## _tnm1017

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---

### Value of a taxpayer compliance program
- Tax agencies operate within a finite budget and need an intelligence-led, evidence-based methodology to identify the most severe risks and allocate resources rationally.
- A targeted, cyclical compliance program systematizes compliance risk identification, risk prioritization, and compliance strategy planning and delivery, ensuring focus on the most significant issues and best use of resources across functional departments.
- The program provides a transparent and defensible record of why resources were devoted to particular risks in preference to others.
- Direct revenue from compliance activities (including audit) represents only a small proportion of total tax collections; in Australia, direct audit revenue accounts for only around two percent of total tax collections each year.
- Internal publication provides front-line staff context and a clear line-of-sight from high-level strategic plans through operational plans to team-level activities, aiding motivation and operational decision making.
- External publication increases transparency, can generate media coverage that enhances deterrence, helps taxpayers manage their affairs, raises community awareness of compliance activity, and can support lobbying for increased resources when severe risks exceed current capacities.

### Features of a typical taxpayer compliance program (Box 1)
- A compliance program is structured around the major taxpayer segments, typically:
  - (1) individuals;
  - (2) micro and small businesses;
  - (3) medium-size businesses;
  - (4) large businesses;
  - (5) non-profit organizations; and
  - (6) government organizations.
- For each taxpayer segment, the program summarizes the economic, revenue and business environment (e.g., number of taxpayers, nature of entities, total tax contribution, number of persons employed, and structural features).
- The program addresses the risks in each of the taxes administered in each taxpayer segment.
- The program outlines the headline compliance issues and the specific risks for each taxpayer segment, and describes how the revenue agency intends to respond to these issues and risks. Headline issues have an impact across more than one taxpayer segment and include, for example, the global economic crisis, informality, international profit shifting and abuse of tax havens.
- The program records the number and type of different service and control initiatives planned to be undertaken in the coming year within each taxpayer segment.
- Reporting against these commitments ensures that the planned activities are carried out and helps build community confidence in the administration of the tax system.

### Steps in developing a compliance program (risk management process)
- The standard risk management process model provides a structured, cyclical approach to identifying risks, assigning priorities, developing responses, implementing strategies, and evaluating impact. Key steps:
  - Step one: evaluate compliance outcomes
    - Begin with evaluation of the previous plan’s effectiveness—alignment of actual outcomes with desired outcomes.
    - Analyze gaps for inappropriate strategies versus poor delivery; consider external factors and test viability of performance indicators (specific, measurable, achievable, relevant and timed).
  - Step two: understand the operating context
    - Ensure the organization’s strategic plan includes mission, vision and values; position compliance risks within broader socio-economic environment and align strategies with organizational direction and values.
  - Step three: identify risks
    - Develop compliance programs around taxpayer segments and sub-segments (e.g., location, size, age, entity type, industry sector).
    - Use multiple information sources to identify risks, including:
      - The current computerized risk analysis system
      - Tax returns, financial statements, taxpayer information schedules and registration applications
      - The audit program
      - Oral and written taxpayer enquiries
      - Other tax administrations
      - Customs, social security agencies, land title offices and other regulatory agencies
      - Third-party intermediaries such as banks, credit card providers and stock exchanges
      - Professional bodies and peak industry groups
      - The general community
    - Combine top-down (strategic, highly visible risks) and bottom-up (operational, localized risks) assessments and use multiple “lenses” (taxpayer segments, industry segments, revenue types, core tax obligations).
    - Capture identified risks in a formal “risk register” describing each risk and its threat to the revenue system (e.g., impact on revenue, government policy goals, community confidence, reputation).
  - Step four: assess and prioritize risks
    - Use a risk rating matrix considering likelihood and consequence; consequence includes more than revenue (integrity, community confidence).
    - Aim to have all “extreme” or “high” risks under active management; lesser risks may be placed on a watching brief.
    - Investment decisions should balance number of serious risks, relative estimated impact, and available operating budget.
  - Step five: analyze compliance behavior
    - Use a compliance model to identify drivers and attitudes underlying noncompliant behavior and to determine appropriate mix of responses.
    - The Compliance Model:
      - Left side: factors influencing taxpayer behavior (business, industry, sociological, economic, psychological).
      - Right side: taxpayer attitudes to compliance and corresponding compliance strategies.
    - Analyze underlying causes (e.g., cash flow needs, competitive environment, perceptions of fairness) rather than treating symptoms.
    - Goal is to mitigate risks to an acceptable level, not necessarily eliminate them completely.
  - Step six: determine treatment strategies
    - Develop responses in context of allocated resources, document desired outcomes and evaluation methods.
    - Consider holistic, integrated strategies to avoid piecemeal approaches; match interventions to causes (e.g., education for ignorance, enforcement for deliberate evasion).
    - Aim for an optimal mix: education, assistance, improved law and procedures, audit and enforcement.
    - Anticipate unintended consequences and identify strategies to address them.

### Developing, implementing and evaluating treatment strategies (Box 2 and evaluation guidance)
- Factors to consider when identifying and analyzing compliance risks:
  - Precisely define the risk and affected population.
  - Identify underlying causes and whether law or administrative systems contribute.
  - Judge how compliance attitudes were formed and validate judgments through taxpayer engagement.
- Planning and implementation checklist:
  - Articulate desired outcomes and success criteria.
  - Ensure the agency’s interpretation of the law is understood and communicated if necessary.
  - Improve ease/cost of compliance (educational material, self-help tools like industry benchmarks or on-line calculators).
  - Identify and assist taxpayers genuinely trying to comply.
  - Ensure internal risk and intelligence capabilities and staff skills/support tools are adequate for detection and enforcement.
  - Identify unaddressed underlying causes and likely unintended consequences.
- Evaluating effectiveness:
  - Use a suite of performance indicators that are specific, measurable, achievable, relevant, and timed.
  - Distinguish effectiveness indicators from efficiency and cost-effectiveness measures; ultimate success is impact on voluntary compliance.
  - Establish baseline data prior to implementation; if unavailable, use first-year implementation data as a starting point.
  - Keep number of indicators limited to ensure monitoring and evaluation occurs.
  - Use the strategy evaluation model to link inputs, activities, outputs (quantity/quality), outcomes (effect/impact), effectiveness, cost effectiveness, and efficiency.

### Box 3. Combating Tax Avoidance Relating to International Transactions in Brazil — Background
- Following the opening of the economy in the early 1990s, Brazil experienced a rise in the volume of international transactions.
- A variety of tax avoidance schemes emerged involving transfer pricing, triangular operations through tax havens, and other offshore arrangements (at the time, profits of Brazilian companies abroad were not taxed at home).

### Box 3. Integrated strategy to combat tax abuse associated with international transactions
- Given the nature and complexity of the problem, an integrated strategy was developed including the following elements.

- Tax policy improvements
  - Adoption of new legislation specifically dealing with:
    - transfer pricing rules;
    - transactions with tax heavens and tax-favorable jurisdictions (including the introduction of a clear objective rule to define such jurisdictions);
    - the introduction of worldwide taxation criteria.

- Institutional strengthening
  - Establishment of specialized units within the organizational structure of the revenue agency (Receita Federal). In particular:
    - a special Office on International Affairs (OIA) responsible for administering and auditing multinational corporations and taxpayers involved with substantial international transactions (this was based in São Paulo close to the main taxpayers);
    - an Investigation and Intelligence Department (IID), responsible for investigating and detecting tax crimes, including those related to international financing and money laundering;
    - four Tax Attaché offices located in Argentina, Uruguay, Paraguay and the US to provide services and gather information on international transactions of Brazilian taxpayers.

- New information systems
  - Development of new sources of information on international transactions, including customs operations, including:
    - integrated information systems on foreign trade (e.g., SISCOMEX, which provides a global view of the taxpayer’s operations and networks);
    - development of new customs information systems based on risk management; coordination and information exchange across federal agencies, including the Central Bank which controls currency exchange flows, and the Council on Financial Activities Control;
    - introduction of new fields on the corporate tax return specifically designed to gather information on such transactions.

- Internal recruitment and training
  - OIA and IID officers were recruited based on a specific skill profile, including language skills, accounting, and auditing of large corporations.
  - Receita Federal offered specialized training, including participation in training programs offered by the IRS Criminal Investigation Unit.

- Networking and partnerships with key stakeholders in Brazil and abroad
  - An extensive pool of stakeholders was consulted on the need to strengthen the prosecution process. Examples include:
    - multinationals and key private sector representatives were invited to participate in the process of lawmaking and drafting of regulations (they helped define objective methods for the transfer pricing rules);
    - a series of seminars and conferences was organized to raise awareness and to prepare taxpayers for the new legislation;
    - extensive work to explain and alert judges from the administrative tribunal and judicial branch about the importance of enforcing the new law and prosecuting offenders, and the need to focus more on tax law interpretation;
    - partnering with tax administrations internationally and exchanging information (for example, signing an information exchange treaty with Argentina).

*Technical Notes and Manuals 10/17 | 2010*

### Box 1 lists the features of a typical

### Box 1 lists the features of a typical taxpayer compliance program

### Value of a taxpayer compliance program
- Tax agencies operate within a finite budget and need an intelligence-led, evidence-based methodology to identify the most severe risks and allocate resources rationally.
- A targeted, cyclical compliance program systematizes compliance risk identification, risk prioritization, and compliance strategy planning and delivery, ensuring focus on the most significant issues and best use of resources across functional departments.
- The program provides a transparent and defensible record of why resources were devoted to particular risks in preference to others.
- Direct revenue from compliance activities (including audit) represents only a small proportion of total tax collections; in Australia, direct audit revenue accounts for only around two percent of total tax collections each year.
- Internal publication provides front-line staff context and a clear line-of-sight from high-level strategic plans through operational plans to team-level activities, aiding motivation and operational decision making.
- External publication increases transparency, can generate media coverage that enhances deterrence, helps taxpayers manage their affairs, raises community awareness of compliance activity, and can support lobbying for increased resources when severe risks exceed current capacities.

### Features of a typical taxpayer compliance program (Box 1)
- A compliance program is structured around the major taxpayer segments, typically:
  - (1) individuals;
  - (2) micro and small businesses;
  - (3) medium-size businesses;
  - (4) large businesses;
  - (5) non-profit organizations; and
  - (6) government organizations.
- For each taxpayer segment, the program summarizes the economic, revenue and business environment (e.g., number of taxpayers, nature of entities, total tax contribution, number of persons employed, and structural features).
- The program addresses the risks in each of the taxes administered in each taxpayer segment.
- The program outlines the headline compliance issues and the specific risks for each taxpayer segment, and describes how the revenue agency intends to respond to these issues and risks. Headline issues have an impact across more than one taxpayer segment and include, for example, the global economic crisis, informality, international profit shifting and abuse of tax havens.
- The program records the number and type of different service and control initiatives planned to be undertaken in the coming year within each taxpayer segment.
- Reporting against these commitments ensures that the planned activities are carried out and helps build community confidence in the administration of the tax system.

### Steps in developing a compliance program (risk management process)
- The standard risk management process model provides a structured, cyclical approach to identifying risks, assigning priorities, developing responses, implementing strategies, and evaluating impact. Key steps:
  - Step one: evaluate compliance outcomes
    - Begin with evaluation of the previous plan’s effectiveness—alignment of actual outcomes with desired outcomes.
    - Analyze gaps for inappropriate strategies versus poor delivery; consider external factors and test viability of performance indicators (specific, measurable, achievable, relevant and timed).
  - Step two: understand the operating context
    - Ensure the organization’s strategic plan includes mission, vision and values; position compliance risks within broader socio-economic environment and align strategies with organizational direction and values.
  - Step three: identify risks
    - Develop compliance programs around taxpayer segments and sub-segments (e.g., location, size, age, entity type, industry sector).
    - Use multiple information sources to identify risks, including:
      - The current computerized risk analysis system
      - Tax returns, financial statements, taxpayer information schedules and registration applications
      - The audit program
      - Oral and written taxpayer enquiries
      - Other tax administrations
      - Customs, social security agencies, land title offices and other regulatory agencies
      - Third-party intermediaries such as banks, credit card providers and stock exchanges
      - Professional bodies and peak industry groups
      - The general community
    - Combine top-down (strategic, highly visible risks) and bottom-up (operational, localized risks) assessments and use multiple “lenses” (taxpayer segments, industry segments, revenue types, core tax obligations).
    - Capture identified risks in a formal “risk register” describing each risk and its threat to the revenue system (e.g., impact on revenue, government policy goals, community confidence, reputation).
  - Step four: assess and prioritize risks
    - Use a risk rating matrix considering likelihood and consequence; consequence includes more than revenue (integrity, community confidence).
    - Aim to have all “extreme” or “high” risks under active management; lesser risks may be placed on a watching brief.
    - Investment decisions should balance number of serious risks, relative estimated impact, and available operating budget.
  - Step five: analyze compliance behavior
    - Use a compliance model to identify drivers and attitudes underlying noncompliant behavior and to determine appropriate mix of responses.
    - The Compliance Model:
      - Left side: factors influencing taxpayer behavior (business, industry, sociological, economic, psychological).
      - Right side: taxpayer attitudes to compliance and corresponding compliance strategies.
    - Analyze underlying causes (e.g., cash flow needs, competitive environment, perceptions of fairness) rather than treating symptoms.
    - Goal is to mitigate risks to an acceptable level, not necessarily eliminate them completely.
  - Step six: determine treatment strategies
    - Develop responses in context of allocated resources, document desired outcomes and evaluation methods.
    - Consider holistic, integrated strategies to avoid piecemeal approaches; match interventions to causes (e.g., education for ignorance, enforcement for deliberate evasion).
    - Aim for an optimal mix: education, assistance, improved law and procedures, audit and enforcement.
    - Anticipate unintended consequences and identify strategies to address them.

### Developing, implementing and evaluating treatment strategies (Box 2 and evaluation guidance)
- Factors to consider when identifying and analyzing compliance risks:
  - Precisely define the risk and affected population.
  - Identify underlying causes and whether law or administrative systems contribute.
  - Judge how compliance attitudes were formed and validate judgments through taxpayer engagement.
- Planning and implementation checklist:
  - Articulate desired outcomes and success criteria.
  - Ensure the agency’s interpretation of the law is understood and communicated if necessary.
  - Improve ease/cost of compliance (educational material, self-help tools like industry benchmarks or on-line calculators).
  - Identify and assist taxpayers genuinely trying to comply.
  - Ensure internal risk and intelligence capabilities and staff skills/support tools are adequate for detection and enforcement.
  - Identify unaddressed underlying causes and likely unintended consequences.
- Evaluating effectiveness:
  - Use a suite of performance indicators that are specific, measurable, achievable, relevant, and timed.
  - Distinguish effectiveness indicators from efficiency and cost-effectiveness measures; ultimate success is impact on voluntary compliance.
  - Establish baseline data prior to implementation; if unavailable, use first-year implementation data as a starting point.
  - Keep number of indicators limited to ensure monitoring and evaluation occurs.
  - Use the strategy evaluation model to link inputs, activities, outputs (quantity/quality), outcomes (effect/impact), effectiveness, cost effectiveness, and efficiency.

*Source: Technical Notes and Manuals 10/17 | 2010*

### Box 3. Combating Tax Avoidance Relating to International Transactions in Brazil

### Box 3. Combating Tax Avoidance Relating to International Transactions in Brazil

### Background
- Following the opening of the economy in the early 1990s, Brazil experienced a rise in the volume of international transactions.
- A variety of tax avoidance schemes emerged involving transfer pricing, triangular operations through tax havens, and other offshore arrangements (at the time, profits of Brazilian companies abroad were not taxed at home).

### Integrated strategy to combat tax abuse associated with international transactions
- Given the nature and complexity of the problem, an integrated strategy was developed including the following elements.

#### Tax policy improvements
- Adoption of new legislation specifically dealing with:
  - transfer pricing rules;
  - transactions with tax heavens and tax-favorable jurisdictions (including the introduction of a clear objective rule to define such jurisdictions);
  - the introduction of worldwide taxation criteria.

#### Institutional strengthening
- Establishment of specialized units within the organizational structure of the revenue agency (Receita Federal). In particular:
  - a special Office on International Affairs (OIA) responsible for administering and auditing multinational corporations and taxpayers involved with substantial international transactions (this was based in São Paulo close to the main taxpayers);
  - an Investigation and Intelligence Department (IID), responsible for investigating and detecting tax crimes, including those related to international financing and money laundering;
  - four Tax Attaché offices located in Argentina, Uruguay, Paraguay and the US to provide services and gather information on international transactions of Brazilian taxpayers.

#### New information systems
- Development of new sources of information on international transactions, including customs operations, including:
  - integrated information systems on foreign trade (e.g., SISCOMEX, which provides a global view of the taxpayer’s operations and networks);
  - development of new customs information systems based on risk management; coordination and information exchange across federal agencies, including the Central Bank which controls currency exchange flows, and the Council on Financial Activities Control;
  - introduction of new fields on the corporate tax return specifically designed to gather information on such transactions.

#### Internal recruitment and training
- OIA and IID officers were recruited based on a specific skill profile, including language skills, accounting, and auditing of large corporations.
- Receita Federal offered specialized training, including participation in training programs offered by the IRS Criminal Investigation Unit.

#### Networking and partnerships with key stakeholders in Brazil and abroad
- An extensive pool of stakeholders was consulted on the need to strengthen the prosecution process. Examples include:
  - multinationals and key private sector representatives were invited to participate in the process of lawmaking and drafting of regulations (they helped define objective methods for the transfer pricing rules);
  - a series of seminars and conferences was organized to raise awareness and to prepare taxpayers for the new legislation;
  - extensive work to explain and alert judges from the administrative tribunal and judicial branch about the importance of enforcing the new law and prosecuting offenders, and the need to focus more on tax law interpretation;
  - partnering with tax administrations internationally and exchanging information (for example, signing an information exchange treaty with Argentina).

*Technical Notes and Manuals 10/17 | 2010 — Box 3. Combating Tax Avoidance Relating to International Transactions in Brazil*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1017.pdf_