Coronavirus forces Tax Administrations to reformulate their tax control plans

This year 2020 all the Tax Administrations (TAs) of the planet began implementing a plan of tax control or annual plan of control, reflecting their strategy of control, inserted in the general strategy to raise levels of voluntary compliance by taxpayers seeking a balance between the control function and the service.

However, the unprecedented economic, health and social crisis that we are going through as a result of the coronavirus pandemic forces the TAs to reformulate these annual control plans and review them permanently, since uncertainty is the word that dominates the current scenario.

On the one hand, there is a huge loss of revenue from this crisis, but at the same time everyone is looking more closely than ever at the performance of the TAs, as there is a need to safeguard tax revenues to protect the financing of expenditures needed to meet the crisis, including the maintenance and expansion of government social protection programs, and above all, the TAs must be ready to restore levels of compliance as soon as possible.

Inequality, informality, job losses and poverty are increasing exponentially at the moment, which leads more than ever to the search for the necessary strategies to reduce tax evasion and illicit financial flows in order to increase the fiscal space.[1]

For all these reasons, I would like to share with you some aspects that I believe the TAs should consider when reformulating their control plans and permanently monitor the results.

It should be noted that some TAs have reduced their enforcement and collection activities in response to the severe financial pressures faced by many companies and individuals.

This reduction should be temporary in order to mitigate the risk of non-compliance taking root in the tax system and being difficult to reverse after the crisis has passed.

We must not lose sight of the fact that the purpose of auditing is to maximize subjective risk by fighting against tax fraud and modifying taxpayer behavior so that voluntary compliance is increasingly greater, since the percentage obtained as direct collection from auditing actions does not exceed 2% to 3% of total collection.

Therefore, as we say, the great goal of a modern TA is not to discover much tax fraud, but to have less and less tax fraud.[2]

The Annual Control Plan or Annual Verification Plan establishes the guidelines, methods and human resources required to comply with the strategies and policies in the area of control. The sectors to be audited and the types of action to be taken are identified, i.e. mass controls, intensive controls. It should be noted here that today many TAs do this directly through Compliance Risk Management.[3]

It is very important that not only the estimated amounts of collection of the various actions to be carried out are specified, but also that goals are set in terms of the number of actions to be carried out in relation to the various types of control, since setting goals only in terms of amounts will not guarantee that the control actions will reach many taxpayers, but rather that the audits will be extensive in time and few taxpayers will be audited, and it will become increasingly difficult to transform the environment.

As I said in a previous paper[4], the analysis of the context of each country is key, since when we are faced with sectors where noncompliance is high, we should prioritize massive or extensive controls over intensive ones, seeking to carry out a greater number of audits, quickly, not with such depth, aiming at reaching more taxpayers so as to transform the field for voluntary tax compliance to increase.

The control system must be unique and appropriate to the characteristics of the environment in which it is applied. All areas of the TAs must participate and there must be permanent feedback on the process to correct what was done wrong and to enhance successful controls.

As I always say, the TAs must carry out sectoral evasion studies in order to focus their control strategy even better. There is no point in knowing the general level of fraud in a country if we do not know which sectors or which activities are producing it and what manoeuvres they are carrying out, especially in crises such as the present one, where they are permanently changing.

However, I would like to put forward a few ideas for reformulating the annual control plan.

In every crisis, there are always sectors that have been winners, so in each country we should find out who they are. The sectors linked to health, food supply, information technology, e-commerce, agriculture, among others, are obtaining gains in comparison with others that are seriously affected such as tourism and leisure, aviation and maritime, automobile, construction and real estate, face-to-face education, among others.

Linked to this point, it is important to review the changes that are taking place in the consumer’s consumption habits from shopping, finance, health, way of working (e.g. teleworking), use of technology, entertainment, food and transportation, among others.

In other words, audit actions should focus on the most critical and emerging compliance risks and on sectors that may be experiencing a business boom.

It is important to monitor larger taxpayers, particularly those businesses that are less impacted or even booming, in order to ensure their timely tax payments.

On the other hand, many taxpayers will be forced to close down their activities or will fall into bankruptcy or insolvency proceedings, which is why the inspection plans should consider these cases, seeking speedy action to safeguard the tax credits owed.

It is also key to identify flagrant abuses and fraudulent activities related to the coronavirus. Therefore, in the reformulation of the control plans, the TAs should also consider the new risks arising in the area of money laundering and financing of terrorism, as warned by GAFILAT[5], since increases in financial frauds, swindles, cyber crimes, crimes related to corruption and abuses linked to non-profit financial institutions, among others, are expected.

Many AATTs have accelerated the processes of refunds and social assistance, which has led to an increase in fraud in these processes in refunds that have already been made, which is why the plan must provide for an urgent review of these processes.

In order to attack the growing inequality and regressiveness of many tax systems, it is key to broaden the tax base by including new taxpayers or by capturing taxable material that is hidden inside or outside each country, thus avoiding directing controls always to the same group of taxpayers. Cooperation between TAs, both nationally and internationally, is vital here.[6]

I agree with what was said at a recent OECD event about accelerating the implementation of automatic information exchange, effectively addressing the issue of opaque corporate and fiduciary structures (identifying the beneficial owner) and implementing a new approach to tackling tax evasion and other financial crimes.[7] Although I am aware that these activities will not always result in immediate collection, they will certainly lead to greater progressiveness and equity in the tax system.

TAs must use the immense information they have to take permanent action to detect unregistered subjects, many of whom trade via e-commerce or digital platforms while remaining hidden or incorrectly included in simplified tax regimes.

In matters of Social Security, the control plan must consider the growing importance of telework and digital platforms which can lead to an increase in undeclared workers or unreported pay.

In the area of customs, all the countries have adopted transitional or temporary measures to deal with the pandemic and facilitate trade, which is why fraud of all kinds must be considered by adopting in the plan actions to strengthen classification, valuation, origin and post-clearance audit controls to combat the reduction of customs tariffs and the counterfeiting of inputs, medicines and medical supplies.

As always, I stress the importance of coordinating the various types of control, in order to avoid duplication of action and also to avoid the so-called “shadow areas”, i.e. taxpayers who are outside the scope of control.

It is important for the control systems to be  unpredictable, because that way the feeling of risk is optimized, all the more in an environment linked to the uncertainty, where outbreaks of coronavirus are predicted and can happen, so it is key to review permanently the control plans.

Finally, it is also urgent to review the human resources to affect the controls, since with the acceleration in the digitalization process produced by the coronavirus crisis, we tend towards an Electronic TA with virtual offices and the development of teleworking, and it is very likely that resources can be redirected towards the different control actions.

[1] To expand the topic of Tax Evasion in Latin America and the Caribbean, a call of attention for all. Alfredo Collosa. CIAT Blog. 22/04/2019.
[2] Compliance Risk Management (CRM): Passing trend or a Need for Tax Administrations? Fernando Díaz Yubero, Alfredo Collosa. CIAT Blog 19/03/20.
[3] For more information on this topic, see note 2.
[4] Massive or intensive controls? What should be the strategy of the Tax Administrations? Alfredo Collosa. CIAT Blog. 13/08/18.
[6] To expand on this topic, see Importance of International Cooperation among Tax Administrations. Alfredo Collosa. CIAT Blog 03/09/19.

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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.

1 comment

  1. Patricia Reyes Reply

    Buen día,
    Como se menciona en el blog es necesario analizar nuevas estrategias para implementar controles e identificar los riesgos que la AT pudieran estar enfrentando ante esta nueva crisis por el covid-19, como todos sabemos no todos los OT tienen sus negocios abiertos y muchos de ellos se han visto afectados llevándolos al cierre temporal o indefinido de sus empresas; para salvaguardar la vida de los colaboradores considero que la mejor forma de llevar acabo las actividades es por Teletrabajo.

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