Experience of merger of tax and customs for Albania future stepsALTax
On the announcement of the merger between the General Taxation Directorate and General Customs Directorate that could be a new reality of administration of budget revenues in Albania in 2016 is the moment to say some considerations. Integration of customs and taxes has been a topic of interest for the World Bank, the IMF, OECD, and CIAT, among others, over the past decade. The desire to increase efficiency and effectiveness has been a basic motivation behind mergers since the early 1980s.
Institutional reform is a two-stage process. The main priority, increasing effectiveness, should be secured first, before efforts and resources are put into increasing the efficiency of the organizations. In essence: motives and strategies must be linked; and the implementation process be carefully monitored and necessary adjustments made.
This article shows two cases of customs and tax agency integration in Denmark, and Latvia.
In Denmark the Ministry of Taxation separated from the Ministry of Finance in 1975. Under the Tax Minister were Tax and Customs, the latter including VAT and excise duties. Each had its own Permanent Secretary.
The tax administration and control were shared between 275 municipalities and a State Tax Service with regional offices in 25 major cities and Headquarters in Copenhagen. The State Tax Service also developed IT systems, printed tax forms and returns, planned and monitored tax activities, and the like. The municipalities were responsible for collecting income and inheritance tax from physical and juridical persons.
The Customs and Excise organization comprised a headquarters office and 31 local offices, each of which handled the collection and administration of VAT, excise duties, and customs.
The administrations also had their own aims and strategies, coordinated by the Minister and the Directorates. Operational targets were developed independently and not routinely shared. Each institution had its own IT systems, policies, strategies, and own providers. Most IT systems for tax were developed and maintained by the Danish Government€™s IT Center, while Customs had its own internal IT development and operating facilities. Regionally and locally, some cooperation existed between Directorates, mainly concerning nuts-and-bolts operational matters.
The Danish Tax Directorate and the Customs and Excise Directorate merged in 1990. The merger took only six months to complete.
Currently fully integrated into one organization, they share central and regional offices under the Minister of Taxation, with one Permanent Secretary responsible for both tax and custom issues.
Headquarters is divided into five operational units, each covering both tax and customs, with four support units.
The country is divided into 29 Customs and Tax Regions, including 7 local Customs Centers plus one in the capital, Copenhagen. The regional offices contain the following departments:
- Administration (collection of customs, VAT, social insurance contributions, excise duties and different administrative tasks).
- Information (enterprise registration, data on citizens and enterprises, including data verification visits to enterprises).
- Legal (response to written communication, assessment of properties), and
- Audit (special audit tasks)
In addition, 12 regional units have a Customs Control Department and 8 a training center.
Each regional office is organized into various enterprise groups. Each group is responsible for collection tasks, including some types of audits. A Legal Department and an Audit Department supports them, while an Internal Service Department looks after administration, i.e., human resource management, office supplies, physical facilities, and accounting.
Local offices in particular border posts are integrated into regional units. Municipalities (local governments) are responsible for tasks such as changing tax cards during a given tax-year.
The new organization has one headquarters office and 31 regional offices. The internal structure of regional offices aimed at designing a work environment which enables staff from two different organizations to work together as quickly as possible. In addition, a self-standing regional institution was created to handle all regional issues within prescribed time limits and to facilitate central planning and strategy development.
The current internal organization was implemented in 1995 at a different pace in each regional office. This change was combined with reducing managerial levels from three to two, resulting in an overall reduction in the number of mangers of 38 percent (from 546 to 340). The main driver of structural change was increased efficiency obtained through better knowledge of each taxpaying enterprise. These changes also provided staff with opportunities to develop core competences.
Until 1991, Latvia was part of the USSR. The USSR Customs Code and the respective customs legal systems were in force, the main task of which was to ensure external trade monopoly. The main responsibility of local offices was to control licenses for import-export operations issued by the Chief Customs Department (part of the USSR External Trade People€™s Commissariat – later the Ministry), and to collect fines and custom service charges.
The formation of the administrative structure for Latvian Customs began after regaining independence, August 21, 1991. In 1993, Latvian Customs was legally and structurally empowered by the sovereign state of Latvia. Late in 1993, consideration was given to merging the Customs Department and the Finance Inspection Department into a unified revenue administration, now known as the State Revenue Service (SRS).
Even after the SRS was created, the agencies maintained separate functions for strategic and development planning, informatics, legal services, collection of arrears, and international affairs. In 1996, amendments to the State Revenue Service Law legislated the integration of functions common to both tax and customs administrations.
The SRS was organized into a two-tier structure: 26 local offices handled tax and customs administration in the provinces, seven offices in Riga dealt with tax matters only; and Riga Customs operated 30 border control posts. The organizational structure of local offices varied, including the integration of the local tax and customs administration. In addition, local office size differed, as did workload and the number of employees in any given local office.
The restructuring of the Latvian tax and customs operations has been an ongoing process since 1991. Today, the Latvian tax and customs administrations are integrated at headquarters but remain separate at regional and local levels.
A major factor in promoting continuous change has been the need to accommodate and modernize SRS to meet EU accession criteria.
SRS implements fiscal and customs policies, protects the state economic borders, and collects revenue to meet State budget estimates. It operates under the supervision of the Ministry of Finance.
It comprises three organizational levels: central, regional, and local. At the central level the National Customs Board (NCB) and the National Tax Board (NTB) are responsible for the functions of strategic planning, operational management, and methodology. Reporting to the Director of SRS are the Deputy Directors for the National Customs Board and the National Tax Board, plus the Deputy Director General, who is responsible for central departments covering support functions.
The SRS regional offices carry out the functions of tax or customs administration, i.e. planning, analysis, control and supervision. The Directors of the Regional offices are responsible for all activities and performance to the SRS Director General, and functionally responsible to NCB and NTB. The Deputy Directors for Customs and Tax, respectively, are responsible for regional performance. Support functions such as financial planning, personnel are decentralized to the regional level.
The establishment of a regional structure began in 1998. The modernization project aims at changing the organization into a three-tier structure which was implemented in 2003. All local offices are included in the regional structure.
The goal was to provide faster and more effective services for taxpayers and increase the level of taxpayer compliance through establishment of one institution responsible for all taxes, including those administered by customs. Also, the merger was expected to reduce administrative costs, especially for support functions, which can be shared at the regional as well as the central level.
Local offices included in the regional structure only have tax administration functions. The Directors of local offices are accountable to the Deputy Director for Taxes at the Regional Office. There are also Custom Control Offices operating at this level. Directors of these offices are directly responsible to the Deputy Director for Customs in regional offices.
With the formation of SRS regions, the taxpayers service idea changed. Service functions are now separated from control and audit, with special taxpayer’s service areas in tax offices, not in separate offices for different taxes, as before.
Effects of the merger
The Latvian merger can be considered a success in that a few years after the merger, the unified State Revenue Service met its main challenge of ensuring revenues for the state budget at decreasing costs per Lat collected. The merger, however, was only the first step in a series of organizational adjustments both centrally and regionally. Among these was a slight rollback of the integration between the National Tax Board and The National Customs Board. For instance, budgets were separated for cost transparency and to enable separate measurements of efficiency. The idea behind further development has not been closer integration but increased cooperation and improved communication, combined with decentralization and clarification of competencies.
The merger did encounter difficulties, especially in personnel issues. The SRS was organized with a strongly centralized top management, with accountabilities concentrated in very few persons. This design became an obstacle for the development of an overall organizational strategy. Latvia’s desire to join the European Union brought about strong focus and assistance from abroad to Customs, while the organizational design of Tax has not enjoyed the same attention. Recently an overall modernization effort has begun and included both tax and customs.
An optimization of the effectiveness of the revenue services does not necessarily require a large degree of integration between the operations of the tax and customs authorities. The case studies illustrate that full merger of the two institutions may in fact impede the goal of increasing effectiveness.
A joint focus on the operational aspects, a cross-institutional focus on target groups, and coordinated legislation and planning may serve the purpose, where as a merger of the physical organizations (shared personnel, organizational culture, infrastructure and IT systems) requires tremendous effort on behalf of the political and administrative leadership, staff, and the stakeholders (vested interests, clients) of the agency – an effort that may in the end be counterproductive.
For this reason, it is vital that governments are clear on the motive behind the integration process, and that strategies chosen for implementation are in harmony with the motive.