Tax systems and Tax Administrations
Latin American and Caribbean countries (LAC) are experiencing a very complex situation, with political instability and institutional weakness, due to economic problems, to high levels of poverty and a high-income concentration, which, measured in terms of the Gini index, is the worst in the world.
In this context, any country, which wants to have social balance and live in democracy, needs an effective state, and for this it is essential to have a tax system (TS) capable of financing a reasonable level of public services and providing citizens with the infrastructures necessary for their social and economic development, without incurring excessive debts. Tax policy is a very powerful instrument for promoting inclusive growth, with benefits that can be distributed fairly.
OECD and ECLAC, among others, recommend that, in the design of tax policy, efforts be made to broaden tax bases by reducing tax benefits and special regimes, as well as to improve the progressivity of the TS as a whole. In addition, there is one aspect that we consider fundamental: strengthening tax administrations (TAs), so that the TS is effectively implemented and the objectives envisaged can be achieved.
Undoubtedly, the design of the TS must consider the capacity and strength of the TA to ensure its applicability and sustainability over time. There is a clear interdependence between TA and TS: a poorly designed system without considering its management possibility cannot be implemented, and a good system will only be implemented if there is a good TA.
How a country’s TS should be, what figures it should count on, what the level of fiscal pressure should be, how the burdens should be distributed, etc., these are essential political decisions to be taken by democratically elected parliamentarians.
The application of tax systems (TS) by TAs must be out of the partisan political debate; it is a matter of “technique”; however, it is an essential political decision, to try that TAs works well and are able to implement the TS as it was prescribed. We believe that the situation of the TA in some LA countries is not a coincidence or a reflection of an incapacity but the consequence of a political choice.
Implementing the TA is a complicated task, as it clearly reflects the confrontation of interests of the different social groups. The TA’s function is to ensure that the rules are applied correctly, preventing them from being emptied of content by poor enforcement.
It is essential to forge a civic tax culture in order for citizens to assume that taxes are the price to be paid for living in a democratically organized society, and that public finances need sufficient income to deal with spending policies that allow for an adequate level of social cohesion.
“Taxes are not only a source of fiscal resources, but also an instrument of development” (BID 2014) so, to use the words of the Spanish Constitutional Court, the function of TAs is to prevent that what some do not pay when they should pay it, others will have to pay with more civic spirit or with less possibilities of defrauding.
The great objective (the mission) of the TAs is to achieve a correct application of the tax and customs system. In order to achieve this, a general strategy has been defined: to promote the “voluntary” fulfilment of tax obligations by citizens, on the basis of two main lines of action:
There is a mission to transmit to the society a strong message: the TA is able to detect, correct and punish the tax breaches and tax fraud and that, following that path, the cost to the noncompliants will end up being higher and the consequences much more severe. At the same time, all facilities must be provided to those who wish to fulfil their obligations. It should be reminded that more than 97/98% of the total tax revenue is collected on a voluntary basis and that the control actions have essentially an induced and dissuasive effect. All this, respecting the rights and guarantees of taxpayers.
How to organize TAs in the twenty-first century?
The management of TAs requires two basic inputs: sufficient information of good quality and qualified personnel capable of analysing and exploiting it.
It is a management of information, hence the relevance of the use of information technologies and communications (ICT) for the construction of an Information System (IS) quality, with reliable data. An IS has to be built it step by step; but we can acquire tools that facilitate its construction.
The construction of a tax Information System requires a lot of resources and may require regulatory changes so that the TA can access any information with tax significance, to have a unique and permanent identification of taxpayers (the so-called NIF, NIT, RUC or RUT in LA) and, finally, an ICT support capable of managing in an agile and secure way a large amount of information. It should be noted that these decisions, especially information on financial operations, often face great resistance, so real political will, not just formal, is essential.
Human resources are undoubtedly the essential asset. The agents working in the TAs must be selected with rigorous examinations, permanently trained, monitored and evaluated on an ongoing basis, given the duties and obligations envisaged (the principal, the tax secret) and paid to the extent of their important responsibility.
TAs are high quality and relevant technical bodies that must be outside the political scope and, moreover, not to be used for purposes other than those related to their natural task, to induce the fulfilment of the tax obligations.
TAs handle huge volumes of economic and financial information that need to be debugged, assigned to their owners and interpreted properly. This requires information and knowledge, and these two basic elements can be shared among the TAs of different countries, including subnational ones, in a relationship in which all parties can win.
There should be no competition between TAs but cooperation, because sharing information, experiences and good practices allows all to better apply their tax systems. This cooperative relationship seems indispensable in a globalized world, with open economies, interdependence and in which countries share the tax bases and quotas to be paid by transnational companies.
Based on the BEPS Action plan, it is necessary to review the role and functioning of the TAs, since a new paradigm of international taxation has emerged. Although the main objective of this initiative is to eradicate practices aimed at eroding the bases and locating them in low-taxation territories, it is not only about containing non-compliance and evasion. There is much to be done to provide relevant information, more and better services and lower compliance costs, building a relationship of trust with taxpayers.
The BEPS package imposes the need for a very high professionalization and specialization of human resources, greater investment in setting up platforms for administrative cooperation, international consensus, greater participation in multilateral initiatives, where relevant officials must be present at technical meetings, forums, etc.
Greater use of information exchange and administrative cooperation in tax matters is essential in the new global context, where LAC countries are becoming more and more visible. Surely in the not too distant future, TAs will share information in the “cloud”. All this undoubtedly requires maximum conditions to ensure the confidentiality of the data.
In addition, the fourth industrial revolution (artificial intelligence and hyper connectivity) offers us greater and better possibilities to provide services and assistance as well as to identify non-compliance and tax fraud and select cases (predictive techniques such as “big data”, etc.) but also, as a counterpart, yields greater collection to ensure the correct use of information and no possibilities of breach.
Situation of Latin American countries
Milka Casanegra said that, in developing countries, the TA is the tax policy; that is to say, he considered the TA as a constraint that prevented to implement complex tax systems. We believe that this is currently a questionable statement and some LAC countries have demonstrated this by achieving high levels of effectiveness and efficiency.
The TAs of LAC countries have made great progress in recent years, achieving greater room for manoeuvre (not independence), more professionalization and better results in services and information, as well as in controlling and reducing evasion. The latest results of ISORA, in the case of the CIAT member countries, are evidence of significant progress of TAs in various aspects.
It is not easy to pinpoint the characteristics that define an ideal model of TA, given that different proposals have achieved equally acceptable results in different countries. However, by linking with a work published in 2003, we could point out as basic notes for the smooth operation of TAs:
After 17 years, the notes remain similar, although, in the coming times, in the Fourth Industrial Revolution and with the advances of BEPS, along with the greatest opportunities for the fulfillment of their mission, new challenges arise for the TAs, for example, those related to the control of the unstoppable digitalization of the economy; the litigation that can be provoked by determinations based on predictive techniques and the use of secret algorithms; the questioning by the tracking of tax “cookies”, which could affect the right of privacy, etc.
We do not want this contribution to be a monologue; we would appreciate opinions, criticisms or suggestions.
We believe that the issues related to the TA are always questionable and debatable. Let’s start arguing, but knowing that “white cat or black cat doesn’t matter, the important thing is that it catches mice.” The TAs are valued for the results achieved, not for making profound theoretical reflections.
 For more information, see: Standards of transparency and exchange of tax information: Advances in Latin America
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