ISLAMABAD (March 25 2003) : As the International Monetary Fund (IMF) has recommended to the Central Board of Revenue (CBR) to expand the client base of Large Taxpayer Unit (LTU), Karachi, the tax authorities would include entire textile sector and wealthy high profile entrepreneurs whose tax affairs are closely linked to private companies falling within the scope of LTU.
At present, initial clientele of LTU, Karachi region has been confined to 294 persons ie 12 percent of all tax revenue collected in fiscal 2001-2002 and 2002-2003.
IMF has apprehended that the largest taxpaying units may have hired services of professional tax consultants, who apply complex methodology to minimise tax liabilities.
The LTU, Karachi, must engage large number of auditors to spend sufficient time for in-depth inquiry of appropriate cases.
The mission has pointed out that most of the LTU's clients have diverse and complex business procedures, often making difficult to detect tax non-compliance.
The sheer number of transactions undertaken by some of the largest taxpayers can increase the prospect of significant tax “errors”, either due to deliberate or careless actions.
The largest taxpayers are the most likely to employ professional tax advisers, and may use complex tax planning/avoidance arrangements (often involving linkages with offshore parties) in order to minimise tax liabilities.
The skills of tax audit staff and numbers available for intensively auditing these sort of taxpayers are often quite limited, which result in the use of fairly superficial examination techniques.
While the mission is not directly familiar with the general standard of skills of the CBR's tax audit officials, it understands that surveys of selected officials highlighted weaknesses in technical skills and general competence as fairly prevalent.
In these circumstances, it would be highly prudent to take special steps over the medium term to improve the knowledge and skills of LTU audit officials.
The audit staff should be exposed to the more in-depth investigative methods and procedures employed by modern tax administrations in developed countries (eg, techniques for the detection of profit-shifting arrangements and the examination of computer-based accounting systems).
The LTU should have a high concentration of audit officials, thus permitting sufficient time for in-depth inquiries in appropriate cases; and should adopt a mix of comprehensive (ie covering multiple issues and/or taxes) and single issue audit approaches to help achieve a high overall level of audit coverage, ideally of the order of 50 percent per annum.
A team approach should be employed for many of the more complex audits – “two (or more) heads are better than one”; industry specialisation is frequently adopted for LTU audit work, covering a country's main economic sectors, to build up tax specific industry expertise.
LTU management should take advantage of the proposed WB-funded technical assistance and other sources of technical assistance to pursue these approaches.
IMF further said that separate selection criteria have been used by income tax and sales tax officials for the initial identification of the LTU's clients. This has reportedly resulted in the situation where, for a small number of clients, only part of their affairs are being handled by the LTU.
This situation needs to be rectified to reflect key principles underpinning the LTU strategy ie, tight administration of all aspects of a taxpayer's affairs from a single site, to permit both a high level of service and close control.
To deal with the matter, a distinct set of criteria needs to be devised and applied across the population of taxpayers.
The mission sees no reason to specifically exclude the textile and cement sectors. If deemed appropriate, the LTU's supervision could also encompass wealthy/high profile entrepreneurs/directors whose tax affairs are closely linked to private companies within the LTU client base.
IMF added that there is room for further integration of work processes. A key strategy of the overall reform plan is that over time there should be a progressive integration of some work processes enabling staff to work on a variety of taxes.
This is not to say that there will not be a requirement for specialists as there will always be complex interpretative and audit work requiring tax specialists.
However, in other areas such as taxpayer facilitation, information processing, enforcement, and the less complex types of audits staff can be trained to deal with a variety of taxes, thus increasing their own skills and competence and value to the organisation, while also benefiting the CBR from the increased flexibility that integration brings.
For example, it is very common in many other countries to have sales tax auditors conduct income tax withholding inquiries in the field when doing sales tax audit work.
While the mission appreciates that it is still “early days” in the LTU's life, it considers that there should be some experimentation along these lines over the next 6-12 months.
<br> A common manager for each of these functions would be a good starting point in this direction, IMF added.