Computerizing tax and customs administrations

The World Bank OCTOBER 2000 PR 72NUMBER 44 PUBLIC SECTOR Computerizing tax and customs administrations Computerization is an important part of World Bank tax and customs projects. Drawing on completed and ongoing projects-especially the Philippines Tax Computerization Project-this note offers recommendations for project design and implementation. A modern tax or customs administration Goals of revenue depends on information technology. In few computerization projects Better technology countries are tax and customs operations The most obvious potential benefit of com- so limited that manual processing of returns puterization is more effective revenue col- enables better and payments is adequate. Thus the Bank lection due to better audit selection, easier considers computerization to be an impor- detection of stop-filers and nonfilers, and revenue collection- tant element of capacity building in rev- faster payment and refund processing. This enue administration. Of the 43 Bank is also the main objective ofmost Bank com_ and can reduce projects with a major tax or customs admin- puterization projects-whether in Hungary, istration component in the 1990s, 33 the Philippines, Thailand, or elsewhere, corruption, improve included partial or complete computeri- But while computerization seeks to zation of tax and customs. enhance revenue, this should not be the sole service, and The International Monetary Fund pro- objective of tax computerization projects. vides technical assistance to revenue admin- Information technology can also increase revolutionize istration reform efforts, but it cannot support the transparency of tax and customs admin- the acquisition and development of hard- istrations and reduce corruption. It can public-private ware and software. Thus Bank projects for improve taxpayer service. And it can revo- tax and customs computerization can be an lutionize communications between tax communications ideal complement to IMF efforts. In recent authorities and the private sector, as well as years one of the most significant such pro- the exchange of data with other government jects has been the computerization of the agencies. Bureau of Internal Revenue and the Bureau By pursuing broader objectives, tax com- of Customs in the Philippines. This note puterization projects can support funda- draws lessons from seven years of project mental changes in the vision, structure, and implementation and from a workshop held public perception of revenue administra- in Manila in April 2000. The workshop was tions. The development of products like part of a powerful new evaluation instrument, interactive Web services for taxpayers or an the Intensive Learning Implementation electronic data exchange system with other Completion Report, that will target 30 per- government agencies (such as the ministry cent of the Bank's portfolio. These new of finance or the land registry) should be reports provide deeper analysis than regular an essential element of the initial project Implementation Completion Reports, dis- design. This approach also avoids a situa- tilling best practices and lessons to improve tion like that in the Philippines, where a project planning, design, and supervision, data exchange system was added only later FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK in the implementation process-causing sequencing of reform efforts. Instead pro- problems with coordination and ownership. jects have simply assumed-as in the Philip- The narrow objectives of early tax and pines Tax Computerization Project-that customs computerization projects resulted the government would initiate the needed primarily from the characterization of these administrative reforms without agreeing on projects as information technology projects a clear strategy and timetable. rather than as tax or customs projects. Emphasis was placed on providing hardware Software development and software instead of using information MostBank tax computerization projects imply technology to reform operations and insti- in-house development of new tax adminis- tutions. To avoid that outcome, tax and cus- tration software. Until recently this approach toms computerization projects should not was unavoidable because very little tax soft- Computerization be designed as standalone projects. Ideally, ware was available. But developing such soft- computerization should be one component ware is costly, time-consuming, and difficult, shoutd be one of a broader Bank effort to reform tax and as the Philippines's experience shows. Among customs organizations and procedures-as the significant risks are an unqualified system component of a in the Latvia State Revenue Services Mod- developer, a lack of cooperation between the ernization Project-or linked to IMF tech- developer and the tax administration during broader Bank nical assistance. development, and problems with system maintenance and updates. effort to reform Preparing a tax computerization In the Philippines computerization of the project customs administration was much less prob tax and customs Several considerations should be taken into lematic than computerization of the tax account when preparing a tax computeri- administration because the Bureau of Cus- organizations and zation project. toms relied on a standard software package, ASYCUDA, developed by the United Nations procedures Links to tax policy and administration Conference on Trade and Development and reform used by more than 60 countries. A new ver- Because tax computerization projects are sion of ASYCUDA, ASYCUDA++, was devel- essentially tax administration reform pro- oped for the Philippines under the Bank jects, their timing depends on the status computerization project and is being main- of legal and administrative reforms of the tamed by UNCTAD for worldwide use. tax system. Major tax policy reforms during On the tax side, software known as the Inte- project implementation can seriously affect grated Tax System and Internal Administra- a project's duration and success. Ideally, tax tive System was designed exclusively for the computerization should follow and support Philippines tax administration, and the full tax policy reform. design and maintenance risk will be borne A sound diagnosis of the revenue admin- by the Bureau of Internal Revenue. Today istration and its reform needs should be car- various software packages are available for ried out before launching a project. This the integrated computerization of tax admin- diagnosis must include a detailed evalua- istrations as well as for the computerization tion of organizational structures, work of specific functions and services, such as tax- processes, and reporting requirements. payer risk analysis and electronic filing. Future Streamlining administrative procedures and projects involving tax computerization should simplifying tax forms are important ele- use standard tax administration software to ments of tax and customs reform in almost the greatest extent possible. all developing countries, and must be addressed as an initial part of the project or Capacity to absorb the project as a prerequisite for computerization. The Computerization is a complex task in a rev- Banks computerization projects have not enue administration with computer-illiterate always emphasized the importance of the staff, inappropriate business processes, and PREMNOTE 44 OCTOBER 2000 badly designed procedures. This raises the nitions of priorities. But the impact of such question of whether computerization should changes can be reduced if a clear imple- occur all at once or in stages. The Philip- mentation strategy-including an activity pine Bureau of Internal Revenue was over- plan and implementation benchmarks-has burdened by the task of computerizing the been agreed with the client government. In entire tax administration in just six years. the Philippines, following changes in the This process involved developing, testing, leadership of the Bureau of Internal Rev- and distributing 14 modules of the Inte- enue, the implementation strategy for the grated Tax System, changing administrative computerization project went through two procedures, establishing training centers rounds of heavy changes. This could have and training more than 6,000 staff mem- been avoided if a clearer project imple- bers, and setting up an infrastructure for mentation plan had been available. taxpayer support. Adetailed project Major computerization projects should Project implementation divide such efforts into smaller pieces. This Three elements of project implementation implementation can be achieved through the appropriate require careful consideration. sequencing of computerization tasks, such plan is crucial as registration or audit selection, or by lim- Implementation plan iting the project to computerizing a small The lack of a detailed project implemen- number of offices in key revenue regions, tation plan was a major weakness in the rolling out to other local or regional offices Philippines and in several other Bank tax at a later stage. and customs computerization projects. Clearly identified project milestones, actions Change management needed to achieve those milestones, and tar- An efficient change management strategy get dates for delivering outputs are critical is another precondition for successful tax to allow for timely and adequate interven- computerization. Completed projects show tion in case of implementation problems. that change management activities should start early in the implementation stage, that Supervision change management activities should tar- Tax and customs computerization projects get taxpayers and tax administration offi- should be driven by priorities for adminis- cials equally, and that international trative reform-not by information tech- consultants may be needed for change man- nology arguments. This point has a direct agement programs if high-quality local con- bearing on a project's supervision needs. sultants are not available. Supervision must involve both information A major and essential task is the dialogue technology experts and tax administration with taxpayers to explain the impacts and experts throughout project implementa- advantages of tax computerization. Other- tion. This is necessary to identify early defi- wise, projects may encounter misunder- ciencies in project implementation, which standings and opposition. In the Philippines can be related to information technology such problems caused an 80 percent sus- or to problems with tax policy and admin- pension in tax return filing during the testing istration. Ideally, a change management phase of the system. expert should be involved in at least part of these supervision activities. Leadership commitment Senior managers must be committed to com- Procurement puterization and modernization during pro- Procurement is a major hurdle in projects ject preparation and design. No multiyear involving large-scale information technol- project is immune to major changes in the ogy. Equipment specifications must be both senior management of the implementing detailed and flexible, taking into account agency, resulting in disruptions and redefi- the short lifecycle of hardware. A number PREMNOTE 44 OCTOBER 2000 of factors contributed to successful pro- countries public salaries are not competi- curement in the Philippines Tax Comput- tive with private salaries, and information erization Project: the input of information technology experts normally find ample job technology experts familiar with procure- opportunities in private enterprises. There ment problems, the use of a company with are only two ways to deal with this issue: by extensive procurement expertise as the pro- exempting information technology staff ject's procurement consultant, and the from salary laws (preferably, through a con- demanding invitation for bids, requiring a dition in the initial project agreement) or turnkey contract and international expe- by outsourcing information technology rience with similar projects. activities. Outsourcing requires a feasibility Projct sstanabiitystudy to identify quality concerns and costs. Computerization An information technology system is a major Links to other public sector investment-one with budgetary and reforms projects should human resource implications that extend Revenue administration computerization far beyond the life of a project. According projects should be seen in the broader con- be seen in the to IMF data, a tax administration usually text of public sector reforms. They touch requires an information technology budget on issues such as the government's overall broader context that is about 10 percent of the total tax strategyfor information technology, the rev- administration budget for years in which enue agency's autonomy in maintaining of public sector major changes are not occurring. During information technology systems, civil periods of major change that share increases vice laws and procurement policies, and reforms to 15-20 percent-and sometimes more. communication and cooperation among There is a substantial risk that, without government agencies. Tax and customs changes in the budget allocation, a tax computerization is often a country's first administration will not be able to maintain exposure to a major computerization pro- and modernize its computer system. There ject in the public sector. Lessons from tax are several ways to address such concerns: and customs computerization can provide * The government can commit to provide incentives-and disincentives-to exploit sufficient financial resources for the sys- opportunities for electronic government in tem in the future. other agencies. * The tax administration can, through an agreement with the government, be This note was written by Michael Enge1schalk allowed to retain a fixed percentage of (SeniorPublic Sector Specialist, Public Sector Man- additional taxes collected through the agement Division, PREM Network), Samia Mel- use of the computer system. hem (SeniorInformatics Specialist, GlobalProduct * The tax administration can be given Group for Information Communication Tech- autonomy in budget, personnel, and pro- nologies), and Dana Weist (Senior Public Sector curement matters, as with a number of Specialist, East Asia and Pacific PREM Unit). autonomous revenue authorities in Latin Ifyou are interested in similar topics, consider America and Africa. joining the Tax Policy and Administration The- High turnover among information tech- matic Group. Contact Michael Enge1schalk nology staff is another challenge for a com- (x87764) or Anna Hansson (x38485), or cick puterized tax administration. In most on Thematic Groups on PaREMnet. This note series is intended to summarize good practice and key policy find- ings on PREM-related topics. The views expressed in these notes are those of the authors and do not necessarily reflect the views of the World Bank. PREM- Snotes are distributed widely to Bank staff and are also available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Sarah Nedolast. For additional copies of this PREMnote please contact PeonyReduction and[conamicdManagiment the PREMt Advisory Service at x87736. Prepared for World Bank staff