The creation of special large taxpayer offices responsible for the administration of the more than 800 major taxpayers has shown the focus of tax administration reform on maximizing revenue collection.
By contrast, attention given to small businesses in practice is very limited, and tax administration in Albania in several historical periods even has tended to discourage the inclusion of small businesses in the tax net because of high administration costs.
This approach is comprehensible from a short-sighted administrative cost-benefit ratio point of view. Indeed, administrative costs per Leks of collection rise considerably with efforts to increase the compliance rate beyond a given point, which is determined by the tax administration capacity and the size and structure of the hard-to-tax group of potential taxpayers.
Small businesses form the core group of hard-to-tax taxpayers. It is not uncommon that a larger percentage of small businesses operate in the informal rather than in the formal economy. While small businesses in no way constitute the only source of underground economy activities, data about the size of the underground economy still can provide a proxy for the scope of the problem.
While there is a certain correlation between the size of the underground economy and the level of non-compliance with the tax system, a complete equation would be misleading. Not surprisingly, research shows a correlation between the stability of small businesses and tax compliance attitudes. The higher the percentage of small businesses with fixed business premises and with multiple years of operation in a country, the higher will be the compliance with tax registration requirements.
But improving small business tax administration should not be viewed purely from the perspective of short-term revenue yield. For any small business tax system, an efficient, professional, and honest tax administration is required to properly implement the system.
Improving small business tax administration also has to be considered a longer-term investment in improving the compliance behavior of the small business segment. Managing small business tax compliance requires organizational and procedural reforms, which put the tax administration in a position to address specifically the factors and circumstances which contribute to a high compliance burden. The reforms should also enable the tax administration to efficiently combat tax evasion in the small business community.
The full implementation of a taxpayer segment approach of tax administration organization can substantially facilitate addressing the specific needs and compliance management challenges of small businesses.
In Albania, the creation of special Large Taxpayer Offices responsible for the administration of the core group of major taxpayers in the country accounting for the administration of 48% - 52% of total tax revenues has been a successful first step in the taxpayer segmentation process.
It has not only resulted in better compliance management, but also in more comprehensive and better targeted services provided to this taxpayer group. Some countries more recently have also started to set up medium taxpayer offices.
The logical and necessary third step in taxpayer segmentation is the creation of special, dedicated, small taxpayer offices, which provide the necessary organizational structure to address the specific needs of small businesses. Taxpayer segmentation has to be understood in an administrative reform to respond to the particular situation and compliance managements requirements of the individual taxpayer segments.
A small taxpayer department would have several critical tasks, none of which seem to be well done at present time. For example, a good small taxpayer department should make the life of small taxpayers easier than it would otherwise be by reducing the opportunity for official harassment and the complexity of tax rules. It should also make the life of tax officials easier by establishing indicators that can easily be verified.
More importantly, its aim should be to make the tax system as a whole more efficient and equitable by estimating carefully the income (or sales) imputed on the basis of such indicators and ensuring that the indicators are periodically adjusted to reflect changing conditions. Finally, for the health of the tax system as a whole, the small taxpayer department should ensure both that those in the small taxpayer system keep at least minimal records and that they are periodically reviewed and upgraded as appropriate in both record-keeping and the extent to which they are in the regular system, until full graduation.
It should not result in a reduction of tax administration efforts to ensure large taxpayer compliance. Large taxpayers in any country remain the focal point for ensuring appropriate revenue mobilization, and improving small business tax administration should not be achieved at the cost of reduced efficiency of large taxpayer administration.
Tax administration needs to put special emphasis on developing needs-oriented taxpayer service programs. Small taxpayers must know and understand their rights and obligations. Experience has demonstrated that even in advanced OECD countries small taxpayers frequently are not aware of important elements of the small business taxation system.
In the UK, a survey carried out by PWC showed that the awareness level for incentives and tax relief opportunities for small taxpayers was only 41%, while the actual usage level of these schemes was only 11%. Tax incentives and policy measures to facilitate tax compliance are non-effective as long as taxpayer do not get appropriate assistance in understanding and applying these measures. This requires the tax authorities to design and offer specific information material and training courses and seminars. Also, advisory visits by tax administration staff to newly created small businesses can be an important contribution to effective taxpayer service and information.
The nomination of a special service representative as the permanent contact person for small businesses in case of complaints or queries could be a way to build confidence, improve small business tax administration relations, and address service needs.
For example, the tax administration in Indonesia is moving to more taxpayer segmentation with the creation of specialized tax offices for specific taxpayer groups. In the model’s special regional offices, the position of Account Representative (AR) has been created. ARs serve as permanent contacts for specific groups of taxpayers. Every company has an AR assigned, who can be contacted whenever needed as a resource person for advice. According to taxpayer surveys, businesses see major advantages in having an AR assigned; in particular: (i) the AR is more responsive and follows up more quickly than a standard tax official; (ii) the AR is better able to give advice on unclear rules and regulations and is more open in sharing information; (iii) the AR provides services and even reminds taxpayers of deadlines; (iv) the AR is easier to contact during office hours.
An innovative approach to facilitate small business compliance could also be the creation of special service centers for small businesses. These could be either integrated into the small taxpayer offices or created as separate centers in cooperation with other government departments.
So, compliance risks and attitudes in the small business segment of the taxpayer population are fundamentally different from large taxpayer compliance behavior.
In case of larger businesses, the core risk for the tax system is the recourse to tax avoidance strategies. Large businesses (and wealthy individuals) have access to sophisticated tax advice to develop strategies for the reduction of their tax liabilities, e.g. through the use of transfer pricing techniques.
Smaller businesses are more likely to engage in tax evasion practices and either operate completely outside the tax net or hide a certain part of their business transactions from the tax inspector.