Increased public spending and reduced tax collection during the coronavirus disease (COVID-19) pandemic forced many countries to actively look for revenue-generating opportunities at both the policy and the administrative levels. Revenue mobilization initiatives typically focus on improving tax collection.
A study supported by the Asian Development Bank's (ADB) Domestic Resource Mobilization Trust Fund, proposed strengthening the administration and oversight of large business taxpayers to deliver better compliance. Most international development partners recommend that revenue bodies monitor this segment closely and establish a large taxpayer office because they have (i) high tax revenue contribution on their own account and by way of withholdings (such as employee and dividend withholding taxes); (ii) complex business and tax affairs, structures, and dealings; and (iii) higher tax risk appetite.
Adapted from this study, this explainer recommends four strategies that can help revenue bodies strengthen their large taxpayer operations.
Defining the large taxpayer population ensures that the agreed portion of tax base coverage/total net revenue is brought under the control of large taxpayer offices (e.g., about 50%–70%). Within the Asia and Pacific region, the most common criteria used for classifying this segment are turnover, economic sector of main operations, and tax paid. The legal structure (incorporated) and number of employees are sometimes factored into the definition. Other considerations may include whether a corporate taxpayer is part of a consolidated group, has foreign subsidiaries, or is a subsidiary of a foreign parent. Often, a combination of criteria is used.
Ensuring an effective international and domestic legal framework, including enhanced data access and management powers, if required, is also important. A strong contemporary legal framework minimizes opportunities for revenue leakage arising from gaps, omissions, or outdated provisions. Tax avoidance thrives where laws are weak, offering loopholes and arbitrage opportunities that can be manipulated using sophisticated and sometimes aggressive tax planning. In managing large and multinational enterprises (MNEs), domestic tax policy, the international legal framework, and the various tax incentives on offer to domestic and international investors need to be considered.
A comprehensive compliance risk management framework and supporting processes sustain better revenue performance. At the highest level, the strategic goal of compliance risk management is to promote voluntary compliance by building community support and trust in the tax system and its administration. This goal is supported by providing high-quality services and assistance, reducing the opportunities for errors or omissions, and effectively dealing with incidents of noncompliance when they do occur.
An effective compliance risk management framework is a holistic approach rather than simply aiming at dealing with incidents of noncompliance. In fact, the need for an audit to correct noncompliance could be seen as a potential failure of compliance risk management processes, because an audit is needed only when upstream measures have failed to prevent evasion.
This strategy relies on data diversity and modern management techniques to support taxpayer segmentation, environmental scanning and other studies, risk identification and risk profiling, and the identification of cases requiring compliance interventions. Revenue bodies are often not making the best use of the data they already hold. Data gathered from taxpayer reporting (such as tax returns and schedules) and revenue body interactions with taxpayers (such as requests for rulings or advice and audit), if systematically captured electronically and stored centrally, can open up a range of possibilities not offered when the data are dispersed and/or are not all held electronically. Simply bringing together data holdings and converting as much as possible to electronic formats can enable a better understanding of the population. Given the relatively small dataset for large taxpayers, this is often a good place to start and can help advance compliance risk management while more expansive datasets and sophisticated data management approaches are being developed.
Increasing the level of service orientation and public accountability influences community attitudes toward voluntary compliance and correlates with higher revenue performance. A service-oriented revenue administration places importance on establishing a formal service strategy, a set of service standards and statement of taxpayer rights, taxpayer satisfaction surveys, complaints channels, measures to reduce costs of compliance, a rulings process, and impartial dispute resolution processes. It can also be validated by behavioral insights research, key client manager services, and cooperative compliance approaches.
In Asia and the Pacific, most revenue bodies have strengthened their service culture by publishing service standards, offering binding rulings, co-designing and testing new services with end users, and legislating taxpayer rights. A few have adopted cooperative compliance approaches or set up behavioral insights teams. Measures enhancing public accountability include the extent to which key information is made publicly available. Disclosures may include their strategic and operational plans, service standards, and performance against these plans/standards. Public accountability is also enhanced by conducting tax gap studies and publishing the results.
Perceptions of fairness and views about levels of corruption shape tax morale and compliance behaviors, among other factors, such as simplicity of compliance and views on how taxes are spent. An important dimension supporting higher levels of tax morale is the extent to which the community perceives that wealthy citizens and large corporations pay the correct amount of tax. The perception of fairness and level of corruption may improve if revenue bodies supervise these taxpayer segments effectively. This will then lead to enhanced voluntary compliance.
Promoting voluntary compliance is now accepted as a principle of good tax administration. Increasing tax compliance for large businesses is a good idea, but it is unlikely to yield benefits if the community does not know about the work the revenue body undertakes or does not trust it.
Conducting regular taxpayer surveys on factors relevant in shaping voluntary compliance can help revenue bodies understand the impact of their work on community perceptions. Advanced economies survey taxpayers on a wider range of matters known to correlate with higher levels of tax morale and voluntary compliance.
There is considerable research suggesting that improving the perceptions of citizens on the levels of corruption in public institutions is likely to deliver material revenue benefits over time. Research findings also support the notion that the way in which the revenue body manages large businesses can have a great deal of influence on these perceptions.
Asian Development Bank (ADB). 2022. Mobilizing Revenue: Strengthening Large Taxpayer Administration. The Governance Brief. Manila.
Daisuke Miura manages the Domestic Resource Mobilization Trust Fund and assists the governments in Asia and the Pacific region in strengthening domestic resource mobilization through capacity development and knowledge sharing, including supporting the governments’ efforts in digital transformation of tax administration under the ADB Asia Pacific Tax Hub. Before joining ADB in 2020, his professional career included 15 years with the National Tax Agency of Japan where he was engaged in resolving tax treaty-related disputes under the Mutual Agreement Procedure.
Annette Chooi has more than 30 years experience in tax administration, working for the Australian Taxation Office (ATO). She currently runs a consulting firm providing professional services in areas including corporate governance and revenue administration. She has worked extensively with over 30 developing countries in Asia and Africa on matters relating to strengthening tax administration and compliance risk management.
Go Nagata supports ADB’s technical assistance to governments in Asia and the Pacific in enhancing domestic resource mobilization.
The Asian Development Bank is a leading multilateral development bank supporting sustainable, inclusive, and resilient growth across Asia and the Pacific. Working with its members and partners to solve complex challenges together, ADB harnesses innovative financial tools and strategic partnerships to transform lives, build quality infrastructure, and safeguard our planet. Founded in 1966, ADB is owned by 69 members—49 from the region.
