## _wp04237 — 1. Selected Economies by Main Type of Collection Agency

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---

### I. Introduction and Purpose
- Increasing awareness that financial sustainability of pension and other social funds depends on more effective collection of contributions.
- Paper describes international practice for administrative arrangements for collection of social contributions within context of pension institutions and revenue administrations.
- Emphasis: need for a government-wide approach to successful reforms; arguments apply equally to health and other social contributions.

### II. Basic Administrative Models for Pension Systems
- Two basic administrative models for public pension institutions:
  - Full-service social insurance institution model: all major functions, including collection of revenues and payment of benefits, managed by pension institution.
    - Examples: Brazil, France, Germany, Japan, Mexico, Thailand.
  - Benefit payment model: relies on tax administration for collection and focuses social institutions on payment of benefits.
    - Examples: Australia, Canada, New Zealand, Sweden, United Kingdom, United States.
- Variations and additional arrangements:
  - United States: Social Security Administration is a benefit payment agency; cash management and investment handled by the treasury.
  - Sweden: benefit payment agency handles cash management and investment of pension assets.
  - Increasing adoption of funded, individual account approaches using fund managers (private or public sector).

### III. International Practice — Main Type of Collection Agency (Selected Economies)
- Tax Collection Agencies:
  - Albania; Argentina; Australia; Bulgaria; Canada; Croatia; Estonia; Finland; Hungary; Iceland; Ireland; Latvia; Montenegro; New Zealand; Netherlands/Norway; Romania; Russia; Serbia; Slovenia; Sweden; United Kingdom; United States
- Social Security Organizations:
  - Austria; Belgium; Brazil; Czech Republic; China, People’s Republic of; France; Germany; Greece; Indonesia; Japan; Mexico; Philippines; Poland; Portugal; Korea, Republic of; Slovak Republic; Switzerland; Thailand; Uruguay
- Fund Managers:
  - Chile; El Salvador; Hong Kong SAR; Malaysia; Peru; Singapore

### IV. Core Functions, Administrative Systems, and Performance Criteria
- Function 1 — Revenue base
  - Systems: Contribution collection system
  - Criteria: Actual compared with potential collections, level of arrears
- Function 2 — Benefit payments
  - Systems: Benefit payment system
  - Criteria: Error rates based on ratio of correct payments to those legally required
- Function 3 — Financial management and investments
  - Systems: Actuarial office for projection of revenues and expenditures; financial office to control investments
  - Criteria: Accuracy of projections in relationship to actual results; performance of investments
- Function 4 — Maintenance of data
  - Systems: Data and information systems; computer systems and telecommunication networks
  - Criteria: Record accuracy; usefulness of data bases; timeliness of reports

### V. Administrative Costs, Collection Reliability, and Sustainability
- Administrative costs:
  - Mature, well-run social security systems: administrative costs of pension programs often less than one percent of contribution collections (or benefits payments).
  - More difficult programs (disability pensions): administrative costs often less than five percent.
  - Funded, individual account schemes often have relatively high administrative costs in relation to contributions collected or assets managed.
  - Social insurance schemes are generally less costly to administer than individual account schemes.
- Collection reliability and sustainability:
  - Reliable revenue collection is critical: contributory pension systems cannot pay benefits unless required contributions are made.
  - Effective coverage = proportion of people brought into the system as contributors and who will ultimately receive a pension.
  - Weak collection systems → weak effective coverage; may require government subsidization and undermine scheme rationale.
  - Collection adequacy is an issue in advanced economies (examples: Italy, France) and most critical in developing and transition countries.

### VI. Historical Development and Regional Trends
- Two fundamental organization models:
  - Parallel collection systems (France, Germany).
  - Integrated collection systems (Sweden, United States, Australia).
- Conversions: from parallel to integrated occurred in Ireland, Italy, Sweden, United Kingdom, Estonia, Hungary, Latvia, Slovenia.
- Provident/fund manager models: Hong Kong SAR, Malaysia, Singapore collect contributions, manage investments and pay benefits.
- Latin America: private defined contribution models starting with Chile in the 1980s (Chile, Peru, El Salvador).
- CEE and former Soviet Union: trend toward integration in many countries (examples: Croatia, Estonia, Hungary, Latvia, Russia, Serbia, Slovenia, Uzbekistan); experience mixed (Georgia reversed integration; Latvia reinstated integration).

### VII. Information, Accountability, and Transparency Needs
- Social funds require individual account records to track lifetime earnings/contributions for accurate benefit calculations and indexing.
- Disability pensions and health systems impose greater information burdens (medical data, monthly family/income updates).
- Automation and modern IT can increase efficiency; pension design should avoid excessive data collection burdens.
- Governance: regular reports, externally audited annual reports, strong management information systems, and formal control mechanisms are essential to maintain public support and prevent corruption.

### VIII. Rationale for Unification of Tax and Social Contribution Collection
- Overriding objective: achieve best possible revenue collection performance to fund long-term sustainability of social insurance schemes.
- Reasons for full integration:
  - Commonality of core processes: identify/register contributors using unique registration numbers; similar employer reporting and withholding; banking/payment processes; enforcement and risk-based audit methods.
  - Efficient use of resources: marginal cost of expanding tax systems to include social contributions often relatively minor; avoids duplication of reforms and IT development.
  - Lower government administration costs: fewer staff, economies of scale, lower infrastructure and IT costs.
  - Lower taxpayer compliance costs: common forms, integrated audits, electronic filing and payment.
  - OECD treats social contributions as “taxes” in tax burden statistics.
- Strategic choice: maintain separate agencies with information-sharing mechanisms or consolidate into one unified collection agency.

### IX. Improved Inter-Governmental Coordination and Harmonization
- Integration requires harmonizing:
  - Definition of income (including in-kind), employee/self-employed definitions, filing intervals, payment dates, penalties.
- Harmonization can reduce compliance and administration costs but may impose constraints; trade-offs required for sectoral factors.

### X. Key Implementation Issues and Typical Timeframes
- Timing: assess readiness of tax administration; integration should be tied to modernization if tax capacity is insufficient.
- Project schedule estimates:
  - Designing new approach and high-level business processes: up to 12 months with full-time working group members
  - Drafting legislative amendments and legislative process: at least a further six months
  - Implementation after legislation passed: likely six to nine months
  - Effective implementation likely to take a minimum of two years
- Transition approaches: phased pilots or one-step transfers; both can succeed if properly managed.
- Critical legislative issues:
  - Define when a contribution is “paid”; align appeals processes; authorize tax agency to collect, enforce, impose penalties, and exchange information; address collection priority and privacy/secrecy provisions.

### XI. Administrative Design Principles and Operational Features
- Broad design strategy:
  - Revenue administration collects most government revenues; social agencies administer programs and manage benefits/eligibility.
  - Employers remit single payments to revenue administration; employers file declarations reconciled by revenue administration and provided to social agencies.
  - Minimize separate employer reports; adopt a common numbering system (TIN) with security check digit.
  - Integrate social contributions into core tax processes: filing, processing, enforced collection, audits, liabilities, sanctions, forms, internal procedures.
  - No separate management structure solely for social contribution collection within tax administration.
- Design principles:
  - Eliminate duplication; allocate tasks by agency competency.
  - Legislative authority for agencies to act on behalf of each other and exchange information.
  - Collect only necessary information; select a single return period and filing method (annual with monthly change reporting recommended).
  - Simplify reconciliation: keep payment and information reporting together and reconcile once.
  - Consider loosening tight linkage between individual contributions and benefit entitlement where feasible to increase administrative efficiency.
- Information flow:
  - Revenue administration reconciles information returns with payments and supplies required information to social funds, requiring legislative authority and acceptance by social funds.
  - Maintain reliable accounting systems and ensure social contributions credited to a separate account immediately after payments received.
  - Employers should report regularly to employees on amounts remitted on their behalf.

### XII. Critical Success Factors and Project Management
- Government-wide approach with ministerial guidance, oversight, and a task force including legislative and administrative experts.
- Clear roles:
  - Social insurance agency: policy, plan design, contribution rules, participant records, eligibility, benefit delivery.
  - Tax administration: collection and audit verification processes under law.
- Use MOUs, performance standards, funding arrangements (cost recovery from social insurance agency possible), steering committee, dedicated project team, competent project manager.
- Management of change: staffing, training, taxpayer communication, assimilation of transferred staff into tax administration culture.
- Dealing with existing arrears:
  - Options: arrears remain with social agency; transfer arrears ring-fenced with special task force; transfer arrears and add to existing arrears stock.
  - Best practice: transfer arrears with uncollectible debts written off prior to transfer or apply a special task-force approach; avoid routine short-period transfers to independent collections agencies.
  - Typical timeframe cited for certain practices: after a period usually between two and six months arrears are sometimes transferred to an independent collections agency (practice to be avoided).

### XIII. Recent Experiences in Transition Countries — Cross-Country Lessons
- Common condition: both social security institution and tax collection agency often require significant modernization.
- Key lessons and priorities:
  - Take a cross-government view of administration reform.
  - Ensure political commitment and involve social partners.
  - Proper sequencing and harmonization of policy and administration.
  - Attend to information needs of agencies.
  - Secure implementation and project management capacity, internal and external funding, and external technical assistance.
  - Encourage strong interagency coordination and use risk management techniques to protect revenue during change.
- Factors determining success:
  1. Status of modernization of the tax administration
  2. Status of modernization of the social security agency
  3. Public perceptions and taxpayer/contributor compliance
  4. Extent of harmonization of policy and legislation
  5. Effectiveness of administrative design and implementation
  6. Project planning and management, including political and institutional commitment
  7. Strength of interagency coordination after the integration
- Optimal circumstance: both social insurance agency and tax administration are modern and effective (example: Sweden).

### XIV. Albania Case Study — Background, Rationale, and Implementation Timetable
- Background:
  - Until December 2002: Social Insurance Institute (SII) collected contributions; government decided to transfer collection to General Directorate of Taxation (GDT).
- Contribution structure (as stated):
  - Social insurance contribution rate: 42.5 percent—comprising a 32.5 percent employer contribution, and 10 percent from the employee
  - Healthcare joint contribution: 4 percent (employees and employers)
  - Contribution rates in aggregate are amongst the highest in Europe
- Key statistics and indicators:
  - Contributions in 2001 accounted for 3.8 percent of GDP
  - Less than 40 percent of the workforce makes contributions
  - 4 in every ten contributors come from the public sector
  - It is estimated that less than 50 percent of private urban companies are known to the SII, of which around 80 percent make contributions
- Comparative figures (Social Contribution Collections: Comparison Among Eastern European Countries, 2001) — Percent of GDP ; Standard Contribution Rate:
  - Albania: 3.8 ; 45.9
  - Bulgaria: 7.8 ; 38.7
  - Croatia: 12.9 ; 37.2
  - Czech Republic: 14.8 ; 47.5
  - Estonia: 12.1 ; 33.0
  - Hungary: 12.9 ; 35.0
  - Latvia: 10.5 ; 35.0
  - Lithuania: 6.8 ; 35.0
  - Macedonia: 10.7 ; 30.1
  - Romania: 12.4 ; 52.5
  - Slovakia: 11.9 ; 50.8
  - Slovenia: 15.5 ; 38.0
- Institutional comparison (capacities):
  - SII: organizational culture focused on benefit payment; weak enforcement powers; seventy staff allocated to collection enforcement activities (7 percent of SII workforce); limited computerization; weak central management and limited training.
  - GDT: focus on revenue collection; full range of enforcement powers; over 500 staff allocated to audit and debt collection (almost 40 percent of GDT workforce); core revenue functions computerized; modernization underway; strengthened headquarters and training programs.
- Implementation timetable (revised):
  1. Large taxpayers — November 1, 2003
  2. Medium size businesses (i.e., taxpayers registered for VAT) — May 1, 2004
  3. Government budget institutions — August 1, 2004
  4. Small businesses — January 1, 2005
  5. Remaining groups—mostly the rural sector — July 1, 2005
- Implementation notes:
  - Transfer staged: begin with large enterprises; LTU administers largest 450 taxpayers.
  - High-level project plan areas: legislative changes; computer system development; process design; taxpayer publicity; workload and staffing; data exchange; new forms; staff training.
- Critical issues and lessons:
  - Project management requires strong coordination; assigning the project to deputy minister of finance and interdepartmental working group effective.
  - Legal changes required to give GDT authority; proposed harmonization amendments were rejected by Parliament and will need revisiting.
  - Integration offers opportunity to strengthen withholding systems expertise and employer compliance.

### XV. Bulgaria Case Study — Rationale and Implementation Progress
- Rationale:
  - Poor collection performance for mandatory social contributions and need for tax administration overhaul led to decision to create a unified revenue collection agency.
- Implementation milestones:
  - June 2000: Council approved concept paper (harmonization, integrated IT, single national identification number, use of banks, risk-based audits, integrated taxpayer assistance, modern organization).
  - November 2002: Legislation enacted to establish the NRA as a formal legal entity reporting to the minister of finance; NRA given responsibility for collecting domestic taxes and social contributions.
  - June 2003: World Bank loan secured to fund design and implementation of the NRA.
- Design principles for integrated work processes:
  - Single national database with single identifier (Bulstat number).
  - Simple registration requiring one visit.
  - Single account per taxpayer/contributor.
  - Integrated registration, processing, collection, taxpayer service, audit, and appeals.
  - Maximum use of banks; simplified forms and electronic filing; joint audit activities; speedy cash and information flows; on-line access by NSSI to data for administering benefits.
- Lessons learned:
  - Strong government support, secure funding, and comprehensive reform package are positive features.
  - Legal and enforcement overhauls proved more complex than anticipated.
  - Project management required specialist expertise; earlier timelines were too ambitious; incremental approaches considered.

### XVI. Romania Case Study — Background, Rationale, Implementation, and Issues
- Background:
  - Three main social insurance funds: National Health Insurance Fund (NHIF), National Pension Fund (NPF), Unemployment Insurance Fund (UIF)
  - Pension reform in 2000: benefits based on lifetime employment history; scope expanded to self-employed, farmers, unemployed; farmers excluded from mandatory coverage
  - Compliance deteriorated in mid-1990s; outstanding arrears high; 1.6 million civil contracts should have been registered under new law but only 100,000 were registered
- Rationale for integration:
  1. Improve administrative efficiency by centralizing fragmented collection services and enforcement
  2. Improve tax and social contribution collection compliance
- Implementation:
  - Decision in 2002 to integrate social contributions with withholding taxes; NAFA established and transfer effective January 1, 2004 for employers
  - Transferred functions include payment, audit, controls, appeals, enforced collection of arrears for employers
  - Employers make payments to tax administration but must advise each social house monthly of employee names, amounts remitted, period of coverage
  - Staff transferred from social houses in stages (October 2003; December 2003; January 2004)
  - One-time self-declaration of arrears due February 15, 2004
  - Reporting of information initially remained unchanged; longer-term objective to integrate payments and information reporting
- Critical issues and lessons:
  - Current work often a transfer of activities rather than full redesign; full benefits require comprehensive modernization including harmonization of tax bases and IT integration
  - NAFA experienced significant reconciliation problems between data from social houses and employer self-declarations; significant manual effort required and reconciliation expected to last many months
  - Administrative design challenges: local filing requirements, inadequate transferred staff, fragmented original designs, differing legal reporting approaches among programs
  - Integration of reporting will require selecting one reporting system for all programs and tax; full alignment of bases remains a future objective
- Expected outcomes:
  - Early improvements in audit activity and enforced collection expected quickly
  - Further work on legislation rationalization and business process redesign required for major benefits

### XVII. Sweden — Example of a Fully Integrated System
- Evolution and features:
  - National Tax Board (NTB) and local tax offices responsible since mid-1980s for collections administration and enforcement; NSIB administers benefits
  - Policy harmonization included unifying the wage base and removal of complex deductions and maximum wage base rules
  - Common personal identity number used; regular exchange of individual circumstance changes with NSIB
- Operational practices:
  - Monthly collection from employers using a single-page tax return form; returns and payment due by the 10th of the following month
  - Payments through banking system with electronic payment information to NTB
  - Annual checks from employees’ returns against employers’ data; in-depth audits where warranted
- Compliance and enforcement:
  - High level of payment compliance attributed to compliance culture and strong enforcement by tax administration
  - Prompt follow-up of arrears with reminders and stronger enforcement, active employer audits, and effective fines and penalties

### XVIII. Conclusions — Project Status and Key Messages
- Integration projects in transition countries are at early stages; pace and scope vary and implementation success is mixed.
- Early signs:
  - Tax administrations stimulated to pay closer attention to PIT collection and withholding
  - Social insurance agencies beginning to reorient toward benefit payment roles
- Substantial work remains; revenue administration improvements alone will not address all social protection issues (e.g., high contribution rates, rural non-compliance).
- Success depends on continued political support, careful project management, legal harmonization, IT and process redesign, adequate funding, and strong interagency coordination.
- If implementation succeeds, project benefits (improved collections, lower administration and compliance costs, better information flows) stand to be substantial.

*Source: _wp04237 (IMF working paper excerpts: "1. Selected Economies by Main Type of Collection Agency", sections on practice, implementation issues, and case studies including Albania, Bulgaria, Romania, Sweden).*

### 1. Selected Economies by Main Type of Collection Agency ....................................................6

### 1. Selected Economies by Main Type of Collection Agency

### I. Introduction
- Increasing awareness that the financial sustainability of pension and other social funds depends on achieving more effective collection of contributions.
- Many transition countries struggle to find an effective collection strategy suited to the diversity of pension schemes.
- Failure to collect the full amount of contributions in several Central and Eastern European (CEE) countries during the 1990s has:
  - deprived pension schemes of resources needed to meet pension obligations, or
  - produced a drain on general revenues.
- Debate in some countries over merits of:
  - collection of contributions directly by pension institutions or fund managers, versus
  - collection by a unified revenue administration.
- International examples:
  - Parallel collection tradition: France and Germany.
  - Unified revenue administration example: Sweden; also used in Canada and the United States.
- This working paper is an outgrowth of discussion papers prepared for an IMF–World Bank workshop (April 2003) and related meetings (November 2003 ILO conference; June 2004 ISSA meeting).

### II. Current Practice and Critical Issues
- Purpose: describe international practice for administrative arrangements for collection of social contributions, within context of pension institutions and revenue administrations.
- Emphasis: need for a government-wide approach to successful reforms.
- Note: arguments for integrating pension contribution collection apply equally to health and other social contributions.

### III. Basic Features of Pension Systems
- Core requirements for a viable pension system:
  - reliable collection of revenues;
  - correct calculation and prompt payment of benefits;
  - secure financial management and productive investment of assets;
  - maintenance of accurate data on contributors and beneficiaries;
  - production of financial statements and reports supported with effective governance, transparency, and accountability systems.
- Two basic administrative models for public pension institutions:
  1. Full-service social insurance institution model: all major functions, including collection of revenues and payment of benefits, are managed by the pension institution.
     - Example countries noted: Brazil, France, Germany, Japan, Mexico, and Thailand.
  2. Benefit payment model: relies on the tax administration for collection and focuses the role of social institutions on payment of benefits.
     - Examples of this model: Australia, Canada, New Zealand, Sweden, the United Kingdom, and the United States.
- Variations and additional arrangements:
  - In the United States, Social Security Administration is a benefit payment agency; cash management and investment of its assets handled by the treasury.
  - In Sweden, the benefit payment agency handles cash management and investment of pension assets.
  - Increasing adoption of funded, individual account approaches using fund managers (private or public sector, regulated by government).

### IV. International Practice — Table 1 (Selected Economies by Main Type of Collection Agency)
- Tax Collection Agencies:
  - Albania
  - Argentina
  - Australia
  - Bulgaria
  - Canada
  - Croatia
  - Estonia
  - Finland
  - Hungary
  - Iceland
  - Ireland
  - Latvia
  - Montenegro
  - New Zealand
  - Netherlands/Norway
  - Romania
  - Russia
  - Serbia
  - Slovenia
  - Sweden
  - United Kingdom
  - United States
- Social Security Organizations:
  - Austria
  - Belgium
  - Brazil
  - Czech Republic
  - China, People’s Republic of
  - France
  - Germany
  - Greece
  - Indonesia
  - Japan
  - Mexico
  - Philippines
  - Poland
  - Portugal
  - Korea, Republic of
  - Slovak Republic
  - Switzerland
  - Thailand
  - Uruguay
- Fund Managers:
  - Chile
  - El Salvador
  - Hong Kong SAR
  - Malaysia
  - Peru
  - Singapore

### V. Core Functions, Administrative Systems, and Performance Criteria — Table 2
- Function: 1. Revenue base
  - Systems: Contribution collection system
  - Criteria for Evaluation: Actual compared with potential collections, level of arrears.
- Function: 2. Benefit payments
  - Systems: Benefit payment system
  - Criteria for Evaluation: Error rates based on ratio of correct payments to those legally required
- Function: 3. Financial management and investments
  - Systems: Actuarial office for projection of revenues and expenditures and financial office to control investments
  - Criteria for Evaluation: Accuracy of projections in relationship to actual results; performance of investments
- Function: 4. Maintenance of data
  - Systems: Data and information systems; computer systems and telecommunication networks
  - Criteria for Evaluation: Record accuracy; usefulness of data bases; timeliness of reports

*IMF working paper: Selected sections from "1. Selected Economies by Main Type of Collection Agency" (chapter/section content provided).*

### 5. Reporting and

### 5. Reporting and

### B. Pension System Administration Costs
- In mature, well-run social security systems, administrative costs of pension programs are often less than one percent of contribution collections (or benefits payments, depending upon which ratio is most appropriate).
- For more difficult to administer programs like disability pensions, administrative costs are often less than five percent.
- Funded, individual account schemes often have relatively high administrative costs in relation to contributions collected or assets managed.
- Social insurance schemes are generally less costly to administer than individual account schemes.
- High administrative cost of collection reduces capacity to pay adequate benefits and threatens sustainability.

### C. Collection Reliability and Pension System Sustainability
- Reliable revenue collection is critical: contributory pension systems cannot pay benefits unless required contributions are made.
- The level of assets for investment returns depends on actual collections.
- Effective coverage = proportion of people brought into the system as contributors and who will ultimately receive a pension.
- Weak collection systems → weak effective coverage; individuals may enter without having made required contributions, weakening the system.
- Inadequate effective coverage often leads to government subsidization; major subsidization of a contributory scheme can undermine its rationale.
- Adequacy of benefits must be calibrated to reliable collections; policymakers should avoid over-promising benefits based on dubious revenue assumptions.
- Collection adequacy is an issue in advanced economies (examples cited: Italy, France) and is critical everywhere, though most dramatic in developing and transition countries.

### D. Historical Development of Collection Models
- Two fundamental organization models:
  - Parallel collection systems (examples: France, Germany).
  - Integrated collection systems (examples: Sweden, United States).
- Parallel systems historically developed in Western Europe; integrated systems in places where social insurance institutions developed later (e.g., Australia, United States).
- Conversions from parallel to integrated have occurred in Ireland, Italy, Sweden, United Kingdom, Estonia, Hungary, Latvia, Slovenia.
- No cases of a well-run integrated system converting to a dual system were identified.
- Regional classification (predominant type of collection agency) highlights variation across Asia/Pacific, Americas, Western Europe, Central and Eastern Europe and former Soviet Union (selected country lists present in source).
- Provident/fund manager models: Hong Kong SAR, Malaysia, Singapore collect contributions, manage investments and pay benefits (public sector provident funds resemble social insurance institutions but differ from traditional Western European social insurance).
- Latin America: adoption of private defined contribution models beginning with Chile in the 1980s; examples include Chile, Peru, El Salvador; Argentina initially adopted then integrated collections into tax administration.
- Central and Eastern Europe and former Soviet Union: trend toward integration (examples: Croatia, Estonia, Hungary, Latvia, Russia, Serbia, Slovenia, Uzbekistan); experience mixed (e.g., Georgia reversed integration; Latvia reinstated integration).

### E. Information Needs of Social Systems
- Pension institutions require individual account records to track lifetime earnings/contributions for accurate benefit calculations and indexing.
- Eligibility, initial benefit calculations, and ongoing record updates (address/status) necessitate reliable records; automation via modern information technology can increase efficiency.
- Disability pensions: greater challenges—medical data hard to electronicize; frequent re-evaluations and post-entitlement actions increase complexity.
- Health insurance institutions often require monthly updates on family composition and incomes, adding complexity.
- Pension design should avoid creating excessive data collection burdens; tradeoff between policy information needs and ease of administration.

### F. Accountability and Transparency Issues
- Pension institutions should provide regular reports to contributors, beneficiaries, and the public; externally audited formal annual reports are increasingly produced.
- Strong management information systems identify issues, support policy development, and provide accounting data.
- Governance requires adequate checks and balances with strong oversight of collection, payment and investment functions.
- Public institutions, including autonomous or semi-autonomous entities, need formal control mechanisms similar to private fiduciary/regulatory regimes.
- Accountability and transparency are essential to maintain political and public support; corruption or creation of special privileges undermines schemes.

### III. Rationale for Unification of Collection of Tax and Social Contributions — Introduction
- Consolidating collection of key government revenues into one professional revenue administration is logical within whole-of-government reform.
- Interim joint operations (data cross-checks, joint reporting, joint audits) yield benefits but are not substitutes for long-term unification.
- Overriding objective of unification: achieve best possible revenue collection performance to fund long-term sustainability of social insurance schemes.
- Major benefits arise from synergies between organizations and reductions in administrative and compliance costs.

### B. The Reasons for Full Integration
- Commonality of core processes between tax and social contribution collection:
  - Identify and register contributors/taxpayers using a unique registration number.
  - Collect information returns from employers/self-employed based on similar income definitions.
  - Employer withholding and payment processes (usually through banking system).
  - Effective follow-up for non-filers/non-payers.
  - Verification of return accuracy using risk-based audit methods.
- Differences in data needs, record retention, taxpayer coverage, and taxable bases add complexity but are manageable.
- Efficient use of resources: marginal costs of expanding tax systems to include social contributions often relatively minor; avoids duplication of similar reforms.
- Social contributions often resemble “tax-type” collections, especially employee withholding taxes.
- Strategic choice: maintain separate agencies with information-sharing mechanisms or consolidate into one unified collection agency.
- OECD treats social contributions as “taxes” in tax burden statistics.
- Public attitudes to compliance may vary by contribution type (example: unemployment insurance vs. pension contributions); modern revenue administrations’ compliance programs address complex compliance risks.
- Core competencies:
  - Tax administrations: strong collection, compliance-based culture, assessment and collection focus.
  - Social insurance agencies: focus on establishing entitlements and benefit delivery; collections responsibility may compromise benefit provision.
- Lowering government administration costs from integration:
  - Fewer staff, economies of scale in HR and training, fewer managers, common processes.
  - Lower infrastructure costs.
  - Elimination of duplicated IT development costs.
- Lowering taxpayer and contributor compliance costs:
  - Common forms and record-keeping, integrated audits, internet-based electronic filing and payment lower compliance costs and improve accuracy.

### C. Improved Inter-Governmental Coordination
- Integration requires higher inter-agency cooperation on harmonizing:
  - Definition of income (including in-kind).
  - Definition of employee/self-employed.
  - Filing intervals, payment dates, penalties.
- Harmonization may impose constraints but can reduce compliance and administration costs and support long-term sustainability.

### IV. Key Implementation Issues and Risks to Be Addressed — A. Implementation Issues
- Timing of introduction: assess readiness of tax administration; integration should be tied to modernization if tax administration capacity is insufficient.
- Country examples:
  - Latvia: successful transfer preceded by analysis and donor-financed technical assistance.
  - Albania: phased implementation pilot in the LTU supported by IMF and World Bank.
  - Bulgaria: plans to create a National Revenue Agency to absorb tax administration and social insurance/health collections.
  - Romania: transfer to NAFA in January 2004 with modernization plans underway.
- Government and senior management commitment: requires clear leadership, resources, monitoring, and constructive agency collaboration.
- Implementation timetables: choice between phased (e.g., LTU pilot) or one-step transfers; both approaches can succeed if properly managed.
- Project schedule estimates:
  - Designing new approach and high-level business processes: up to 12 months with full-time working group members.
  - Drafting legislative amendments and legislative process: at least a further six months.
  - Implementation after legislation passed: likely six to nine months.
  - Effective implementation likely to take a minimum of two years.
- Transitional measures: phased approaches and interim arrangements (examples in source Table 4).

### IV. B. Policy and Legislation Issues — Harmonization
- Harmonization needed before integration in areas including:
  - Structure of social contribution and tax rates.
  - Definition of payment/income base.
  - Coverage and payer definitions, including special categories (e.g., agricultural sector).
  - Calculation and payment regulations.
  - Appeals and judicial processes.
- Trade-offs will be required to reflect unique sectoral or industry factors while minimizing administrative divergence.
- Key legislative considerations:
  - Definition of when a contribution is considered “paid” affects fund responsibilities and reconciliation duties.
  - Appeals process should align across tax and social contributions to reflect harmonized bases.
  - Legislation authorizing tax agency to collect, enforce, impose penalties, and exchange information is required.
  - Rules on collection priority (e.g., bankruptcy distributions) must be addressed; social contributions may be trust monies with higher priority.
  - Privacy/secrecy provisions may require amendment to permit necessary information sharing.

### IV. C. Administrative Issues — Key Design Features
- Broad design strategy elements from systems designed for tax-based collection:
  - Revenue administration collects most government revenues; social agencies administer programs and manage benefits/eligibility.
  - Employers and non-employer contributors remit single payments to revenue administration; employers file information declarations reconciled by revenue administration and provided to social agencies.
  - New/departing employees or dependent changes handled by a mix of real-time or annual reporting depending on country practice.
  - Minimize separate employer reports based on payroll information.
- Scope of transfer: avoid splitting collection responsibility; transfer all collection activity to one agency.
- Common numbering system: adopt a taxpayer identification number (TIN) with security check digit; pre-existing social insurance number (SIN) may be used as TIN if criteria met.
- Integration into core tax processes: integrate social contributions into filing, processing, enforced collection, and post-assessment audit on a seamless basis with common liabilities, sanctions, forms, and internal procedures.
- No separate management structure solely for social contribution collection within tax administration; accountability integrated into functional departmental managers.
- Objectives of integration include:
  - Improved collections performance across tax and social funds.
  - Better compliance through integrated audit and enforcement.
  - Lower compliance burden on taxpayers.
  - Reduced total government collection costs.
  - Reduced social fund costs by sharing information collected once.
- Design principles to respect:
  - Eliminate duplication; allocate tasks by agency competency.
  - Legislative authority for agencies to act on behalf of each other and exchange information.
  - Collect only necessary information for verification, eligibility, and benefit management.
  - Select a single return period and filing method (annual with monthly change reporting recommended).
  - Simplify reconciliation: payment and information reporting should remain together and be reconciled once.
  - Ease of administration and reduced burden on taxpayers as core criteria.
  - Consider loosening tight linkage between individual contributions and benefit entitlement where feasible for administrative efficiency.
- Managing information needs of social funds:
  - Social funds require both payment information and contributor detail for entitlement and accounting purposes.
  - Best approach: keep information reporting and payment processing together; revenue administration reconciles information returns with payments and supplies required information to funds, requiring legislative authority and acceptance by social funds.
- Accounting and reporting for collections:
  - Maintain effective, reliable accounting systems and ensure social contributions credited to a separate account immediately after payments received.
  - Transparency: employers should report regularly to employees on amounts remitted on their behalf; internet technologies can improve accountability and transparency.

### IV. D. Critical Success Factors
- Government-wide approach needed: issues span multiple ministries and require ministerial guidance, oversight, and a task force of legislative and administrative experts.
- Roles and relationships:
  - Social insurance agency: exclusive responsibility for policy, plan design, contribution rules, participant records, eligibility, benefit delivery.
  - Tax administration: exclusive responsibility for collection and audit verification processes as per law.
  - Consultation process and memorandum of understanding (MOU) recommended to manage inter-agency change proposals.
- Performance standards: set and report standards for timeliness, debt and non-filing actions, audits, and speed of information/payment transfers.
- Funding: tax administration should be properly funded; cost recovery from social insurance agency based on accurate management accounting is an approach used in some countries.
- Project management: essential to have an effective steering committee, dedicated project team, and a competent project manager to plan, execute, monitor milestones, and manage risks.
- Management of change: address impacts on operational policies, staff selection and transfer, training, taxpayer/employer communication, and assimilation of transferred staff into tax administration culture.
- Inter-agency management relationships: strong protocols, MOUs, service level agreements, senior liaison meetings, and relationship managers needed; IT plans must accommodate both agencies’ needs.
- Dealing with existing arrears:
  - Options: arrears remain with social contributions agency; transfer arrears to tax administration ring-fenced with special task force; transfer arrears and add to existing arrears stock.
  - Best practice suggests transferring arrears with uncollectible debts written off prior to transfer or applying a special task-force approach; avoid having arrears transferred to an independent collections agency after a short period.
  - Typical timeframe cited for certain practices: after a period usually between two and six months arrears are sometimes transferred to an independent collections agency (practice to be avoided).

V. Conclusion — Integration Experience in Central and Eastern Europe
- The source documents a clear trend over the last decade toward integration in the region, with mixed implementation success and an uncertain pace and scope of future integration efforts.

*Source: _wp04237 - 5. Reporting and (PDF chapter/section).*

### Section II described the recent experiences of transition countries in developing and

### _wp04237 - Section II described the recent experiences of transition countries in developing and implementing plans to integrate all or some aspects of the collection of social contributions and taxes

### Recent experiences and cross-country lessons
- Many transition countries are in the early stages of initiatives to integrate collection of social contributions and taxes; it is too early to assess overall results, but preliminary observations and lessons are available.
- Common condition: in Central and Eastern Europe (CEE) both the social security institution and the tax collection agency often require significant modernization.
- Case illustrations:
  - Albania: tax agency modernization preceded social insurance agency modernization; integration may help the social insurance agency advance its own modernization. Employer-based withholding for PIT existed; integrating social contribution collection into this system has led to steps to improve the withholding system.
  - Bulgaria: social security institution largely modernized; plan developed to establish a new revenue administration to modernize tax collection and integrate social contribution collection.
  - Romania: modernization of both social security and revenue administration at preliminary stages. A national agency for fiscal administration (NAFA) established in January 2004; responsibility for social contribution collection transferred to NAFA. Challenge: integrate core collection processes for tax and social contributions as part of planned modernization.
- Key lessons and priorities:
  - Take a cross-government view of administration reform; carefully integrate and sequence reforms in tax administration and social agencies, considering modernization status of both.
  - Ensure political commitment and involve social partners to promote public understanding and support.
  - Properly sequence reforms, harmonizing policy and administration aspects during implementation.
  - Give strong attention to information needs of agencies when designing integrated systems and procedures.
  - Ensure adequate implementation and project management capacity within agencies; secure internal and external funding and external technical assistance.
  - Encourage strong interagency coordination.
  - Implement risk management techniques to protect revenue during changes.
- Factors determining success of integrated collection plans:
  1. The status of modernization of the tax administration.
  2. The status of modernization of the social security agency.
  3. Public perceptions and the level of taxpayer/contributor compliance.
  4. The extent of harmonization of policy and legislation.
  5. The effectiveness of administrative design and implementation.
  6. Project planning and management, including political and institutional commitment.
  7. The strength of interagency coordination after the integration.
- Optimal circumstance: both social insurance agency and tax administration are modern and effective (example cited: Sweden).
- Even in developed countries, integration often accompanies wider modernization programs (examples cited: United Kingdom, Ireland, Italy).
- In CEE, where both institutions commonly need modernization, integration is more challenging; nevertheless, pursuing integration as part of a broad modernization program across government is recommended over waiting for separate modernization completion in each institution.

### Albania case study — background and context
- Prior to early 1990s: social protection and universal healthcare were state responsibilities.
- Post-transition: funding relies heavily on mandatory contributions from employers, employees, and self-employed.
- Until December 2002: collection responsibility rested with the Social Insurance Institute (SII), an independent public institution administering social benefits, particularly pensions.
- In December 2002: government decided to transfer collection from the SII to the General Directorate of Taxation (GDT).
- Contribution structure (as stated):
  - Social insurance contribution rate: 42.5 percent—comprising a 32.5 percent employer contribution, and 10 percent from the employee.
  - Healthcare joint contribution: 4 percent (employees and employers).
  - The contribution rates, in aggregate, are amongst the highest in Europe.
- Separate arrangements apply to self-employed and certain other individuals (e.g., farmers):
  - Self-employed: required to make quarterly contributions through the banking system.
  - Farmers: required to make quarterly contributions, but most do not; rural pension scheme effectively a heavily subsidized social assistance program rather than contributory insurance.
  - Voluntary schemes exist (e.g., for immigrants) with minimal participation.
- Demographic pressure: beneficiaries forecast to increase from current levels of around 15 percent to one-quarter of the population by year 2050.

### Rationale for integration in Albania
- Motivation: improve collection performance; low contribution collection threatens sustainability of social protection schemes.
- Key statistics and indicators:
  - Contributions in 2001 accounted for 3.8 percent of GDP.
  - Less than 40 percent of the workforce makes contributions.
  - 4 in every ten contributors come from the public sector.
  - It is estimated that less than 50 percent of private urban companies are known to the SII, of which around 80 percent make contributions.
- Comparative figures from Table 5 (Social Contribution Collections: Comparison Among Eastern European Countries, 2001) — Percent of GDP and Standard Contribution Rate:
  - Albania: 3.8 ; 45.9
  - Bulgaria: 7.8 ; 38.7
  - Croatia: 12.9 ; 37.2
  - Czech Republic: 14.8 ; 47.5
  - Estonia: 12.1 ; 33.0
  - Hungary: 12.9 ; 35.0
  - Latvia: 10.5 ; 35.0
  - Lithuania: 6.8 ; 35.0
  - Macedonia: 10.7 ; 30.1
  - Romania: 12.4 ; 52.5
  - Slovakia: 11.9 ; 50.8
  - Slovenia: 15.5 ; 38.0
- Government decision to transfer based on assessment of relative collection and enforcement capacities of SII and GDT.

### Institutional comparison (SII vs GDT) — summarized capacities
- Organizational focus:
  - SII: organizational culture and core functions not geared to collection; sees itself essentially as a benefits payment organization.
  - GDT: organizational focus is on revenue collection.
- Enforcement powers:
  - SII: weak enforcement powers.
  - GDT: full range of collection enforcement powers provided for under the law.
- Staffing for collection/enforcement:
  - SII: Seventy staff allocated to collection enforcement activities, representing 7 percent of the SII’s workforce.
  - GDT: Over 500 staff allocated to audit and debt collection functions, representing almost 40 percent of the GDT’s workforce—further capacity planned through modernization initiatives.
- Computerization and systems:
  - SII: Limited computerization—business operations mainly paper based; no firm modernization plans.
  - GDT: Core revenue collection functions are computerized, albeit at a rudimentary level in some areas—redevelopment underway as part of a comprehensive modernization program.
- Management and training:
  - SII: Weak central management of the collection function; limited training in collection enforcement procedures.
  - GDT: Headquarters capacity has been strengthened under the modernization program; core training programs are in place.

### Implementation approach and timetable
- Transfer staged to manage risks: begin with large enterprises, then proceed to other sectors.
- Amendments to legislation scheduled for Quarter 3, 2003; a broad implementation timetable approved.
- Overall accountability assigned to the deputy minister of finance; an interdepartmental working group created under her direction.
- Revised timetable for transfer of contribution collections to the GDT:
  1. Large taxpayers — November 1, 2003
  2. Medium size businesses (i.e., taxpayers registered for VAT) — May 1, 2004
  3. Government budget institutions — August 1, 2004
  4. Small businesses — January 1, 2005
  5. Remaining groups—mostly the rural sector — July 1, 2005
- High-level project plan areas covered:
  - Legislative changes.
  - Computer system development.
  - Design of work processes, procedures, and jobs.
  - Taxpayer publicity and education.
  - Workload estimation and staffing.
  - Data exchange between the GDT and SII.
  - Design of new forms.
  - Staff training.
- Implementation progress at time of case study:
  - Stage 1 (installation in the GDT’s large taxpayer unit (LTU) in Tirana) had been successfully completed.
  - Stage 2 will involve 10,000 registered medium size businesses throughout the country.
  - Stage 3 (government budget institutions) expected to be straightforward because obligations are entries within the government’s financial system.
  - Stage 4 will involve 40,000 small business taxpayers and is expected to be the greatest challenge.
  - Stage 5 covering rural areas is being reconsidered.
  - Note: LTU administers the largest 450 taxpayers—its revenue collection capabilities are more developed than those in the GDT generally.

### Critical issues, lessons learned, and implications for policy/design
- Project management:
  - Complexity requires strong coordination and decision-making across agencies.
  - Integrating the project into the GDT’s modernization program under the project manager was effective for progress, but risked SII concerns that social contribution issues would receive less attention than tax administration issues.
- Oversight and governance:
  - Assigning responsibility to the deputy minister and establishing an interdepartmental working group provided an effective forum for discussion and communication on implementation strategy.
  - A memorandum of understanding (MOU) between heads of GDT and SII and relevant ministers was proposed to ensure coordination and cooperation.
- Legal framework:
  - Legal changes were required to give GDT authority to collect contributions.
  - Other legislative changes sought (but rejected by Parliament) included:
    1. Harmonize taxable bases for contributions and personal income tax (PIT) to allow PIT and social contributions to be collected from employers using a single declaration form.
    2. Expand taxable base to include in-kind benefits.
  - Without these amendments, GDT will face difficulties designing efficient collection processes and will face administering an eroding tax base; the changes will need revisiting at a later stage.
- Withholding systems expertise:
  - Integration of social contribution and PIT collections offers opportunity to improve collection performance and employers’ compliance with withholding obligations.
  - Audits of large businesses had previously concentrated on profits tax and VAT with limited attention to PIT compliance.
  - Implementation brought renewed focus on strengthening expertise in withholding systems, including development of research and analytical capabilities.

*Source: _wp04237 - Section II described the recent experiences of transition countries in developing and implementing plans to integrate all or some aspects of the collection of social contributions and taxes*

### Conclusion

### Conclusion

### Project status and main findings
- The project to integrate collections is in the early stages, and it will be some time before implementation is complete.
- Early signs:
  - The GDT is being stimulated to pay closer attention to the collection of personal income tax.
  - The SII is beginning to see an opportunity to reorient itself as a benefit payment agency.
- Significant work remains; improvements in revenue administration alone will not address all social protection issues.
- Policy matters requiring revisiting include high contribution rates and the situation in rural areas.

### Case study: Bulgaria — background
- Integration of social contribution collection processes with tax administration is an important element of Bulgaria’s structural reform program, accelerating as the country prepares for EU accession (anticipated in 2007).
- The national social security institute (NSSI) has undergone continuous change since it was established in 1995.
- Reform of tax administration, initially slower, became the subject of a major modernization program.
- Social insurance structure:
  - Publicly managed social security and mandatory private pension schemes.
  - Every public and private sector employee and self-employed person born after December 31, 1959 must become a member of a universal pension scheme managed by a pension insurance company.
  - The universal pension schemes are defined contribution schemes and contributions accumulate in individual accounts.
  - Healthcare coverage is mandatory.
- Contribution and payment arrangements:
  - Employers withhold compulsory social contributions from gross wages and pay amounts monthly via the banking system.
  - Separate arrangements, including different contribution rates and bases, apply to the self-employed and agricultural workers.
  - Self-employed persons are required to make quarterly contributions through the banking system.
- Current and planned collection responsibilities:
  - Currently, the NSSI has responsibility for collecting social contributions, including transferring collections to private pension funds and the national health fund (NHF).
  - The NSSI will relinquish this role in 2005 when the collection function is absorbed into the operations of a newly created national revenue collection authority (NRA).

### Rationale for integration
- Integration is part of a broader package of reforms that began with the social insurance administration project (SIAP) in the mid-1990s.
- A 1996 appraisal of the SIAP indicated the single most important action to improve unacceptably low social contribution collections was to upgrade coordination between the General Taxation Department (GTD) and the NSSI.
- In October 1999, the Bulgarian government decided to create an entirely new unified revenue collection agency due to:
  - Poor collection performance for mandatory social contributions.
  - Evidence that tax administration needed a major overhaul.
- Expected benefits of a unified revenue agency:
  - Establish a single-point of accountability for tax and social contribution collection performance.
  - Better coordinate collection and enforcement by replacing fragmented collection functions with a single dedicated authority.
  - Introduce streamlined registration, filing, and payment procedures for employers and self-employed.
  - Eliminate duplicated functions and rationalize GTD and NSSI administrative support structures.
  - Sharpen the focus on risks to revenue, particularly in the emerging private sector.

### Implementation process and milestones
- June 2000: Council of Ministers approved a concept paper restating objectives and key features of the unified revenue collection system, including:
  - Harmonization—as far as practicable—of the tax and social contribution legislation.
  - Development of integrated business processes and information technology (IT) systems for collecting taxes and social contributions.
  - Adoption of a single national identification number (Bulstat number).
  - Use of banks as primary collection agents.
  - Implementation of modern audit techniques based on risk management principles.
  - Implementation of integrated taxpayer and contributor assistance programs.
  - Establishment of a modern function-based organization structure.
  - Development of strong human resource management practices.
- Proposed two-phase approach:
  - Enabling phase: joint activities by GTD and NSSI (harmonize income bases of social insurance contributions and personal income tax (PIT), develop a single statutory definition of labor income, conduct joint audits of taxes and compulsory contributions withheld at source).
  - Implementation phase: comprehensive modernization program to create the new unified institution.
- November 2002: Legislation enacted to establish the NRA as a formal legal entity reporting to the minister of finance; the NRA given responsibility for collecting domestic taxes and social contributions, and implementing the revenue administration reform program.
- June 2003: A loan was secured from the World Bank to provide funding to design and implement the NRA.

### Critical issues and lessons learned
- Positive features of the reform effort:
  - Strong government support for the project.
  - Secure project funding.
  - Comprehensive reform package directed at building an effective integrated revenue administration.
- Project status: roughly at the mid-way point.
- Key issues encountered:
  - Political support and resources:
    - After Council approval, the project languished for twelve months owing to insufficient commitment of resources.
    - Appointment of a new minister of finance in mid-2001 led to renewed interest and decisive actions (passage of the NRA Act and securing World Bank funding).
  - Legal framework:
    - The NRA Act gave the new agency responsibility for all components of the project and provided for a NRA advisory board including heads of NSSI and NHF to protect their interests.
    - Significant changes to substantive tax and social security laws were needed to align legal definitions, calculation bases, taxpayer/contributor obligations and rights, and penalty regimes.
    - An overhaul of enforcement powers and administrative provisions proved far bigger and more complex than anticipated, demanding greater inter-agency and inter-ministerial coordination.
  - Project management and implementation schedule:
    - Various iterations of project management since inception.
    - March 2000: Small project team formed with part-time representatives of GTD, NSSI, and NHIF; activities managed as a joint agency effort.
    - A unified revenue agency commission—formed by decree of the Council of Ministers and chaired by the deputy minister of finance—was responsible for coordinating activities across ministries and agencies and making policy and strategic decisions.
    - A GTD deputy director was appointed NRA project leader but remained part of the GTD executive.
    - An IT directors’ board with GTD and NSSI representation was established.
    - Passage of the NRA Act in November 2002 and World Bank support in mid-2003 expanded the project scope; the implementation team grew to over 90 staff.
    - Earlier implementation plans and timetables were too ambitious; authorities considered an incremental approach, including gradual integration of social benefits collection into NRA processes, systems, and organization.
  - Need for specialist project management expertise increased with project scale and complexity.

### Integrated work processes (design principles)
- A single national database comprising taxpayer and contributor information, with a single, accurate, and reliable identifier (the Bulstat number).
- A simple registration system requiring only one visit to the agency.
- A single account for each taxpayer and contributor.
- As far as possible, integrated work processes and systems for taxes and contributions, including registration, processing, collection, taxpayer service, audit, and appeals.
- Maximum use of banks for the collection of tax and contributions, and continued use of collection points, such as post offices.
- Simplified forms and declarations, including electronic filing.
- Joint audit activities for tax and contributions.
- Speedy cash and information flows between the NRA and related funds.
- On-line access by the NSSI to information and data for the purposes of administering the social benefits system.

*Source: _wp04237 - Conclusion*

### Conclusion

### Conclusion

### Bulgaria: progress and remaining tasks
- Significant steps taken:
  - development of the NRA concept
  - passing the NRA Act
  - establishing an implementation team
  - securing adequate project funding
- Remaining work:
  - careful transition of the existing GTD and NSSI collection operations into the NRA
  - bulk of the project development task lies ahead
- Critical dependencies:
  - continued political support
  - careful project management
- Long-term outlook:
  - project benefits stand to be substantial if implementation succeeds

### Romania — Background
- Social insurance structure:
  - three main social insurance funds: the National Health Insurance Fund (NHIF), the National Pension Fund (NPF), and the Unemployment Insurance Fund (UIF).20
  - Contributions to these funds represent a major part of government revenue.
- Pension reform and coverage:
  - pension fund revised in 2000: benefits based on contributors’ lifetime employment history; scope expanded to include self-employed, farmers, and the unemployed
  - pension coverage: mandatory for employees and for other specified classes of self-employed persons, voluntary for others; farmers excluded
  - unemployment insurance: mandatory for employees and voluntary for others
  - health coverage: mandatory for all
- Contribution base:
  - differs by type of contributor (employee, employer, self-employed, farmer, unemployed) and by type of insurance (pension, unemployment, health)
- Compliance history:
  - compliance deteriorated in the mid-1990s; many businesses ceased to pay contribution liabilities
  - outstanding arrears debt in the social funds is high, with largest corporations (mostly state-owned) accounting for the bulk
  - registration non-compliance example: with pension reform there were 1.6 million civil contracts that should have been registered under the new law; however, just 100,000 were actually registered

### Romania — Rationale for integration
- Government objectives for integrating social contribution collection and tax administration:
  1. improve administrative efficiency and provide better services by centralizing and rationalizing fragmented collection services and enforcement activities
  2. improve tax and social contribution collection compliance
- Expected benefits:
  - improved level of collections and general compliance levels
  - more consistent treatment of taxpayers
  - reduced costs to government through economies of scale
  - reduced administrative burden on taxpayers

### Romania — Implementation process
- Timeline and legal changes:
  - decision in 2002 to integrate social contributions with withholding taxes from wages; interim plan to create a separate collections agency was superseded by decision in early 2003 to transfer collections directly to NAFA from January 1, 2004
  - NAFA established as legal entity, operating largely autonomously from the MOPF under a president who is also a secretary of state
  - government orders and new legislation enacted to implement the integration; initial transfer for employers only became effective on January 1, 2004
- Key legislative provisions (as adopted):
  - the collection functions to be transferred include payment, audit, controls, appeals, and enforced collection of arrears
  - the transferred functions will be those related to employers only
  - audit and appeals will be carried out according to the rules and authorities of the tax administration (but based on the requirements of the enabling social legislation)
  - all legal rights of transferred employees will be retained
  - responsibilities for collection of social contributions for non-employers can be transferred at a date to be determined by the government
- Operational arrangements:
  - employers make payments to the tax administration, but retain the obligation to advise each social house monthly of the names of each employee covered, the amount remitted, the period of coverage, etc.
  - staff were transferred from the social houses: initially for audit and collection enforcement in October 2003, and in December 2003 and January 2004 for remaining activities
  - payment forms and processes were re-designed to provide a single payment declaration, but with multiple payment orders
  - a one-time self-declaration of arrears for all social programs was required from employers, with this due February 15, 2004
  - reporting of information remained unchanged: employers continue to provide information on their individual employees and contributions for each, directly to the social houses
- Longer-term objective:
  - comprehensive reform to fully integrate payments and information reporting for social contributions with tax, allowing social houses to dismantle payment and reporting infrastructures

### Romania — Critical issues and lessons learned
- Project scope and sequencing:
  - current work is primarily a transfer of activities rather than a full redesign and integration of collections and information reporting
  - full benefits require a larger sequenced revenue administration modernization project including:
    - integration of payments and collections processes for employer contributions, combining liabilities for salary taxes, pension, unemployment, and health into a single declaration and payment system, which will require:
      1. a review of existing operations and business processes in all collection functions, including those of the tax administration
      2. better definition of business requirements (including specialized information requirements of the social houses)
      3. elimination of unnecessary or duplicative functions
      4. re-engineering of the fundamental business processes
      5. integration of the IT platform for these operations
    - harmonization of the tax base for social security contributions
    - integration of taxpayer and contributor services, collection enforcement, and audit
    - finalization of transfer of collections, audit, and appeals for social contributions by non-employer contributors
  - further study required to determine what is possible under present legislation and what requires harmonization of bases and definitions
- Data reconciliation and information problems:
  - NAFA experienced significant problems reconciling data provided by social houses with its own data and with employers’ self-declarations of arrears
  - significant manual effort required to resolve discrepancies; reconciliation likely to last many months and consume considerable resources
  - important differences observed: amounts reported as arrears by social houses vs. self-declared by many employers, with self-declared amounts generally higher
  - lack of alignment of dates of prior audits between social houses and NAFA complicates reconciliation
  - greater inter-agency coordination planned when transferring information related to the self-employed
- Administrative design issues:
  - filing of payroll taxes at local level for branch offices reduces integration benefits; present laws require that where there are five or more employees at a branch office location, payroll taxes must be remitted at the local level.21
  - social funds perceive they lack important information and consider it NAFA’s responsibility to address these gaps
  - number of employees transferred from social funds to NAFA for collections-related work is inadequate, potentially compromising NAFA’s capacity and access to social fund skills and knowledge
  - fragmentation in original design: each social program was designed separately and includes its own collection powers; the Government Ordinance assumed base legislation would be amended to resolve overlapping authorities, but this has not occurred
- Information reporting incompatibilities:
  - differing legal approaches to reporting:
    - salary taxes: payments remitted throughout the year; information return reconciling total withholdings to individual employee accounts filed at year-end (or when a person ceases to be an employee a return for that employee is filed at that time)
    - Unemployment and Pensions: monthly information return indicating all employees on the payroll and their status
    - Health: initial information filed when a person becomes an employee and updated every month to show departures/arrivals or family member changes; NHIF administrative practice requires full information every month
  - integrating reporting will require selecting one reporting system to be used for all three social programs and tax
- Policy objective outstanding:
  - full alignment of the bases for the programs remains a future objective to enable easier calculation of contributions for employers and simpler administration by a single collections authority

### Romania — Conclusion
- Initial integration steps have been taken; early benefits expected:
  - improvements in audit activity and enforced collection should be evident quickly
- Further work needed before major benefits are realized:
  - rationalization of legislation
  - full redesign of the collections business process
- Governance imperative:
  - work is broader than any single ministry’s responsibility and will require assignment of responsibilities and authorities across ministries with strong government-level oversight

### Sweden — example of a fully integrated system
- System features and evolution:
  - main part of Swedish social security (excluding unemployment insurance) administered by the National Social Insurance Board (NSIB) and regional/local social insurance offices
  - National Tax Board (NTB) and local tax offices responsible for population registration and since the mid-1980s for collections administration and enforcement
  - change process began in mid-1970s; by mid-1980s tax administration assigned responsibility for the entire contributions collection system
  - policy harmonization measures included unifying the wage base and removal of complex calculations (e.g., deductions based on number of employees and maximum wage base for high-income employees)
- Operational practices:
  - common personal identity number used; changes in individual circumstances exchanged with NSIB regularly
  - collection of social contributions from employers monthly using a single page tax return form; registered employers sent forms monthly
  - submission of the return form and payment by the 10th of the following month
  - payments through banking system with payment information provided electronically to NTB
  - annual checks from employees’ returns against employers’ submitted data; NTB undertakes in-depth audits of annual returns if warranted
- Compliance and enforcement:
  - Sweden generally has a high level of payment compliance attributed to compliance culture and strong enforcement by tax administration
  - arrears are promptly followed up with reminder letters and stronger enforcement actions
  - active employer audit verifies calculations
  - effective system of fines and penalties to sanction defaults

*Source: _wp04237 - Conclusion*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2004/_wp04237.pdf_