Coronavirus forces Tax Administrations to reformulate their tax control plans

This year 2020, the Tax Administrations (TAs) around the globe began implementing a plan of tax control or annual plan of control. As in insertion to the general strategy, this action reflects widely on their strategy of control to raise levels of voluntary compliance by taxpayers seeking a balance in turn between the control function and the service function.

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

On the one hand, there is a massive loss of revenue from this crisis whileon the other, there is a requirement to protect the financing of expenditures needed to meet the void left by the crisis including the maintenance and expansion of government social protection programs. More closely than ever before, everyone is looking at the performance of the TAs.There is a need to safeguard tax revenues, and the TAs must be ready to restore levels of compliance as soon as possible.

At the moment, inequality, informality, job losses and poverty are increasing exponentially. This situation creates an urgency to the search for the necessary strategies to reduce tax evasion and illicit financial flows to improve the fiscal space.[1]

For all these reasons, I would like to share with you some aspects that I believe the TAs should consider when reformulating their control plans. The results obtained must be permanently monitored for building a precautionary rather than a corrective system of implementation.

It should be noted that some TAs have reduced their enforcement and collection activities in response to the severe financial pressures faced by many companies and individuals. This reduction should be a temporary change. Along with mitigating the risk of non- compliance, this will prevent it from taking root in the tax system and being difficult to reverse once the crisis has passed.

We must not lose sight of the fact that the purpose of auditing is to maximise subjective risk by fighting against tax fraud and modifying taxpayer behaviourto enhance voluntary compliance.However, there is a lack of incentive to support a good audit structure since it contributes a meagre 2- 3% of the total direct collection.

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

The Annual Control Plan or Annual Verification Plan establishes the guidelines, methods and human resources required to comply with the strategies and policies in the area of control. It helps in the identification of the sectors for auditing and the types of actions, i.e. mass controls, intensive controls. It is relevant to note here that today many TAs do this directly through Compliance Risk Management.[3]

It is imperative that on carrying out various actions, not only the estimated amounts of the collection are specified, but also that goal-setting takes into play, the number of actions to be carried out concerning the various types of controls.Setting goals only in terms of amounts will not guarantee that the control actions will reach many taxpayers, but rather that the audits will be extensive in terms of the time taken covering few taxpayers.In the former situation, it will become increasingly difficult to transform the environment.

As I said in a previous paper[4], the analysis of the context of each country is vital. When we are facing sectors with high non-compliance, we should prioritise massive or extensive controls over intensive ones, seeking to carry out a higher number of audits, quickly, not with such depth, aiming at reaching more taxpayers to transform the field for voluntary tax compliance to increase.

The control system must be unique and appropriate to the characteristics of the environment in which it is applied. While all areas of the TAs must participate, there must be permanent feedback on the process to correct the wrongdoings and to enhance successful controls.

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

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

In every crisis, there are always sectors that have been winners.Each country must recognise and highlight the same. The sectors linked to health, food supply, information technology, e-commerce, agriculture, among others, are obtaining gains in comparison with others that are severely affected such as tourism and leisure, aviation and maritime, automobile, construction and real estate, face-to-face education, among others.

The review of changes in customer consumption pattern is imperative to analyse the real booming businesses. It is possible to analyse the same on studying consumer habits from shopping, finance, health, way of working (e.g. teleworking) to use of technology, entertainment, food and transportation, among others.

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

Monitoringthe larger taxpayers, particularly those businesses that are less impacted or even thriving, is crucial to ensure their timely tax payments.

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

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

The threat of fraud looms over many tax authoritiesas processes accelerate for granting refund and social assistance amidst the pandemic. Thedesigned plan must provide for an urgent review of suchoperations.

It is beneficial to broaden the tax base by including new taxpayers or by capturing taxable material that is hidden inside or outside each country to attack the growing inequality and regressiveness of many tax systems.Directing controls always towards the same group of taxpayers can be avoided. Cooperation between TAs, both nationally and internationally, is vital here.[6]

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

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

In matters of Social Security, the control plan must consider the growing importance of telework and digital platforms. If ignored, there is a potential of leaving aside undeclared workers or unreported pay.

As for customs, all the countries have adopted transitional or temporary measures to deal with the pandemic and facilitate trade. These measures all the more induce the warning of fraud of all kinds inframing the plan actions to strengthen classification, valuation, origin and post-clearance audit controls in combating the reduction of customs tariffs and the counterfeiting of inputs, medicines and medical supplies.

Evermore, I stress the importance of coordinating the various types of control, in for avoiding duplication of action and also the so-called "shadow areas", i.e. taxpayers who are outside the scope of authority.

It is cardinal for the control systems to be unpredictable, because that way, the caution of risk is optimised especially in an environment linked to the uncertainty, where outbreaks of coronavirus are predicted and can happen. Bearing this in mind, the Tax Authorities must review the control plans permanently.

Finally, it is also pressing to review the human resources which can affect the controls.With the acceleration in the digitalisation process amplified by the coronavirus crisis, we tend towards an Electronic TA with virtual offices and the development of teleworking making it more likely than notthe redirection of resources towards the different control actions.

[1] To expand the topic of Tax Evasion in Latin America and the Caribbean, a call of attention for all. Alfredo Collosa. CIAT Blog. 22/04/2019.

[2] Compliance Risk Management (CRM): Passing trend or a Need for Tax Administrations? Fernando Díaz Yubero, Alfredo Collosa. CIAT Blog 19/03/20.

[3] For more information on this topic, see note 2.

[4] Massive or intensive controls? What should be the strategy of the Tax Administrations? Alfredo Collosa. CIAT Blog. 13/08/18.

[5] https://www.gafilat.org/index.php/es/espanol/19-noticias/102-comunicado-del-gafilat-sobre-covid-19-coronavirus

[6] To expand on this topic, see Importance of International Cooperation among Tax Administrations. Alfredo Collosa. CIAT Blog 03/09/19.

[7] https://www.oecd.org/about/secretary-general/high-level-event-on-financing-for-development-in-era-of-covid19-and-beyond-may-2020.htm

Disclaimer: Content posted is for informational & knowledge sharing purposes only and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/ interpretation of the publisher is based on the available Law, guidelines, and information. Each reader should take due professional care before you act after reading the contents of that article/ post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax.