## _tnm1006

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---

### I. Purpose and scope
- Choosing the right organization structure is a key component of any program of tax administration reform and modernization.
- The note examines how generally accepted principles of tax administration organization either address or can be adapted to the needs of small and micro economies.

### II. Definitions: What is a small economy? What is a micro economy?
- Population-based definitions:
  - Populations lower than 10 million are described as small; by this standard, 134 countries are considered small.
  - The British Commonwealth definition: populations of less than 1.5 million are considered small; by this measure, 45 developing countries are small.
- Per capita GDP among the 45-country group ranges from $400 to $9,000.
- For the purposes of this note, small and micro economies are treated as one group because organizational advice differs little between them.

### III. General principles of tax administration organization
- Core principles:
  - An organization based on the key functions of tax administration, rather than separate business units for each different tax.
  - An organization that is integrated: all national taxes administered by one organization rather than separate departments for different taxes.
  - An organization that recognizes differences among large, medium and small taxpayers and tailors programs accordingly (segmentation).
- Additional dimensions to consider:
  - The need for policy direction and monitoring that is separate from operational delivery.
  - The requirement for specialization.
- Typical large/medium organization features:
  - Headquarters divisions/units for taxpayer service and education (including registration); returns processing and payment; audit and investigations; enforced collections; tax operations policy; objections and appeals; and corporate support functions.
  - An operational arm including a network of regional offices, sometimes segmented for large taxpayers and medium taxpayers.
  - Headquarters responsible for developing policies and programs, allocating operational results, setting goals and targets, measuring results and adjusting approaches.

### IV. Characteristics of tax administration in small and micro economies
- Structural features that typically distinguish small/micro economies:
  - a low population base
  - physical isolation
  - geographic dispersal and isolation from markets
  - small markets and relatively open economies
  - a narrow base for revenue generation
  - a propensity for disruption by natural disaster
- Operational realities and constraints:
  - The workforce is usually quite small and the domestic labor market often lacks the education and experience needed.
  - The overall government budget available to the tax administration is small; many organizational features (e.g., separate operational offices) cannot be instituted for lack of financing.
  - Overall technical capacity is low, reflecting the labor market and limited training opportunities.
  - Civil society is quite small; government officials and private sector business people are often well known to each other, which can lead to political direction on operational cases.
  - Difficulty retaining adequate legal counsel affects compliance, as taxpayers assume limited capacity to pursue non-compliance legally.
  - Tax administrations are under almost daily pressure to report revenue collection results and often measured solely on revenue collection.
  - Many tax administrations are responsible for numerous fees and charges (e.g., vehicle registration, driver licenses), which can detract from core revenue administration but may also offer compliance synergies if exploited.
- Consequences for organizational form:
  - Detailed function-based structures typical of larger administrations are often not possible.
  - Administration by tax type is often present.
  - Limited attention to taxpayer education, enforced collection and audit.
  - Use of basic risk management techniques is rare; operational emphasis is on collections.

### V. Illustrative examples
- Fiji (FIRCA):
  - FIRCA Act 1998 combined previous tax and customs departments under a single executive management structure supervised by a board of directors.
  - An attempted close-to-full integration produced a complex matrix structure with seven functional managers overseeing a mix of tax-type, functional and segmented units; this proved too complex.
  - In 2008 FIRCA reestablished core tax and customs competencies in two functional departments; a third department continues integrated management support services.
  - Domestic taxes branch: led by a general manager supported by three subordinates for revenue collection, audit compliance and debt management.
  - The domestic taxes organization is partially function-based but has limitations (e.g., no focus on taxpayer service or assessment and collections and no distinction between headquarters and operations).
- Seychelles (Seychelles Revenue Commission, SRC):
  - SRC created on 1 January 2008; brought together domestic tax and trade taxes divisions and the compliance division of the Social Security Fund.
  - Led by a Commissioner; creation of a Deputy Commissioner position is contemplated.
  - Domestic tax division has close to 40 staff with planned increase to 60 in 2010.
  - Proposed domestic taxes organization foresees three units: taxpayer services, enforcement and audit; with a sub-unit for large taxpayers.
  - Limited distinction between headquarters functions and operations.

### VI. What makes the general principles difficult to apply in small/micro economies?
- Small workforce and concentrated geography:
  - Many administrations have workforce numbering 100 or less.
  - Too few staff to justify separate headquarters and field operations; one audit unit may set programs, select audits, carry out audits and monitor results from a single point.
  - Specialization and centers of excellence are hampered by limited staff; staff are often multi-disciplined and spread thin.
- Historical mandates and capacity issues impede integration:
  - Traditional focus on income tax; new taxes (e.g., VAT) often lead to creation of new departments rather than integration.
- Preponderance of fees and service charges:
  - Collection of many fees can distract from core tax administration and consume management/staff time.
- Few large taxpayers:
  - There are often few large taxpayers; those that exist may be foreign-owned/managed.
  - Many administrations do not segment the taxpayer base into small, medium and large groups, leading to one-size-fits-all approaches.
- Social interconnectedness constrains enforcement:
  - High levels of inter-connectedness can make officials feel constrained in exercising full legal powers due to community pressure or lack of cooperation from sectors (e.g., banks).
  - Underlines the need for a clear distinction between policy direction and operations so senior officials can ensure the organization exercises its full mandate.

### VII. Adapting the principles for small and micro tax administrations
- Acknowledgement:
  - Function-based, integrated and segmented principles are difficult to implement fully in small and micro economies.
- Practical guidance:
  - Organizations should be guided by principles of efficiency and effectiveness and by a need for clear roles, mandates and accountabilities.
  - Strict separation of headquarters from field operations and full specialization is often impractical in administrations of less than 300 staff and micro administrations with less than 100 staff.
  - Adaptations should respect the basic intent of the general principles while reflecting workforce size, budget constraints and the need for multifunctional staff.

### Organizational principles for small and micro tax administrations (Section 2)
- Core organizational recommendations:
  - Even the smallest organizations should identify a small group (as small as one person) that focuses on program design and monitoring.
  - The senior official responsible for the small organization (with some support) can assume roles usually attributed to headquarters, for example directing work, allocating resources, reviewing results.
  - Specialization may be difficult when staff resources are limited; units can be expert in more than one subject (e.g., taxpayer service and enforced collection) and be responsible for both program development and delivery.
  - Integration is feasible and important regardless of size: separate units by tax type that offer the complete range of administrative functions do not make sense even for very small workforces.
  - Segmentation is necessary to address large taxpayers and their compliance risk, but a full large taxpayer unit is often impractical in organizations with fewer than 100 staff.

### Options and organizational models
- Small programming and planning unit reporting directly to the senior official can:
  - Determine how tax administration functions are delivered.
  - Set targets for functional areas and monitor results.
  - Handle resource allocation to functional units.
  - Impose a matrix management element where staff have hierarchical and vertical reporting relationships to the programming and planning unit.
- Alternative models when a full unit is impractical:
  - Create a unit focused solely on large and medium taxpayers, with the remainder of the administration handling small taxpayers.
  - Institute a large taxpayer program where officers across departments are designated as “large case” officers while remaining assigned to their current units; a portion of their daily work focuses on large taxpayers.
- For micro organizations without staff for a planning unit:
  - Headquarters activities can be performed within each functional unit (e.g., the audit unit undertakes audit planning, sets targets, seeks resources).
  - Establish large taxpayer programs within existing tax administration functions rather than a full large and medium taxpayer office.

### Suggested organization structure (functional highlights)
- Program design & monitoring
- Policy & planning
- Audit & investigations & programs
- Legal & technical
- Returns, payment processing & enforcement (Tax operations)
  - Shared returns & payment processing
  - Shared taxpayer services
- Taxpayer services & objections
- Taxpayer debt & filing enforcement
- Audit & investigations
- Large & medium taxpayers
- Small taxpayer audit
- Small taxpayer debt & filing enforcement
- Commissioner, Inland Revenue

### Case example — Dominica
- Context:
  - Population of less than 100,000.
  - Inland Revenue Department (IRD) has less than 100 staff.
  - IRD is responsible for corporate and personal income tax, PAYE and VAT.
- VAT implementation:
  - With VAT introduction in 2006, IRD created a VAT project unit to manage implementation.
  - The project unit evolved into a VAT unit; IRD managed by tax type rather than in an integrated manner.
  - Only taxpayer services and payment were centralized; other key functions (audit, collections enforcement) were separately managed and administered.
- Reforms undertaken over the past two years:
  1. Fully integrate operations for all tax types.
  2. Create a unit to oversee large and medium taxpayers and another unit for small taxpayers.
  3. Establish common taxpayer service and processing.
  4. Create a small sub-division to oversee operations and the future direction of the IRD.

### Addressing integrity and oversight
- Organizational solutions (integration and functional oversight) provide:
  - More effective management and oversight.
  - Elimination of silos and better checks and balances.
  - Reduced risk that a single individual or division has complete control over a process or the affairs of a single taxpayer.
- Operational enhancements should be supported by an appropriate integrity strategy and plan.

### Key points for tax administration design
- The organization should:
  1. Be function-based.
  2. Integrate delivery of all tax types.
  3. Address specific needs of taxpayer groups by segmenting the taxpayer population into large, medium and small taxpayers.
- All these principles can be adapted for small and micro economies.
- Integration of administration of all taxes is possible no matter what the size and is especially important given the challenges of small size.
- Function-based organization and segmentation remain solid principles and can be readily adapted to small and micro administrations.

*Source: Tax Administration in Small Economies, Maureen Kidd; Technical Notes and Manuals 10/06 | 2010, Fiscal Affairs Department, International Monetary Fund.*

### Section 1

### _tnm1006 - Section 1

### I. Purpose and scope
- Choosing the right organization structure is a key component of any program of tax administration reform and modernization.
- The note examines how generally accepted principles of tax administration organization either address or can be adapted to the needs of small and micro economies.

### II. Definitions: What is a small economy? What is a micro economy?
- Population-based definitions cited:
  - Populations lower than 10 million are described as small; by this standard, 134 countries are considered small.
  - The British Commonwealth definition: populations of less than 1.5 million are considered small; by this measure, 45 developing countries are small.
- Per capita GDP among the 45-country group ranges from $400 to $9,000.
- For the purposes of this note, small and micro economies are treated as one group because organizational advice differs little between them.

### III. General principles of tax administration organization
- Core principles include:
  - An organization based on the key functions of tax administration, rather than separate business units for each different tax.
  - An organization that is integrated: all national taxes administered by one organization rather than separate departments for different taxes.
  - An organization that recognizes differences among large, medium and small taxpayers and tailors programs accordingly (segmentation).
- Two additional dimensions to consider when determining structure:
  - The need for policy direction and monitoring that is separate from operational delivery.
  - The requirement for specialization.
- Typical large/medium organization features (as presented in Figure 1):
  - Headquarters divisions/units for taxpayer service and education (including registration); returns processing and payment; audit and investigations; enforced collections; tax operations policy; objections and appeals; and corporate support functions.
  - An operational arm including a network of regional offices, sometimes segmented for large taxpayers and medium taxpayers.
  - Headquarters responsible for developing policies and programs, allocating operational results, setting goals and targets, measuring results and adjusting approaches.

### IV. Characteristics of tax administration in small and micro economies
- Structural features that typically distinguish small/micro economies:
  - a low population base
  - physical isolation
  - geographic dispersal and isolation from markets
  - small markets and relatively open economies
  - a narrow base for revenue generation
  - a propensity for disruption by natural disaster
- Operational realities and constraints:
  - The workforce is usually quite small and the domestic labor market often lacks the education and experience needed.
  - The overall government budget available to the tax administration is small; many organizational features (e.g., separate operational offices) cannot be instituted for lack of financing.
  - Overall technical capacity is low, reflecting the labor market and limited training opportunities.
  - Civil society is quite small; government officials and private sector business people are often well known to each other, which can lead to political direction on operational cases.
  - Difficulty retaining adequate legal counsel affects compliance, as taxpayers assume limited capacity to pursue non-compliance legally.
  - Tax administrations are under almost daily pressure to report revenue collection results and often measured solely on revenue collection.
  - Many tax administrations are responsible for numerous fees and charges (e.g., vehicle registration, driver licenses), which can detract from core revenue administration but may also offer compliance synergies if exploited.
- Consequences for organizational form:
  - Detailed function-based structures typical of larger administrations are often not possible.
  - Administration by tax type is often present.
  - Limited attention to taxpayer education, enforced collection and audit.
  - Use of basic risk management techniques is rare; operational emphasis is on collections.

### V. Illustrative examples (Box 1)
- Fiji (FIRCA):
  - FIRCA Act 1998 combined previous tax and customs departments under a single executive management structure supervised by a board of directors.
  - An attempted close-to-full integration produced a complex matrix structure with seven functional managers overseeing a mix of tax-type, functional and segmented units; this proved too complex.
  - In 2008 FIRCA reestablished core tax and customs competencies in two functional departments; a third department continues integrated management support services.
  - Domestic taxes branch: led by a general manager supported by three subordinates for revenue collection, audit compliance and debt management.
  - The domestic taxes organization is partially function-based but has limitations (e.g., no focus on taxpayer service or assessment and collections and no distinction between headquarters and operations).
- Seychelles (Seychelles Revenue Commission, SRC):
  - SRC created on 1 January 2008; brought together domestic tax and trade taxes divisions and the compliance division of the Social Security Fund.
  - Led by a Commissioner; creation of a Deputy Commissioner position is contemplated.
  - Domestic tax division has close to 40 staff with planned increase to 60 in 2010.
  - Proposed domestic taxes organization foresees three units: taxpayer services, enforcement and audit; with a sub-unit for large taxpayers.
  - Limited distinction between headquarters functions and operations.

### VI. What makes the general principles difficult to apply in small/micro economies?
- Small workforce and concentrated geography:
  - Many administrations have workforce numbering 100 or less.
  - Too few staff to justify separate headquarters and field operations; one audit unit may set programs, select audits, carry out audits and monitor results from a single point.
  - Specialization and centers of excellence are hampered by limited staff; staff are often multi-disciplined and spread thin.
- Historical mandates and capacity issues impede integration:
  - Traditional focus on income tax; new taxes (e.g., VAT) often lead to creation of new departments rather than integration.
- Preponderance of fees and service charges:
  - Collection of many fees can distract from core tax administration and consume management/staff time.
- Few large taxpayers:
  - There are often few large taxpayers; those that exist may be foreign-owned/managed.
  - Many administrations do not segment the taxpayer base into small, medium and large groups, leading to one-size-fits-all approaches.
- Social interconnectedness constrains enforcement:
  - High levels of inter-connectedness can make officials feel constrained in exercising full legal powers due to community pressure or lack of cooperation from sectors (e.g., banks).
  - Underlines the need for a clear distinction between policy direction and operations so senior officials can ensure the organization exercises its full mandate.

### VII. Adapting the principles for small and micro tax administrations
- Acknowledgement:
  - Function-based, integrated and segmented principles are difficult to implement fully in small and micro economies.
- Practical guidance:
  - Organizations should be guided by principles of efficiency and effectiveness and by a need for clear roles, mandates and accountabilities.
  - Strict separation of headquarters from field operations and full specialization is often impractical in administrations of less than 300 staff and micro administrations with less than 100 staff.
  - Adaptations should respect the basic intent of the general principles while reflecting workforce size, budget constraints and the need for multifunctional staff.

*Source: Tax Administration in Small Economies, Maureen Kidd; Technical Notes and Manuals 10/06 | 2010, Fiscal Affairs Department, International Monetary Fund.*

### Section 2

### _tnm1006 - Section 2

### Organizational principles for small and micro tax administrations
- Even the smallest organizations should identify a small group (as small as one person) that focuses on program design and monitoring.
- The senior official responsible for the small organization (with some support) can assume roles usually attributed to headquarters, for example directing work, allocating resources, reviewing results.
- Specialization may be difficult when staff resources are limited; units can be expert in more than one subject (e.g., taxpayer service and enforced collection) and be responsible for both program development and delivery.
- Integration is feasible and important regardless of size: separate units by tax type that offer the complete range of administrative functions do not make sense even for very small workforces.
- Segmentation is necessary to address large taxpayers and their compliance risk, but a full large taxpayer unit is often impractical in organizations with fewer than 100 staff.

### Options and organizational models
- A small programming and planning unit reporting directly to the senior official can:
  - Determine how tax administration functions are delivered.
  - Set targets for functional areas and monitor results.
  - Handle resource allocation to functional units.
  - Impose a matrix management element where staff have hierarchical and vertical reporting relationships to the programming and planning unit.
- Alternative models when a full unit is impractical:
  - Create a unit focused solely on large and medium taxpayers, with the remainder of the administration handling small taxpayers.
  - Institute a large taxpayer program where officers across departments are designated as “large case” officers while remaining assigned to their current units; a portion of their daily work focuses on large taxpayers.
- For micro organizations without staff for a planning unit:
  - Headquarters activities can be performed within each functional unit (e.g., the audit unit undertakes audit planning, sets targets, seeks resources).
  - Establish large taxpayer programs within existing tax administration functions rather than a full large and medium taxpayer office.

### Suggested organization structure (functional highlights)
- Program design & monitoring
- Policy & planning
- Audit & investigations & programs
- Legal & technical
- Returns, payment processing & enforcement (Tax operations)
  - Shared returns & payment processing
  - Shared taxpayer services
- Taxpayer services & objections
- Taxpayer debt & filing enforcement
- Audit & investigations
- Large & medium taxpayers
- Small taxpayer audit
- Small taxpayer debt & filing enforcement
- Commissioner, Inland Revenue

(Referenced as Figure 2: Suggested tax administration organization chart)

### Case example — Dominica (Box 2)
- Context:
  - Population of less than 100,000.
  - Inland Revenue Department (IRD) has less than 100 staff.
  - IRD is responsible for corporate and personal income tax, PAYE and VAT.
- VAT implementation:
  - With VAT introduction in 2006, IRD created a VAT project unit to manage implementation.
  - The project unit evolved into a VAT unit; IRD managed by tax type rather than in an integrated manner.
  - Only taxpayer services and payment were centralized; other key functions (audit, collections enforcement) were separately managed and administered.
- Reforms undertaken over the past two years:
  1. Fully integrate operations for all tax types.
  2. Create a unit to oversee large and medium taxpayers and another unit for small taxpayers.
  3. Establish common taxpayer service and processing.
  4. Create a small sub-division to oversee operations and the future direction of the IRD.

### Addressing integrity and oversight
- Organizational solutions (integration and functional oversight) provide:
  - More effective management and oversight.
  - Elimination of silos and better checks and balances.
  - Reduced risk that a single individual or division has complete control over a process or the affairs of a single taxpayer.
- Operational enhancements should be supported by an appropriate integrity strategy and plan.

### Key points for tax administration design
- The organization should:
  1. Be function-based.
  2. Integrate delivery of all tax types.
  3. Address specific needs of taxpayer groups by segmenting the taxpayer population into large, medium and small taxpayers.
- All these principles can be adapted for small and micro economies.
- Integration of administration of all taxes is possible no matter what the size and is especially important given the challenges of small size.
- Function-based organization and segmentation remain solid principles and can be readily adapted to small and micro administrations.

*Source: _tnm1006 - Section 2*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1006.pdf_