risks.
    - Use integrated compliance plans utilizing all available compliance tools.
    - Aim for industry- or risk-cluster-focused interventions over a two- or three-year timeframe.
    - Include only matters of significance.
- Differences from NAFA approach:
  - International methods are strategic and integrated across functions, shifting from taxpayer-by-taxpayer to industry and major risk cluster focus.
  - Audits target matters of significance identified via risk analysis rather than auditing entire accounts or auditing due to statute of limitation issues.
- Compliance Risk Management (CRM) model:
  - CRM model endorsed by the IMF, the EU, and the OECD.
  - Aims to influence taxpayer compliance behaviors using marketing-like techniques; audit is one of many tools.
  - Audit results are communicated within taxpayer segments to influence overall behavior.

### The way forward and technical assistance (paragraphs 13–15)
- Necessary LTO changes:
  - Implement modern compliance risk management methods.
  - Strengthen organizational structures, up-skill personnel, and utilize modern IT tools.
  - Government support required, including legislative changes.
  - Court of Accounts should change audit approach to accommodate modern revenue administration operations.
- Technical assistance context:
  - World Bank (WB)-financed modernization project (value: US$92 million) began implementation in August 2013 to increase effectiveness and efficiency in tax and social contribution collection, increase tax compliance, and reduce administrative burden.
  - IT reform is a major component; gap exists between current business processes and processes needed to benefit from a modern commercial off-the-shelf IT system.
  - FAD has continued to support specific TA needs related to taxpayer compliance management (e.g., HWI compliance projects).
  - Further assistance recommended for HWI and LTO components and implementation of a taxpayer self-assessment system.

### Improving the large taxpayer criteria (paragraphs 16–22)
- Current situation and issues:
  - Selection criteria have changed multiple times; initial turnover test replaced by more complex criteria.
  - LTO population nearly tripled since 2006 with a commensurate increase in auditors, but without significant impact on LTO share of total NAFA collected revenue.
  - Current identification criteria are not optimal; modest increase in LTO revenue share despite growth in taxpayer base and auditors suggests poor focus.
  - Using a criterion based on actual taxes paid (as in NAFA) misses taxpayers who have reduced tax liabilities via aggressive tax planning, transfer pricing, or loss offsetting.
- Box 2. Large Taxpayer Selection Criteria:
  - The basic criterion defining a large taxpayer is the result of aggregating two indicators selected in the following proportions:
    - the volume of the tax liabilities declared by the taxpayer—50 percent; and
    - the turnover reported in the financial statements as of December 31 of the year preceding the one in which the categorization is performed—50 percent.
  - Other criteria:
    - All banking, insurance, and financial institutions are included.
    - New businesses which self-declare when established that they will invest Euro (EUR) 10 million or more.
    - The first 2500 legal entities that meet the criteria are selected for inclusion with the LTO.
- Table 2 (selected figures for 2006–June 2015):
  - Taxpayer population:
    - 2006: 1,874
    - 2007: 998
    - 2008: 1,309
    - 2009: 1,892
    - 2010: 1,978
    - 2011: 3,034
    - 2012: 2,000
    - 2013: 1,937
    - 2014: 2,500
    - June 2015: 2,392
  - Number of auditors (selected years, as reported):
    - 2006: 235
    - 2007: 135
    - 2008: 144
    - 2009: 146
    - 2010: 166
    - 2013: 261
    - 2014: 290
    - 2015: 341
    - 2015 (another reported value): 332
  - LTO share of NAFA revenue (in percent, selected years):
    - 2008: 37
    - 2009: 38.8
    - 2010: 41.9
    - 2012: 47.8
    - 2013: 45.8
    - 2014: 49.9
    - June 2015: 47.9
- Turnover-test benefits (Table 3 summary and example):
  - A turnover criterion set at Romanian Leu (RON) 100 million and above would yield:
    - LTO population: 1,241 taxpayers
    - Share of all taxes: 57.5 percent
  - Table 3 (stratification highlights; totals preserved as presented):
    - Total number of taxpayers reported: 355,142
    - Total VAT amount (In RON): 1,090,405.54 (100.00 percent)
    - Total All Tax Types amount (In RON): 56,973.28 (100.00 percent)
    - Total Amount (In RON): 128,709.19 (100.00 percent)
  - Table 3 shows distribution by turnover band with counts and percentage shares (as reported in the source).
- Related selection considerations:
  - Inclusion of all financial enterprises in LTO aligns with international good practice.
  - Inclusion of new businesses self-declaring an investment of EUR 10 million ensures early LTO supervision of significant start-ups.
  - International good practice: include in LTO all entities related to the large taxpayer and apply the turnover selection criterion to the controlled group to determine LTO inclusion.

*Source: Box 1. Examples of Compliance Risks Related to International Activities (excerpt).*

### 23.      It is essential that the LTO selection criteria are clearly specified in operational

### 23.      It is essential that the LTO selection criteria are clearly specified in operational

### LTO selection criteria and transparency
- Selection criteria must be clearly specified in operational instructions across NAFA and applied without exception.
- Transparency requirement: definitions and calculation methods must be clear so criteria are applied consistently and all appropriate cases are included in the LTO.

### Changes when new criteria are applied and handover arrangements
- Applying the new criteria will reallocate some cases currently in the LTO to NAFA regions and move some regional cases into the LTO.
- Taxpayers leaving LTO who do not meet the new turnover test may still be significant economic contributors and require careful handling when moved to NAFA regional offices.
- Handover arrangements that must be put in place include:
  - appointment of LTO liaison officers at regional offices;
  - procedural guidelines or instructions to regional offices;
  - allocation of cases to regional staff with appropriate experience and skills;
  - training and mentoring of staff where required.
- NAFA could consider instructing regional offices to audit transferred taxpayers who have not recently (within the last two–three years) been audited by the LTO to familiarize regional offices with new taxpayers and compliance risks.

### Retention period after falling below criteria
- Immediate removal from LTO upon failing the criteria is not recommended; it creates a disruptive carousel for enterprises near the turnover threshold.
- International practice: a majority of European countries’ LTOs retain taxpayers for two or three years after circumstances change.
- Recommendation: apart from taxpayers removed because of the new criteria, retain any taxpayer who no longer meets the criteria within the LTO for at least two years.

### Recommendations on LTO taxpayer population criteria
- Replace the existing LTO basic criteria with a turnover criterion set at RON 100 million.
- Apply the turnover test to grouped companies to determine if in aggregate they qualify as a large taxpayer.
- Retain the existing additional criteria of all financial entities and new businesses which self-declare a minimum EUR 10 million investment in Romania.
- Apply the new criteria consistently and without exception.
- Put in place arrangements to ensure that taxpayers leaving the LTO are properly managed in the NAFA regions.
- Retain any taxpayer who no longer meets the criteria within the LTO for at least two years (except those removed purely because of the new criteria).

### LTO current risk assessment framework (existing shortcomings)
- LTO plans risk assessment and audit work within NAFA HQ guidelines (annual, quarterly, monthly notes). Top priorities:
  - 1) VAT refund audits (top priority);
  - 2) audits nominated or requested from other parts of NAFA or other governmental bodies;
  - 3) cases risk assessed and nominated by the LTO if capacity remains.
- Consequences of current priorities:
  - Emphasis on VAT refunds and external nominations distorts risk identification and the audit program.
  - VAT refund screening: around 90 percent of VAT refunds are assessed as low risk and not audited; high-risk VAT refunds trigger full audits.
  - LTO estimates currently only 20 percent of its audit resource is spent on high risk (non-VAT refund) cases.
- Risk selection methods are largely bottom-up and auditor-driven, relying on:
  - VAT cross-matching;
  - checks on issues from prior audits;
  - stand-alone databases;
  - assessment of business type.
- Missing elements versus international good practice:
  - No high-level assessment of sectoral or tax code risks;
  - No cross-LTO prioritization of risk;
  - No differentiation of taxpayers by behavior or capacity to manage tax risks.

### Audit performance (Table 4—exact figures)
- Large Taxpayer Office—Audit Results (Amounts are in millions of RON)
  - Number of audits completed: 2012 — 245; 2013 — 241; 2014 — 343
  - Additional taxes identified: 2012 — 944; 2013 — 2,559; 2014 — 2,630
  - Additional taxes collected: 2012 — ...; 2013 — 879; 2014 — 865
  - Penalties: 2012 — 0.2; 2013 — 0.27; 2014 — 0.23
  - Number of auditors deployed: 2012 — 210; 2013 — 225; 2014 — 317
- Source: National Agency for Fiscal Administration.

### Moving toward international good practices in risk assessment
- Compliance models usually start with the CRM model and a differentiation framework and evaluate tax compliance risks from three perspectives:
  - the tax perspective: identify the most material risks to each major tax (irrespective of market segment or industry);
  - the market and industry perspective: identify major risks prevalent in different taxpayer segments (typically, large, medium, and small business) and in major industries;
  - the taxpayer-level perspective: evaluate the risk posture of individual enterprises using a risk differentiation framework.
- Tax gap analysis is important to understand causes of gaps, develop counter-strategies, and direct resource allocation. NAFA HQ has undertaken some high-level analysis, but it is not yet sufficiently advanced to provide operational or policy insights.

### Tax perspective recommendations
- Extend LTO’s risk management system to identify and actively manage risks involving particular taxes or parts of the tax code that cut across industries.
- Appoint senior and experienced “risk owners” responsible for nationally coordinated strategies for material risks to each major tax or part of the tax code.
- Responsibilities of risk owners include:
  - developing risk filters to identify risks in specific tax returns;
  - proposing legislative changes;
  - proposing process or procedural changes;
  - providing enhanced guidance to taxpayers;
  - developing new taxpayer services and audit techniques;
  - periodic reporting to LTO leadership on mitigation actions and progress.

### Market and industry perspective recommendations
- Develop industry-based approaches with industry-specific risk parameters and filters to detect noncompliance risk in particular industries.
- Create national industry-based compliance strategies underpinned by a national plan that sets targets for number and types of treatments for large businesses in key industries.
- Consider appointing an “industry leader” for specific industries to oversee design and national implementation of strategies, including:
  - developing industry-specific risk parameters and filters;
  - setting targets for treatments to be implemented by compliance teams in different locations;
  - reporting results to LTO leadership.

### High-Risk Industry Project approach (key steps)
- Engage industry/business associations to explain high-risk designation and understand industry operations.
- Publicize verification program intentions and seek association support.
- Identify and alert tax practitioners with significant client bases in the targeted industry.
- Conduct sample audits to confirm noncompliance areas and quantify tax at risk.
- Engage associations and practitioners to prepare advice for industry participants.
- Communicate with taxpayers requesting review and voluntary self-corrections, highlighting lenient penalties for voluntary disclosures.
- Offer free seminars and advisory visits (ideally with industry associations).
- Ensure enquiry and collection staff are aware of the program and treatment options for voluntary disclosures.
- Conduct follow-up audits targeting non-self-correctors and prosecute worst offenders.
- Publicize audit and prosecution results and measure program effectiveness by tracking voluntary disclosures, changes in tax paid, and surveying industry/practitioners.

### Industry coverage and suggested sector groupings
- LTO has adopted an industry-based approach only for banking, finance and insurance sectors.
- Additional industry groupings based on NAFA sector analysis could include:
  - mineral exploitation;
  - wholesale and retail trades;
  - energy production and distribution;
  - manufacturing;
  - oil and gas sector (essential with the new petroleum tax regime from the start of 2016).

### Taxpayer-level perspective and risk differentiation
- Current LTO taxpayer-level risk assessment is limited: auditors assess if a taxpayer poses a tax risk for inclusion in monthly audit plans, but:
  - there is no comprehensive assessment of overall taxpayer risk posture or placement on a compliance spectrum;
  - no differentiation of audit types; full audits are conducted when a taxpayer is selected, not necessarily targeted to specific issues.
- International good practice uses risk filters to profile taxpayers by:
  - size, structure, and complexity;
  - past compliance behavior and cooperation;
  - governance and management of tax risks;
  - business performance over time compared with tax outcomes and peers;
  - issues from risk assessment, specialist areas, intelligence (e.g., mergers, acquisitions, disposals);
  - intelligence from industry sectors, overseas tax administrations, other government agencies, and public sources;
  - risks from new tax law implementation;
  - level of international dealings and tax outcomes relative to functions, assets, and risks;
  - adequacy of internal controls and systems.
- Taxpayers are placed into four broad risk categories using a risk differentiation framework to determine the appropriate risk management approach and audit type.

### Establishing a Risk Management Unit (RMU)
- Recommendation: establish an RMU dedicated to the large taxpayer segment, either as part of a broader risk management division or as a distinct unit within the LTO. Preference for an LTO-specific RMU given current NAFA structures.
- RMU will require significant training and cultural change within LTO.
- Functions of an RMU include:
  - identifying emerging compliance risks and developing risk mitigation strategies;
  - preparing the annual audit plan;
  - developing risk analysis methods and case selection techniques;
  - introducing new audit techniques;
  - conducting quality assurance and review;
  - evaluating outcomes and feeding into future plans, strategies and techniques;
  - establishing and maintaining a working relationship with the NAFA High Wealth Individual Unit.

*IMF Staff Report excerpt.*

### 43.      These are the recommendations for improving the LTO’s compliance risk assessment:

### _cr16284 - 43.      These are the recommendations for improving the LTO’s compliance risk assessment:

### Recommendations to improve the LTO’s compliance risk assessment
- Carry out tax gap analyses to enable a better understanding of the underlying causes of the gap, and thus permitting the LTO to develop appropriate counter-strategies and appropriately allocate resources.
- Extend the LTO risk management system to identify risks involving a particular tax (or part of the tax code) that cut across multiple industries and bring these risks under active management.
- Refine the LTO risk management system by developing industry-based approaches, including an LTO structure largely based on industry-focused units for both risk assessment and audit teams.
- Adopt a Risk Differentiation Framework to make decisions about which large taxpayers will be risk assessed, based on a full understanding of all relevant facts and circumstances.
- Enhance the LTO’s capability to fully support the risk approach described above, including the establishment of a specific RMU.
- Work with the NAFA training unit to address the considerable up-skilling needs inherent in moving to the new approach to risk assessment.

### IV. Strengthening audit selection and focus — Current situation and key findings
- Audit program distortions:
  - LTO management reports that 32.5 percent of its audit resource is spent on checks required by other parts of NAFA and external bodies.
  - 46 percent of audit resource is devoted to VAT refund audit.
  - This leaves the LTO with just over 20 percent of its audit resources to devote to high risk non-VAT refund cases.
  - LTO management aspires to having the discretion to use 50 percent of its audit resources on high risk (non-VAT refund) work.
- Audit approach and incentives:
  - Outdated compliance audit approach: selection criteria include time since last audit and statute of limitations; selected taxpayers are then subjected to full audits not restricted to initially identified issues.
  - Auditors focus on procedural cross-checks and seeking to establish every last RON of tax; risk of personal liability for shortfalls drives full, exhaustive audits.
  - Court of Accounts oversight emphasizes procedural propriety and detailed cross-checks rather than materiality or identification of major tax risks.
  - Consequences: substantive risks go undetected; audits take longer; more issues go to appeal; higher burdens on taxpayers; reduced net revenue yield.
- Progress potential:
  - Court of Accounts indicated scope to develop its monitoring approach to match a new LTO risk assessment and audit approach and a protocol between NAFA and the Court of Accounts was considered feasible.
- Operational needs:
  - LTO audit work should be guided by the Risk Differentiation Model and limited to the specific risks identified through the risk assessment process.
  - Need for a more pragmatic attitude to materiality to ensure audits are targeted, shorter, and more productive.
  - Considerable up-skilling required across LTO compliance skills to adopt new audit approaches.
  - An advanced case management system is needed to manage audit workload and performance metrics.
  - Audit support tools recommended: laptops and special audit applications that (1) include data from taxpayers’ tax returns and related ratios; (2) contain reference material, procedural manuals, checklists and forms; and (3) provide guidance during each stage of the examination.

### IV.B Recommendations to improve audit selection and focus
- Substantially reduce or remove entirely the requirements around VAT refund audits, and the other audit and checking requirements put upon LTO by others.
- Follow up speedily on the mission’s discussion with the Court of Accounts.
- Remove from the law the stipulation that auditors can be held personally responsible for potential shortfalls, or overrule in tax law or dis-apply in the suggested NAFA/Court of Accounts protocol.
- Adopt the Risk Differentiation Model and only audit the specific risks identified through the risk assessment process.
- Introduce and use more realistic and pragmatic guidance concerning materiality.
- Discontinue the practice of conducting a ‘full’ audit even where a minor initial risk was identified.
- Avoid auditing taxpayers solely for statute of limitation reasons, but only if the risk assessment identifies major compliance risks.
- Adopt a range of different ways of fostering voluntary compliance, of which full audit will be the most exceptional.
- Provide an enhanced case management system to manage the workload for the audit function.
- Provide other audit support tools to auditors.

### V. Improving VAT refund procedures — Current situation and key findings
- VAT refund emphasis distorts LTO capacity to close the tax gap: LTO left with only 20 percent of resources to audit high risk non-VAT refund cases.
- NAFA HQ guidelines prioritize VAT refund audits. Around 90 percent of refund claims are assessed as low risk and are passed to NAFA HQ for repayment without audit; high risk refunds trigger a full audit.
- Audit characteristics:
  - Full, time-consuming and costly audits; auditors review more widely than specific risks to protect against criticism.
  - Law requires audit to cover the entire period back to the last VAT audit; statute of limitations can determine risk selection.
  - Audits typically take six months to complete.
- VAT refund audit strike rates reported by LTO senior managers:
  - 70 percent of VAT refund audits produced no change to the amount claimed;
  - 20 percent resulted in minor adjustments of less than 10 percent;
  - 10 percent produced adjustments of more than 10 percent.
- Other administrations use computer-based risk analysis tools that automatically verify a high proportion of refund claims and enable remaining cases to be audited in a day or less; risk rules are regularly tested and improved.
- Timely payment of refunds is essential for investment climate; late payment of refunds was experienced throughout 2014 (see Table 6).

### V.B Recommendations to improve VAT refund procedures
- Change the risk planning assumption that VAT refund audits is the primary priority for the LTO, which is currently detrimental to other work which will contribute more to tax gap closure.
- Enhance the VAT refund risk identification rules to reduce the proportion assessed as high risk, reducing significantly the number of pre-refund audits and markedly improving the proportion of audits that result in a significant adjustment to the claim.
- Amend laws and instructions to remove requirements that an audit shall cover the entire period back to the last audit.
- Perform refund verification audits only on the issues that are material to the refund claim, avoid the examination of other issues and taxes and streamline and shorten the audits so that they are broadly in line with international good practice.

*Source: _cr16284 - 43.*

### 63.      The LTO performs better than the rest of NAFA in this area. At the end of June 2015,

### _cr16284 - 63.      The LTO performs better than the rest of NAFA in this area. At the end of June 2015,

### Arrears and debt statistics
- At the end of June 2015, the accumulated stock of tax arrears owed by large taxpayers stood at RON 5,905.2 million, including social contributions.
- This represents 12.8 percent of the LTO’s total collections for the period or 6.1 percent of national tax revenue.
- Comparable debt for all of NAFA: Total debt RON 19,250.1 million or 20 percent of collections (mid-year figure).
- Table 7 (selected figures):
  - Revenue total: 2013 = 173,533.5; 2014 = 182,546.1; 2015 (June 30) = 96,069.3.
  - LTO total collections: 2013 = 79,459.3; 2014 = 91,090.6; 2015 (June 30) = 46,168.4.
  - LTO as percent of own collections: 2013 = 4.7; 2014 = 5.7; 2015 (June 30) = 12.8.
  - Total debt: 2013 = 14,941.8; 2014 = 16,988.3; 2015 (June 30) = 19,250.1.
  - LTO debt: 2013 = 3,719.1; 2014 = 5,203.5; 2015 (June 30) = 5,905.2.
  - LTO share (percent of total debt): 2013 = 24.9; 2014 = 30.6; 2015 (June 30) = 30.7.
- Excluding social security (selected figures):
  - All NAFA tax debt: 2013 = 10,620.2; 2014 = 12,878.8; 2015 (June 30) = 14,682.6.
  - LTO debt: 2013 = 2,725.3; 2014 = 4,295.4; 2015 (June 30) = 4,871.1.
  - LTO share (percent): 2013 = 25.7; 2014 = 33.4; 2015 (June 30) = 33.2.

### Interpretation and context
- The report notes it is too soon to say if the increased total debt level of 20 percent (and the LTO’s 6.1 percent) is a cause for alarm, emphasizing that both tax payments and debt management responses have an annual cycle and 20 percent is a mid-year figure.
- Tax arrears in OECD countries commonly range from about 5–15 percent of annual tax collections.

### State-owned enterprises (SOEs) and LTO debt concentration
- SOE debt managed by the LTO: RON 3,563.8 million (2015, June 30).
- SOEs account for about 60 percent of LTO debt, or 18.5 percent of national tax debt.
- Table 8 (SOE debt series):
  - SOE debt: 2013 = 1,988.1; 2014 = 2,218.6; 2015 (June 30) = 3,563.8.
  - Percentage increase since 2013 = 79.
  - Percent of LTO total debt: 2013 = 53; 2014 = 43; 2015 (June 30) = 60.
- Recommendation highlighted: Use as little resources as possible on highly indebted SOEs as their situation requires a political solution.

### Debt management methods and installment policies
- NAFA uses a range of enforcement options; increased use of seizure and sale of assets has been mentioned but became less useful after the economic crisis.
- Not enough use is made of installment payments:
  - Normally bank guarantees are required before an installment plan is agreed; guarantees are described as expensive and hard to obtain for paying taxes.
  - Competition directorate of the European Commission mentioned legal difficulties with relaxing guarantee requirements.
  - Clear rules exist for consistent decisions on the duration and scope of installments and can be automated; most EU countries use unguaranteed installment plans as a key element in debt work.

### Causes of arrears volume
- Much of NAFA’s arrears workload is attributed to an outdated tax assessment system:
  - NAFA still sifts through all tax returns and administratively assesses taxes where doubt exists, rather than using full taxpayer self-assessment.
  - VAT arrears at end 2013: RON 2,239 million, split evenly between taxpayer self-declarations and administrative assessments and “accessories”.
  - Some RON 1,200 million of VAT arrears was under appeal.
- The cycle of administrative assessments and accessories creates a large sum of disputed arrears, burdening both NAFA and businesses with costs and delays.

### Need to move to self-assessment
- NAFA needs to move to a full self-assessment system as a component of implementing the WB project; failure to do so will perpetuate inefficient and ineffective debt management and slow progress towards risk-based working.

### Recommendations for arrears collection (section B)
- Implement a comprehensive installment system for tax debts on modern lines with bank guarantees only required in exceptionally risky cases.
- Develop decision-making rules and detailed protocols to manage installment plans fairly and consistently.
- Use as little resources as possible on highly indebted SOE’s as their situation requires a political solution.
- Move towards a full self-assessment system that produces realistic and undisputed tax liabilities for quick collection.

### LTO organizational weaknesses and proposed structure
- Main deficiencies:
  - Insufficient taxpayer services section; lack of robust taxpayer services leads to missed opportunities to assist compliance and reduce the tax gap.
  - Compliance operations lack separation between staff who select taxpayers for audit and those who conduct audits.
  - Absence of specialist technical support unit for international tax issues or anti-avoidance.
  - No industry specialization, impeding development of sector-specific knowledge.
- Proposed structural changes (Figure 3 summary):
  - Create a stronger taxpayer services section.
  - Establish a strong Risk Management Unit (RMU) to separate selection from audit conduct.
  - Create a technical support unit and an in-house legal section to advise auditors on complex cases.
  - Re-organize compliance sections on industry sector-specific lines to develop specialized compliance programs.

### Account manager function
- Proposal to create “account manager” posts within taxpayer services, organized in industry-specific units and assigned groups of taxpayers as single points of contact.
- Expected duties of account managers:
  - Ensure taxpayer requests and queries are addressed within stipulated periods.
  - Proactively update taxpayers on changes in tax laws and matters affecting tax affairs.
  - Make initial contact with delinquent taxpayers to ascertain reasons for missed returns/payments.
  - Accompany auditors to introductory meetings before audits commence.
  - Provide the RMU with information on taxpayers’ activities.
- Suggestion: phase in these posts after implementing the basic structure.

### Stakeholder engagement
- Regular meetings with industry groups, practitioner bodies, and financial advisors are recommended to better understand business environments and gain insights on tax issues.

### Training and skills development
- Skills gap: Auditors enter with economics or legal degrees but lack practical taxation and audit experience.
- Recommended training path:
  - Basic training before first audit covering basics of each tax and simple audit techniques.
  - Intermediate and advanced training including international taxation and anti-avoidance.
  - Delivery can be in-house, via partnership with professional institutes, or both.
- NAFA’s existing training tradition:
  - In-house training historically provided in basic taxation with examinations.
  - Typical career progression: move through three levels of responsibility over about nine years with attendant pay increases.
  - Recommendation to link career progression to attendance at training modules and passing examinations.

### Information Technology (IT) improvements
- IT produces payback in taxpayer accounting, record keeping, debt analysis and collection, refund management and audit.
- Current issues:
  - Many basic processes are heavily reliant on clerical staff and paper; LTO runs a “mountain of paper.”
  - Only 12 licenses exist in the LTO for the Access Control List computer package, insufficient to sustain a community of users.
- Recommendations:
  - LTO must specify operational and functional IT needs for the WB RAMP redevelopment.
  - Create a small in-house IT unit (systems and business analysts) to articulate IT business needs to developers.
  - Clearly specify functional requirements for the new IT system; LTO involvement is essential.
  - Use existing IT systems to gradually create the proposed structure while RAMP is implemented.

### Autonomy and methodological subordination
- Current status: LTO is “methodologically subordinated” to NAFA’s normal procedures.
- Recommendation: provide the LTO with organizational autonomy similar to regional offices and competences to develop methodologies tailored to large taxpayers to improve compliance and efficiency.

### Recommendations for selected LTO issues (section F)
- Adjust the LTO structure over time to an industry-sectoral basis.
- Add legal expertise to the LTO headquarters.
- Improve auditor training using in-house and external trainers; structured, modular programs covering taxes and risk management processes, including basic and advanced audit skills.
- Ensure LTO top managers and NAFA Training Department coordinate to build risk assessment training into programs with specified levels of need, content, and timing.
- Train more audit staff in e-audit techniques and software and increase the number of licenses to match.
- Strengthen taxpayer services, including phasing in account managers.
- Set up an LTO management group to identify, specify, and implement the best possible IT architecture under the RAMP program.
- Add in-house IT expertise to the LTO headquarters.
- Develop permanent, structured forums for exchanging views with taxpayer representative bodies and industry associations.
- Provide the LTO with organizational autonomy similar to NAFA regional offices and relax its “methodological subordination” to standard NAFA practices.

### Appendix I — LTO overview and key operational facts
- The LTO manages just under 50 percent of NAFA’s tax revenues and accounts for some 30 percent of tax arrears.
- Monetary shares (2014 figures): LTO collected RON 91,091 million out of total NAFA collection RON 182,546 million.
- 2014 arrears: LTO share RON 5,204 million from total RON 16,988 million.
- Staffing: 598 officers in place from an authorized establishment of 641 (uses about 2.5 percent of NAFA’s personnel).
  - 332 tax inspectors in the LTO; remaining 266 positions are management, administrative, and support.
- LTO currently manages 2,392 large businesses.
- Organizational principle: geography—nine audit units handle eighteen audit teams; sixteen teams territorial, two sectoral (insurance and banking).
- Eleven audit teams are based in Bucharest; seven in regions under direct LTO control.
- LTO HQ in Bucharest handles administrative and support functions including registration, file maintenance, taxpayer service, debt management and enforcement.
- Business community support: well-attended meeting with ‘Big 4’ accountancy firms showed strong support for continuing LTO development; higher skill and confidence of auditors seen as positive.

*Source: National Agency for Fiscal Administration (as presented in the IMF mission report)._

### Appendix II. Overview of Large Taxpayer Office Business by

### Appendix II. Overview of Large Taxpayer Office Business by Sector and Revenue

### LTO Business by Sector and Revenue — Taxpayers Revenue 2014
- Source: National Agency for Fiscal Administration.
- Table fields presented: Business Sector; Number of LTO Taxpayers; Percent of Total LTO Taxpayers; Amount (Billions Leu); Percent of Total.

- A Agriculture, forestry, and fishing
  - Number of LTO Taxpayers: 60
  - Percent of Total LTO Taxpayers: 2.39
  - Amount (Billions Leu): 0.74
  - Percent of Total: 0.82

- B Mining and quarrying
  - Number of LTO Taxpayers: 281,11
  - Percent of Total LTO Taxpayers: 13.26
  - Amount (Billions Leu): 14.62

- C Manufacturing
  - Number of LTO Taxpayers: 72128.69
  - Percent of Total LTO Taxpayers: 19.63
  - Amount (Billions Leu): 21.64

- D Electricity, gas, steam, and air conditioning supply
  - Number of LTO Taxpayers: 893.54
  - Percent of Total LTO Taxpayers: 6.07
  - Amount (Billions Leu): 6.69

- E Water supply; sewerage; waste management, and remediation activities
  - Number of LTO Taxpayers: 67
  - Percent of Total LTO Taxpayers: 2.67
  - Amount (Billions Leu): 1.09
  - Percent of Total: 1.21

- F Construction
  - Number of LTO Taxpayers: 1756.96
  - Percent of Total LTO Taxpayers: 2.18
  - Amount (Billions Leu): 2.40

- G Wholesale and retail trade; repair of motor vehicles and motorcycles
  - Number of LTO Taxpayers: 787
  - Percent of Total LTO Taxpayers: 31.32
  - Amount (Billions Leu): 30.22
  - Percent of Total: 33.32

- H Transporting and storage
  - Number of LTO Taxpayers: 1335.29
  - Percent of Total LTO Taxpayers: 4.11
  - Amount (Billions Leu): 4.53

- I Accommodation and food service activities
  - Number of LTO Taxpayers: 130.52
  - Percent of Total LTO Taxpayers: 0.29
  - Amount (Billions Leu): 0.32

- J Information and communication
  - Number of LTO Taxpayers: 793.14
  - Percent of Total LTO Taxpayers: 4.21
  - Amount (Billions Leu): 4.64

- K Financial and insurance activities
  - Number of LTO Taxpayers: 1244.93
  - Percent of Total LTO Taxpayers: 4.22
  - Amount (Billions Leu): 4.65

- L Real estate activities
  - Number of LTO Taxpayers: 170.68
  - Percent of Total LTO Taxpayers: 0.28
  - Amount (Billions Leu): 0.31

- M Professional, scientific, and technical activities
  - Number of LTO Taxpayers: 933.70
  - Percent of Total LTO Taxpayers: 2.20
  - Amount (Billions Leu): 2.42

- N Administrative and support service activities
  - Number of LTO Taxpayers: 532.11
  - Percent of Total LTO Taxpayers: 1.11
  - Amount (Billions Leu): 1.23

- O Public administration and defense; compulsory social security
  - Number of LTO Taxpayers: 1
  - Percent of Total LTO Taxpayers: 0.04
  - Amount (Billions Leu): 0.42
  - Percent of Total: 0.46

- P Education
  - Number of LTO Taxpayers: 10.04
  - Percent of Total LTO Taxpayers: 0.01
  - Amount (Billions Leu): 0.01

- Q Human health and social work activities
  - Number of LTO Taxpayers: 90.36
  - Percent of Total LTO Taxpayers: 0.15
  - Amount (Billions Leu): 0.16

- R Arts, entertainment, and recreation
  - Number of LTO Taxpayers: 210.84
  - Percent of Total LTO Taxpayers: 0.43
  - Amount (Billions Leu): 0.48

- S Other services activities
  - Number of LTO Taxpayers: 1.0.04
  - Percent of Total LTO Taxpayers: 0.00
  - Amount (Billions Leu): 0.00

- T Activities of households as employers; undifferentiated goods—and services—producing activities of households for own use
  - (No numeric values provided in source)

- U Activities of extraterritorial organizations and bodies
  - (No numeric values provided in source)

- Total
  - Number of LTO Taxpayers: 2,47298.37
  - Amount (Billions Leu): 90,62
  - Percent of Total: 99.91

- Note 1: For example, as classified by Nomenclature statistique des Activités économiques dans la Communauté Européenne (EU  economic codes), established by EP/Council Regulation No 1893/2006 or other classifications in use in Romania.

### Appendix III. Australia — Risk Profiling of Taxpayers (Risk Differentiation Framework)
- Purpose
  - The Risk Differentiation Framework (RDF) is used to assess tax compliance risk and determine the intensity of the Australian Taxation Office's response.
  - The RDF places taxpayers into one of four broad risk categories for each tax type (income tax, GST and excise).

- Core premises of the RDF
  - Likelihood of non-compliance (that is, having a tax outcome we don’t agree with).
  - Consequences (dollars, relativities, reputation, precedent of that non-compliance).
  - Risk rating influences likelihood, formality and intensity of review but does not influence the outcome of a risk review.

- Risk categories and stances
  - Quadrant 1 – higher risk taxpayers
    - Suggested stance: real time/continuous risk review.
    - Characteristics: relative size, nature of transactions, apparent effective tax rate, compliance history.
    - Enforcement approach: assign sufficient resources; more likely to use formal powers of information gathering.
  - Quadrant 2 – key taxpayers
    - Suggested stance: continuous monitoring.
    - Characteristics: most of Australia’s largest businesses; significant influence on the tax system.
    - Enforcement approach: less likely to use formal powers; more likely to use alternative dispute resolution approaches; Annual compliance arrangements (ACAs) provide certainty and reduced compliance costs.
  - Quadrant 3 – medium risk taxpayers
    - Suggested stance: periodic review.
    - Enforcement approach: involvement in specific risk reviews and compliance projects addressing identified issues.
  - Quadrant 4 – lower risk taxpayers
    - Suggested stance: periodic monitoring.
    - Activities may include targeted information about market issues, visits, and normal internal risk review processes.
    - Outcome: unlikely to be contacted for additional information and less likely to have significant matters requiring follow up.

- Application and assessment process
  - Taxpayers are profiled twice a year against previous results and data from other businesses.
  - Factors used as risk filters include:
    - past compliance behavior;
    - tax task management governance;
    - business performance over time compared to tax outcomes and peers;
    - issues identified by specialist areas and intelligence gathering (e.g., material merger, acquisition or disposal);
    - intelligence from industry segments, overseas tax administrations and JITSIC;
    - intelligence from other government agencies such as ASIC and publicly available information;
    - risks arising out of implementation of new tax law;
    - level of international dealings and tax outcomes relative to functions performed, assets used and risks accepted.
  - Special research programs are undertaken to improve understanding of compliance issues and better identify high risk cases.
  - Ratings are reviewed at least annually and discussed with the taxpayer if there is a concern.

- Specific compliance risks highlighted
  - profit shifting through transfer pricing, thin capitalization and debt generation;
  - material transactions such as mergers, acquisitions and business restructures that allow for opportunistic tax planning.

- Administrative information
  - This information is from the Large business and tax compliance booklet.
  - The publication was current at December 2011.
  - Publication identifier in source: NAT 73993-12.2011; JS 2262.

*Source: National Agency for Fiscal Administration; Australian Taxation Office (as included in the provided content).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16284.pdf_