Compliance Risk Management: the Roadmap for Long-term Strategic Tax Reform

Steffen Normann Hansen is IMF Tax Administration Reform Advisor for South East Europe. He is based at the CEF since June 2014. He works with colleagues in national tax administrations in South East Europe, helping them to develop modern European tax systems and fighting against tax evasion, using good risk analysis. At the CEF, Mr. Hansen helps deliver training programs related to his work. His work is funded by the Japanese government. We spoke with Mr. Hansen about his role in the SEE region and about the EU's Compliance Risk Management (CRM) Model and its implementation in countries of the SEE region - why should countries follow the model as the road map for its long term strategic reform and what is necessary for its successful implementation.

What does your job as IMF’s Regional Revenue Advisor encompass?

When a diagnostic IMF headquarters mission establishes the reform development gaps in a country and recommends measures to mitigate these gaps, the regional advisor provides guidance and support to implement the necessary measures and coordinates the work of short-term experts. Furthermore, if the management team or the director-general of the tax administration want to discuss a new initiative or have some doubts about a certain issue, they are welcome to contact the advisor for assistance or just a brief discussion.

What can the IMF do to help and insert itself into the heart of the tax reform agenda in SEE?

I do not think that the IMF needs to be more inserted into the heart of the tax reform in the SEE region. The IMF is already there and has been so for a decade. Through intense advice and guidance about basic tax administration performance and tax reforms, the IMF has proved to be a very important player in reforming SEE tax administrations.

The main theme of your work is to help SEE countries to follow a path towards modern tax administration. The basic model proposed is the EU’s Compliance Risk Management (CRM) model which is very much in line with the IMF’s own recommendations on tax administration. Why should SEE countries see this model as the roadmap for long-term strategic reform? Could you give an example of the CRM model’s success in your own country?

In many countries, including my own – Denmark, the CRM approach has proved to be the only way forward to ensure tax collection of the right amount at the right time and with the lowest possible compliance cost for both businesses and tax authorities. I think it is impossible to find a single tax administration in Europe that does not try to reduce cost and raise revenue. Proper implementation of the CRM model can be the way to do it. The CRM approach is all about knowing the risk of non-compliance and how to tackle this risk in an intelligent way by using a wide range of tools, and the audit only as the last option.

In Denmark we started to implement the CRM model in 2005. Since then we have significantly decreased the number of employees and at the same time improved tax compliance, reducing the compliance cost for businesses by 25 per cent. This shows a high degree of efficiency.

Another example from our early work in Denmark: addressing non-compliance of taxpayers who had property abroad but did not pay the property tax. We estimated that more than 30,000 Danes owned a property in another country and were thus liable to pay the property tax in Denmark. However, only less than 400 taxpayers were doing that.

We used our exchange of information agreements with European partners. Parallel to that, we talked about the rules with a number of Danes and realized that no one really knew that they should pay property taxes in Denmark for a property abroad. We then issued guidance and got the media’s attention who started to write about these rules and about the fact that the Danish tax authorities had asked for information from other countries. During the next couple of weeks the administration received some 6,000 voluntary disclosures from the taxpayers. We continued with this approach until obtaining information from other countries. Then we started to send information letters to the actual property owners and eventually we had 25,000 voluntary disclosures before we began to audit those few remaining. Only a few tax officers were directly involved in the project. Effective? Yes, very much so.

Based on your experience in working closely with tax authorities in this part of the world, can and does the CRM method work? Could you share any examples from practice?

There is no doubt in my mind that the CRM model can work in all SEE countries, and I have already seen it work in some. Taxpayer service has significantly improved in all the countries, and most countries perform risk assessment to target the riskiest areas in tax legislation. I have seen annual compliance plans produced to target these risks in different ways. In one country the risk assessment showed a very high degree of non-compliance in the construction sector. The usual way to tackle this problem would be to perform as many audits as possible within a year. The tax authorities of that country instead addressed the problem by explaining to the construction businesses what to do and issued pamphlets, guiding them how the legislation should be interpreted and offering a deadline to perform a voluntary disclosure. Only after the deadline did they start to audit some companies.

Why, in your opinion, the pace of reform is usually slow despite the obvious benefits of the CRM approach? What is the truth about the tax administration reform?

There can be a number of reasons for the slow implementation of new working methods. As far as I have seen, there are two main reasons. First, the need to adopt a new tax procedure code that would allow for a risk-based approach to be approved by governments. This often takes longer than expected. The second reason, and unfortunately a serious one, is the uncertainty for staff. When an administration introduces a new way of working or a new organizational structure, employees normally think “what does it mean for me”, and if the methods and changes are not properly introduced to the staff, they will work against the new approach or at least not go along with it. Managers often underestimate the importance of working with change management activities.

What are the main challenges for tax authorities in SEE based on your experience?

The main challenges are in my answer to the last question. Administrations urgently need to review their tax procedure codes; implement change management activities around new working methods; improve governance; and educate the staff to apply the new methods.

Can some of these challenges be addressed through the recently launched training and networking project “Supporting Capacity Development of Tax Administrations in South East Europe”?

The short answer is “Yes, certainly, and that is why the IMF is supporting the project.” I am especially happy to see that the project will focus also on softer tax administration elements, such as human resources and change management activities.

What factors in particular need to be considered to effectively manage changes when reforming tax administrations?

One of the very important elements in reforming tax administrations is information. The importance of giving the right information at the right time cannot be stressed enough. There is nothing worse for the staff than to be insecure in their job. The management should share information as soon as possible during the process and continue with that until the reform has been fully implemented. In addition, they must make sure that the information is well understood, which can only be accomplished with a number of change management activities. When dealing with major reforms, such as the CRM model, the top management must meet with the staff to explain the model, while being honest about the related risks and uncertainties.

You have worked with a number of large-scale and complex development and reorganization projects. Such projects are usually connected with risks and uncertainties, which often lead to resistance. How have you dealt with situations when the staff has shown resistance to the changes needed?

First of all we introduced a special website about the reform to 1) give all the necessary information as soon as possible; 2) inform when new information could be expected; 3) reveal the minutes of management meetings along with the decisions adopted; 4) provide an option to ask questions from the management with very quick answers; and 5) in case of rumors, provide immediate explanations from the management.

The top management (DG and deputy DG) travelled around the country and met with all the staff to discuss the reform and give people an option to ask questions. This is time and effort consuming for the top management but very necessary.

During the implementation period change management activities were applied: meetings in every department/unit where every staff member explained in their own words what they thought the reform would mean for their work, how they could influence the reform, and which new opportunities they could see for their personal development.