Ch- 4

Tax Administration

Teklu K. (PhD)
Oct,2021

Teklu [email protected]
 Contents

The need for tax administration

Tax administration and Fiscal Federalism

Constitutional Bases of Taxation

 Contents

Essence

The need for tax administration

Indicators of T.A Effectiveness
Benchmarking
Goal of tax administration

Compliance
Tax Administration & Fiscal Federalism
 1.What is tax administration

The management, direction, and

supervision of the execution of tax laws.
Tax administration includes
 Identification,
 Registration
 Assessment,
 Collection,
 Audit &Enforcement,
 Litigation,
 Publication, and statistical gathering.
 2.The need for tax adm.

Equity, productivity, effectiveness etc

Harvesting revenue from tax requires

effective tax administration.
 The best tax policy in the world is worth
little if it cannot be implemented
effectively.
 2.The need for tax adm.

How revenue is raised ( the effect of

revenue generation)on social capital,
equity, the political l fortunes, and the
economic welfare- is more important in
many perspectives than how much revenue
is raised.
 2.Need for tax adm.
.

To enhance revenue through voluntary

compliance
compliance gape; The aggregate amount of
true tax liability imposed by law for a given
tax year that is not paid voluntarily and timely
 An in depth analysis of gap and benchmarking are required to

examine the effectiveness of tax administration

 3.Indicators of T.A Effectiveness

A) Quantitative Indicators:
 Total revenue collected/ Annual revenue
collection target.
 Total revenue collected/GDP.

Number of tax declarations filed/ Number

of registered taxpayers.
 3.Indicators of T.A Effectiveness

A) Quantitative Indicators:
Number of tax declarations received on
time/ Total number of tax declarations filed.
Amount of taxes paid voluntarily by
taxpayers/ Amount of taxes payable on the
basis of tax declarations.
 3.Indicators of T.A Effectiveness

A) Quantitative Indicators:

Additional taxes assessed after investigation

and audit/ tax liability declared.
Amount of additional assessed taxes
sustained in appeal/ Amount of additional
assessed taxes challenged in appeal.
 3.Indicators of T.A Effectiveness

A) Quantitative Indicators:
Amount of tax arrears recovered/ Total
amount of tax arrears at the beginning of
any year.
Number of cases of tax evasion
successfully prosecuted each year.
 3.Indicators of T.A Effectiveness
B)Qualitative Indicators
 Perception f tax payers regarding:
Risk of detection of non-compliance and
severity of consequences.
Quality of assistance provided by the RA to
enable taxpayers to comply with their legal
obligations.
 3.Indicators of T.A Effectiveness

B)Qualitative Indicators
 Perception f tax payers regarding:

Effectiveness of the RA in resolve

taxpayer problems.
the degree of corruption in the RA.

 Rev Adm. morale and self-image.

 4. Benchmarking
A careful benchmarking is essential to
measure the performance, Cross country,
previous year, or targeted performance.
 Benchmarks such as timeliness e.g agreed
date,
 cost,
coverage,
duration etc may be used to interpret
 5.Goal of tax adm:

Voluntary compliance : The timely filing and

reporting of required tax information, the correct
self-assessment of taxes owed, and the timely
payment of those taxes with out enforcement
action
An effective tax administration can improve
voluntary compliance through taxpayer education
and enforcement of tax laws.
 6. Obstacles to taxpayers Compliance

Tax administration should encourage

voluntary compliance and address
obstacles that prevent voluntary
compliance.
 The important obstacles to taxpayers’
compliance are:
Perceived inequality of the tax system;
6. Obstacles to taxpayers Compliance

The complexity of the tax laws;

The lack of fairness of the penalty

system;
Weak taxpayer education program;
Low levels of integrity and professionalism of the
tax administration’s staff;
 6. Obstacles to taxpayers Compliance

The tax administration’s inability to

ensure impartiality in the appeal
process;
Weak or lack of well designed audit
program; etc.
Fairness, simplicity, services, cost,
integrity of tax official
 7.Tax Adm & Fiscal Federalism

Federal and sub national governments

share the responsibilities of tax
administration .
Special laws and constitutions provide this
responsibilities.
.
 7.Tax Adm & Fiscal Federalism
Rationale for fiscal decentralization

(A) Economic arguments:

 1) Efficiency in resource allocation:
Decentralization can reduce the number of
decision making layers
.
 7.Tax Adm & Fiscal Federalism

2)Productive efficiency: fosters

accountability, reduces corruption,
increases cost effectiveness.
3) Priority for local preferences: local leaders know their
constituencies better than central govt authorities

4)Equity and poverty concerns: mobilization of local

resources and increased participatory process
 7.Tax Adm & Fiscal Federalism

4)Equity and poverty concerns: mobilization of

local resources and increased participatory
process

5.Enhance tax effort and sustainability of

services: people are more willing to pay for
services which they find to be more responsive
to their preferences.
 7.Tax Adm & Fiscal Federalism

6) Increase competitiveness among sub

national govts. to satisfy the needs of the

local residents
7) Increase access to service delivery:
delivering services to neglected peripheral
and remote areas.
 7.Tax Adm & Fiscal Federalism

Other arguments:
a) Political necessity: component of
democratization process
b) Ideological values: increases popular
participation in decision making

c) Indicator of good governance: Good

governments are those closer to people
 7.Tax Adm & Fiscal Federalism

Elements of good FD program

1.Adequate enabling environment:
constitutional or legal mandates for
minimum level of autonomy, rights and
responsibilities for local govts is a foundation
on which to build decentralization
 7.Tax Adm & Fiscal Federalism
Elements required:
 Political conditions – strong national will to
decentralize (E.g.. Ethiopia, Uganda)
Clearly defined constitutional and legal
provisions to support decentralization
 Mechanism to coordinate the
decentralization activities (E.g. Federal
Affairs Ministry in Ethiopia
Adequate resources for sub national govts to
function ( Transfer programs)
 7.Tax Adm & Fiscal Federalism
Elements………
2)Assignment of appropriate functions to
sub national govts
 Poor capacity of local govts will lead to
poor performance
3) Assignment of appropriate revenues to
local govts:
 Responsibilities should be supported by
appropriate revenue assignment,
 7.Tax Adm & Fiscal Federalism

Challenges of revenue assignment

 Assigned revenues are never adequate
transfer programs are inevitable
Local govts use too many unproductive
revenues that barely cover the cost of
collection
 Lack of attention to implementation
Local revenue sources suffer from design
process:static bases, ineffective collection
mechanism
 7.Tax Adm & Fiscal Federalism

4) Developing an appropriate transfer

system:
 Local own resources generally do not
cover expenditure responsibilities.
 Transfers help to recover local govt fiscal
imbalances
 7.Tax Adm & Fiscal Federalism

Elements of FD
 Helps to offset fiscal capacity differences
among local govts
Transfer systems:
 Different types of programs are used for
different purposes
a)Unconditional grants for redistribution
function
b) Conditional grants for specific
services
 7.Tax adm &FD

5) Developing local access to investment

capital: Local govts get most of their
income from transfers

Some decentralized govts are able to

borrow
 8.Tax Administration Orgaizatio
Three tax Administration organization
models are common
Type of tax model
Taxpayer segment model

Functional model, and

 Type of tax adm, org. model

Type of tax model

Based on type of tax criterion
Separate departments for each tax
Self sufficient and independent of each other
 VAT,BIT ,RIT
 Type of tax adm, org. model

Taxpayer segment model

staff are assigned to units that focus on specific groups of

tax payers.
The groups are frequently based on the taxpayer’s scale
of operation, form of ownership, or economic sector.
 Sole, PS, SC

 Maunf, merchandiser, service

 large taxpayers, small/medium,

 Type of tax adm, org. model

Functional Model
Several common tax administration activities emerge in a
function-based model, these include:
1.Taxpayer services and education

2. Returns processing and payment

3. Audit and investigations

4.Collections enforcement

5. Tax operations policy

 DISCUSSION QUESTION
 Perceived inequality of the tax system
 The complexity of the tax laws
 The lack of fairness of the penalty system;
 Weak taxpayer education program;
 Low levels of integrity and professionalism of the tax
administration’s staff;
 The tax administration’s inability to ensure impartiality in the
appeal process;
 Weak or lack of well designed audit program; etc.
 Fairness, simplicity, services, cost, integrity of tax official
 ARE The important obstacles to taxpayers’ compliance
Discuss&Report the existence, magnitude
&severity of each in Ethiopian tax system.
 Ch- 5
Tax Administration Functions

Teklu K. (PhD)
Oct,2021

Teklu [email protected]
 1.Tax Adm. Functions

 Identifying taxpayers
Registering taxpayers
 Giving Identification numbers
 Collection of information
Assessment
Filing control
 valuation and audit
Processing Returns and payment
Collection of tax
Educating tax payer
others
 2.Tax Adm Challenges

The need for automation & inability

to do so.
Outsourcing tax administrative
functions
 3.The need for automation

Throughout the years, tax administrators have

been constantly concerned about developing
new ways of;
 improving institutional performance,

 increasing the effectiveness of tax control, and

 providing taxpayer services that may allow
them to better comply with their tax obligations.
 3.The need for automation
A fundamentally important problem
appears to be the difficulty faced by the tax
administrators to adopt and put into
practice new technologies in
administration.
 3.Need for Automation

Improvements in Tax adm calls for a

transformation of procedures and methods.
Information technology facilitates this
transformation
 4.Impact of using automation
1.Greater speed in communications

2. Immediate interconnection

3.Access to the systems from anywhere,

4 Reduces processing time and production
cycles,

5. Lowers cost
 4.Impact of using automation

6.Offers services which were not feasible otherwise

7.The quality of the information

8. Increases the means to receive mass information

.9.More and better information

10. Can have direct contact, on line, and interaction
with all branches and employees.
 5.Automation in Ethiopia

The Standard Integrated Government Tax

Administration System (SIGTAS), the automated
tax adm system, wasinitially applied for VAT
only.
The system has been made operational since year
2006 for all taxes. It is planned to be applied in
all regions through a national network
 5.Automation in Ethiopia
The expected benefits from the proper implementation of
SIGTAS are the following:
Increased revenues and enhanced control

Better service to taxpayers

Standardized practices throughout departments

Reduction of non-value adding activities( reduced paper

based mgt)
Good time management (reminders, remittances, etc.)
 5.Automation in Ethiopia

Integrated management of all taxes (especially for audit)

 manages all aspects of system administration including

the tracking of late-filers and late-payers, exemption
period-automatically,
 provides an over all view of all taxpayer liabilities and
payments,
eliminates manual calculation of penalties and interest,

helps ensure that data collected is valid,

 5.Automation in Ethiopia……

The automated procedures incorporated in SIGTAS

include:

Registration,
Assessment,

Cashing,
Collection,

Audit,

Objections, and
Information & administration procedures
 6.Outsourcing feasible administrative
functions

An effective tax adm may look into areas

such as outsourcing feasible administrative
functions, for improvement.
 7 Outsourcing tax adm

II. Outsourcing tax administration:

 Certain administrative tasks can be contracted out to the
private sector where this can be clearly shown to improve
efficiency or effectiveness.
 The government loses no autonomy if certain
administrative activities are delegated.
 There are a variety of TA functions that can be privatized
or outsourced ranging from producing tax forms, to
mandatory financial audit, to tax withholding etc…
 7.Outsourcing tax adm
Tax administrative functions that can be
outsourced include:
 Tax receipts

Processing Returns

Collection
Audit:
Collection of delinquent taxes
 7.Outsourcing tax adm
Requesting information from third parties-
Requiring private sector to assist in taxpayer
services
developing database for computer enquiries

software devpt for preparation of tax returns

publication of specialized literature
training seminars on tax matters
 Discussion Question

What are the challenges that

tax administration faces

while outsourcing functions?

 Ch- 6
Tax Accounting and Tax Auditing

Teklu K. (PhD)
Oct,2021

Teklu [email protected]
Tax Accounting
 1.Tax Accounting in Ethiopia

Ethiopia uses FGE system of Accounting to

account for taxes
FGE - A modified Cash Basis of Accounting
Procedures:
Captures the transaction through the source
document/ the Receipt Voucher
 1.Tax Accounting in Ethiopia
Records into the accounting system- by
transferring to the Transaction Register from
the source document
Summarize in accounts- posting to Ledger
Card from transaction register
Sends monthly reports to MoFED or
reporting entities
 1.Tax Accounting in Ethiopia

Timely recording of collection;

Recording payments to individual taxpayer’s
files, and to appropriate accounts
Facilitates refunds, bank reconciliation, and
revenue sharing
,Guides eventual enforcement efforts, and a
base for selecting for audit.
 2.FGE Accounting bases
FGE Accounting is bases
Financial policy (Proclamation,
Regulation and Directives)
Annual budget proclamation
Fund system
Modified Cash base philosophy

59
 2.1 The financial policy

The financial policy provide general

direction of the accounting system.
It direct what, when, how and to whom
financial report is provided in general and
detail.

60
 2.2 Budget policy
Discuss revenue to be collected by whom,
when, how much and clearly show
spending public entities together with
money assigned to them along with its
budget category, transfer power and power
to use internal revenue
61
 2.3 Fund system
It is organized into two as general fund and
Special fund.
 General fund is used to account or all types
of revenue and expenditure while
Special revenue accounts for specific
revenue and expenditure. Example:
 Road fund
 Industrial dev't fund,
 Fuel stabilization fund etc
62
 2.4 Basis of Accounting
The accounting system at the federal and
regional levels employs a modified cash
basis of accounting.
The modified cash basis of accounting in
FGE means that cash basis applies except
for recognition of the following
transactions:
1. Revenue and expenditure are recognized
when aid in kind is received.
2. Interest on salary advances is recognized as
revenue when the salary advance is made. 63
 2.4 Basis of Accounting
3. Expenditure is recognized:
 When payroll is processed.
 At the end of the year when a grace
period payable is recognized.
When goods are received or services
are rendered
4. Intergovernmental transfers are
recognized in the absence of actual cash
movement.
64
 2.4 Basis of Accounting
5.Transactions resulting from salary
withholdings are recognized in the absence of
actual cash movement.
6. Amounts due on treasury bills and direct
advances to Government from the National
Bank of Ethiopia are recognized as current
liabilities
65
 5.FGE Major accounts

Major account group Code

0-999

Revenue Domestic 1000-1799

External aid 2000-2999
External loan 3000-3999
Expenses 6000-6999

Asset 4000-4999
Liability 5000-5599
Net Asset/Capital 5600-569966
 6.FGE Accounting rules for Debits and Credits
Account Category Used for Normal Increase Decrease
Modified Cash Basis Balance Recorded as Recorded as

Revenue Credit Credit Debit

Expenditure Debit Debit Credit

Cash and cash equivalents Debit Debit Credit

Receivables Debit Debit Credit

Payables Credit Credit Debit

Transfers Debit or Credit depending on transfer type

Net assets/equity Credit Credit Debit

67
 7.Source Documents

The source documents used to capture data are

 Receipt Voucher: is used for transactions like cash
collection, bank deposits, bank transfer and receipt of cheque.
 Payment Voucher: is used to acknowledge payments of
cash, cheque and bank transfers.
Journal voucher: is used to record the following transactions
 Salary Expenditure
 Closing / Start up entry
 Grace Period Payable
 Advance Settlement
 Payables/Receivables
 Aid in kind
 Revenue recognition
 Adjusting/ Correcting
Tax audit
 1. Tax audit& Tax assesmet

What is Tax audit?

A tax audit is an examination of tax

return by the tax office to verify that

income and deductions are accurate

Teklu K. [email protected]
 1. Tax audit& Tax assesmet
Tax assessment
TA Is an initial review by the tax official of the
tax declarations and information provided by a
taxpayer and a verification of the arithmetical
accuracy of the declared tax liability shortly
after the submission of declarations. (official
assessment)
 2.Types of Tax audit

1. Mail audits

2. Office audits

3. Field audits
4. Full audits

5. Limited scope audits

6. Single issue audits

Teklu K. [email protected]
 2.Types of Tax audit

6.Fraud investigation

7.Registration check

8.Advisory audits
9.Record keeping audit

10.Refund Audit

11. Issue-oriented audit

Teklu K. [email protected]
 3.Possible outcomes of an audit

  Satisfying : no change on tax return.

Proposing changes to tax return:The auditee

agree and accept the changes or challenge
the assessment.
 If disagree with the findings, request tax
office manager to further review your case or
you can request a formal appeals conference.
Teklu K. [email protected]
4.Periods and parts under examination:
Audits can focus on one accounting period,
or extended to cover multiple fiscal periods.
It can focus on specific parts of the
taxpayer’s activities (such as sales, goods in
stock etc

Teklu K. [email protected]
 5.Principles of Tax Audit

Accuracy: identify non-compliance, interpret

ate law correctly, and asses correct liability.
Efficiency:- minimize the compliance
burden on the taxpayer and minimize the
use of the revenue body’s resources in
terms of the outcome delivered.
Teklu K. [email protected]
 5.Principles of Tax Audit

Objectivity - All decisions made are based

on facts.
Transparent - As issues need to be fully
documented in the work papers, and are to
be discussed with the taxpayer during the
course of the audit.
Fair – Audit need to be Technically accurate
and procedurally correct in accordance with
laws and policies.
Teklu K. [email protected]
 5.Principles of Tax Audit
Complete - The audit has a defined start
and end point and the taxpayer knows
when the audit process is complete.
Defensible - The decisions made in the
audit and the actual audit process can
stand up to external scrutiny.
 Consistent - The same taxpayer
circumstances should produce the same
result regardless of which auditor
undertakes the audit.
Teklu K. [email protected]
 6.Steps in coductigTax Audit

Preparing for Tax audit / planning

 Examination of the Accounting System
 Initial Meeting
 Auditing
 Resolving issues on the Tax Audit Findings
Closing Meetings( Exit Conference)
 Tax audit report
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 7. The roles of the taxpayer audit

Promote voluntary compliance:

Detect non-compliance
Gather information on the “health” of the tax
system
Educate taxpayers:
Identify areas of the law that require
clarification Teklu K. [email protected]
 8.Pre requisites for tax audit
A comprehensive legal framework
Well defined organizational and mgt processes
Well defined audit techniques and support
arrangements
Adequate human resource mgt and
development programs
 8. Pre requisites for tax audit

Legal framework: essential to provide integrity in tax

adm. and to protect taxpayer rights. This includes
Record keeping obligations
Tax officials access to taxpayer’s books
Tax official’s access to third party information

Information from other national revenue bodies

Powers of revenue body to amend returns
Sanctions for non compliance
 9.Delinquency Control and compliance
 Tax authorities compare returns received against master
file to determine what accounts are delinquent. The
delinquency may involve
 Tax owed by the taxpayer directly,
 Tax owed by the taxpayer but collected from others, and
 Taxes that the entity is expected to remit for other
taxpayers.
 10.Tax appeal and enforcement

Taxpayers are permitted to give appeals

against audit and assessment
Appeals assure non discriminatory
application of the tax system, and work
toward the achievement of an equitable tax.
 Ch- 7
Tax Reform

Teklu K. (PhD)
Oct,2021

Teklu [email protected]
 Contents

 Need for reforms

 Strategies of reforms
 Ethiopian Tax Reforms
 1Tax Reforms

Tax reform is the process of changing taxes or the way

taxes are collected or managed by the government
Reformers have different goals.
 Some seek to reduce the level of taxation,
 some seek to make the system more or less
progressive,
 some others may try to make their tax system more
understandable or more accountable.
 2 Need for reforms

1. Fiscal imbalance and insufficient

revenue:

In some countries, fiscal deficits are too

large and public expenditure needs are

too pressing for a fiscal balance.

 2. Need for reforms

2. Distortions in resource allocation that can

reduce economic welfare and growth:

This happens when taxpayers either modify

their behavior in an attempt to reduce tax
burdens or spend resources in evading tax
 2.Need for reforms

3.Inadequate provision of equity: Tax systems in

developing countries are not progressive and
the poor often bear significant tax burden
Even those who should pay tax are not taxed
equitably
4. Poor administration of taxes: Since taxes are
involuntary payments to govt, taxpayers have
a strong incentive to minimize their tax
liabilities either through avoidance or through
evasion.
 2.Need for reforms

The main goals of the reform includes;

1. To generate revenue
2. To lift the tax burden off the poorest households
and to ensure that actual tax structures become
more equitable both horizontally and vertically
3. Simplifying tax administration and
strengthening tax administration to enforce the
interest of a reformed tax code
Not all the objectives of the reform can be satisfied
simultaneously. Trade- offs are unavoidable.
 3. Reform strategies
Strategies include:
(1) Broadening tax base: The base can be
broadened in two ways;
(a) identify new bases of tax; and
(b) expand the bases of existing taxes.
Some potential new bases include
environmental damage, and activities in the
informal sector,
 3.Reform strategies
 The narrower the base the higher the rate
that is required to generate a given amount
of revenue. The higher the tax rate, the
greater the possibility of avoiding and
evading tax
 3.Reform strategies
For taxes on goods and services, broadening the base
involves subjecting to taxation more goods and
services.
 For income taxes, broadening base involves
subjecting more types of income, income in kind and
fringe benefits to taxation; and reducing many
special purpose allowances, deductions, and
exceptions
 3.Reform strategies
2. Rationalizing rate structure :
The choice and number of rates should
be justified by assessing cost and
benefit. Too many rates increase the
complexity of tax system, increase tax
evasion and tax administration cost.
 3. Reform strategies
3. Improving Tax administration: At each of the
adm. Stages, weakness of administration will
prevent the fulfillment of objective
Tax administration reform should aim to
improve (a) compliance on the part of
taxpayers and (b) efficiency with which taxes
are assessed, processed, and collected.
 3.Reform strategies
Principles in reform strategy
1) Political commitment to and the
sustainability of the reform
2) Simplify the tax system to facilitate
administration and reduce compliance cost
3) Encourage voluntary compliance
 3.Reform strategies
4) Formulate a clear strategy
5) Identify the tax and accounting laws that require
change
6) Differentiate the treatment of taxpayers by size
7) Ensure the effective management of the reform
process
8) Set priorities and establish a time table
9) Begin fundamental reform with pilot projects-
 4. Tax Reforms of Ethiopia
With the aim of facilitating the overall development of the
economy, the Govt of Ethiopia has undertaken a
comprehensive tax reform program beginning year 2002.
The important reasons for tax reforms are:
1.Complex and outdated tax laws : The tax law, which was
put into practice for more than 40 years (No 173/53)
could not serve the current economic set up and could
not go with globalization and automation.
 4. Tax Reforms of Ethiopia
2. Weak Tax administration: Tax administration was
characterized by weak assessment, collection, follow
up, and enforcement due to lack of skilled manpower,
proper work procedures, and modern equipment
3) Failure to generate adequate revenue to meet
government expenditure: Govt could not collect the
tax revenue due in past years. This resulted in fiscal
imbalance in the economy
 4.Tax Reforms of Ethiopia

World Bank and IMF identify certain key

features for good practice in tax system

They are:
Increased reliance on broad based
consumption taxes ( such as VAT)
Low import tariff rates
 4.Tax Reforms of Ethiopia
 limited personal exemption and deductions,
 moderate rate, and few tax brackets,
 exemption for people with moderate income,
 extensive use of withholding system for
income tax.
 Corporate tax should be levied at one rate
 enhance accuracy and fairness of assessment
 4.Tax Reforms of Ethiopia

Based on the above features, the following projects were

incorporated into the tax reform of the country.

1) Tax Policy and Legislature project

2) Tax Identification Number Project

3) Presumptive tax project

4) Value added Tax project

5) Reorganization and work producer development project

6) Taxpayer Education project

 4.Tax Reforms of Ethiopia

Goals of Eth. revenue adm. reform

1. raise the tax revenue- GDP ratio
2. enhance the institutional capacity
3. Improve tax administration by sealing leakage
loopholes
4.establish a culture of professionalism and
mutual support
 4.Tax Reforms of Ethiopia
5. promote and facilitate cooperation among
tax administration and taxpayer community
6. identify strategies to combating tax evasion
and avoidance, promote ethics and integrity
7. strengthen tax payer education
 4.Tax Reforms of Ethiopia
8. coordinate capacity development and
technical assistance through seminars,
workshop, and training
9. respond to the needs and interest expressed by
taxpayers

10. emphasize self assessment systems and

reduce compliance and administrative costs
 4. Tax Reforms of Ethiopia
11. implement organizational reforms to
modernize the tax authority and enable
provision of quality service
12. recognize the role of tax adm. in the
promotion of econ. development and
good governance
 Discussion Question
Discuss the type, purpose ad effectives
of tax reforms I Ethiopia
THE END