GOVERNANCE GOVERNANCE EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT COVID-19: Tax Policy and Revenue Administration Implications Potential Tax Policy, Tax Administration, and Customs Measures to Respond to the Crisis Raúl Félix Junquera-Varela Cristian Óliver Lucas-Mas © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third- party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Graphic Designer: Maria Lopez / lopez.ten@gmail.com >>> This note brings together current thinking among global and regional teams on governance and institutional approaches to dealing with COVID-19. With a focus on tax policy and revenue administrations, it presents governance and institutional reforms that could support revenue administration responses to the pandemic.1 COVID-19 has brought about a new normal in which work practices should change. Shocks usually trigger responses, and a productive response here would be to automate tax and customs services over the medium term and to massively accelerate the use of digital and virtual technologies. This paper updates a technical note jointly prepared by the MTI and GGP colleagues. The working group was overseen by Chiara Bronchi and led by Raul Junquera-Varela; it comprised Ana Cebreiro Gomez, Anna Custers, Daniel Alvarez, Dialigué Ba, Viet Anh Nguyen, Rajul Awasthi, Roel Dom, Rick Fisher, Benjamin Holzman, Paola Arce, Claudia Lucia Vargas Pastor, Alfredo Revilak, Ivan Krsul, and Cristian Lucas-Mas. Contributions and comments were received from Jim Brumby, Gael Raballand, Marijn Verhoeven, Mohan Nagarajan, and Oleksii Balabushko. 1. This note focuses on tax policy and revenue administration measures only. For a discussion of broader governance issues, please visit https://www.worldbank.org/en/topic/governance/brief/governance-institutions- covid-19-response-resources. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 >>> Contents COVID-19 Fiscal Impact Analysis 5 Phase One: Containment 8 1.1 Alleviate Cash Flow to Entities 8 1.2 Monitor Compliance Risks 9 1.3 Manage Business Continuity 14 1.4. Create a Task Force 15 1.5. Take Customs and Trade Measures 16 1.6. Update DRM Policy Responses 19 Phase Two: Recovery 21 2.1 Revenue Forecasting and Budgeting 21 2.2 Tax Incentives and Trade Facilitation Measures 22 2.3 Simplified Regulations and Procedures for Key Operations 24 2.4 Strengthened Tax Compliance Strategies 24 2.5 Prioritized Automation Enhancements 30 2.6 World Bank Operational Support 30 Phase Three: Stabilization 31 3.1 Accelerate the Move to a Digital Revenue Administration 31 3.2 Reformulate Comprehensive Compliance Strategies 31 3.3 Implement a Comprehensive Business Continuity Plan 35 3.4 Take Customs and Trade Measures 40 3.5 Improve Digital Economy Taxation 41 3.6 Fight Corruption in the Post-Crisis Context 42 >>> COVID-19 Fiscal Impact Analysis This note expands on the issues raised in the World Bank´s decline; and (iii) countries take steps to lower the tax burden, notes “COVID-19 Revenue Administration Implications: for example, by lowering tax rates or scaling up incentives. Potential Tax Administration and Customs Measures to Revenue performance may be further harmed by operational Respond to the Crisis”2 and “The Fiscal Impact and Policy restrictions in revenue administrations due to health measures Response to COVID-19.”3 and the related risk of worsened taxpayer compliance. The coronavirus disease (COVID-19) pandemic has resulted It is still too soon to assess the impact on revenues, in a sudden, sharp recession in the global economy. Many although insight can be gained from looking at specific fear that even if a good policy response limits its duration, its aspects of the revenue system that will likely affect effects will be felt for a long time. Two main factors support this collections in client countries: fear. First, many major economies were already ill-equipped to handle adverse exogenous shocks. Second, this sudden • Customs and trade taxes. In open economies, the economic disruption is especially destructive because, in many interruption in global value chains has a direct and cases, it has destroyed both supply and demand. Current immediate negative impact on the revenue collected health responses to the pandemic impact drivers of economic by customs (excises, import duties, and VAT). For growth, likely leading to economic shutdowns across sectors. African and other client countries, China’s slowdown in Governments must think about second-phase fiscal policy economic activity has already translated into a drop in interventions to restart a globalized economy once the health manufacturing imports. These problems deepened as challenges of COVID-19 have been met. advanced economies entered crisis mode and COVID-19 spread across the globe. The COVID-19 crisis presents unprecedented challenges to domestic revenue mobilization (DRM). From past crises • Consumption taxes (inland). A large share of goods we know that the effect on taxes (especially direct taxes) consumed in developing countries are imported or include exceeds the economic impact in scale and duration. The parts from China and other countries where production unprecedented cash flow and income hit for businesses and has been affected. As supply chains have been individuals creates a dual challenge for revenue systems: to interrupted, local traders selling imported items such as provide relief for affected taxpayers and to manage a sudden textiles, electronics, or household goods are not supplied. large drop in collections. The widening impact from COVID-19 will likely cause further deterioration that will be compounded as demand The COVID-19 pandemic and related economic slowdown responds to supply shocks. will lower government revenues as a share of GDP as (i) some tax bases are disproportionately affected by a growth • Direct taxes. Over the next years, revenues from slowdown, including profits, capital gains, items with excises, Corporate Income Tax (CIP) and Personal Income Tax and imports; (ii) commodity prices and related revenues (PIT) are likely to decrease as income generating activities 2. World Bank (2020), “COVID-19 Revenue Administration Implications: Potential Tax Administration and Customs Measures to Respond to the Crisis” (World Bank, Washington, DC), https://openknowledge.worldbank.org/handle/10986/34152 License: CC BY 3.0 IGO. 3. World Bank (2020), “The Fiscal Impact and Policy Response to COVID-19” (World Bank, Washington, DC). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 slow down. The most immediate effects will likely be felt compliance. Moreover, tax arrears may increase as in the collection of payroll and wage taxes, which have a taxpayers divert constrained cash flows to their business shorter lag. operations. Businesses may also protect their cash flows by suspending or delaying payment of salaries, supplies, • Revenue from natural resources. COVID-19 coincides loans, and other obligations, which could further reduce with a major drop in the price of oil and other commodities taxes collected. as the world economy slows. Oil price declines were reinforced by disagreement between Russia and Saudi Designs for fiscal (revenue and expenditure) responses to Arabia on production cutbacks in response to declining the COVID-19 pandemic can be assessed through specific world demand. Commodity importing nations generally aspects of individual revenue instruments that indicate benefit from oil price drops, but revenue from taxes based their efficacy and efficiency in achieving their goals, both on the value of oil products (i.e., ad valorem instead short and long term. These aspects include the efficiency of specific rates for fuel and other products) could be of a specific instrument to achieve targeted objectives; cost adversely affected. and fiscal sustainability; flexibility to adjust to changing circumstances; and administrative feasibility. • Tax administration and compliance.4 As noted above, health measures disrupt revenue administration The relative weight of these aspects in each country’s operations, including enforcement and taxpayer services. choices will depend on circumstances. For example, (Some tax administrations have already suspended countries with solid fiscal buffers will be less constrained by audit and collection activities.) Reduced enforcement costs, and countries with strong administrative capacity will be activity would likely increase taxpayers’ risk tolerance able to deploy more complex instruments than countries with for tax avoidance and evasion and thereby reduce tax limited capacity. 4. Revenue administration aspects are only touched on in this note. A detailed assessment can be found in the GGP/MTI companion note “Revenue Administration Implications from COVID-19.” EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 > > > B O X 1 - Framework for Assessing Fiscal (Revenue and Expenditure) Policy in Response to COVID-19 Fiscal policy measures in this note are assessed using a framework derived from the traditional timely-targeted-temporary model for assessing responses to crisis situations, with a focus on the following aspects: Efficiency. The efficiency of a specific fiscal instrument to achieve particular objectives cost-effectively will be influenced by: • Targetability: The extent to which the instrument allows direct targeting of specific businesses, population groups, or activities. • Speed: The time elapsed between adopting the instrument and achieving the desired impact. • Abuse resistance: The ease with which abuse by eligible beneficiaries and other parties involved with the measure can be controlled. Cost and fiscal sustainability. Containing the cost of fiscal measures is another important aspect of the fiscal response. This involves considering costs and benefits of specific instruments and their interactions. For example, measures to reduce layoffs may generate benefits by reducing unemployment and social security payments. • Affordability: The extent to which the use of the instrument impacts fiscal stability. For example, instruments that provide support in the form of credits or through deferred payments will have lower cost implications than instruments in the form of outright grants and expenditure. • Predictability and control of cost: The extent to which upper limits of program costs can be established and actual costs reasonably well predicted. Flexibility. The high uncertainty regarding the duration of the pandemic and the intensity with which individual countries will be affected puts a premium on the flexibility with which an instrument can be deployed, including the ability to scale up or stop the use of an instrument as needed. • Scalability: The extent to which the instrument can be expanded or replicated for additional groups of beneficiaries in accordance with needs. • Reversibility: The ease with which the response can be withdrawn without causing economic and behavioral distortions. Feasibility. Measures may not have their intended effect if they are difficult to implement due to administrative constraints or their impact is blunted by health measures, such as social distancing and lockdowns. • Administrative ease: The extent to which the instrument can be implemented within existing administrative capabilities. • Impacts of the pandemic and containment measures: The COVID-19 pandemic has direct impacts on deployment of fiscal instruments. For example, scaling up health expenditure may be constrained by a lack of qualified personal; measures involving human contact (especially in groups) will be less desirable than instruments that limit such exposure; and scaling up consumption and investment may face supply side constraints as suppliers and contractors may be in lockdown mode. When analyzing the fiscal impact and potential revenue • Phase Two: Recovery. Recovery measures as the administration measures for responding to the COVID-19 health crisis stabilizes but the economy has yet to regain crisis, it is useful to differentiate three phases: its footing. • Phase Three: Stabilization. Measures to increase • Phase One: Containment. The immediate crisis response resilience and sustainability as the economic situation to soften the economic downturn and protect businesses, stabilizes and attention can turn to applying lessons from jobs, and citizens from undue economic hardship. the crisis and to sustaining gains made. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 >>> Phase One: Containment 1.1 Alleviate Cash Flow to Entities to strengthen collaboration between taxpayers and revenue administrations at a time when it is most needed. The COVID-19 crisis will trigger negative economic shocks Cash management considerations are similarly relevant that cause liquidity crises for both businesses and households, to fiscal authorities and revenue administrations during leaving many without the cash or easy-to-convert assets with unanticipated economic shocks. Revenue shortfalls to treasury which to honor their public debt. accounts materialize through different channels, mainly lower turnaround levels of tax payments from cash-constrained Cash management stands out as a critical function for taxpayers, shrinking tax bases due to lower economic activity, businesses’ strategic planning, with implications for investment and sudden declines in overall tax compliance. Revenue and employment strategies. Businesses must understand the collection is also likely to be affected by short-term and extent of future cash generation and necessary expenditures, temporary policy measures to improve cash management for with a focus on short-term needs for day-to-day operations. distressed taxpayers and to protect vulnerable populations Daily cash forecasts are driven by receipt and payment data from adverse health and economic effects. from accounts receivable and payable ledgers; tax information and net profit or performance; cash surpluses retained in the During the containment phase of the pandemic crisis, business; and short-term liquid investments. Tax payment revenue administrations and fiscal authorities should adopt obligations play a critical role in a business’s overall treasury comprehensive compliance and receipt management strategy and risk management. Cash forecasts include tax strategies to mitigate adverse economic effects and introduce estimates, and businesses typically consider optimizing their healthy revenue performance and budget practices. Most early resources to ensure enough liquidity to pay taxes on time and measures will target affected taxpayers, often requiring them make smart use of refund requests. to prove they are qualified to receive relief. While eligibility criteria are necessary to prevent abuse, in practice use of the During challenging economic times, when cash becomes a criteria can burden both taxpayers and tax administrators. vital commodity as unanticipated shocks affect businesses’ Tax administrators will need to spend significant resources short-term receipts and payments, fiscal authorities play a approving and monitoring taxpayer requests, while already fundamental role in adjusting the tax system to ensure taxpayers struggling to cope with the pandemic. Tax administrations improve their cash flow. Fiscal authorities and revenue should therefore avoid cumbersome procedures likely to administrations can provide valuable sources of liquidity, delay or prevent taxpayer compliance and to increase the either through accelerated tax refund processes (based on risk that policy objectives will fail. For example, because risk-management parameters) or deferral of tax payments most tax revenue come from very large taxpayers, in many (akin to interest-bearing loans from the treasury). Adoption cases a government could offer relief to all small and medium of a well-designed package of tax mitigation measures has taxpayers without risking its overall revenue intake. the potential not only to mitigate liquidity constraints, but also EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8 A comprehensive set of recommended short-term mitigation 1.2 Monitor Compliance Risk measures to assist businesses and household taxpayers’ cash management concerns during the pandemic’s containment phase appear in the World Bank paper COVID-19 and Taxation: The pandemic will have a substantial impact on tax Between the Devil and the Deep Blue Sea,5 addressing the compliance and revenue collections. Businesses classified dilemma of using budget expenditures to alleviate taxpayers’ as nonessential may consequently lay off or furlough many cash flow constraints, given the need to generate revenues to employees. COVID-19 has affected people across the create fiscal space. world—it does not distinguish between rich or poor or spare people by country or ethnicity. Taxation issues arising from Measures that tax administrations can use to improve COVID-19 similarly do not distinguish between businesses businesses and individuals’ cash flow and liquidity include or individuals or taxpayers of different sizes (large, medium, tax refunds, interest-bearing loans, smooth-out effects for small/micro); they do not spare taxpayers or traders in different economic losses, and incentives for critical investments. Most economic sectors. of these measures require tax authorities to adjust processes and regulations, while others require temporary changes in The COVID-19 crisis requires revenue administrations to tax policy tailored to specific social and economic objectives understand emerging compliance risks and to strike an during the containment and recovery phases of the pandemic effective balance between assistance interventions and health and economic crises. Delaying payments by a quarter enforcement interventions, formulating or reformulating or two gives immediate breathing space to the private sector compliance strategies for each phase of the crisis. This list while keeping intact fiscal balances intact. Extending filing summarizes the key aspects applying to both high- and low- and payment deadlines for individuals would provide much capacity tax administrations: needed relief and reduce possible work backlogs for the tax administration. • Taxpayers not affected by the crisis may nonetheless decide not to pay. Payment deferrals and installment agreements for customs • Distressed taxpayers may be unable to file and pay. duties can also be an important tool by supporting businesses • Growing numbers of taxpayers may be unable to exporters to stay resilient through tough economic times. pay arrears. Such measures could replace and/or complement temporal • Large taxpayers’ noncompliance may increase. policy actions such as granting (i) a temporary zero-rate • Timely processing of refunds is crucial. policy to specific tariff codes; (ii) limited or provisional tax/ • Delays in releases of imported essential goods, such as tariff exemptions to relevant sectors; or (iii) more flexible tax medical supplies, must be avoided. deferrals. These measures can help traders increase their international competitiveness, face trade costs during the Revenue administrations must develop tax compliance global recession, and secure their participation in the global strategies to address these challenges, specifically value chains. measures to: Accelerating tax refunds in whole or part can provide vital cash- • Assist taxpayers to cope with the pressures of the flow relief to financially distressed taxpayers, as can speeding COVID-19 crisis. up value-added tax (VAT) rebates for exporting businesses or • Adjust taxpayer service and enforcement programs to delaying VAT collection from importing companies. Countries address emerging risks. that provide less frequent filing for small and medium • Contain and manage the rise in noncompliance. businesses (SMEs) can allow SMEs with excess VAT inputs to opt for monthly filing, to enable more frequent VAT refunds Because the COVID-19 crisis has broad impact on compliance, (monthly rather than quarterly). Best practice for improving it differs substantially from the 2007/2008 financial crisis. timeframes for processing income tax refunds or releasing VAT COVID-19 impacts all types of taxpayers (large, medium, refunds uses automated risk assessment. Effective, timely small), more economic sectors and industries (beyond implementation greatly depends on tax authorities’ capacities, banking), and both businesses and individuals. The main however, which widely vary across countries. Therefore, a priority for responding, therefore, is to target interventions to simplified refund process should balance agility and control. address the greatest risks. 5. Junquera-Varela, Raúl Félix, Daniel Álvarez Estrada, and Cristian Óliver Lucas-Mas (2021), COVID-19 and Taxation: Between the Devil and the Deep Blue Sea, EFI Insight-Governance Series (Washington, DC: World Bank). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 9 • Existing tax compliance strategies are likely out-of- These priority risks and treatment strategies should be step with the new context. A typical compliance strategy considered for each phase: assumes that most taxpayers are or will be compliant, given some assistance. The COVID-19 crisis may upend • During the containment phase it is paramount that such assumptions, and tax administrations must deal revenue administrations build trust and confidence with with more widespread noncompliance with changed tax the taxpayer/trader community. Revenue administrations compliance strategies. must take the lead in understanding the challenges faced • Governance arrangements may need strengthening to by businesses and individuals. ensure an effective tax compliance risk management team • Focus should be on providing assistance to taxpayers is ready to design, implement, and monitor the strategies. who are substantially affected by the COVID-19 crisis and • Data analysis and risk assessment should drive all therefore unable to comply. Tax administrations could, for major decision making. One major game-changer since example, relax filing and payment requirements or speed the 2007/2008 crisis is the evolution in technology; tax up refund claim processing. administrations can now make more effective use of • Enforcement should focus on essential businesses in internal/external data to identify compliance risks. sectors that might be experiencing growth (e.g., large supermarkets, pharmacies, health sector businesses, or • There is no need for sophisticated software: Excel businesses selling goods online). can do the job!!!! • Emphasis should be placed on monitoring the compliance • A small data analytics team can analyze data to of the largest taxpayers (particularly large businesses not identify possible compliance risks; thus only a few impacted by the crisis), many of which should not receive staff will need proficiency with advanced Excel relief from filing, payment, accurate reporting, or payment features (e.g., PowerPivot). of arrears. • Smaller administrations may not have resources for a formal data analytics team, but even one or two officers Table 1 provides guidance on preparing a Taxpayer can further the use of data to identify compliance Compliance Strategy during the containment phase. Its two risks. For example, comparing the taxpayer register to sections acknowledge differences in tax administrations’ the companies and customs registries could identify maturity in designing and implementing taxpayer compliance potentially unregistered taxpayers, and analysis of strategies, core tax administration business processes, and return and payment data can easily measure on- ICT development. time filing and payment compliance levels, which are crucial. This analysis could be done by type of tax or by economic sector. > > > T A B L E 1 - Phase One: Containment of Risks to Revenue and Suggested Responses Revenue Administrations with Mature Compliance Strategies/Business Processes/ICT Risks Treatment Strategy Comments 1. Taxpayers who have not • Review the taxpayer register to identify • This will likely include many large been affected by the taxpayers that should not be provided taxpayers but not necessarily all (e.g., COVID-19 crisis decide relief from registration, filing, and in normal circumstances, a large hotel not to comply. payment, as they have been unaffected might be classified as large, but this by the crisis and some may be thriving. sector has been substantially impacted by the crisis). 2. Distressed taxpayers are • Develop simple communication materials • Establish a small team to develop unable to file and pay. to make taxpayers aware of government communication materials and maintain and revenue administration COVID-19 contact with taxpayers electronically responses and measures. (including dedicated staff to contact EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 10 Risks Treatment Strategy Comments • Temporarily suppress automatic stop- taxpayers about COVID-19 measures). filer reminders and warning letters and • Build partnerships with the taxpayer only contact essential businesses not community to get it involved in filing and paying on time. disseminating information and obtaining • Temporarily suspend ongoing audits of feedback from distressed taxpayers. distressed taxpayers. 3. A growing number of • Encourage use of installment • Inform taxpayers of policies and taxpayers are unable to agreements for taxpayers who cannot procedures for paying arrears, as they pay arrears. make full and timely payment. may not be aware of them. • Priority should be placed on collecting • More staff should be assigned as new arrears from taxpayers not impacted needed to stay current with collection of by the crisis and whose operations may potentially collectible large arrears. be thriving. Firm and prompt recovery • Definitions of essential businesses vary actions should be taken to collect arrears by country, so staff must review taxpayer from businesses that are doing well. registers to find those meeting the local definition (e.g., parts of Canada classify businesses selling alcohol or marijuana, which have had revenue spikes, as essential). 4. Noncompliance by large • On-time filing and payment for all core • The large taxpayer office (LTO) might taxpayers (classified as tax types should be closely monitored need additional resources for timely essential businesses) to ensure compliance levels do not monitoring of on-time filing and payment, increases during the crisis. deteriorate. audits, and collecting arrears. • Audit programs for large taxpayers • A small number of KPIs should be unaffected by the crisis must be stepped adopted and reported on regularly to up (focus should be on accurate senior management (e.g., revenue reporting of VAT and reporting of net collected, on-time filing %, on-time operating loss). payment %, audit results, and changes stock of arrears, broken down by sector and tax type). 5. Timely processing of • All refunds should be centrally refund claims must be processed. maintained. • Use risk-based assessment criteria to process refunds within 30 days. • Priority should be given to issuing refunds to SMEs, exporters, and individuals. • Estimate the amount of refunds to be claimed during the crisis and ensure government allocates an appropriate budget. 6. Release of imported • Steps should be taken to expedite the • Businesses and citizens rely on the essential goods and clearance process for essential goods timely importation of goods and medical medical supplies is and medical supplies (e.g., establish a supplies during the containment phase. delayed. fast-track clearance facility). EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 11 Revenue Administrations with Limited Experience with Taxpayer Compliance Strategies or Limited ICT Solutions Risks Treatment Strategy Comments 1. Taxpayers not affected • Review the taxpayer register to identify • If the register is not automated or is by the COVID-19 crisis taxpayers that should not receive relief inaccurate and unreliable, establish a decide to not comply. from registration, filing, and payment small group who can use local knowledge because they are unaffected by the to determine the essential businesses. crisis, and some may be thriving. 2. Distressed taxpayers are • Develop simple communication materials • Establish a small team to develop unable to file and pay. to make taxpayers aware of government communication materials. and revenue administration COVID-19 • Staff should use traditional channels responses and measures. to keep taxpayers informed (e.g., print • Generate a list of nonessential media, phone calls to key taxpayers) businesses and suspend filing/payment and should consider using social media compliance monitoring and any audits. to inform taxpayers. 3. A growing number of • If taxpayers are unable to make full • If IT support is limited, focus on reviewing taxpayers are unable to and timely payment, encourage use of filed returns and/or completed audits to pay arrears. installment agreements but maintain identify essential businesses with large focus on collecting any large arrears. arrears. 4. Noncompliance by large • If the tax administration does not have a • A small team at the central, regional/ taxpayers (classified as specific LTO or large taxpayer program, provincial, and/or district level should essential businesses) staff should take time to identify the monitor the largest taxpayers in the increases during the crisis. businesses that paid the largest amounts geographic area (e.g., each office could of tax in previous years and ensure that start by closely monitoring the top 50 or businesses unaffected by the crisis are 100 taxpayers in amount paid). closely monitored to ensure all returns • A small number of KPIs should be and payments are made on time. adopted and reported on regularly to senior management (e.g., revenue collected, on-time filing %, on-time payment %, audit results, and changes in arrears). 5. Timely processing of • A small team focus on processing any • Any refund claim from a distressed refund claims must be refund claims. Dedicated staff should SME should be immediately issued and maintained. deal with any large refund claims. checked later. • If the taxpayer has any outstanding • Large refund claims should be carefully arrears, the amount to be refunded reviewed; if the taxpayer has a good should be offset first. compliance history, the refund could be • A very simple risk-based selection issued. A fast-track method should be process should be used to issue refunds. used when exporters request a refund. 6. Release of imported • Steps should be taken to expedite the • Businesses and citizens rely on the essential goods and clearance process for essential goods timely importation of goods and medical medical supplies is and medical supplies. supplies during the containment phase. delayed. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 12 1.2.1 Allow but Monitor Growth in Tax Arrears with reliable tax elasticity and buoyancy coefficients (in Tax agencies should identify risks of noncompliance as quickly relation to underlying tax bases, such as gross domestic as possible and monitor tax arrears. In many countries, close product (GDP) or private consumption), these models monitoring of large taxpayers’ arrears, the bulk of tax revenue, can help revenue administrations determine the effects is necessary avoid a sharp decline in revenue collection. of revenue shortcomings in the short term and estimate those effects against the annual revenue budget. 1.2.2 Increase Reporting of Net Operating Loss (NOL) • Enhance transfer pricing audits. Any adjustments made Taxpayers in businesses affected by overall economic to transfer pricing arrangements should be closely audited conditions are likely to file NOL increases, but some to ensure they are applied with extreme diligence, both businesses consider economic downturns opportunities to in transfer pricing documentation and in the underlying claim sham NOLs. Close monitoring of NOL filling is needed analytics; a framework for intertemporal evolutions of the to avoid wiping out short-term CIT revenues. transfer pricing model should be provided. In post-crisis tax audits, tax administrators should also analyze and 1.2.3 Increase Monitoring of Inaccurate VAT challenge any COVID-19-induced group losses to ensure Reporting they would not have arisen even without the crisis and Businesses affected by economic conditions might incorrectly to verify alignment with reviewed transfer pricing policies report amounts of VAT paid at importation or increase the to allocate group profits and losses. Tax officials may amount of zero-rated and/or under-report sales. The tax take into account the exceptional current situation for administration must closely monitor VAT reporting. comparability analysis purposes and, if necessary, adjust the pre-crisis comparability analysis and review related- 1.2.4 Soften & Speed up Responses party transactions. Refund processes should be monitored as distressed taxpayers may engage in fraudulent refund claims as a source • Audit compliance for conditional tax benefits and of cash flow, especially VAT refunds (often a rather weak subsidized loans. Many companies and entrepreneurs operational performance area). may benefit from tax advantages (e.g., tax rebates or postponements) and subsidized loans at beneficial or Additional measures to improve and monitor compliance risks zero-interest rates if they comply with certain conditions from fiscal authorities include: and commitments (for example, they do not distribute dividends, buy back shares, or, for large companies, • Strengthen tax compliance monitoring within tax establish operations in noncooperative states or territories). administrations. Special task forces within revenue Tax authorities should expend extra care and resources on administrations can help mitigate short-term effects of auditing and verifying that taxpayers benefiting from such economic shocks. The task force should closely monitor special aid measures appropriately qualify. potential tax base erosion or the exposure of higher levels of compliance risk. It could also be instrumental in • Suspend statutes of limitations for tax authorities. All establishing effective feedback loops with the ministry of statutes of limitations should be suspended until the end finance economic team tasked with monitoring revenue of the COVID-19 crisis to prevent expiration of ongoing tax collection and preparing budgets for the midterm economic audits and to allow initiation of new tax audits that would framework. have expired during the pandemic, impairing audit and revenue procedures. Suspensions would be applicable to • Monitor monthly receipts. In addition to developing both the taxpayer and the tax authority, and no tax audit revenue forecasting and estimation tools (mostly would be initiated during the suspension period. Identical tailored to macroeconomic management and tax policy provisions should be applied to rules for all time limitations objectives), countries should have a reliable monthly applicable to recovery, inspections, and tax rulings under revenue receipt model. When appropriately calibrated, customs regulations. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 13 1.3 Manage Business Continuity Business Continuity Management (BCM) ensures that all to recover and continue critical processes in the event of an critical processes in an organization are available at all times to interruption or disaster like the COVID-19 pandemic. BCM is tax and customs officials, taxpayers, trade partners, and other illustrated in the figure below. entities that must access them by creating continuity strategies 01 Identify Critical Analysis 02 Areas Business Impact 07 Business Risk Training Continuity Management Management 03 06 Define Recovery Testing & Strategies Validation Disaster 04 05 Recovery Plan The BCM thus aims to have ready a Disaster Recovery Plan 1.3.2 Restore Critical Functions (also termed a Continuity Plan) providing strategies and By investing now in a viable BCM program, tax and customs procedures to return operations to an acceptable level of authorities can develop the most effective approach to restoring performance as quickly as possible after the disruptive event. and resuming critical and essential functions and processes. The speed with which the organization’s assets can return to Focus should be on developing, implementing, and maintaining normal or near-normal performance will impact the time the a credible BCM program that implements the complete cycle organization requires to return to business as usual (BU). shown in Figure 1 and, most importantly, provides a layer of protection for the organization’s most important assets: 1.3.1 Analyze Business Impact people, information, cash flow, and reputation. The BCM process begins by identifying critical operational areas and ends with a disaster recovery plan (1 and 2 in 1.3.3 Apply Mitigation Strategy Figure 1). Business Impact Analysis identifies the most In the context of COVID-19, the tax and customs authorities’ important business areas and the resources necessary for recovery plans should include specific mitigation strategies that their operation. Risk analysis examines internal and external enhance their ability to rapidly coordinate responses to adapt threats and vulnerabilities that may negatively impact the most to unpredictable change, because the strategies needed are important business areas. strongly influenced by how the organizations define their most EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 14 critical areas and highest risks. Emphasis should be placed on providing hygiene products, fostering safety-first attitudes, creating clear, secure operational guidelines and procedures etc. In the context of COVID-19, risk-based inspections/ for employees taking decentralized initiative. audits become even more critical to limit physical interaction. To decrease in-person interactions, authorities may need to 1.3.4 Support Social Isolation temporally close physical offices and/or reduce office-based The COVID-19 pandemic differs from most business and IT activity to a minimum. While replacing office visits with ICT risks identified in traditional risk analysis because it prevents might be ideal, however, that option may be unavailable to employees and taxpayers from visiting tax and customs some revenue administrations. authorities’ facilities. Earthquakes, floods, fires, tornados, blackouts, riots, civil unrest, equipment failure, hackers, etc., Shift to digital. To date, much of the focus of government all affect infrastructure, but COVID-19 prevents employees, responses to COVID-19 has been on prevention and taxpayers, and trade partners from reaching facilities and mitigation. But signs are emerging of adaptation actions with carrying on normal operations: infrastructure and systems possible long-term consequences for government structure operate normally, but people cannot use them. and operation. Governments might move to automation or e-services (including tax services) and limit close physical Tax and customs authorities must develop business continuity interactions, often legacies of the predigital era, to reduce plans that identify critical business processes and mitigation future viral contagion risk. While some countries have closed measures. Having a continuity plan for tax administration and their tax administrations, others are rapidly shifting onto digital customs operations during the COVID-19 period is essential, platforms, allowing users to access some services remotely to especially given the spatial distancing imperative in place limit the risk of exposure and spread. while authorities need to take action. One big lesson that governments learned from the COVID-19 1.4 Create a Task Force pandemic is how critical internet-based compliance is for taxes and customs. Where such platforms were operating, COVID-19’s negative impact on revenue was a function not of Cooperation is critical in this new environment. A task force administrative but of economic factors such as sharp declines comprised of officials from the tax policy department, from in consumption (impacting VAT), increased unemployment the ministry of finance, and revenue administration, from (impacting PIT and PAYE), and the fall in profits (ultimately tax and customs departments, should be created and made reducing CIT). responsible for the design and day-to-day implementation and monitoring of the emergency DRM package. The task A revenue administration’s ability to maintain business force could also regularly update information on emerging continuity during the pandemic emerged as a critical element risks and adjust the emergency plans (including the business of successful operations. This went far beyond the availability continuity plan, the compliance strategy, etc.) as needed. It of ICT platforms; it included maintaining staff and taxpayer could also play a key role in properly planning and resourcing safety, creating an emergency task force, providing continuous the corresponding agencies and regularly monitor results critical services to taxpayers and government, making clear achieved. In addition, the task force should cooperate closely and timely decisions in a rapidly changing environment, with representatives from the taxpayer community to engage communicating promptly and effectively with taxpayers and them in the design and implementation of the DRM package. staff, preserving confidentiality of tax records, expediting customs inspections, and reassigning personnel (e.g., to focus Revenue administrations should aim to have a centralized on taxpayer services) or institutions (e.g., tax administration to high-level team design, implement, and monitor their customs) as needed. COVID-19 tax compliance strategy. Since the 2007/2008 financial crisis, a growing number of tax administrations have Workforce safety. Revenue authorities’ pandemic-related some form of compliance risk management organization in business continuity plans must deal with large-scale staff place that has responsibility for designing, implementing, and absences, as more and more people report sick or avoid monitoring compliance improvement strategies; a number their offices due to social distancing. While proper business of tax administrations are in the process of introducing such continuity plans may take time to develop and implement, arrangements. In the short term some tax administrations may simple measures undertaken on an urgent basis can make not have the option of establishing a formal centralized team. a big difference; these include limiting public service users, However, the principles laid out below could still be achieved by EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 15 appointing a small team to develop preliminary tax compliance 1.5 Take Customs and Trade Measures strategies (perhaps in the form of a project). The following good practices for tax compliance governance frameworks are recommended for tax administrations’ consideration: 1.5.1 Secure Border Crossings • A central compliance risk management team should be Temporary travel and border restrictions. The objective of established with responsibility for identifying emerging this measure, like other resolutions adopted under the current risks and possible treatment strategies. public health emergency, is to protect citizens’ health and safety. Implementing temporary restrictions on “nonessential” • The team would include a small group of data analysts travel, such as tourism, may help curb the spread of the with access to all internal/external data to identify COVID-19 virus. Borders can remain open only for citizens risks and, if possible, sector/industry specialists. or residents, cross-border workers performing “essential • The risk management team will review the risks, activities,” or other urgent essential reasons. identify treatment strategies, and present their findings to the Compliance Risk Management Preserve supply chains. The security and integrity of Council/Committee. the supply chains must be preserved in the interest of both citizens and economies. Keeping borders open for cargo • A compliance risk management council or committee flows, especially flows across common borders, responds to comprised of senior tax administration executives should the need to avoid disruptions of supply chains, particularly of be established to review proposals presented by the essential goods such as food, imported medicines, disinfection central compliance risk management team and to make articles, protective supplies, and medical equipment. decisions regarding what priority actions to take. Monitoring strategy for counterfeit goods. Customs • This could include the head or deputy head of the tax administrations should actively and aggressively monitor administration. any shipments that could present a threat to public health. • Other members might include senior management This measure is crucial, as counterfeit products will continue from headquarters departments/units in-charge of to expand during the outbreak. Due to ongoing efforts by core tax administration functions (e.g., registration, some customs administrations, seizures of unauthorized filing, payment, audit, arrears management, and or fraudulent test kits are rising. Increased engagement taxpayer services) and support functions such as HR and collaboration with industry on intellectual property right and ICT. also matters. • Finally, operational managers from selected field offices (e.g., head of the LTO, regional/provincial 1.5.2. Prioritize and Expedite Essential Goods heads) should participate. Publicize HS classification reference for COVID-19 Internal and external communication is critical for the efficient medical supplies. Customs administrations can make management of the crisis. On the one hand, it is important available the WCO’s updated HS Classification Reference for to have a communication strategy to coordinate messages COVID-19 Medical Supplies6 to assist importers in determining related to policy objectives, instruments, and institutions within the appropriate HS classifications. Entities and operations the government (the above-mentioned task force should related to the referred commodities should be allowed to use play a critical role) before tax measures are announced, green lanes and receive pre-arrival processing. The eligible to help manage expectations. Authorities also need to six categories are as follows: clearly communicate, in a timely manner and simple terms, the measures being taken and the packages available to i. COVID-19 test kits and instruments and apparatuses taxpayers. Revenue administrations should use the full set of used in diagnostic tests service channels (website, e-mail, telephone contact centers, ii. Protective garments (gloves, face and eye protection, walk-in offices, radio, TV) and products to publicize available textile masks, gas masks, protective garments) policy measures and compliance strategies to the public. iii. Thermometers 6. WCO, HS Classification Reference for COVID-19 Medical Supplies, Ed. 2, April 2020. http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/ nomenclature/covid_19/hs-classification-reference_en.pdf?la=en. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 16 iv. Disinfectants and sterilization products Ease formalities related to certificate of origin. Obstructing v. Other medical devices (ventilators, oxygen, tomography requests for preferential tariff treatment during the outbreak scanners) is the impossibility of obtaining proof of origin according vi. Medical consumables (needles, syringes, intubation kits, to established formalities because infections have caused bandages, paper bed sheets) delays and limited contact. Foreign trade operators forces may be immobilized, affecting SMEs particularly. Acceptance Green lane system for essential goods. To the extent of scanned or hard copy certificates will help streamline legally possible, new customs prioritization procedures should the import process and should not restrict controls over be implemented to address issues that could delay access tariff preference. to essential goods. A “green lane” system helps streamline the release of cargo by expediting and prioritizing inspection Use of digital/electronic signature as a facilitation and clearance formalities to ensure timely access to crucial measure. Preventive isolation orders due to COVID-19 supplies such as medicines and medical equipment, food, significantly limit carrying out customs and trade procedures. energy (fuel), and applicable personal hygiene goods, to In this context, the use of a digital or electronic signature can minimize shortages. be considered for forms with instructions requiring an original handwritten signature for formalization. In customs where Expedite reception of international emergency donations. digital signatures are not yet used, electronic signatures using To expedite international donations without compromising scanned images of a person’s ink signature are recommended the population’s health, customs authorities and ministries to preserve the operation and continuity of procedures (e.g., of health will need to work jointly to immediately issue the invoices, transportation of hazardous materials declarations, necessary import permits for donated medicines and health guarantees, and powers of attorney). supplies that meet quality standards. Within this framework, these shipments can be exempt from advance electronic filing 1.5.4 Reinforce Simplified Customs Procedures requirements (if applicable), approved for waiver of formal entry, and released by submitting the cargo manifest. Foreign Authorize emergency temporary admission of equipment. shipments released under these guidelines are usually subject To support actions to address large-scale emergencies, any to proper screening upon arrival, and records are logged medical and surgical equipment that will be used temporarily according to existing policies. and exclusively in the context of the crisis (including ambulances) should be subject to an emergency relief Advance ruling mechanism to expedite imports for consignment clearance and temporary admission procedure medical supplies. To coordinate inquiries regarding with total relief from import duties and taxes. This alternative importation of medical supplies and personal protective may entail simplified customs formalities, reduced document equipment, best practice is to establish a resolution unit or submissions, and exemption from the requirement to specialized team to promote clear and consistent application guarantee temporary importations. of regulations, facilitate requests from other government bodies, and coordinate with the ports to avoid unnecessary Extend deadlines for customs formalities. Terms for filing delays in releasing cargo. This unit can also coordinate binding entry and supporting documents, amendments, notifications, ruling requests through a specific email account created for appeals, and control results should be extended, along with this purpose. periods for re-exportation of goods under temporary admission and for submitting documentation regarding audits. Cargo- 1.5.3 Enable Alternative Document Forms overstay deadlines should be considered with no penalties due. Terms should resume at the end of the emergency period. Flexible submission of supporting documents. Customs administrations may extend deadlines and temporarily accept Presentation of goods at approved places. In case of a submission of scanned supporting documents for transits and fortuitous event or for justified cause, some customs authorities other customs procedures subject to this facilitation measure. have the legal power to approve delivery of goods to a place If irregularities or fraud is suspected, customs authorities may other than that authorized. For the duration of the pandemic, require the original paper documents for control. this may be considered case by case to facilitate submission EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 17 of cargo related to essential goods directly at the economic of trade and commerce or relevant trade policy executive operators’ facilities. Such arrangements should be disclosed agencies. to the competent authorities and trade entities. Import VAT and duties exemptions for medical supplies 1.5.5 Enable Safety Measures for Enforcement and equipment. Medical supplies to prevent or control the Actions virus, such as oxygen, compresses, disinfectants, soaps, antibacterial gel, PPE (gloves, masks, respirators, disposable Minimize exposure of front-line staff to COVID-19. Social garments), diagnostic reagents, and medical equipment could distancing and personal protective equipment (PPE) are be considered for exemption from import duties and import VAT necessary to minimize exposure and protect customs’ and until the health emergency subsides. Before the COVID-19 other port agencies’ workforce and staff from COVID-19 for outbreak, according to a report based on WTO data sources,7 from. Social distancing should be used to the maximum extent 89 countries collected taxes on imported medical devices; 63 possible, but if personnel cannot telework, administrations countries (3 percent to 15 percent) charged taxes on imported may need to provide PPE including gloves, masks, respirators, medicines; 100 nations still tax disinfectant imports; and eye protection (face shields or goggles), and/or disposable 79 countries charge import tariffs of 15 percent or more on garments. Use of equipment and sanitary measures should imported soap.8 be clarified through standard operating procedures to ensure most staff members are trained in PPE use, staff safety, Excise duty relaxation on denatured alcohol. To meet and sanitation. local and global demand for hand sanitizers and disinfectants, administrations should ease restrictions on companies Reduce physical interactions during cargo inspections. producing such supplies. Excise duty exemptions on imports To reduce physical interaction during customs clearance of denatured alcohol (or non-denatured, in case of shortage) processes, consider exemptions from sanctions on entities not used as raw materials in manufacturing sanitizers should attending physical inspections. Instead, entities may authorize be granted. logistics operators to appear for cargo examinations on their behalf or inform authorities (electronically) that inspections Relief on non-tariff barriers for medical supplies. To the can be carried out in their absence. extent possible, offer temporary exemptions on non-tariff measures affecting essential medical supplies and hygiene Explore virtual audit mechanisms. Current COVID-19 items. Many medium- and high-income countries have restrictions and related public health measures have restrictive trade policies affecting epidemic supply imports. complicated continuing scheduled audits. Special Medicines, soaps, and disinfectants confront such barriers as mechanisms must be developed to regulate exceptions import bans, license requirements, anti-dumping measures, arising from interrupted audits. Suspended and extended internal taxes on foreign supplies, or regulations favoring administrative terms are regular practice for customs audits local companies. and other compliance interventions on traders’ premises. While suspension on control operations for small or medium (SME) 1.5.7 Consider Cash Flow Management businesses may last longer, compliance formalities for high- risk cases should continue to the extent possible. Alternative Deferrals of customs debt. Due to the severity of the means of communication, such as video conferences, secure COVID-19 crisis, customs authorities should approve file transmission, or other telework technology, can be used to extended payment periods and allow payments in installments continue such processes. as temporary relief measures to keep traders afloat during low-profit periods and cash-flow constraints. To be effective, 1.5.6 Consider Tax Relief, Duties Exemptions, and these options must use clear eligibility criteria based on risk Non-Tariff Barriers management considerations and should address specific groups of traders affected by the economic downturn. Recommended preventive and containment measures under in this framework include policy contributions by authorities 7. Simon J. Evenett (2020), “The Trade Policy Dimension: Tackling Coronavirus” Global Trade Alert, Mar. 11, 2020, https://www.globaltradealert.org/ reports/50. Global Trade Alert is an independent, Swiss trade policy monitoring initiative. 8. WTO, Tariff Download Facility (latest year available). Unweighted mean applied MFN import tariff rate. Note: Countries not reporting import tariff data to the WTO are marked in grey. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 18 Deferrals of customs debts and related tax payments (in care is available for those in need, providing relief to those addition to measures on the policy side, such as exemptions) affected most (e.g., through deferment of tax obligations can also help businesses cope with the crisis. Delaying and cash transfers to vulnerable households), lowering corporate income tax payments is one immediate measure. advance payments, and keeping core government agencies In most countries, corporate income taxes account for only operational, including revenue administrations. In Phase a few percentage points of tax revenue. However, delaying 2 key moves will be to roll back initial measures, step up payments by a quarter or two gives breathing space to the compliance enforcement, and implement tax policy measures private sector while keeping fiscal balances intact. Extending to restore revenue performance. Windows of opportunity may filing and payment deadlines for individuals would also provide emerge to strengthen taxes that benefit the environment (e.g., much needed relief and reduce possible backlogs of work for fuel taxes) and health (e.g., taxes on tobacco, alcohol, and the tax administration. sugary drinks and foods) or that reduce tax avoidance by multinational corporations (e.g., using a diverted profit rule). Customs interests and penalties adjustments. During a During Phase 3, countries must consider lessons from the crisis, when increasing numbers of businesses face serious crisis to be better prepared for future adverse events and to cash-flow problems, customs administrations may refrain from deepen commitments to sustainability. A holistic, cross-country charging credit interest or interest on arrears or may adjust approach to green taxes, international tax system reforms, fines and penalties on delayed customs debt payments until and reform of weaknesses in countries’ revenue systems will the crisis ends or shortly thereafter to improve companies’ be the focus during this stage. opportunities for compliance and liquidity. Protecting Businesses Accelerate VAT refund processing. Tax refunds can provide vital cash-flow relief to financially distressed taxpayers. Deferral of tax obligations. Extended payment periods, Accelerated issuing of all or part of a tax refund can help installment payments, and accelerated VAT refunds are useful both companies and individuals. Speeding up value-added temporary relief measures to keep taxpayers afloat during low tax (VAT) rebates for exporting businesses, conversely, profitability periods and cash-flow constraints. To be effective, helps delay the collection of VAT from importing companies, clear eligibility criteria and risk management are required. The leaving more liquidity in the hands of traders. Automated risk fiscal cost of these measures can be contained by targeting assessment is best practice for improving the timeframe for affected businesses—but this may not be feasible in all releasing VAT refunds. The same concern applies to timely cases, especially if the economic effect of the COVID-19 crisis processing of income tax refunds. Effective and timely becomes more widespread in client countries. implementation depends on the authorities’ capacity, however, which varies widely across countries. Therefore, a simplified An alternative approach focuses on advance CIT payments. refund process that balances agility and control should Typically, advance payments are based on the previous year’s be used. income. During a downturn, advance payments are too high and the mismatch between (high) advance tax payments and (lower) final liability causes a cash-flow crunch. The fiscal 1.6 Update DRM Policy Responses impact of this measure is short lived; firms pay the full amount due for their CIT at the end of the fiscal year. The task force should establish a COVID-19 project plan Caution should be exercised with measures that allow outlining all key tasks and timelines for designing and taxpayers to escape taxes, such as suspended audits and implementing the DRM package.9 Several key performance tax amnesties, which can hamper revenue recovery after the indicators (KPIs) should be adopted and regularly monitored. crisis and drive up short-term fiscal costs. Revenue policy focus will shift over the phases of the crisis. Lower taxes for vulnerable businesses. The impact on During Phase 1, emphasis will be on ensuring that health revenue of lowering the CIT rate for SMEs could be offset 9. For comprehensive compilations of jurisdictional tax measures and government relief in response to COVID-19, please refer to the following publicly available online databases: • IMF: https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19. • KPMG: https://home.kpmg/xx/en/home/insights/2020/03/jurisdictional-tax-measures-in-response-to-novel-coronavirus-covid-19.html. • OECD: https://www.oecd.org/ctp/tax-policy/tax-and-fiscal-policy-in-response-to-the-coronavirus-crisis-strengthening-confidence-and-resilience.htm EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 19 by phasing out tax incentives for some sectors following the more flexible deferral or installment agreements for customs crisis. But this measure risks creating strategic sorting around duties. These mechanisms can help exporters increase their the threshold, and rate reductions are generally difficult to international competitiveness, handle trade costs during target and reverse after the crisis. the global recession, and secure participation in global value chains. Reducing compliance costs by simplifying tax obligations, especially for SMEs, has been widely proven effective at Tax incentives and holidays should be avoided as they can increasing compliance levels. During periods of economic decrease mid- to long-term tax compliance. distress and increased noncompliance risk, simplified taxes become particularly relevant, opening opportunities for tax Protecting vulnerable households. Payments for Personal authorities to make serious efforts to identify complete sets Income Tax (PIT) may be deferred for low-income earners. Also, of regulations imposing high compliance costs on taxpayers. countries may introduce cuts in social security contributions. Accelerated or immediate expense of fixed assets is an These cuts may bring substantial relief and disposable income appropriate policy tool for providing tax relief to adversely to workers. This is expected to help businesses retain workers affected taxpayers. It can also provide an incentive for and support consumption and economic growth. bringing forward investments needed in critical economic sectors, such as health providers or pharmaceutical firms. Well-targeted tax credits and lower taxes for specific vulnerable The approach should be seen as a temporary mitigation groups can provide cost-effective relief quickly. But targeting measure. It requires well-defined tax periods, simple eligibility tax relief measures to affected and vulnerable households is criteria, and close monitoring by a special task group within often challenging. the tax administration. Extending loss carry forward rules will support businesses in future years when the tax relief Boosting consumption. A number of countries may becomes operable. This may not provide immediate relief but implement temporary reductions in VAT rates and other indirect many businesses gain certainty that their crisis losses can be taxes, often focused on affected sectors such as aviation expensed against future tax payments. and tourism. Reversing lowered tax rates may be difficult, however, especially if the post-crisis recovery is slow, which To support exporters, particularly SMEs, to stay resilient would drive up their fiscal cost. The effect of such measures through tough economic times, administrations should reduce on consumption is also in doubt. Even with more money trading costs affected by taxes and customs duties. This available, people may not spend it during the pandemic from can be done short-term through, among other options, (i) a caution or because businesses are shut down and movement temporary zero rate policy to specific tariff codes; (ii) limited is restricted. or provisional tax/tariff exemptions to relevant sectors; or (iii) EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 20 >>> Phase Two: Recovery As soon as the immediate health crisis abates and disruptive When analyzing alternative policy options from the health measures such as lockdowns are scaled back, revenue side, country characteristics are important. The countries must get their revenue administration systems most fundamental determinants for the choice of instruments back on the rails by withdrawing rules introduced to deal with will be the country’s available fiscal space and capacity to the immediate crisis (perhaps with some exceptions for new design and implement specific fiscal interventions. In addition, approaches that might be beneficial beyond the emergency). each country’s economic and fiscal structure will require The need to raise revenues must be balanced against the different combinations and intensities of response. This need to respond to the likely event of an economic recession section discusses how these factors affect fiscal instruments’ and the residual damage to businesses and households. efficacy in responding to the pandemic and its economic impacts. It also shows the variation across countries with respect to these factors, which provide categories that facilitate 2.1 Revenue Forecasting and the choice of fiscal instruments best aligned with specific country circumstances. Budgeting The success of fiscal (revenue and expenditure) measures depends on the country’s capacity to design When it comes to domestic resource mobilization, this global and implement them and on its fiscal space to adopt health crisis, combined with the economic and social crisis, measures at the needed scale. While countries with high will lead to a substantial decline in revenues. Three salient capability and fiscal space will be able to choose from the factors could cause revenue to decline in relation to GDP: entire menu of reforms, countries with lower capability or the tendency of some tax bases to decline faster than GDP lower fiscal space will be more constrained and will have a in the face of an economic downturn (profits, capital gains, much more limited set of options. excises, and imports tend to decline faster than GDP during a recession); a decline in commodity prices and related The political and institutional capacity to design and revenues; and discretionary changes in tax policy. It is also implement fiscal responses to an external shock also important to consider a fourth factor: the increased risk of affects the choice of instruments. In a broad sense, capability worsened taxpayer compliance. includes both the technical capacity to implement particular fiscal measures and institutional and political arrangements During phases 1 and 2, governments must deal with budgeting that can either facilitate or hinder an adequate fiscal response. their economic and pandemic responses, filling gaps by Institutional capacity, including the Ministry of Finance, the shifting budgetary resources and identifying additional Revenue Administration, and Social Protection systems, is of resource needs. Governments’ periodic liquidity assessments particular importance for some measures. Broader capabilities look at the availability of fiscal resources to cover economic relating to the quality of policy coordination and government and pandemic responses in the short-term. They also require decision processes will also be important. Table 2 summarizes an estimate of the cost of restarting the economy. the features of fiscal measures according to capacity and size of fiscal space. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 21 > > > T A B L E 2 - Fiscal (Revenue and Expenditure) Strategies to Address COVID-19 Impacts Aligned with Country Capability and Fiscal Space Lower Capability Higher Capability More Fiscal • Focus on less complex fiscal measures. • Seek fiscal instruments most suited to the Space specific country circumstances, including economic and fiscal structure. Less Fiscal • Focus on interventions with manageable cost • Focus on cost control and reversible measures. Space control and that are easily reversible with limited • Clearly prioritize objectives. capability. • Seek to expand fiscal space. • Focus on less complex fiscal interventions. • Clearly prioritize objectives. • Seek to expand fiscal space. For countries with limited fiscal space, focusing on easily 2.2 Tax Incentives and Trade reversible interventions with limited cost implications will be particularly important. Credit instruments such as tax deferrals Facilitation Measures and short-term loans may be particularly appropriate. Having less fiscal space also forces countries to set clear priorities. In most cases, health interventions will clearly have the While some policy measures, including certain tax relief, can highest priority, followed by interventions to protect people be counterproductive and should be avoided, some temporary, and businesses. tailored stimuli could be considered. Neutrally designed tax incentives could be granted to strategic sectors or industries, Countries with limited fiscal space will also find it important preferably through the immediate expenditure of investments to expand that space as possible. Limited access to funding to lower the after-tax rate of return. Tax administrations are key from reserves or borrowing will force countries to reallocate to managing incentives (particularly on the control side with funds toward COVID-19 priorities. However, disruption of the grant processing and monitoring for misuse). In addition, by programs from which resources are reallocated can have contributing to evidence-based analysis (in most cases, during significant economic cost in terms of delayed development. Phase 1), tax administrations can also support the government Development partners of developing countries will play an by ensuring that incentives are well-targeted. These actions important role in expanding the fiscal space through increased can help contain revenue losses from unintended incentives development assistance, debt forgiveness or deferral of debt and misuse. service payments, or reprioritization within existing programs of support. Improving trade facilitation conditions should also be considered to reduce trade costs and sustain high rates of Limited state capability imposes a different set of constraints economic growth. Quick, low-cost measures can be used to on the implementation of fiscal measures, and scope for improve specific conditions. These include: increasing such capacity in the short term will be very limited. Using nonstate actors, faith-based organizations, or the • Registration processes. Simplified customs processes private sector in the response may help broaden capabilities and procedures such as registration or filing, payment, and the set of interventions that can be used. Without such and refunds will reduce both compliance costs (especially help, the focus will need to be on selecting administratively for SMEs) and administrative costs. less complex instruments within the country’s capability. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 22 • Risk-based customs controls. Significant reductions in While reinforcing administrative measures instead of relying release times can be achieved using risk management on tax relief and exemptions is an effective policy, foreign trade techniques and audit-based controls rather than fosters participation by small- and medium-sized enterprises, traditional physical inspection regimes. Customs can offer which are key players in low-medium-income countries’ immediate cargo release, so companies save on storage productivity. SMEs can be important drivers of employment and inspection fees. growth, reduce gaps in average salaries between SMEs and larger firms, and expand total value-added of exports. • Non-intrusive methods (NII). Use of non-intrusive methods improves customs control, reduces inspection • Reduced trading costs affected by taxes and time, and increases the number of shipments that can customs duties. To support SME exporters in staying be examined. Modern technologies such as X-ray and resilient through tough economic times, it is important gamma-ray scanners, radiation and echo detectors, pulsed that administrations help reduce trading costs affected fast neutron analysis, and thermal neutron analysis, for by taxes and customs duties. Short-term approaches example, allow customs administrations to inspect high- include (i) a temporary zero-rate policy for specific tariff risk containers or cargo quickly without disrupting the flow codes; (ii) limited or provisional tax/tariff exemptions to of legitimate trade. relevant sectors; (iii) more flexible deferral or installment agreements for customs duties; etc. • Unnecessary costs. Addressing unnecessary costs such as consular fees can lower trade costs, which will • Prioritized domestic production (trade policy and be reflected in companies’ profits and cash flow and in customs). Several countries have measures in place to increased revenue collection. support SMEs, including by encouraging large enterprises to cooperate with SMEs regarding raw material supply • Trade flow boosts. Initiatives such as (i) Trusted Partner chains. Focusing on domestic production of necessary or Authorized Economic Operators, (ii) pre-arrival goods or on relevant sectors by operating in regional (or processing, (iii) nonmandatory use of agents for submitting cross-border) supply chains can be a good start. SMEs import declarations, (iv) use of simplified declarations, and expect serious supply chain disruptions and a considerable (v) reducing inventories of abandoned goods can help decrease in sales due to current and upcoming economic boost trade flows by easing bottlenecks and expediting impacts. Governments that strengthen incentives to ramp customs processing. up domestic production of high-demand products in short supply during crises foster local manufacturers or • Automation enhancements. Automation can have suppliers’ continued participation. the largest effect on lowering trade costs, reducing time costs, and increasing trade flows for low- and middle- • Accelerated customs formalities for raw materials. income countries. Completing e-initiatives to simplify Given the specific circumstances SMEs currently documentation and procedures should be a high priority. face, customs administrations may accelerate import Countries with limited funding should sequence ICT procedures and inspections in the main productive sectors modernization. where most SMEs are active. Machinery equipment and raw materials critically needed for domestic production Customs administrations should start with a comprehensive could be prioritized. customs management system covering most foreign trade procedures. With this foundation, they can move to automate • Export restrictions and export expansion. Many heavy processing functions such as a single-window platform, countries place trade restrictions (including required manifest declarations, accounting procedures, transit and authorizations or licenses) on exports of medicine and suspense procedures, guaranteed management, e-payments, medical equipment; however, these measures may do and refund processing. Following this, automating compliance more harm than good. Raw materials and some items operations and other advance features will be useful. More should flow unrestricted to efficiently replenish global mature customs administrations should aim for a full suite supplies of essential goods. To expand exports that benefit of automation supporting all functions and regulations with SMEs, customs administrations should optimize pre- common case management and workflow applications. In export inspection procedures and expedite certification both cases, it is important to undergird ICT modernization with services (certificate of origin, health certificates). a comprehensive risk-management framework and simplified and reengineered business processes. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 23 2.3 Simplified Regulations and • For each identified risk, treatment strategies or measures can usually be broken down as follows: Procedures for Key Operations • Expand assistance to taxpayers (e.g., e-services for registration, filing, and payment). Simplifying tax processes and procedures such as filing, • Target enforcement actions to address noncompliance payment, and refunds will not only reduce compliance (e.g., additional resources to address the growing costs, especially for SMEs, but also administrative costs. stock of potentially recoverable arrears). For example, tax administrations should prioritize self- • Address legislative and business process changes assessment for all taxpayers (businesses and individuals), relating to emerging risks (e.g., changes to alter which reduces interactions between taxpayers and tax advance payment rules or standard operating officials. Well-designed, simplified tax regimes to reduce procedures to improve efficiency and effectiveness in the tax administration burden for struggling, new, or closing processing VAT refunds). enterprises could also be considered. In addition, countries with monthly and quarterly VAT filing consider changing VAT • Make the accuracy, reliability, and currency of the taxpayer filing frequency for SMEs to reduce compliance costs. These register a priority. measures can be introduced at the end of the health crisis to aid economic recovery. • Ensure the accuracy of each taxpayer’s economic activity code (e.g., ISIC (International Standard Industrial Classification)), so risks can be broken 2.4 Strengthened Tax Compliance down by economic sector/industry and the taxpayer’s obligation is listed accurately (i.e., the tax types for Strategies which the taxpayer is registered will affect compliance level monitoring). After the health crisis is contained, a tax compliance • Adopt or adjust performance management criteria so strategy will be essential to help mitigate the growing risk of actions taken to improve compliance can be effectively noncompliance associated with economic downturns (including measured. (i) The revenue collection target should be the temptation not to remit to the government withheld taxes adjusted to realistically reflect the impact of the COVID-19. and VAT or income payments). Other risks relate to a deep (ii) Criteria should go beyond (adjusted) collection targets shift in economic activity from the formal to the informal sector, to measure the quality of tax administration operations. which undoubtedly will increase rates of noncompliance. During the recovery phase, activities to identify possible risks of noncompliance related to the economic downturn and tax Key Guiding Principles evasion (e.g., enhancing scrutiny of cross-border transactions • Continue building trust, confidence, and partnerships with and offshore evasions) must intensify. In many countries, the taxpayer/trader community throughout the recovery closely monitoring large taxpayers, which represent the bulk phase. The health crisis may be improving, but countries of tax revenue, will be a key priority. may still be at a fragile stage as the economy has yet to regain its footing. The tax compliance strategy should be devised using key • Focus on providing assistance to taxpayers who are still design and monitoring principles. The following list highlights distressed but beginning to work and to taxpayers able to principles (expanded on in later sections) essential to consider comply with filing and payment requirements. when developing a COVID-19 tax compliance strategy. • Expand enforcement programs to focus on the growing number of taxpayers no longer entitled to COVID-19 • Risks should be assessed by taxpayer size (large, relief measures. medium, small), economic sector/industry (identified by • Emphasize monitoring compliance of the largest taxpayers data analysis), and core tax administration functions (on- unaffected by the crisis, expanding it to additional large time-filing, on-time payment, stock of arrears). and medium taxpayers from sectors now in their own recovery phase. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 24 > > > T A B L E 3 - Phase Two: Recovery from Risks to Revenue and Suggested Responses Revenue Administrations with Mature Compliance Strategies/Business Processes/ICT Risks Treatment Strategy Comments 1. Growing noncompliance • Use Big-Data to identify compliance • Revenue administrations are beginning (e.g., on VAT) risks and improve service delivery. or expanding use of Big-Data to identify compliance risks (e.g., Russia, China, • Prioritize development of a VAT Australia). Compliance Monitoring System that • For example, the Federal Tax Service of uses all VAT data from buyers and Russia is using Big Data technologies to sellers to identify compliance risks monitor “real-time” VAT compliance. • For further guidance on using Big-Data, refer to the OECD’s “Technologies for Better Tax Administration.” 2. Taxpayers who are • Review the taxpayer register to produce • During this phase, adjustments to no longer subject to an updated list of which taxpayers are COVID-19 measures might increase the COVID-19 emergency now required to comply with traditional number of taxpayers that should resume relief measures decide not compliance requirements (e.g., filing, normal compliance requirements; to comply paying, and accurately reporting). some sectors of the economy might be required to resume normal operations (e.g., certain hotels, manufacturing, airline industry, transportation). 3. Confusion/uncertainty • Communication materials shift from • The communication team will need to regarding revised informing taxpayers/traders about clarify educational materials on who is COVID-19 measures COVID-19 emergency measures to still entitled to relief measures and what impedes resumed filing increasing awareness of the withdrawal the measures are. and payment compliance of certain COVID-19 relief measures. • Tax administrations will need to further • Time in Phase 1 may have been too build on partnerships with the taxpayer limited to update websites, so during this community to prioritize increasing phase steps should be taken to ensure awareness of changes (e.g., targeted all COVID-19 materials are available partnership with sectors such as the on the revenue administration website hotel and manufacturing sectors). (including emerging Frequently Asked • Communicate clearly on “transitional Questions). rules” for restarting certain businesses • Tax administrations with contact centers (e.g., dealing with losses of certain goods could expand their use to focus on during the crisis for which deductions handling ongoing inbound calls about will be allowed). COVID-19 measures (e.g., a dedicated team could handle COVID-19 taxpayer inquiries). • Increase use of social media to inform taxpayers. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 25 Risks Treatment Strategy Comments 4. As additional taxpayers • Review filing/payment data by type of • Data analysis and risk assessment can resume operations, the tax and identify any economic sectors or assist in targeting filing noncompliance. number of taxpayers who industries that might have a substantial Tax administrations might not have do not file or pay could percentage of non-filers; the problem sufficient resources to deal with the increase might be acute in several sectors, so growing number of taxpayers that do the treatment strategy should include not file returns or pay during this phase. communicating with these taxpayers to Priority should be given to taxpayers address this risk. presenting the greatest risks to revenue. • For taxpayers that should still be filing This will likely include large taxpayers returns but have decided not to, the tax and possibly a portion of the medium administration should make greater use taxpayers. of default assessments to determine tax liability for a given tax period, reserving audits for larger non-filing cases. • Restart the automatic generation of stop- filer reminder and warning letters for businesses that are back in operation. 5. A growing number of • During this phase, administrations • If needed, the tax administration should taxpayers are unable to should continue to encourage the use assign more staff to stay current with the pay arrears of installment agreements for taxpayers collection of potentially collectible large still unable to make full and timely arrears. payment. However, the administration • Arrears management staff should return should resume “firm action” to collect to using the full suite of collection arrears from taxpayers able to pay. enforcement actions provided by tax • Taxpayers must demonstrate, using laws (e.g., garnishment, recovery from a simple reporting requirements, that third party). they are in a distressed position. A • Although Phase 1 may not have allowed simple form or mechanism should be sufficient time to validate if a taxpayer used to make this easy for taxpayers. had a legitimate cash flow problem, The LTO staff should be in immediate this should be evidence-based during contact with any large taxpayer with Phase 2. outstanding debt. • Given the potential risk to revenue, the • During this phase, special attention LTO should handle collection of arrears should be given to collecting arrears from bankrupt companies. from bankrupt companies. This could include having dedicated staff focus on these cases and increasing cooperation between the tax administration and the bankruptcy court. 6. Noncompliance by large • During this phase, the LTO should Proactive • and collaborative taxpayers continue to focus on closely monitoring arrangements should be established large taxpayers’ compliance, including with key sectors/industries affected by those resuming operations. the crisis to foster voluntary compliance • Audit programs need to expand (e.g., meetings with businesses involved coverage during Phase 2; audit risk in online sale of goods and services EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 26 Risks Treatment Strategy Comments selection criteria should address risks could have experienced substantial related to inaccurate reporting of VAT growth). (e.g., inaccurate reporting of zero-rated • During this phase, resumption of the audit sales and VAT carried forward), CIT program can be used to educate/inform (e.g., increase in NOL), and PAYE. taxpayers; desk audits with phone calls • Audits should be targeted interventions could be practical for building stronger dealing with identified issues versus relationships with taxpayers, given the comprehensive audits. need to continue some form of social • During this phase, a practical step would distancing. be to resume or expand the use of third- • Regarding third-party data, priority could party data to detect noncompliance be placed on matching customs data risks. with tax data to identify inaccurate VAT • As withholding taxes present a high risk reporting. to revenue collection during a crisis, the audit program should include increased audits of withholding taxes. 7. Timely processing of • Continue timely refund processing as refund claims advised in Phase 1; however, during this phase, tax administrations should review the effectiveness of risk selection criteria and automate this critical process. • Consider reviewing some of the “large” refunds issued in Phase 1 to determine if further action is needed (e.g., an audit). • Estimate the amount of refunds to be claimed during Phase 2 and ensure government allocates sufficient budget. Revenue Administrations with Limited Experience with Taxpayer Compliance Strategies or Limited ICT Solutions Risks Treatment Strategy Comments 1. Taxpayers no longer • In the absence of an accurate and reliable • It will be difficult to get a perfect subject to COVID-19 taxpayer register and given limited IT updated list, so the team should use emergency relief measures solutions, the most practical option is to “local knowledge” and closely monitor decide not to comply have a small team compile an updated taxpayers; focus on bringing back the list of taxpayers required to resume largest taxpayers (e.g., if the hotel meeting compliance requirements (e.g., industry resumes operations focus on filing, paying, and accurately reporting). monitoring the largest). 2. Confusion/uncertainty • Communication materials shift • The communication team will need to regarding revised from informing taxpayers/traders of expand educational materials to clarify COVID-19 measures COVID-19 emergency measures to who is still entitled to relief measures impedes the resumption increasing awareness of the withdrawal and what the measures are. of filing and payment of certain COVID-19 relief measures. • Tax administrations should consider compliance • Smaller tax administrations should establishing a Small Business Assistance consider establishing a COVID-19 Program to provide targeted assistance EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 27 Risks Treatment Strategy Comments hotline that taxpayers can call for to small businesses. (Australia and New answers to their questions. In addition, Zealand have launched such programs tax administrations could establish to assist taxpayers with their registration dedicated email addresses so taxpayers requirements and with complying with can send queries electronically. tax obligations.) During this phase, this • As a short-term measure, tax concept could be tested or piloted using administrations without e-services could one or several business sectors. consider allowing larger businesses to conduct some services, such as updating registration details or email filing. • Strategically located drop boxes provide another filing option to make submitting returns easier for taxpayers while respecting the need to social distance. • If not already adopted, self-reported tax liabilities could be introduced during this phase to eliminate the need for taxpayers to visit tax offices to submit returns. • Continue to increase the use of social media to communicate with taxpayers, especially small and micro businesses. 3. As additional taxpayers • In the absence of IT solutions and resume operations, the limited staff, smaller administrations will number of taxpayers who need to keep things simple, practical, do not file or pay may and focused on monitoring the filing increase and payment compliance of the largest taxpayers in their geographic area (e.g., each office could start with the top 100 taxpayers in terms of amount paid). • Restart the automatic generation of stop- filer reminder and warning letters for businesses that are back in operations. 4. A growing number of • During this phase, administrations • If needed, the tax administration should taxpayers are unable to should continue to encourage the use assign more staff to stay current with the pay arrears of installment agreements for taxpayers collection of potentially collectible large still unable to make full and timely arrears. payment. However, the administration • During this phase, priority should still be must resume “firm action” to collect given to collecting the largest arrears. arrears from taxpayers able to pay. • Administrations with a highly decentralized network of tax offices (regional/provincial offices and district/ local offices) could group collection EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 28 Risks Treatment Strategy Comments enforcement resources in strategic locations to increase the efficiency of arrears collections. 5. Noncompliance among • As mentioned in Phase 1, some tax • During this phase, resumption of the large taxpayers administrations do not have a separate audit program can be used to educate LTO, so the best option is to continue and inform taxpayers; desk audits with identifying large taxpayers in terms of phone calls could be a practical way the amount of taxes paid in previous to build a stronger relationships with years and allocate a few officers to taxpayers, given the need to continue monitor their compliance. some form of social distancing. • Steps should be taken to reestablish • Selecting taxpayers for audits can be the audit program. However, during this practical and simple during this phase, phase, the focus could be on building as the idea is to pilot a new approach. simple audit risk selection criteria that For example, any taxpayer with a 50% identify issues to be verified; audits increase in VAT zero-rated sales or should not be comprehensive audits of amount carried forward from one tax all taxes but rather issue-based audits. year to another could be selected for audit. Regarding CIT, the criteria could select any taxpayer claiming an increase in a NOL greater than 100% from the previous year. Regarding PAYE, the selection could be based on a substantial reduction in the amount of taxes paid over one year; the focus should be on those businesses that were not in a distressed position during the crisis. 6. Timely processing of • Continue timely processing of refunds as refund claims advised in Phase 1; however, during this phase, tax administrations should review the effectiveness of risk selection criteria and automate this critical process. • Estimate the amount of refunds to be claimed during Phase 2 and ensure government allocates sufficient budget. Maintaining taxpayer trust during the recovery phase will be to reflect economic realities. In addition, more consideration crucial for eventually increasing taxation in the third phase. could be given to facilitating tax compliance—that is, making In this phase, tax administrations would gradually retighten it easier for taxpayers to pay. Facilitation measures introduced enforcement but would try to avoid increasing tax burdens too in the first phase could be sustained if they make sense steeply to prevent suffocating a recovering economy. While it beyond the crisis, although vested interests will need to be will be tempting to focus on making up for revenue shortfalls, watched closely. Expanding digitization could further reduce short-term revenue maximization could backfire over the compliance costs, especially for SMEs. In addition, tax medium term, especially if heavy-handed enforcement is administrations could consider being more explicit in their used. To avoid harassing taxpayers, performance incentives communications with taxpayers by linking the relief measures linked to revenue collection should be monitored carefully—or of Phase 1 to the need for higher taxation in Phases 2 or 3 to temporarily ceased—and revenue targets should be adjusted rebuild the economy. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 29 2.5 Prioritized Automation The COVID-19 crisis will push some countries to quickly develop their IT systems and to provide and promote the use Enhancements of electronic operations facilities for all core taxes. At minimum, IT systems will reduce human intervention, but at the time of filing it will also provide a check of the taxpayer’s identity Automating processes and procedures in tax administration against the registration database, record the date of filing, and customs both facilitates compliance by the largest number perform an arithmetic check, record the tax liability, and store of taxpayers and lowers administrative costs. Automation declaration data. An automatic system should also receive can also reduce corruption from revenue administrators’ and generate a receipt for electronically filed declarations, nontransparent discretion and protect against COVID-19 consolidate a picture of a taxpayer’s filing history across all contagion by allowing revenue administration officials to core taxes, and report when a tax declaration is expected from work in less close proximity. Automation is primarily limited the taxpayer. by technology in that some functions still require human intervention. Audits and litigation, for example, require On the administrative side, another major advantage of analysis and subjectivity only possible from humans. Even electronic systems is the automatic production of management those functions can be eased by electronic systems, however, information (e.g., statistical reports by core tax/region/taxpayer such as by having an automated case management system segment, etc., including number of declarations expected from generate assessment notices and allocate non-filer cases to registered taxpayers, filed on time, filed late, not yet filed, as enforcement staff. Automating trade facilitation formalities with well as the age of outstanding declarations). the largest impact on reducing costs can increase trade flows in low- and middle-income countries. E-initiatives, such as simplified documents and procedures (e.g., single windows), should receive high priority to the extent possible. 2.6 World Bank Operational Support Many tax administrations already use modern technology in their filing and payment systems. These electronic services Seek World Bank operational support to initiate an effective help reduce taxpayers’ costs of doing business with the compliance risk management framework more quickly, tax administration. to increase use of Big-Data to identify compliance risks, to streamline core business processes, and to automate. Electronic filing enables taxpayers to complete and file tax Increased automation, meaning more e-services, requires a declarations online via the internet. Electronic payment can large investment, which is not easy for countries facing fiscal be made by credit or debit card or electronic funds transfer difficulties, now and after the pandemic. World Bank financing from the taxpayer’s bank account to the treasury account. could support countries in their move toward automation. Electronic payments can also be made using mobile phones. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 30 >>> Phase Three: Stabilization 3.1 Accelerate the Move to a Digital access to the data collected, however, while preserving the confidentiality of taxpayer information. Revenue Administration Finally, post-COVID-19, VAT management should be strengthened, considering its higher buoyancy coefficient For revenue administrations, the lessons of the COVID-19 relative to income taxes. VAT contributions to revenue pandemic point in one direction: the need to move into a collection should increase as economic activity resumes; digital future. The endgame is a modern, taxpayer-friendly, authorities must prioritize administrative measures to ease digital revenue administration providing world-class registration, filing, payment, and refunds. Developing a VAT online services, characterized by efficient paperless Compliance Monitoring System that uses all VAT data from operations and equipped with sharp, ICT-enabled risk- buyers and sellers to identify compliance risks should be based enforcement to optimize revenue mobilization. The a priority. pathway to this end will vary from country to county. The digital revenue administration of the future will be “digital by default.” For example, call centers using artificial 3.2 Reformulate Comprehensive intelligence (AI) will instantly recognize taxpayers and retrieve Compliance Strategies and assess their records. Assessments will be based on algorithms, and risk analysis will be done using predictive data analytics that focus on risky taxpayers, saving time and During the stabilization phase of the crisis, revenue compliance costs by leaving most taxpayers alone. Revenue administrations will need to reformulate their comprehensive administrations would be user-centric, and smart portal compliance plans given what they have learned about solutions, mobile apps, and blockchain solutions and cloud risk management. Compliance strategies and objectives services will be used wherever possible. should be readjusted to achieve full recovery of pre-crisis compliance levels. Taxpayer administrative data has proven to be a valuable source of information for both tax and non-tax analysis. In the wake of the crisis, opportunities will arise to boost Beyond compliance objectives, administrative data provides (voluntary) compliance and reshape the fiscal contract for the unique insights useful for fiscal and social policy making into better. As the economy stabilizes, governments will focus on how taxes are levied across households and firms. Quality reducing budget deficits, which in many countries will likely assurance will provide validation, correction, and updating involve tax increases. Whether taxpayers will support these to ensure the information serves its intended policy making increases will depend on the government’s earlier actions. objectives, and the skillset to perform quality statistical If governments used the first two phases to solidify their analysis is likely scarce in most tax administrations. Big-Data legitimacy and secure taxpayers’ trust, taxpayers will likely will allow external stakeholders more regular and systematic tolerate tax increases in this phase. This momentum could be EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 31 harnessed to pursue additional reforms to further improve tax tax relief must be granted for well-defined periods, use simple system equity, for example, by increasing taxation of high-net- and unambiguous eligibility criteria, and be closely monitored worth individuals and closing (international) loopholes exploited by a special task group within the tax administration. by large corporations, instead of prioritizing expanding the tax base into the informal economy. This approach would During the stabilization phase, the economy will regain a signal a new fiscal contract and improve system equity and more solid footing, and fewer taxpayers will turn to COVID-19 taxpayer morale. In contrast, if government actions in earlier relief measures. Registered taxpayers will again need to phases undermined its legitimacy by, for example, only bailing comply with registration, filing, accurate reporting, and timely out large corporations, citizens are unlikely to support later payment, including outstanding arrears. Tax administrations tax increases—much like in the aftermath of the Global should evaluate the impact of the COVID-19 relief measures Financial Crisis. to ensure no substantial abuse occurred during the previous two phases. The possibility of future health pandemics and/ Tax-based relief programs granted to taxpayers during the or natural disasters is real, so steps should be taken during COVID-19 period should be assessed and monitored closely this phase to ensure gaps or bottlenecks identified during the to avoid abuse. Designed as temporary mitigation measures, current crisis are fully addressed. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 32 > > > T A B L E 4 - Phase Three: Stabilization of Risks to Revenue and Suggested Responses Revenue Administrations with Mature Compliance Strategies/Business Processes/ICT Revenue administrations with relatively mature compliance strategies must continue expanding, improving, and 1. strengthening their annual compliance improvement plans. The following are key approaches: • Increase use of Big-Data to identify compliance risks and improve service delivery. • Increase the capacity of Risk Management Units by assigning additional specialists (e.g., industry specialists, data analytics experts). • Improve the effectiveness of risk-based compliance strategies by strengthening monitoring and evaluation. • Build stronger partnerships with the taxpayer community to develop future strategies. • Improve the ability to respond to future shocks impacting compliance; COVID-19 requires us to think differently. 2. Expand the compliance focus to target key taxpayer groups and/or economic sectors to identify and resolve compliance risks. In each case, revenue administrations will need to identify risks and treatment strategies (including increased use of third-party data to identify noncompliance risks and of cooperative agreements with taxpayer groups). The following groups/sectors/issues should be considered: • Taxpayers involved in the digital economy • Taxpayers involved in the extractive industry • Financial sector • High-net worth individuals • Self-employed professionals Following is an example of issues to consider when identifying risks related to the digital economy; several of these issues apply to the other sectors listed above as well: • The COVID-19 crisis accelerated the shift toward online consumption, a trend likely to persist post-pandemic. Once a policy framework for indirect and direct taxation of the digital economy is in place, tax administrations must prepare an appropriate compliance strategy. • Detection of noncompliance in digital transactions will require extensive use of third-party information. Foreign suppliers may not have an in-country physical presence, but their interactions with customers will leave a financial and electronic trail. • Data from the main online platforms, and potentially from carriers, will be important in identifying potentially noncompliant suppliers. • Other sources of data, including tax returns, information from treaty partners about online suppliers based in their territories, data about cross-border payments held by banks and credit card companies, and data from internet service providers, will be valuable for detecting noncompliance. • Collaboration with digital marketplaces, platforms, and other stakeholders is needed to secure the data. 3. Administrations with a Large Taxpayer Office (or offices), should be addressing all of the following issues: • Capacity to detect and address compliance risks in key sectors, including those listed above (e.g., digital economy, extractive industries, etc., as applicable). • Further capacity to deal with transfer-pricing and APAs. • Cooperative agreements with additional taxpayer groups. • Expanded use of third-party data and mega-data to identify compliance risks. • Effective and binding ruling systems. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 33 Revenue Administrations with Mature Compliance Strategies/Business Processes/ICT 4. Use automation priorities to support compliance strategies. • Aim for a full suite of automation that supports all core tax administration functions and taxes with common case management and workflow applications. • Continue to expand e-services (e.g., e-complaints and e-appeals systems). • Consider using IT support to shift to prepopulated returns. • Expand data warehousing facilities that support use of mega-data to identify compliance risks. • Expand use of mobile technology to facilitate compliance. Revenue Administrations with Limited Experience with Taxpayer Compliance Strategies or Limited ICT Solutions 1. Administrations that have not institutionalized a comprehensive risk-based compliance management framework (discussed above under Phase 2) should introduce new organizational arrangements and support processes. 2. Build an effective data analytics function at the tax administration headquarters using internal data and increasing amounts of third-party data to identify compliance risks. For small tax administrations, a team of two staff with strong Excel skills would be a good start. 3. Expand compliance strategies to target key issues and taxpayer groups: • Risks related to a growing cash economy • Risks related to SMEs noncompliance 4. For administrations with no Large Taxpayer Office, now is the time to introduce this function. Closely monitoring compliance by the largest taxpayers in the country enables tax administrations to protect a majority source of revenue—typically 50 to 80 percent of total domestic revenue collection. An effective LTO includes: • A sound legal framework • Clear and simple criteria for selecting large taxpayers • Standardized, clearly stated operating procedures • LTO administration of all designated large taxpayers for all national domestic taxes • Responsible for all core tax administration functions (filing, payment, stop-filers, audit, and debt management), including ensuring an accurate register of all large taxpayers • Risk management principles applied across all core tax administration functions • Industry/sector specialization • Job descriptions that provide opportunities for specialization • Sufficient staff (typically 4 to 7 percent of total staff) • Staff with appropriate skill sets to handle large taxpayer compliance issues (e.g., accounting/legal background, client relationship skills) • Appropriate LTO job grading and remuneration • Effective LTO staff training programs 5. Accelerate the automation agenda of the tax administration. Countries with limited funding should sequence ICT modernization, starting with a comprehensive registration function and then including heavy processing and resource- intensive functions such as taxpayer accounting, filing and returns, payment, and refund processing. Automation of compliance operations and other advanced features can follow. ICT modernization should be based on a comprehensive risk-management framework and simplified, reengineered business processes. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 34 3.3 Implement a Comprehensive and improve) (PDCA) cycle to implement, maintain, and continually improve ] BCM systems. Under the COVID-19 Business Continuity Plan emergency, many of these steps must be expedited, and a project leader must ensure that all meetings, resources, and authorizations occur without delay to prepare a solid and By implementing a Business Continuity Management (BCM) comprehensive BCM. Action Plan in the context of COVID-19, tax and customs authorities will create a common understanding among all Some components are likely to be present in some form in stakeholders and enable them to prioritize and mitigate threats the organization already, so the project leader should be able to their operations. A BCM system emphasizes the following: to collect and update these (e.g., management support, risk assessment methodology, and communication strategy). • Understand the organization’s needs and the necessity The proposed Action Plan presented in Table 5 can serve for business continuity policies and objectives. as a template and be put to use straight away, facilitating • Identify the operation and maintenance processes, the BCM project leader’s task. It also includes guidance and capabilities, and response structures needed to ensure examples to help identify the main components and actions the organization will survive disruptions. necessary for quick dissemination among the organization’s • Monitor and review the performance and effectiveness of key resources. Each implementation phase is important and the BCM system. must be documented and communicated to ensure proper • Continually improve the plan based on qualitative and completion under the PDCA methodology. Nonessential quantitative measures. activities (shadowed) may be deployed later; the priority is to meet the current emergency. This document applies the Plan (establish), Do (implement and operate), Check (monitor and review), and Act (maintain > > > T A B L E 5 - Action Plan for BCM Implementation Implementation Phases Action/Tasks Guidance/Comments Research which BCM benefits apply to This step is a given under current your company. circumstances. Present the benefits to management and State the expected benefits, such as Obtain management support get its commitment. adequate operations under the current emergency. It is essential to get commitment to support the plan. Get formal approval for the project. Decide whether you are will use consultants If possible, use an experimented consultant or documentation templates. to help get things done faster. Educate your project team. Assembling a project team of experienced people and make certain everybody understands the project’s importance and Prepare for your project main requirements. Write the project plan, including the Distinguish responsibilities and define the descriptions for project manager, team, resources needed for project success. Use and sponsor; required resources; and milestones to assess performance and milestones. maintain clear team objectives. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 35 Implementation Phases Action/Tasks Guidance/Comments Define the stakeholders who must be informed about each step in the project. Organize a kick-off meeting. Identify interested parties. Identify all stakeholders, including external ones such as taxpayers, the media, contractors, etc. Make sure you have contact information and create distribution Identify requirements lists for communication and status reports. Identify interested parties’ requirements. Clarify what all stakeholders need or expect. Some require only status updates, but others may require specific procedures to perform their work. Write the Business Continuity Policy The goal of a business continuity policy is to document what is needed to keep the organization running on ordinary business days as well as in times of emergency. Well-defined and adhered to policies allow companies to set realistic expectations for business continuity and disaster recovery plans. Key components of a business continuity policy include staffing, metrics, and standards. The business continuity policy should outline the staffing needed, including roles and responsibilities of department heads, corporate management liaisons, Define scope, management and members of the BC/DR team and intention, and responsibilities may also include external personnel (e.g., vendors, stakeholders, and customers). Keeping track of everyone involved in or affected by the business continuity policy is key to ensuring compliance. A business continuity policy and business continuity plan (BCP) have a lot in common; both address all unique requirements and preparations for an organization to maintain continuity. They serve different purposes within the organization, however: the policy outlines standards to be followed and benchmarks to be met, while a plan maps out from beginning to end how the organization will get through an event. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 36 Implementation Phases Action/Tasks Guidance/Comments Decide on the business continuity Not all activities/objectives of the Tax and objectives. Customs Authority can be continued under emergencies, so a definition is needed of what must be done and what is not strictly urgent for the organization (example: delay hiring if possible; leave development of new services to the future, etc.). Write a procedure for document control. Organize and control documents created and produced during the project development. Implement support Write a procedure for internal audit. Maintain checkpoints to validate the actions procedures and facilitate accountability and control. Write a procedure for corrective action. Create a process for corrective actions during emergencies, and document how to follow it. Develop the risk assessment methodology. A risk assessment is a reliable method for figuring out potential threats and determining their likelihood. It identifies potential hazards and provides ways to reduce their impact on the business. Identify the risks of disruptive Perform a risk assessment. The general steps: incidents • Identify the hazards. • Determine what or who could be harmed. • Evaluate the risks and create control measures. • Record the findings. • Review and update the assessment. Develop a business impact analysis (BIA) A BIA determines the effects of a potential methodology. disaster on an organization by finding existing vulnerabilities. It focuses primarily on business impact, recovery time, and Identify continuity priorities recovery point objectives. and objectives Circulate business impact analysis BIA questionnaires collect experience questionnaires. from business owners regarding risks and vulnerabilities. This knowledge is the foundation of the Business Continuity Strategy. Compile a business continuity strategy The BCS is a conceptual summary of (BCS). preventive (mitigation) strategies, crisis Determine priorities, required response strategies, and recovery strategies resources, and mitigation to be carried out between a disaster and restoration of normal operations. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 37 Implementation Phases Action/Tasks Guidance/Comments Compile a risk treatment plan (RTP). A risk treatment plan documents mitigation options and controls for each unacceptable risk, specifying security controls needed, who is responsible for them, any deadlines, and required resources (i.e., financial and human). Compile a preparation plan. From the BCS and the RTP collect and make available all the resources needed to fulfill the needs described in those documents. Compile a business continuity plan (BCP). The BCP template will have prefilled sections and should be used for guidance and as an example; the project leader must incorporate the actual information from the Tax and Customs Authority. Compile an incident response plan (IRP). The IRP template will have prefilled sections and should be used as for guidance and as an example; the project leader must incorporate the actual information from the Tax and Customs Authority. Define business continuity Disaster Recovery Plan (DRP) The DRP template will have pre-filled procedures and should be used for guidance and as an example; the project leader must incorporate the actual information from the Tax and Customs Authority. Transportation plan(s) Independently develop a transportation plan according to local conditions. Communication procedure(s) Develop a training and awareness plan. This training material should be prepared in tandem with the actions in this project. Perform training for all employees who lack Perform training and the required skills. awareness programs Perform awareness programs for all Be sure to update and revise the training employees and third parties with roles in frequently. your BCM. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 38 Implementation Phases Action/Tasks Guidance/Comments Exercise and test the plan. Given the current context, expediting testing and corrective actions is advisable. Exercising and testing Exercise and test the reports. Take any corrective actions needed. Undertake a post-incident review. Documenting the most common incidents In case of disruptive incidents and critical disruptions and developing corrective actions is very important. Take any corrective actions needed. Include a maintenance and review plan. Regularly review the BCM system to make sure it remains effective. Plan to continually Regular review of plans improve it. An experienced manager and business continuity should be appointed to maintain a plan that arrangements will be adequate and responsive to new emergencies. Take any corrective actions needed. Measure if you have achieved the objectives Meet with senior management to assess Measure the BCMS set for your BCM. whether their goals were satisfied. Develop an audit program. To obtain unbiased results, appoint an external auditor. Perform internal audit Perform internal audit(s). Write an internal audit report. Take any corrective actions needed. Act according to the findings. Perform management review. Review the performance of the people who supported the BCM system. Perform management review Maintain records from management review. Take any corrective actions needed. Obtain proposals from several certification Validate and certify the plan and audit if bodies. possible. Select the certification body. Certification audit Conduct Stage 1 certification audit. Conduct Stage 2 certification audit. Undertake surveillance visits. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 39 3.4 Take Customs and Trade Measures The effectiveness of enforcement actions is usually affected by how administrations conduct risk analysis and customs controls. For customs, revenue administrations should develop a solid risk management mechanism based on risk profiling. • Incorporate proactive risk analysis mechanisms. In This profiling should not only consider the usual potential many small administrations, risk analysis or audits are risks of customs duty avoidance (customs value, origin, reactive, meaning they are performed on a case-by- and misclassification of goods) but also elements to detect case basis, revealing isolated cases of noncompliance. invoice fraud schemes, fictitious operations, underreported Although this is a good practice, a proactive approach sales, bogus traders, etc. Conducting unit price analysis from through bulk data analysis strategies will identify more different sources, such as customs declarations, e-invoice, and relevant cases and a higher number of fraudulent entities. financial institutions (if applicable), is also critical to detecting transactions in an under-/over-invoiced scheme, which can • Increase the scope of risk elements. Customs reflect concealment of trade profit abroad, exploitation of administrations must develop a solid risk mechanism that export incentives (VAT refunds), or incorporation of illicit goes beyond traditional customs duty fraud to address proceeds into the domestic legal and financial system. invoice fraud schemes, fictitious operations, under- reported sales, bogus traders, etc. Also important is unit- Customs administrations should evaluate the impact of the price analysis, which can detect under-/over-invoicing and COVID-19 relief measures to ensure no substantial abuse other schemes. occurred during Containment and Recovery. The possibility of future health pandemics and/or natural disasters is real, so Due to the pandemic, online transactions have increased, steps should be taken during this phase to ensure gaps or and in some countries, consumers exploit loopholes in VAT bottlenecks identified during the crisis are fully addressed. and tariff exemption thresholds for small-value consignments to make multiple small purchases overseas and avoid • Comprehensive risk-based compliance. For paying taxes. administrations that have not institutionalized a comprehensive risk-based compliance management • Revamp courier arrangements. New arrangements framework, now is the time to introduce these with postal/couriers are needed to improve monitoring of organizational arrangements and supporting processes. express consignments. Specific elements include: • Focus on large economic operators. For administrations i. Small-medium economies not currently receiving that have not categorized their economic operators based advance information from couriers should begin on size and risk level, now is the time to introduce this requiring access to couriers’ databases for risk strategy. By closely monitoring compliance of the country’s analysis. (Several countries have cooperative largest traders — typically representing 50 to 80 percent agreements with FEDEX, UPS, and DHL.) of total customs revenue collection — administrations will ii. Administrations can start exploring the possibility of be able to protect a majority source of revenue. removing the VAT import exemption on low-value consignments. • Data analytics for risk identification. Build an effective iii. For non-dutiable consignments, administrations data analytics function at customs administration may want to transition from obliging carriers to send headquarters using internal data and an increasing advanced entry summary declarations to a simplified amount of third-party data to identify compliance risks. For customs declaration (reduced dataset). To avoid small customs administrations, a team of two staff with blocking the flow of very-small-value consignments, solid Excel or Access skills would be a good start. advanced submission of only the entry summary declaration can be acceptable. For shipments above • Increase voluntary compliance through risk the threshold value for duty exemption, both an entry assessment. A solid compliance mechanism will increase summary declaration from the carrier and the regular the perception of risk within the trading community and customs declaration must be filed. ultimately be reflected in voluntary compliance behavior. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 40 • Electronic customs controls. collected, leaving these imports to flow into jurisdictions untaxed. The resulting revenue losses are rapidly growing i. Administrations receiving advance electronic and putting unfair competitive pressure on domestic information for express cargo must establish businesses, creating in turn a negative effect on domestic guidelines and controls to improve the quality and employment and other revenue, including personal integrity of the data (e.g., a Tax ID or coded entity income taxes and local business taxes. registration and validation rules to avoid vague cargo descriptions or by requiring at least a four-digit Unlike previous financial downturns, the ongoing COVID-19 HS code). health and economic crisis will have a significant impact on ii. Rule triggers can be created based on quantity VAT collection, the largest source of revenue for many low- to identify consignees with prior multiple similar income countries. Despite this, the accelerated pace of online consignments or by placing lookouts on entities commerce worldwide presents an opportunity for governments identified as high risk (based on audits/risk analysis) to use digital taxation as a VAT revenue buffer during the for potential tax evasion. COVID-19 containment phase and as a revenue source during economic recovery as consumption levels regain strength. 3.5 Improve Digital Economy Taxation Consequently, governments should focus on designing and implementing policy measures for efficiently and effectively collecting VAT on e-commerce sales of goods, digital products, services, and intangibles, based on internationally agreed- Taxation of digital transactions, a trend triggered by the upon standards and best practices. Such policy measures increasing digitalization of the world economy during and would include: after the COVID-19 crisis, has gone from being a novel and appealing government tax options to being an effective policy • Developing an analytical guide for country-specific response. The increased use of new digital technologies e-commerce business models and processes, from following this crisis will change the way tax administrations go a VAT policy and operational perspective. This should about their business. A tax reform priority will be to address the include analysis of sales and delivery processes, the impact of digital economy development on tax enforcement role of the relevant actors in these processes, and the and to design and implement measures tailored to it. At infrastructure employed in digital trade. different levels, depending on the country context, a higher contribution of e-commerce to the global economy post- • Designing effective legislative measures for collecting COVID-19 is expected. Governments will feel further pressure VAT on e-commerce sales and digital trade, covering to embrace good practices and international standards on domestic as well as cross-border trade of goods, services, digital taxation, especially related to VAT. These reforms and intangibles. This would cover all key areas of digital require wide international cooperation. trade now challenging VAT policy and administration, including: The following points highlight the main value-added tax (VAT) or general sales tax (GST) challenges related to the • VAT collection on sales of services, digital products, digital economy: and intangibles provided by foreign online vendors • VAT collection on imports of low-value goods from • The strong growth in the trade of services, digital online sales (alternative mechanisms to traditional products, and intangibles—particularly in sales to private customs processes) consumers—is a challenge because often little or no VAT/ • Regulating the role of online marketplaces and other GST is levied because of the complexity of organizing, digital platforms in collecting VAT, including measures administering, and enforcing VAT/GST payments on such to hold these platforms liable for sales they facilitate supplies under traditional rules. through data sharing • Designing policy and administrative measures for • Exponential growth in the volume of low-value imports applying VAT to the sharing economy from online sales presents a challenge because under traditional customs procedures, VAT/GST cannot be EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 41 • Implementing strategy and an operational roadmap for Actions to mitigate heightened risks of corruption in revenue effectively collecting VAT on online trade. This would administration resulting from the crisis include: cover all key operational elements, including concrete steps for building registration and filing processes, VAT • Reinforce the internal control body or establish a collection and remittance processes, communication and new task force to develop new risk-based compliance related taxpayer services, and information technology strategies. development and frameworks. • Strengthen monitoring of customs/tax staff in vulnerable areas, such as (i) taxpayer/trader services • Creating effective audit and administrative risk (e.g., customs clearance), (ii) enforcement activities management strategies and processes, including (customs inspections, audits), and (iii) administration concrete measures to tackle VAT fraud associated with budget or expenditure management, by incorporating the online trade. This guidance can also include potential following into the risk analysis process: avenues for regional cooperation based on successful initiatives in other jurisdictions. • Conduct declaration and monitoring of assets. • If available, use employee bank account data on financial activities to identify anomalies and raise 3.6 Fight Corruption in the red flags. Monitoring could extend to close relatives’ banking transactions. Post-Crisis Context • Use electronic invoicing data and declarations of operations with third parties (if applicable) as relevant sources for highlighting unusual transactions. While responding to the pandemic requires swift action, it • Analyze activity logs to identify suspicious activity or also offers opportunities for corruption. The post- COVID-19 patterns. context should be favorable to the development of anti- • Monitor enforcement actions and conduct in- corruption measures and campaigns in revenue (tax and depth investigation of staff with low rates. Constant customs) administration. The economic and social crisis that monitoring is essential. follows the health crisis will leave many people in need of • Conduct reverse audits. Keep records related to support, including tax officials and taxpayers. verified positive cases from enforcement actions (audits/inspections) and identify any recurring cases Generally, an independent investigation of taxpayer complaints that should be further investigated. concerning wrongdoing and maladministration exists in all countries. In this regard, many countries have an ombudsman • Promote accountability and transparency through strategic or equivalent state official with powers to investigate taxpayer mechanisms. complaints of, for example, unfair treatment, poor service, and uncorrected administrative mistakes. Systemic problems • Allow more contact methods to report any customs and recommended actions to fix them are often reported to officer engaging in corrupt practices. the minister and tax administration head. It is also common • Use automation to reduce red tape, allow customs for countries to have an anti-corruption agency that, among officers to exercise discretion, and provide an audit its broader responsibilities, oversees tax administration anti- trail for vulnerable staff monitoring. corruption policies and investigates alleged corrupt conduct • Use algorithms in the customs selectivity mechanism by tax officials. Revenue authorities should also have an to select, randomly and based on workloads, internal unit in charge of corruption and ethics to deal with which officers conduct inspections. This reduces agent wrongdoing. Such a unit should be able to do regular discretionary power and collusion. monitoring and recommend actions to senior management.10 • Construct IT audit trails to address unauthorized use or manipulation of data and unusual levels of activity. 10. For a more detailed discussion of measures against corruption risks, consult the World Bank note available at http://documents.worldbank.org/curated/ en/801501588782665210/pdf/Ensuring-Integrity-in-Governments-Response-to-COVID-19.pdf. EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 42