## _tnm1010 - 1. Why is the choice of an organizational model so important?

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### Importance of the organizational model
- An effective organization is the basic platform from which all other procedural reforms are launched and maintained.
- Without the right organization structure in place, revenue administrations cannot operate effectively and their revenue collection efforts will be sub-optimal.
- Where function-based organizations have not been implemented, extensive procedural and operational reforms needed to support modernization would likely be ineffective.
- Different sizes and jurisdictions have attempted different kinds of organizational reform; many tax administration organizations are combinations of structural categories.

### What is a function-based organization?
- Defined as an organization structured on the basis of the type of work performed, rather than the type of business, product, or customer.
- Principle: grouping similar activities that require similar skills or specialties yields increased depth of knowledge in core business expertise.
- Usually anchored by a strong headquarters organization that sets policy, program direction and guidance.
- Main responsibilities of headquarters:
  - Preparing an annual national work plan specifying expected work volumes, service and enforcement initiatives, and staffing levels and expenditure budget requirements. The national plan would contain quantity, quality, and timeliness performance measures.
  - Regular monitoring and reporting on national performance against the national work plan, explaining variances, and recommending corrective action.
  - Designing and maintaining standardized processes and policies, producing related documentation (manuals, circulars, etc.), and assuming “ownership” for the business processes and IT requirements related to those processes.
  - Providing advice and guidance to field operational units as required.
- Field operations form a distinct organization focused on program delivery and may be managed by a single individual who reports directly to the head of the organization (reporting arrangements depend on size and geography).

### Key components of a function-based organization in tax administration
- Core function groupings that encompass all taxes for which the administration is responsible enable standardization of common work and simplify taxpayer relationships (one point of contact for service, one point of contact for payment).
- Common tax administration activities in a function-based model:
  - taxpayer services and education — strategies, materials and channels for delivery of education and services targeted at specific taxpayer segments;
  - returns processing and payment — timely processing of all tax payments and returns, electronic commerce, and all related accounting systems;
  - audit and investigations — national audit strategy, procedures for all types of audit, including single issues audits, audit standards, coverage rates, etc.;
  - collections enforcement — collection procedures and legal issues;
  - tax operations policy — appeals, rulings and operational policy for all tax types, legislative review, international activities and double taxation agreements; and other residual issues.
- Each function should have a clear organizational locus at headquarters; headquarters is responsible for design and monitoring of programs and procedures (sometimes design and monitoring are split for objectivity, though splitting may be impractical in small organizations).
- Headquarters support functions include:
  - human resources — staffing and recruitment, compensation, employee relations (within broader government employment context);
  - finance and budgeting — managing and overseeing the budget allocated to the tax administration and its further allocation to headquarters and field units;
  - corporate planning — preparing a regularly updated strategic plan and overseeing the development of operational and work plans by individual units;
  - information technology — managing the tax administration’s IT platform (hardware and software);
  - internal audit and internal investigations — reporting directly to the head of the administration, undertaking internal audits and internal investigations of staff as needed.
- Field organization mirrors headquarters and focuses on operational and program delivery; field structure influenced by geography, scope of taxes or fees, and decisions about segmenting taxpayers (e.g., large, medium, small) or concentrating functions for economies of scale.

### Main advantages of a function-based organization
- Greater uniformity and specialization across the organization: core functions grouped together, overseen by one senior official, with processes designed and delivered uniformly.
- Improved compliance results: administration benefits from a complete view of taxpayer behaviour across all tax types, enabling identification and quicker response to trends in non-compliance.
- Simpler processes for taxpayers and the administration: common processes and single access points reduce repetitive interactions across tax types.
- Centers of excellence: specialties (e.g., registration) concentrated in one place enabling research, development, and improved techniques.
- Better resource management:
  - Reduced duplicated processes (e.g., a single IT system vs. multiple systems by tax type).
  - Enhanced productivity and ability to respond to seasonal peaks by reallocating resources.
  - Headquarters better positioned to assess field needs and make informed investment decisions.
- A tool for integrity: shared responsibility across functional lines reduces opportunity for collusion among officers.

### How the function-based organization works
- Structure allows unit heads to report directly to the commissioner or through senior managers to maintain manageable spans of control.
- Two guiding principles:
  1. Policy direction and oversight must be located at headquarters and separate from field operations.
  2. Policy direction should be organized by functional specialty (service and registration, processing and payment, collections enforcement, audit, tax operations policy).
- Headquarters requires sufficient staff to:
  - Monitor overall health of the tax administration system;
  - Formulate national strategies to improve performance;
  - Design reform initiatives and arrange implementation;
  - Evaluate results and monitor operational performance to detect negative trends requiring timely responses.
- Field heads receive direction from expert headquarters units depending on specialization; field offices usually mirror headquarters functions.
- Organizational options for field reporting include:
  - All field offices reporting directly to the commissioner (common in larger administrations);
  - Subordinate field managers reporting to one person who reports to the commissioner;
  - Organizing field offices into regions which report to the commissioner;
  - Establishing large taxpayer offices (LTOs) and medium taxpayer offices (MTOs) as key field components.
- OECD (2008 data) reported percentages of total staff at headquarters for selected countries:
  - Australia 15
  - Belgium 3
  - Canada 21
  - Czech Rep. 1
  - Denmark 1
  - Finland 7
  - Germany 1
  - Greece 5
  - Hungary 8
  - Iceland 100
  - Ireland 18
  - Italy 4
  - Japan 1
  - Korea 4
  - Luxembourg 15
  - Mexico 25
  - Netherland 0.05
  - New Zealand 23
  - Norway 4
  - Poland 4
  - Portugal 12
  - Slovak Rep. 9
  - Spain 12
  - Sweden 3
  - Switzerland 100
  - Turkey 3
  - United Kingdom 9
  - USA 20
- IMF technical assistance indicates an international best-practice division of staff across headquarters functions (percentages reported):
  - Taxpayer service and registration 15–20
  - Processing and payment 10–15
  - Audit 25–30
  - Collections enforcement 15–20
  - Large taxpayers 8–10
  - Support services 10–15
- Example workflow for audit:
  - Headquarters audit unit sets overall audit strategy and plan, coverage rates, allocates resources to field units, provides support and guidance, and manages audit training.
  - Field units carry out audits per the headquarters plan, use assigned resources, follow guidance, manage workload and performance, inform headquarters of challenges and emerging non-compliance trends, and seek HQ discussion on complex cases.

### How management direction is given
- Management direction cuts across normal vertical lines of authority; refers to guidance provided by headquarters to field offices and among organizational branches.
- Direction covers policy and procedures and typically takes the form of formal directives, operating memoranda, instructions, written guidance, or informal communication by telephone, e-mail, or in person.
- In tax administration context, direction often involves a headquarters unit setting and communicating policies to field offices who then deliver the corresponding programs and services.

### Box 1. Canada: A function-based tax administration
- On November 1, 1999, the Canada Customs and Revenue Agency (CCRA) was created as an agency of government (assuming the functions of the former Department of National Revenue).
- The CCRA is responsible for the administration of tax programs as well as the delivery of social and economic benefits.
- It also administers certain provincial and territorial tax programs and has the authority to enter into new agreements with the provinces, territories and other government bodies to administer non-harmonized taxes and other services at their request and on a cost recovery basis.
- The CRA is lead by a Commissioner and employs close to 40,000 people.

Organization and functions
- The CRA has a function-based organization structure with a headquarters that includes branches for:
  - Taxpayer service and debt management
  - Compliance
  - Assessment and benefit services
  - Legislative Policy and Regulatory Affairs
  - Assessment and collections
  - Appeals
- These branches:
  - Set national programs
  - Develop operational policy and procedures
  - Monitor performance against targets that they set
  - Play a role in resource allocation to a network of field offices that includes five regional offices and a number of subordinate tax offices
- The CRA is also supported by corporate branches including:
  - Internal audit and evaluation
  - Finance and administration
  - Human resources
  - Information technology
  - Legal services
  - Public affairs
  - Corporate strategies and business development

Governance, accountability, and challenges
- Management direction in this model is closely tied to accountability—if a field office takes direction from headquarters that office is clearly accountable to headquarters for what it does.
- Dual accountability and reporting relationships characterize the function-based administration—no matter what the size of administration that chooses this course of action.
- Problems in functional direction generally stem from confusion about roles and responsibilities combined with inadequate communication between managers and a lack of attention by senior management.
- Functional direction is a feature of most modern public sector organizations.

Requirements for successful functional direction
- There is a need for clarity, standards, authority and a compliance mechanism to ensure success:
  - Clarity — those with mandated functional responsibility must review the legal framework and government policies that control governance. An accountability structure would then be created that matches the responsibility.
  - Standards — well-enunciated policies, processes and expectations are the keys to success. Standards must be communicated to responsible staff and this should include proactive education and training programs.
  - Authority — Clear accountability is central to success. Horizontal accountabilities must be clearly understood and communicated.
  - Compliance — the headquarters office that sets the standards should be responsible for measurement and compliance tools.
- Practical experience shows that for functional direction to work well three basic requirements must be met:
  1. The roles and responsibilities of both the operational and headquarters functional management must be clearly defined—this means setting out clear accountabilities so that staff knows to whom they are accountable for each aspect of their work. It also means making careful distinctions between formal functional direction and the softer functional advice or guidance.
  2. Good communication must be maintained between headquarters and operational managers at all levels. Functional direction puts a premium on the need to work together on specific issues. Field managers must know what direction or advice their staff are receiving from headquarters while headquarters managers must get feedback from field offices if they are to ensure that their policies fit the operational reality.
  3. Senior management must hold both the line and headquarters managers accountable for their respective responsibilities—with responsibility divided horizontally and vertically.

Key points for tax administration design
- A function-based organization for tax administration is the most effective organization to launch successful reforms and to support a modernization program.
- A function-based organization is based on fundamental principles of matrix management. Managers have dual accountabilities to both vertically (the traditional reporting relationship) and horizontally (from headquarters to the field office and back).
- The function-based organization offers the best possibility of developing specialities within the tax administration i.e. registration and services, returns and payment processing, audit etc and allows for the development of centres of excellence.
- Managing within a function-based organization can be complex, depending on the size and overall geographic spread of the organization. It requires a high degree of management vigilance and some countries may want to consider implementation in phases to ensure success.

*International Monetary Fund. Technical Notes and Manuals 10/10 | 2010.*

### 1. Why is the choice of an organizational model so important?

### _tnm1010 - 1. Why is the choice of an organizational model so important?

### Importance of the organizational model
- An effective organization is the basic platform from which all other procedural reforms are launched and maintained.
- Without the right organization structure in place, revenue administrations cannot operate effectively and their revenue collection efforts will be sub-optimal.
- Where function-based organizations have not been implemented, extensive procedural and operational reforms needed to support modernization would likely be ineffective.
- Different sizes and jurisdictions have attempted different kinds of organizational reform; many tax administration organizations are combinations of structural categories.

### What is a function-based organization?
- Defined as an organization structured on the basis of the type of work performed, rather than the type of business, product, or customer.
- Principle: grouping similar activities that require similar skills or specialties yields increased depth of knowledge in core business expertise.
- Usually anchored by a strong headquarters organization that sets policy, program direction and guidance.
- Main responsibilities of headquarters:
  - Preparing an annual national work plan specifying expected work volumes, service and enforcement initiatives, and staffing levels and expenditure budget requirements. The national plan would contain quantity, quality, and timeliness performance measures.
  - Regular monitoring and reporting on national performance against the national work plan, explaining variances, and recommending corrective action.
  - Designing and maintaining standardized processes and policies, producing related documentation (manuals, circulars, etc.), and assuming “ownership” for the business processes and IT requirements related to those processes.
  - Providing advice and guidance to field operational units as required.
- Field operations form a distinct organization focused on program delivery and may be managed by a single individual who reports directly to the head of the organization (reporting arrangements depend on size and geography).

### Key components of a function-based organization in tax administration
- Core function groupings that encompass all taxes for which the administration is responsible enable standardization of common work and simplify taxpayer relationships (one point of contact for service, one point of contact for payment).
- Common tax administration activities in a function-based model:
  - taxpayer services and education — strategies, materials and channels for delivery of education and services targeted at specific taxpayer segments;
  - returns processing and payment — timely processing of all tax payments and returns, electronic commerce, and all related accounting systems;
  - audit and investigations — national audit strategy, procedures for all types of audit, including single issues audits, audit standards, coverage rates, etc.;
  - collections enforcement — collection procedures and legal issues;
  - tax operations policy — appeals, rulings and operational policy for all tax types, legislative review, international activities and double taxation agreements; and other residual issues.
- Each function should have a clear organizational locus at headquarters; headquarters is responsible for design and monitoring of programs and procedures (sometimes design and monitoring are split for objectivity, though splitting may be impractical in small organizations).
- Headquarters support functions include:
  - human resources — staffing and recruitment, compensation, employee relations (within broader government employment context);
  - finance and budgeting — managing and overseeing the budget allocated to the tax administration and its further allocation to headquarters and field units;
  - corporate planning — preparing a regularly updated strategic plan and overseeing the development of operational and work plans by individual units;
  - information technology — managing the tax administration’s IT platform (hardware and software);
  - internal audit and internal investigations — reporting directly to the head of the administration, undertaking internal audits and internal investigations of staff as needed.
- Field organization mirrors headquarters and focuses on operational and program delivery; field structure influenced by geography, scope of taxes or fees, and decisions about segmenting taxpayers (e.g., large, medium, small) or concentrating functions for economies of scale.

### Main advantages of a function-based organization
- Greater uniformity and specialization across the organization: core functions grouped together, overseen by one senior official, with processes designed and delivered uniformly.
- Improved compliance results: administration benefits from a complete view of taxpayer behaviour across all tax types, enabling identification and quicker response to trends in non-compliance.
- Simpler processes for taxpayers and the administration: common processes and single access points reduce repetitive interactions across tax types.
- Centers of excellence: specialties (e.g., registration) concentrated in one place enabling research, development, and improved techniques.
- Better resource management:
  - Reduced duplicated processes (e.g., a single IT system vs. multiple systems by tax type).
  - Enhanced productivity and ability to respond to seasonal peaks by reallocating resources.
  - Headquarters better positioned to assess field needs and make informed investment decisions.
- A tool for integrity: shared responsibility across functional lines reduces opportunity for collusion among officers.

### How the function-based organization works
- Structure allows unit heads to report directly to the commissioner or through senior managers to maintain manageable spans of control.
- Two guiding principles:
  1. Policy direction and oversight must be located at headquarters and separate from field operations.
  2. Policy direction should be organized by functional specialty (service and registration, processing and payment, collections enforcement, audit, tax operations policy).
- Headquarters requires sufficient staff to:
  - Monitor overall health of the tax administration system;
  - Formulate national strategies to improve performance;
  - Design reform initiatives and arrange implementation;
  - Evaluate results and monitor operational performance to detect negative trends requiring timely responses.
- Field heads receive direction from expert headquarters units depending on specialization; field offices usually mirror headquarters functions.
- Organizational options for field reporting include:
  - All field offices reporting directly to the commissioner (common in larger administrations);
  - Subordinate field managers reporting to one person who reports to the commissioner;
  - Organizing field offices into regions which report to the commissioner;
  - Establishing large taxpayer offices (LTOs) and medium taxpayer offices (MTOs) as key field components.
- Observation from OECD (2008 data): larger economies tend to assign a greater number of staff to headquarters. OECD-reported percentages of total staff at headquarters for selected countries:
  - Australia 15
  - Belgium 3
  - Canada 21
  - Czech Rep. 1
  - Denmark 1
  - Finland 7
  - Germany 1
  - Greece 5
  - Hungary 8
  - Iceland 100
  - Ireland 18
  - Italy 4
  - Japan 1
  - Korea 4
  - Luxembourg 15
  - Mexico 25
  - Netherland 0.05
  - New Zealand 23
  - Norway 4
  - Poland 4
  - Portugal 12
  - Slovak Rep. 9
  - Spain 12
  - Sweden 3
  - Switzerland 100
  - Turkey 3
  - United Kingdom 9
  - USA 20
- IMF technical assistance indicates an international best-practice division of staff across headquarters functions (percentages reported):
  - Taxpayer service and registration 15–20
  - Processing and payment 10–15
  - Audit 25–30
  - Collections enforcement 15–20
  - Large taxpayers 8–10
  - Support services 10–15
- Example workflow for audit:
  - Headquarters audit unit sets overall audit strategy and plan, coverage rates, allocates resources to field units, provides support and guidance, and manages audit training.
  - Field units carry out audits per the headquarters plan, use assigned resources, follow guidance, manage workload and performance, inform headquarters of challenges and emerging non-compliance trends, and seek HQ discussion on complex cases.

### How management direction is given
- Management direction cuts across normal vertical lines of authority; refers to guidance provided by headquarters to field offices and among organizational branches.
- Direction covers policy and procedures and typically takes the form of formal directives, operating memoranda, instructions, written guidance, or informal communication by telephone, e-mail, or in person.
- In tax administration context, direction often involves a headquarters unit setting and communicating policies to field offices who then deliver the corresponding programs and services.

*Source: _tnm1010 - 1. Why is the choice of an organizational model so important?*

### Box 1. Canada: A function-based tax administration

### Box 1. Canada: A function-based tax administration

### Overview
- On November 1, 1999, the Canada Customs and Revenue Agency (CCRA) was created as an agency of government (assuming the functions of the former Department of National Revenue).
- The CCRA is responsible for the administration of tax programs as well as the delivery of social and economic benefits.
- It also administers certain provincial and territorial tax programs and has the authority to enter into new agreements with the provinces, territories and other government bodies to administer non-harmonized taxes and other services at their request and on a cost recovery basis.
- The CRA is lead by a Commissioner and employs close to 40,000 people.

### Organization and functions
- The CRA has a function-based organization structure with a headquarters that includes branches for:
  - Taxpayer service and debt management
  - Compliance
  - Assessment and benefit services
  - Legislative Policy and Regulatory Affairs
  - Assessment and collections
  - Appeals
- These branches:
  - Set national programs
  - Develop operational policy and procedures
  - Monitor performance against targets that they set
  - Play a role in resource allocation to a network of field offices that includes five regional offices and a number of subordinate tax offices
- The CRA is also supported by corporate branches including:
  - Internal audit and evaluation
  - Finance and administration
  - Human resources
  - Information technology
  - Legal services
  - Public affairs
  - Corporate strategies and business development

### Governance, accountability, and challenges
- Management direction in this model is closely tied to accountability—if a field office takes direction from headquarters that office is clearly accountable to headquarters for what it does.
- Dual accountability and reporting relationships characterize the function-based administration—no matter what the size of administration that chooses this course of action.
- Problems in functional direction generally stem from confusion about roles and responsibilities combined with inadequate communication between managers and a lack of attention by senior management.
- Functional direction is a feature of most modern public sector organizations.

### Requirements for successful functional direction
- There is a need for clarity, standards, authority and a compliance mechanism to ensure success:
  - Clarity — those with mandated functional responsibility must review the legal framework and government policies that control governance. An accountability structure would then be created that matches the responsibility.
  - Standards — well-enunciated policies, processes and expectations are the keys to success. Standards must be communicated to responsible staff and this should include proactive education and training programs.
  - Authority — Clear accountability is central to success. Horizontal accountabilities must be clearly understood and communicated.
  - Compliance — the headquarters office that sets the standards should be responsible for measurement and compliance tools.
- Practical experience shows that for functional direction to work well three basic requirements must be met:
  1. The roles and responsibilities of both the operational and headquarters functional management must be clearly defined—this means setting out clear accountabilities so that staff knows to whom they are accountable for each aspect of their work. It also means making careful distinctions between formal functional direction and the softer functional advice or guidance.
  2. Good communication must be maintained between headquarters and operational managers at all levels. Functional direction puts a premium on the need to work together on specific issues. Field managers must know what direction or advice their staff are receiving from headquarters while headquarters managers must get feedback from field offices if they are to ensure that their policies fit the operational reality.
  3. Senior management must hold both the line and headquarters managers accountable for their respective responsibilities—with responsibility divided horizontally and vertically.

### Key points for tax administration design
- A function-based organization for tax administration is the most effective organization to launch successful reforms and to support a modernization program.
- A function-based organization is based on fundamental principles of matrix management. Managers have dual accountabilities to both vertically (the traditional reporting relationship) and horizontally (from headquarters to the field office and back).
- The function-based organization offers the best possibility of developing specialities within the tax administration i.e. registration and services, returns and payment processing, audit etc and allows for the development of centres of excellence.
- Managing within a function-based organization can be complex, depending on the size and overall geographic spread of the organization. It requires a high degree of management vigilance and some countries may want to consider implementation in phases to ensure success.

*International Monetary Fund. Technical Notes and Manuals 10/10 | 2010.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1010.pdf_