You will notice that this approach does not depend on tax-type: it is about the overall revenue position of a given segment. Over the long term the secret of increasing compliance is to focus on behaviour rather than the mechanics of collection. This is because voluntary compliance is the most effective and efficient way to collect tax, and it depends on taxpayer stance rather than enforcement - if people are happy to hand over some of their income the rest becomes easy.
It also enables the connection of non-tax behavioural indicators. For example, one country couldn’t understand why there was a high level of evasion in the Pharmacy sector. This occurred across multiple tax types, and extended into the owners and workers in those business. A deep-dive showed that the pharmacists were not trying to evade tax: the process of registering for tax was dependent on a pharmacy licensing process that was convoluted, illogical and expensive. They were being forced out of the tax system by another government department.
This lies at the heart of the next stage - understanding why tax contribution differs across segments. There is nothing wrong with this from a policy perspective. For example, extractive industries are a way for a country to generate significant short-term income gains by exporting natural assets. When externalities are taken into account these activities are often effectively subsidised through tax expenditures, a legitimate policy choice. It simply needs to be explicit and understood, supporting taxpayer morale.
I have taken a simple starting point for the purposes of this book by using economic segments based on the ISIC classification structure, but once this concept becomes comfortable the segmentation approach can be applied using any population where data is available.
A standardised format helps with presenting each segment summary. Prepare and maintain a sheet for each risk segment, and link it to a compliance threat and risk register.
Here's a checklist of steps to summarising the segment risk assessment. I will expand on each area later:
Give the segment a name. This should align with the economic segment model or ISIC category at this stage. As the analysis is refined it will start to encompass industries, sectors and behavioural types.
Summarise key relevant factors about the segment. This should include basic information such as value, number of actors, key attributes and trends. It can also highlight key players and potential sources of information.
Describe the major compliance problems. Each should be backed up by evidence - phrases such as "there is a large cash economy" or "our taxpayers are worse than other countries" are not useful without evidence and some reference to research. It needs to include non-revenue barriers such as in the example above.
Do NOT add a risk rating to the summary. Number anchoring and other cognitive mis-fires cause issues for those consuming this type of information. DO include short narrative indicating the relative risk posed by the segment.
Summarise the treatments that will be applied to each risk area (including research, experiments, collaboration with other agencies and education through to enforcement action).
Show links to organisational resource requirements. For example, if technology change or capacity development is required, note it here (think in terms of people, process and systems).
Identify key information requirements, and where there are dependencies on other agencies.
Include policy assumptions. When presenting policy, governments will generally include estimates of effect. Be sure to factor these in to projections for revenue and compliance impact. Contrast differences. This is often the only way to highlight areas that require policy adjustments, and in the short term allows threats and risks to be tolerated as they are by design.
The process of establishing the parameters above is often more important than the actual answers. It needs to include diverse inputs. One good practice is to engage sector leaders in a semi-formal discussion to help understand the subtleties of behaviours.
Tax auditors should be exploited as intelligence resources. Often they develop a deep understanding of industries or segments, and can offer insight into the real causes of risks.
This should be prepared as two documents: a deeper analysis (perhaps 6 pages at most) combined with a single page summary (often an A3 size). The risk should be tied to the risk register. We have found that a standardised summary allows the easiest path to a database of risks.