National Intelligence Division proposed to identify massive tax evasion cases

ISLAMABAD (August 27 2003) : Tax consultant Maxwell Stamps has proposed to the Central Board of Revenue (CBR) to establish a 'National Intelligence Division' (NID) for identifying cases of massive tax evasion and emerging threats to tax revenue.

The 'National Intelligence Division' and Customs Tax Fraud Department would work separately under the reform plan, as the former would identify cases while the latter would conduct investigation to combat institutionalised tax evasion.

Sources said here on Tuesday that NID would be empowered to collect information from various intelligence sources, including domestic/foreign informers, agencies, police, road/rail and air transportation companies.

However, the tax consultant has apprehended that the staff of NID would face serious difficulties in building good working relationship with the above-said government departments.

This new functional 'division' would work along with the Risk Management Unit (RMU) covering Customs, Excise, Export, Direct Taxes and Sales Tax, but NID would not be engaged in investigation.

The proposed Customs Tax Fraud Division would be given authority to investigate cases detected by NID.

The primary responsibility of RMU would be to analyse and report overall business environment and individual taxpayer performance.

It would ensure that statistically and analytically sound information is available for audit purposes.

The RMU arm of the NID will identify and analyse existing/emerging threats to tax revenue at the macro level and monitor the effectiveness of the CBR's compliance.

For instance, changes in overall economic conditions, or the trading performance of different industrial sectors may influence levels of taxpayer compliance.

By analysing trends in taxpayer behaviour, the CBR will have early notice of these potential risks and will devise programmes to effectively deal with them.

In the same manner, the CBR will closely monitor how effectively its responses manage the potential revenue losses.

This analysis is important to the CBR's understanding of the overall levels of taxpayer compliance and therefore the effectiveness of the self-assessment system on the one hand and compliance ie audit, on the other.

These analyses can be used in the proposed differentiation of audit case selections.

Under the proposal, parameters for case selection will be the responsibility of the audit function in headquarters and audit selection will be made on all levels with the national level selecting national audit cases based on a national risk analysis.

The central body will select cases and define the percentage of the control.

At the regional level, cases with significant risk will be selected, with any resources remaining being used by the local offices for local case selection.

The NID, besides using the above said information, will, through international liaison, look at international trends adding information to the pool for better analysis.

The focus of the NID at the macro level is to identify international and national organised fraud and smuggling trends and the weaknesses in the processes and systems being exploited.

At the tactical level, the NID will target serious fraud and criminal suspects and compile intelligence cases for investigation.

It will also identify and build intelligence cases on methods, geographical areas, commodities, services, methods of transport, and routes suspected of being used in the aiding and abetting the perpetration of tax and prohibition crime.

RMU will target audit and other compliance programmes towards high-risk, or potentially high-risk, taxpayers.

The planning of these programmes will be informed by intelligence about the performance and level of risk of individual taxpayers across all of their tax responsibilities (ie, their direct tax, sales tax and customs duty responsibilities).

RMU will continuously analyse individual taxpayer performance and levels of risk, and provide this information to those responsible for planning audit and compliance activities.

Computer-supported analytical techniques such as ratio analysis or profiling will be used.

For example, tax performance data will be compared for different businesses in the same sector, or for an individual business over a defined period of time, to find inconsistencies and trends.

Analysis will be possible by company size, legal form, and geographical location etc.

At a more advanced level, it will be possible to segregate the analysis into entities at different stages of development, such as “new business”, “expanding business”, “mature business”, and “business in recession” etc.

Another method of analysis the RMU will consider is to track the taxpayer's key business life events, such as business establishment, employing or firing staff, merging businesses, opening, closing and selling of a filial or branch.

Markets Segmentation Specialisation Programs will be another method of analysis.

This focuses on developing high quality intelligence for a particular market segment.

A market segment may be an industry, such as construction or entertainment, a service profession, such as legal services or real estate agents, or an issue like passive activity losses.

The functions described above will not need large numbers of staff.

They will, however, require capable intelligence staff and analysts, and they will require computer support (including access to shared databases) and tools for analysis and reporting.

The NID and RMU functions will be completely dependent upon continuous access to up-to-date data sharing is inculcated across the whole of the revenue service – which, on the basis of international experience will require concentrated effort over several years.

The NID and RMU functions will assume the responsibility of ensuring that the necessary databases are established, cross-tax accessibility provided, and the necessary taxpayer performance information is routinely input at source.

The NID and RMU will take responsibility for the development and maintenance of the cross tax database and the software to enable search and capture of cross-related data, tailored to the individual needs of each tax department.

On this side, NID and RMU will review current data collected by each tax department, recommend supplementary data requirements and define and specify software needs for both the development of the data base and the individual tax departments' individual interrogation requirements.

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