The indispensable autonomy in the Tax Administrations

According to the Royal Spanish Academy (RAE), autonomy is the “power that municipalities, provinces, regions or other entities have within a State, to be governed by their own rules and governing bodies.” Venturing with our own definition, we could point out that autonomy is the degree to which a public institution can operate independently of the government of the day in terms of form and legal status, financing, budget, personnel policy, and administrative practices.

In what sense can it be said that a Tax Administration (TA) is autonomous?

In the first place, when we speak of autonomy, we refer to a wide range of dimensions that must be considered.

The autonomous TAs[1]:

  • They prepare and can modify their budget.
  • They have their own administrative career and personnel policy regime.
  • They develop their own strategic planning processes.
  • They define their organizational structure.
  • They are subject to rigorous external accountability mechanisms.
  • In some cases, they have Boards of Directors with powers to establish general policies and strategies.
  • Stability and permanence in their positions at the managerial level are usually reinforced.
  • In Latin America, they usually imply having resources through a percentage of the collection, etc.

According to a document[2] prepared by CIAT that addresses the Panorama of Tax Administrations taking as a source the survey carried out by ISORA (International Survey on Revenue Administration), 76% of the tax administrations claim to have autonomy for the design of their internal structure, 67.3% for managing their current budget and 55.3% for managing the capital budget. Likewise, said study indicates that CIAT member countries show high levels of autonomy in all three dimensions, with 81.1% responsible for their own internal structure, 75.7% of the current budget and up to 67.7% of the capital budget.

Evaluating the degree of autonomy of a TA in comparative terms is complex since, for example, some TAs have greater autonomy in the dimension of personnel administration than others, but less autonomy to administer their assets. In the scope of Latin America, among others, Peru (pioneer in Latin America), Mexico, Argentina, Guatemala, and Bolivia have participated in the transformation of the Tax Administrations into “Autonomous Agencies”. Important exceptions to this process are the administrations of Chile, Brazil, and Uruguay. (Diaz Yubero, 2003)

It is always good, even if repetitive, to point out that the TAs must be effective in the application of the tax system, acting impartially and fairly, promoting, and facilitating voluntary tax compliance, and controlling and fighting against tax fraud. In this regard, the TAs must be efficient in using the resources at their disposal to achieve these objectives. Likewise, society and taxpayers have to perceive that the TA acts impartially, otherwise the legitimacy of the tax system is undermined, which is, that each citizen contributes to the public treasury voluntarily and in accordance with their tax capacity.

It is necessary to be emphatic with respect to the fact that the TAs are organizations of a high specialized and technical level, so their main task must be separate from the ups and downs of political struggles and even more so, to be used for purposes other than those related to their natural purpose: to induce compliance with tax obligations.

Why do we note that autonomy is important and that it is related to a better performance of the TAs?

A scarce institutional autonomy is in contradiction with acting “free of pressure” and, therefore, impartially, which should characterize a TA.

Several Latin American countries were hit by scandals related to the illegal financing of politics, and in some cases, figures of high public connotation and politicians have been formalized, among others, for tax crimes.

The combination of low institutional autonomy and exclusive potentially discretionary powers given to the TA can result in questionable decisions by the tax authority, especially when these decisions fall on large taxpayers, high net worth individuals or people related to political activity.

It is not reasonable that a TA is constantly in the news for making decisions based on criteria that are technical in principle, but which, analyzed in the light of little autonomy, can be seen by taxpayers as decisions that favor certain “privileged” groups that tend be those with the greatest assets and, therefore, with the best tax advisors.

Some opinions advocate endowing the TAs with autonomy enshrined at the constitutional level, emulating organizations such as the Central Bank or the Office of the Comptroller General of the Republic. However, it is known that the TA has a direct link with the Ministry of Finance, which is why it is worth asking whether it is an indispensable necessary condition to establish autonomy, that it has to be established at the constitutional level. Notwithstanding this, what should be done is to establish the necessary mechanisms for the TA to have real autonomy.

The truth is that, if TAs do not have the autonomy to determine an adequate personnel policy and civil service career, the impact and consequences will be reflected in demotivated personnel, with less commitment and eventually bribery, which can translate into possible cases of corruption, as well as a flight of officials to the private sector.

In this sense, not being able to establish its own personnel policy and an attractive civil service career puts TA officials in the dilemma of having to depend on the “good will” of the political authorities, since any change or improvement in the working conditions will be handed over to a law, and for that law to prosper and materialize in concrete improvements, its initiative and processing is delivered -depending on the government system of each country- to the will or vision of the authorities in charge.

The few studies[3] that exist on this matter conclude that, if one compares the state of affairs before and after the reforms of greater autonomy in the TAs, an improvement is demonstrated in most cases and in most dimensions of performance. This study highlights that most of these organizational reforms, which are essential to improve performance, could not have been carried out without the design of autonomous agencies or the indispensable political support to materialize them. Three main lessons emerge:

  • The reforms that give autonomy to the TA require a certain operational distance from the Ministry of Finance for autonomy to be significant.
  • Independent design features should be used to build autonomy and improve accountability; and
  • The board of directors’ model allows for greater governance benefits compared to the General Director model.

From my point of view, autonomy does not solve corruption problems, nor does it promise to be the answer to the most immediate challenges of TAs; However, I dare to affirm that autonomy – in its different dimensions – is a necessary condition for the TAs to be able to fulfill their role more efficiently and fairly. Notwithstanding this, however reasonable and plausible the arguments in defense of the autonomy of the TAs may be, the truth is that their implementation leads us to raise some concerns, leaving some questions open for debate: is it necessary to enshrine the autonomy of the tax administrations at the constitutional level? Will the technical decisions and criteria adopted by an autonomous body independent of the government of the day be more legitimate? Should the TAs have exclusive powers in the matter of criminal prosecution of tax fraud? Will being autonomous improve the efficiency of the TAs? Should a maximum authority be established as General Director or should a Board of Directors be formed in its place? Should the President of the Republic intervene in the appointment of the highest authority (s) of the TA?

Current times and the demands of an increasingly active citizenry require that there be a greater degree of autonomy in key public services, such as the TAs, so that they can act free of political pressure from the government in power and with full autonomy for the search for the common good. In this sense, it is not only necessary to analyze the costs of implementing greater autonomy in a TA, but also the greater social acceptance of the tax system, which may have a positive impact on tax collection, must be assessed.

[1]Diaz Yubero, Fernando – “Most outstanding aspects of advanced Tax Administrations”, Magazine N ° 23 of the Inter-American Center of Tax Administrations (CIAT), 2003 (spanish version).
[2]Overview of Tax Administrations: structure; income, resources and personnel; operation and digitalization ISORA (International Survey on Revenue Administration) / 2019
[3]Taliercio, Robert, Jr., 2004, “Designing Performance: The Semi-Autonomous Revenue Authority Model in Africa and Latin America,” World Bank Policy Research Working Paper 3423 (Washington: World Bank)

 

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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