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Tax Administration

Tax Administration proper is the fourth theme. Beginning with the interaction between policy and administration, the knowledge entries here deal with organization, management, functions, and resources of tax administration.

Sub Themes:

1. Tax structure and administration
2. Tax administration organization
3. Tax administration management and functions
4. Tax administration functions performed externally
5. Tax administration procedures
6. Tax administration inputs
7. Management of change
8. Special problems of social security administration
9. Bank and Fund advice

1. Tax structure and administration

Different tax regimes require different types of administrative arrangements. Tax policy not only has an impact on the costs of administration, but also on the organization of the administration. On the other hand, the level of administrative capacity in the tax and customs administration should be a key factor to consider when designing a tax system. This point has been made very clear in Milka Casanegra’s famous statement that "Tax Administration is Tax Policy". This means in practice that Tax Administration involvement in policy making should be guaranteed. Also Simplification of tax legislation, which is an objective of tax reform in many OECD countries, may to a certain extent be driven by administrative considerations. For the administration of the overall tax system a decision has to be made as to which agency should be responsible for certain types of taxes. While the tax administration in any country will have the main responsibility for the administration and collection of taxes in general, different approaches might be chosen for the administration of VAT, which in a number of countries has been assigned to the customs organization, and the administration of local taxes, which often is done by local governments or as a shared responsibility between the central government tax administration and local governments. In federal countries, but also in China, we find a coexistence of national and subnational tax administrations. In a strongly developed federal structure, like in Germany, this can even mean that a federal tax administration barely exists, so that the tax system is administered by sub-national tax administrations. Finally, an important organizational issue that needs to be considered is the Fixing of collection targets for the tax administration.

Key Issues:

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2. Tax administration organization

An organizational issue that has received recent attention is the creation of semi-autonomous revenue administration Autonomy and revenue boards . These appear to have worked well been created – with mixed success -in several developed and developing countries to in increaseing administration efficiency and effectiveness. The same objective forms the background to efforts to improve the cooperation between tax and customs organizations, which can, like in Denmark and Canada, result in the complete merger of tax and customs. Even when the revenue administration is not set up as an autonomous agency its relationship to the Ministry of Finance needs to be determined. While in some countries it is part of the ministry, other countries prefer a separate structure for tax and customs administration. Another issue in some countries has been the creation of a separate Tax Police , partly following the example of the Guardia di Finanza in Italy. In the internal structure of the organization, an issue of key importance is the organizational model, which can be based on tax administration functions, on type of taxes, or on type of taxpayers. In practice, although all tax administrations choose one model as the basic model, to a certain extent mix different organizational approaches. Typical example of such a mix is the creation of a Large Taxpayer Unit in tax administrations organized along functional lines. The second principal issue is the regional structure of the organization, the determination of the number, role and responsibilities of regional and local offices, and their supervision through the headquarters of the organization. An issue which has created serious problems in a number of countries is the interference of local governments in the work of regional and local tax offices in cases where these offices are responsible for the collection of national and local taxes., though determinants of their success – and their failure in some cases – have not been systematically explored. Finally, Internal Accounting conventions for tax administration, though a part of the broader area of government accounting, are important as they affect the accuracy with which administrative costs are determined and allocated to different administrative units, and also for measured effectiveness, for example, through conventions for recognizing tax collection arrears.

Key Issues:

The Role of Organizational Design in the Revenue Strategies of Developing Countries: Benchmarking with VAT Performance William McCarten, March 2005

Autonomy and revenue boards

Designing Performance: The Semi-Autonomous Revenue Authority Model in Africa and Latin America." Robert Taliercio, Jr. East Asia PREM)

Integration of tax and customs functions

Tax Administration Reorganization

  • Seth E. Terkper, “Tax Reform in Sub-Saharan Africa, Part One: Tax Administration Reorganization.” Tax Notes International, 1 December 2003.


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3. Tax administration management and functions

The main functions of a tax administration, in dealing with taxpayers, aside from actual tax collection or sanctioning non-compliance, largely involve gathering or processing information. The first information related function is Identification of taxpayers followed by their Registration as taxpayers and, for most major taxes,the assignment of a assigning taxpayer identification numbers. Other information functions include, at the preliminary stage collection of information from third party sources including, importantly, tax withholders, accessing asset ownership information (such as cadastral records), engaging in taxpayer education and providing taxpayer services to keep their compliance burden low. Verification of the correctness of tax payments starts with return Filing control followed by Assessment of tax liability of the taxpayer. Among the major types of assessment activities are Valuation and Tax Audit the latter activity typically being the most important function of tax administrations from the perspective of resource use. To establish tax evasion or to facilitate identification of non-filers Investigation and inspection are also necessary. If prima facie non-compliance is established, then Penalties and prosecution of tax offenders may be required. Actual Tax collection is divided into two functions, mechanical collection of taxes from those who pay voluntarily on time and collection of delinquent taxes. In some countries a substantial part of the capacity of tax administrations is absorbed by the execution of non-tax related functions, such as the collection of user charges and fees for other government agencies. Those kinds of responsibilities should be critically reviewed to allow the tax administration to concentrate on its main function. In several countries, Amnesties are declared for different reasons. Amnesties, of course, must be administered and not just enacted. The final function of tax administrations covered here, again largely information related and becoming increasingly important, is International tax cooperation with other administrations.

Key Issues:

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4. Tax administration functions performed externally

Francisco Gil Diaz, applying the subsidiarity principle to tax administration, stated that private sector entities should be delegated public administration tasks which they are well suited to perform. In general, global economic efficiency would suggest that particular activities should be outsourced by a tax administration if these activities can be performed more effectively or at lower social cost by some external agency. Considering Tax farming and out-sourcing of functions, the former represents the extreme case of complete privatization of tax administration, a situation not unknown historically and even for some taxes at present. However, in general economic theory suggests, as Slemrod and Yitzhaki (1996) point out, that tax farmers will, from the perspective of society, overemploy resources for tax administration since they will not take into account costs borne by other agents such as taxpayers. In practice, this can take the form of coercion and harassment if sufficient powers are available to the tax farmer. However, various specific functions should and have been outsourced by tax administrations. The most pervasive phenomenon is of a tax administration imposing compliance requirements on taxpayers and third parties to reduce administrative costs. The extent to which this is done varies considerably across taxes and countries. The most important example of this in practice is related to official versus self-assessment of taxes. Likewise, the most wide spread examples of privatization are tax withholding and Bank collection of taxes (other than delinquent taxes) for the treasury. An important class of functions performed, in many countries, by government agencies other than the tax administration are Police functions and Prosecution activity. The use of Citizens groups to help curb abuse of power or corruption by tax administrators or the use of Ombudsmen as independent channels to redress taxpayer grievances are other important areas. While audits and certification of accounts by private sector auditors is required for business firms in most countries, the degree to which this function can be delegated can vary and Mexico is among the countries that have the greatest degree of delegation with private auditors and their clients being jointly liable for the accuracy of several aspects of the audited accounts. The recognized and regulated use of Tax advisors is another important example of outsourcing. In customs administration, a prominent example of outsourcing is the use of private Pre-shipment Inspection firms.

Key Issues:
  • The subsidiarity principle
  • Tax farming and out-sourcing of functions
  • Imposing compliance requirements to reduce administrative burdens
  • Bank collection
  • Police functions
  • Prosecution activity
  • Citizens groups
  • Ombudsmen
  • Audits and certification
  • Tax preparers
  • Pre-shipment Inspection
  • Tax forms
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5. Tax administration Procedures

The preparation of a Strategic Plan for the operation and further development of a tax administration is an important document to clarify the tasks and objectives of the organization. The strategic plan should also provide information on the Vision and Mission of the administration. Clear and transparent formal procedures are important to implement the plan. They are also crucial for equitable administration and an important way of restricting corruption. Streamlining and simplification of procedures is part of tax administration reform in many developing and developed countries to reduce compliance costs of taxpayers and administration costs. Overcomplicated procedures may induce the emergence of Informal Procedures, which are agreed upon by the taxpayer and tax inspector without a legal basis. A strong Internal Audit system is necessary to avoid such practices. A Code of Conduct can be a useful tool to set out the behavior and standards expected of employees. Apart from administrative procedures defining the work processes of the tax administration, special attention should be given to Taxpayer grievance and appeals procedures clarifying taxpayers’ rights in the taxation process. Another area of specific importance is Information System Related Procedures.

Key Issues:
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6. Tax administration inputs

That The tax administration budget is a potentially important tool to promote tax administration efficiency and effectiveness has been argued in theory and also found in practice, though the evidence is not conclusive. Besides budget determination rules, there also the important issue of the appropriate size of the tax administration, a question on which theoretical prescriptions are also available. Rules and procedures for determining and pricing the nature and quantity of Physical infrastructure for tax administrations have, as yet, received limited attention except in the area of procurement of capital equipment and, to some extent, outsourcing of functions.,Issues covered in the entry on Human Resource Management are recruitment procedures, functional distribution of staff, job descriptions, performance evaluations and promotions. An important question is to what extent tax and customs administrations should be exempted from general civil service rules. This leads to the issue of autonomy and revenue boards. Special attention is given to the design of Training for tax and customs officials; there is a variety of options here, including setting up of a special tax and customs training center, use of general public or private training institutions, and training on the job. The entry on Wages and incentives deals with the important question of using compensation and other incentives to motivate tax administrators to act in accordance with the interests of the government. The area of Information Technology has emerged as the most important aspect of tax and customs administration modernization in the past two decades and a variety of resources are available under this entry, from readings, to details of Bank projects, to information on off-the-shelf automation products and consultancy available from different sources.

Key Issues:
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7. Management of change

The Human Resources and Staff Development Dimension

Change management has become increasingly important in private enterprise reforms, as companies of all sizes strive to become more agile and to anticipate changing markets and other critical externalities that drive change. In many countries, both developed and developing, public sector agencies have been turning to private sector experience and practices for ways to manage large-scale change (Ingstrup and Crookall 1999).  For this reason, this discussion focuses on recent literature about change management practices in the private sector, where human resources and staff development play vital roles in partnership with executive management in the design and development of deep, transforming organizational change. 


In the ensuing discussion human resources management (HRM) and associated staff development in tax administration modernization efforts is the focus. The approach taken is meant to provide a different frame of reference for revenue administration reforms. The question explored is whether private sector model can be emulated by tax administrations to meet their reform goals with regard to formal and informal organizational patterns typical of these agencies.

Most tax reform projects are rooted in transactional changes. These are incremental, generally slow-paced changes targeted on specific technical and administrative areas.  Transformational change occurs when there is widespread and rapid change.  In the private sector, transformational change usually involves the use of HRM and intensified staff development as change agents by enterprise managers at all levels. Most revenue reforms combine both approaches. Outcomes typically are expressed as transformational, i.e., comprehensive reorganization, culture change, employee replacement programs, and new competitive compensation systems; however, a transactional strategy is generally employed: quick start-up aimed at a early “wins,” but then slowing to a more incremental, and mostly technical (systems) modality to establish newly functional organizations.     

Many of the change strategies used by the private sector are being used in revenue administration modernization efforts, as in other public sector reforms; however, the transformational characteristics of change management as practiced by the private sector are seldom encountered.  The Note is premised on the assumption that by drawing on private sector change models and experience a better congruence between transactional and transformation change elements can be obtained. This should lead to better sustainability of reform investments and especially more empirically based measurements of financial and human capital factors. It is important to note that private sector change initiatives are not piecemeal but seek to transform the organization, with the CEO working closely with the director of human resources to develop and implement change management policies and practices.

To explore the possibility of using private sector experience in tax administration reforms, the Note: (i) overviews recent theoretical and practical efforts to sharpen the focus of revenue administrations; (ii) external factors that exert pressure for large-scale reforms in enterprise and tax sectors (components of the latter oriented toward transactional outcomes); (iii) overcoming constraints in HRM and staff development in leading the management of change; and (iv) the role of compensation, culture, and leadership in shaping tax reforms.  To illustrate the point, the Note applies private sector change management criteria to a recent tax reform in Hungary, rating the adequacy of transformational change management applications in the reform and drawing implications for using a change management methodology in revenue administration reforms.

Change Management Considerations

  1. More emphasis placed on changing revenue administration management culture, focusing on agency vision, mission, and objectives, and building incentives for performance and pay based on agency–wide understanding and participation in goal setting and mutually agreed and annually updated performance objectives and standards. 

  2. Staff development as the handmaiden of the HRM-management nexus in transforming agency ethos; however, without an adequate expression of vision, mission, and strategy derived from broad consensus about the reasons and means to change, the effect of even comprehensive reforms will be quickly subsumed by the previous organizational culture and inefficiencies, and lack of accountability—often accompanied by corrupt practices.

  3. New organizational approaches able to meet routine business needs and at the same time tailor innovative business strategies to meet new external challenges, such as e-commerce. 

  4. The development of managers and human resource professionals in tax administrations as a priority in an effort to motivate staff at all levels to participate in shaping and managing change in an increasingly decentralized, local, knowledge-based network.  


Sharpening the Focus of Reforms

In 1992, the International Monetary Fund published a compendium on tax administration reforms in developing countries, including an essay on organizational structure and human resource issues based on the Argentina case portrayed as generally applicable to other revenue administrations in developing countries (Schlemenson in Bird and Casanegra (eds.), 1992, pp. 343-62).  Schlemenson comments that though much literature is available on these topics and their interrelationship, only rarely has any of it been applied to the field of tax administration.    He suggests, inter alia, that compensation, the work itself, and the opportunities it affords for the exercise of individual judgment, and development, advancement and career opportunities as the three factors that affect worker satisfaction and thus by implication performance. All are generic to many organizational reforms regardless of sector.

The World Bank retrospectively evaluated its experience in tax reform over the decade of the 1990s (Barbone et al., 1999).  A framework was developed for diagnosing the comprehensiveness of tax reforms with respect to tax policy, accountability, and service delivery using a series of  performance indicators.  Among the lessons learned using this framework were the need to: identify institutional concerns; base project design on the strategic vision of the administration; gauge implementation capacity; and develop appropriate performance indicators based on “project base values.”

On a related theme, Das Gupta et al. (October 1999), looked at motive and opportunity for corruption in tax administrations, a major preoccupation worldwide, including the development to both positive and negative incentives to prevent it. Mission and vision statements were cited as addressing motive, with positive incentives including agency autonomy, performance-linked budgets and compensation, intra-and inter-agency competition, competitive base pay, and transparent and non-arbitrary reward procedures. To address opportunity, under organization and management, a functional organization, transparent human resource procedures, computerization and automation, and privatization of selected functions, along with internal an external checks, including effective management supervision procedures, citizen review and oversight, and internal anti-corruption units were recommended.  

Subsequently, Gill (2000) developed a comprehensive diagnostic framework for analyzing revenue administrations, incorporating tax policy, accountability, and service delivery, in an effort to support diagnostic work in the tax sector and to assist clients in developing a more systematic approach to understanding their own reform context and requirements. The diagnostic framework covers formal and informal organizational arrangements (culture), as well as characteristics of staff and their relationship to the organization, e.g., qualifications, skills, and personal goals, and incentives of managers and staff relative to organizational requirements and expectations—generic organizational, HR, and, by extension, training factors.        

Premises for Change and What to Do

Generally deep organizational reform in the private sector occurs because something is not happening that threatens the viability of the enterprise. Moreover, the pressure for the transformation generally originates outside the company.  The same is true for tax reforms, i.e., something big is missing or needs to be done: for example, collections are miniscule as a percentage of GDP and have been that way for years; there is no consumption tax; there is no income tax and/or no taxpayer culture; large taxpayers are evading on a grand scale; revenue collections are down and there is a deepening fiscal crisis; and corruption appears in all parts and levels of the agency.  What should be done?

Increasingly tax administrations respond by undertaking major structural and functional changes, creating a radically different organization. Often this requires merging taxes and customs (and/or social tax collection) during the transition. New, specially staffed and trained units, e.g., large (or special) taxpayer units, and the introduction of a value-added tax (VAT) are required, which become a major feature or centerpiece of the reform because of the anticipated impact on quickly increasing revenues (“profits”) to the State to meet public expenditure programming goals of line ministries (meeting social demands for provision of public services).  Often employee retrenchment/replacement and professional upgrading programs are implemented, as well as technology improvements, especially new hardware, software, and telecommunications networks.  All this needs to be steered by effective leadership and management, and particularly human resource management in league with what often becomes a massive (but frequently short-term) training and retraining program. 

Tax administration reforms have many characteristics in common with private enterprise reforms; namely: external pressure (social-political and fiscal) galvanizing the need to change (transform) the agency; employment rationalization/replacement programs; agency mergers; creation of new organizational units; decentralization of operations; development and deployment of new software and hardware; use of advanced technology as a management tool and for training delivery; the need to manage a system-wide transition; better client service; and changing the organizational culture, often to combat corruption. These elements frequently are incorporated in tax project designs used in developing countries in the tax sector, typified by:

  • Modernizing the business side of tax administration along functional lines, relying heavily on new information and management systems technologies.
  • Reorganizing the agency to accommodate the new functions. 
  • Combating informality and corruption by hiring new staff, training them, and creating incentives for better performance. 
  • Focusing reforms on specific segments of the taxpayer population (expanding the client base), often by creating of special units (especially large taxpayers);
  • Decentralizing operations, supported by increasingly sophisticated IT applications, sometimes including personnel and training functions as well; and
  • Developing a “client service” orientation to taxpayers.

Much of this involves direct HRM and participation. Recent principles and practices used by enterprises to manage change integrate HRM and staff development strategies. These strategies may point the way to deeper and more sustainable reforms in tax administration modernization efforts. The major issue revolves around how to build capacity in HRM departments limited to vision and leadership to meet explicit agency objectives.

Overcoming Constraints to HRD and Staff Development

Several challenges confront tax administrations in the HRM and staff development area: (i) scarcity of well-trained professionals; (ii) limited scope of work; and (iii) weak link of staff development to strategic (and often even routine) organizational objectives. 

Frequently, the pool of professionally trained human resource management specialists in revenue administrations is shallow or does not exist. One reason is limited opportunities for professional specialization at either the undergraduate or graduate levels. HR directors occasionally receive undergraduate training in industrial or general psychology. In developing countries, graduate and continuing professional education is only rarely encountered explicitly in HRM; moreover, public administration as a field of study is not widely available either, which contributes to the generally weak management in the public in general.  On the plus side, some countries have branches of internationally recognized HRD associations and a growing awareness of international trends, but this is not the rule.

A related capacity constraint is the use of human resource departments as merely record-keepers, with information systems limited to payroll, and little strategic use of the personnel or financial data captured.  The concept of “management” of human resources is generally not understood sufficiently for the department to serve as change agent during full-scale reforms—even though there are many human resources issues to contend with.  These include: hiring, firing, transfers, wage-setting, coordinating emergent training programs, and developing new position descriptions and career paths. This is just beginning to change under the pressure of comprehensive (tax) reforms.

In tax modernization efforts in developing countries, the staff development (training)  system, if it exists in the tax administration, is frequently poorly organized, supply driven, not oriented toward the specific professional and skill upgrading for the agency, thus lack a focus and capacity to meet the change objectives of the agency.   Typically, there is little management or supervisory input to shape capacity development.  In some countries the educational system provides an adequate supply of accountants, auditors, economists and lawyers from which the tax administration can draw both before, during, and after reform efforts--depending on the size and strength of the private sector and its corresponding human capital demands. But in others, well-trained professionals are in short supply and the private sector is quick to absorb them.

In contrast, for the private sector much of the management of change occurs through the interaction and HRM leadership with executive management, ensuring that all parts of the organization are involved in and understand the change process being undertaken and the reasons for it.  Training capacity generally exists, but needs to be supplemented to meet explicit and commonly agreed organizational goals and objectives looking to the longer term. Deep organizational change is characterized by efforts to develop a shared corporate vision, build client confidence, and foster effective management of change and encourage innovation as integral organizational dimensions. Generally, the professional capacity exists in potential but needs to be harnessed to an organizational objective, vision, and strategy.

Within the private sector, human resource departments continue to evolve within contemporary organizations.  Recent stages in this process have been described by Ulrich (1997, pp. 23-27):  HR professionals shifted their focus from: operations to strategic; qualitative to quantitative; policing to partnering; short-term to long-term; administrative to consultative; functionally oriented to business oriented; internally focused to externally and customer-focused; reactive to proactive; and activity focused to solutions focused. Now this relational change has been overtaken by a new perception of the multiple roles and integrative responsibilities of the HR professional.  Ulrich divides the roles (paired with the outcome), into four: management of strategic resources (executing strategy); management of firm infrastructure (building an efficient infrastructure); management of employee “contribution,” (increasing employee commitment and capability); and management of transformation and change (creating a renewed organization). The corresponding activities are: aligning HR and business strategy—organizational diagnosis; reengineering organizational processes—shared services; listening and responding to employees—providing resources to employees; and managing transformation and change—ensuring capacity for change.

Not surprisingly, the internet is also changing the way HR is managed by creating web-based service centers that include benefits, recruiting and staffing, performance management, compensation planning, employee development, and knowledge management. As an example, in the case of performance management, company intranets can be used for on-line performance appraisals; creation of self-paced learning programs to help managers understand performance management information systems; and creation of employee scorecards against agreed goals and objectives that can provide indications of overall agency performance (Walker (ed.), 2001, pp. 81).

From another angle executives and HRM professionals need to measure the return on investment in human capital.  Jac Fitz-enz (2000, pp. 58-9) suggests that human capital should be thought of as an “investment” rather than a “cost.”  Further, measuring effectiveness of human capital by revenue per employee  is “simplistic” and “out-of-date.” He also recommends developing a financial and human capital scorecard template to model a set of financial and human metrics to provide management with targets against which to judge functional unit performance. Rationalizing how much should be invested in staff development however is problematic. He suggests “developmental” expenditures should be defined by the organization and then subjected to measurements based on careful monitoring of impact criteria established by enterprise executives (Ibid., p.44). 

The question is, To what extent can these private sector ideas about tapping HRM and staff development concepts be integrated into tax reform efforts, and what role can HRM and training play in this process, given the inherent capacity differences and perceived incompatibilities?  Three areas are central to HRM playing a larger role in change management in tax administrations: compensation, culture change, and managerial leadership.

Compensation, Culture, and Leadership Change 

Compensation. Because the private sector is so often held up as the reference point for public sector reforms, the differences that affect public sector possibilities for change must be carefully considered when trying to emulate private sector examples. Perhaps the most important--with the exception of leadership development--is the inability to establish wages fully competitive with the private sector and performance incentives linked to tangible and non-tangible rewards to attract and retain top-tier (as well as competent) staff. The wage factor also limits the effectiveness of executive management and higher level training, given the likelihood of high turnover and loss of key management, professional, and technical personnel to the private sector.

Some of the problems induced by the traditional public sector pay model include:  reinforcement of the job hierarchy at a time when organizations are trying to encourage teamwork; stresses salary grade changes and promotions as the basis for salary increases instead of focusing on developing and enhancing job competence;  "game playing" and dishonesty as the basis for justifying a higher salary grade; this makes organizational change and downsizing more difficult, as all job changes must be reevaluated based on traditional compensation programs; promotes rigid and inflexible rules governing compensation; creates a sense of entitlement if pay is increased across the board; perpetuates bureaucratic management; establishes implicit limits on what employees are willing to do, as their pay is based on duties listed in job descriptions; and leads to tension between line managers and human resources staff who are required to defend the program's principles and police the decision process  (Risher 1999, pp. 323-43). 

In traditional pay systems in both public and private sectors compensation is based on seniority and promotion and pay increases are not strongly related to performance. In some private sector pay schemes there may be agreement between what employee and employer in elements that go into a pay package, as well as differentials based on what the staff member expects to achieve in the coming year.  Another approach is to highly reward the top 20% of staff beyond market level; meet market level with the middle 60% (sometimes split 30/30); pay the bottom 20% below market to encourage turnover (Tropman 2001, p. 48, Table 2.2).  Whether this could be suitable for use on revenue administration reforms remains to be seen; however, it does reward the key and critical positions disproportionately to combat the turnover issue that plagues revenue agencies in developing countries.

It must be noted that the attraction of relatively stable employment in public sector agencies, along with numerous bonuses, training opportunities, housing and cars for some categories of staff, provide important incentives that must be factored into the equation  when determining private sector wage comparators against both tangible and intangible benefits of work, in this case in revenue administrations. Such incentives may have little to do with encouraging better performance.  In one country, highly trained tax auditors, who had left their positions for better paying jobs in the private sector, sought to return to their old job during an unexpected economic downturn, reportedly for the stability of a civil service career, despite the lower salaries.

Heneman et al. (p. 201) believe a strategic compensation system focuses not on individuals but on the performance of the entire organization. In this regard, not only is compensation misunderstood, frequently it also is misapplied…and [often] completely out of sync with the rest of  the organization's values and processes. The reason is clear: Although organizations have undergone dramatic changes, the strategies for assigning, administering, and implementing compensation have until very recently been frozen in time. As a result, compensation is no longer aligned with the organization's evolving organizational structure, work cultures, values and business strategies. Flannery et al. (2001, p. 4).

Culture. Other chief impediments to reform include antiquated civil service laws, regulations, and national labor codes, unions (who often perceive any change as a threat to the status quo, and are reluctant to trust managerial overtures for their involvement in the change process.), and national constitutions that still retain anachronistic protection of workers rights that pertain to a bygone era.  There is also little scope (or tolerance) for innovation at any level because of political pressure combined with an often intractable organizational culture (deeply rooted informalization of organizational norms frequently leading to deviant behavior, i.e., corruption).  Collectively these factors serve to inhibit possibilities of deep institutional reform along the lines of private sector initiatives.

To the extent that this does not happen, organizations will tend to remain highly centralized, management will continue to be based on bureaucratic formalities, and employees passive bystanders, as the reform process is contoured from the top down.  If this occurs, the sustainability of the “reform” may be imperiled. 

Mills (2001, p. 111) notes that organizations can modify behaviors and norms by establishing recruiting parameters, including “realistic job previewing” to cull those candidates who are not sufficiently flexible to exchange ideas openly (a characteristic valued in a “lattice” oriented organization described below); by providing visibility to role models from all levels of staff, including managers, who personify organizational “values”; and it can be done through structured training.   

Management.   Private sector use of HRM (including corporate training systems) is increasingly directed to deployment as a central change agent in enterprise transformations.  An essential ingredient of this is management leadership involving the head of HRM as well as top-tier mangers who are capable of coaching, guiding, inspiring, and leading the change (modernization) effort.  This invariably requires:  (i) innovative management approaches and (ii) sharing and delegating decision-making authority away from headquarters—two of the biggest challenges facing any comprehensive public sector reform.  This is especially true in developing countries, with their highly centralized bureaucracies, patronage systems, rigid pay structures, lack of performance incentive structures, and built-in constituency to resist any but cosmetic changes (characterized by new organizational structure, new managers, and spot training generally to meet short-term (immediate) goals of the reform. In this regard, McKinsey & Company uses seven elements to define organizational architecture: strategy, structure, systems, staff, style, skills, and shared values. The ability to design, integrate, and operate these systems can be considered the essence of effective organizations. Ulrich 1997, p. 67).  Building a constituency for change is one of the main challenges of mangers and HRM professionals.

As noted, the private sector confronts constituency challenges similar to those of the public sector, especially when attempting to shift the locus of authority from a central to a decentralized, “shared” decision-making” model; i.e., corporate headquarters is sometimes reluctant to release control over many aspects of its business to subsidiaries.  On the other hand, newly transformed businesses and industries are quick to deploy advanced technologies to the fullest, and much more geared to change internal dimensions of the organization in the interest of performance enhancement and competitiveness, drawing on team-based synergies (often across departmental lines) from a network of decentralized offices (from regional hubs to strategically located offices) to develop new products, and evolve more innovative management leadership approaches and marketing strategies to reach their client base. The incentive to maintain profits and shareholder confidence is paramount, but is an outcome and not the prime mover of change.  In the public sector the incentive should be to engender more trust by the general public in the stewardship and integrity of the tax administration. In addition, the concept of the tax administration as a public “asset,” with careful accounting for financial and human capital, also lead to a more empirical framework for public accountability, just as CEO is accountable to shareholders for balance sheets (see Sanchez et al. 1993).

The Nature of Transformational Change 

A distinction is drawn between change premised on a transactional (generic public sector) model (step-by-step, incremental and evolutionary) and a transformational (recent private sector) model (sweeping or “revolutionary,” i.e., changing the basic working arrangements and premises of the organization (often away from a functional structure to encourage rapid adaptability to changing circumstances, e.g., developing a response to e-commerce taxation), changing the management culture mold (non-hierarchical), and deliberately addressing corporate culture change. 

Changing an organizational structure generally follows a transactional model based on incremental change over time to increase efficiency. This includes introducing a functional organization based on new work flows affecting registration; declaration processing, collection, arrears management; audit and investigation; adjudication and appeals; and taxpayer services. In addition, new position descriptions are required and new technology is introduced, often leading to new organizational permutations, including more decentralization and more responsibility at the local level.  Although implementation may be lengthy, this seems relatively straightforward in outline, although not always easily accomplished (as many tax reforms can attest).  It takes time to initiate such reforms and usually years to consolidate.

Transforming organizations is a different challenge and incorporates a unique set of change management principles.  The literature on private sector approaches to transforming their enterprises is quite voluminous, and centers on some basic notions that must be integrated into change efforts. Some of the most recent and compelling organizational reforms in large, decentralized organizations (i.e., multi-regional—both within country and international) have used similar strategies to achieve their internally and mutually agreed goals and are delineated below as referents for "qualitatively valuing" tax reforms that will be discussed below.

Private sector businesses and industries recently have:

  • Sought the commitment of all organizational levels to a shared vision, values, and objectives as constituting the required platform for lasting change. 
  • Directly involved and drawn on the leadership of the central human resources department working jointly with top management in developing ever-widening circles of consensus throughout the organization about any changes foreseen.
  • Concentrated on changing management styles toward more democratic decision-making based on interaction between and among organizational levels moving away from centralized management.
  • Involved all staff in deciding how the functional and operational decentralization will take place; generally, through a reduction (sometimes by as much as two-thirds) in the central headquarters staff.  Other staff displacements in regional and local offices are reconfigured as staffing requirements change, but all affected units have a voice in how change is managed and how it affects them.
  • Agreed performance benchmarks jointly between regional offices and headquarters based on analysis at the local level, which becomes fully accountable for achieving the agreed targets. 
  • Associated the word “empowerment” with successful decentralization, meaning that local operational decision-making is encouraged at all organizational levels to the level of the individual, as a strategy to achieve better client service and promote more effective business orientation. 
  • Concentrated on human resource development and engaged in continuous training, especially directed at all levels of management/leadership training, which is both consistent and adapted to fit the specific needs of the increasingly decentralized organizational environment in the interest of better product development and client service.
  • Implemented new pay structures, often using a menu of performance incentives linked to organizational objectives, based on individualizing pay alternatives and pay classification systems in the corporate interest.  

Without these change ingredients, effective cultural and organizational change have been found to be seriously compromised in private sector enterprise reforms—which may be especially relevant in “enterprises” that serve both public and private clients.  These changes often originate and are implemented from within the enterprise itself but under external pressures for change.

Such pressures have also led to the use of a “networked lattice” management model in the progression from a pyramidal functional hierarchy to a matrix divisional hierarchy.  The functional hierarchy is defined as an executive group, middle managers, and works groups; the divisional hierarchy is decentralized in nature, has a large core services orientation, with the several management layers over the work groups, with the focus of management on cooperation and negotiation, as opposed to coordination and control.  The lattice network is intended to ensure flexibility, simplicity and lower costs.  It features direct reporting relationships without close supervision, semi-autonomous teams, and self-leading individuals. Issues are expected to be resolved by those closest to them without resorting to executive (or central) management.  As for goal-setting, in the pyramidal structure managers set goals, while in the matrix model they are established above the functional/project interface.  In the networked lattice organization, goals are largely locally established within a framework prescribed by higher executives. The success of the lattice is determined not by structure but by business process management (see Mills 2001, pp. 86-103).  It would appear that elements of pyramidal, matrix, and lattice could  provide insights about better organizational arrangements to meet tax project management and HRM objectives.           

It needs to be underscored again that to successfully carry out such reforms, the private sector has relied heavily on the support of HRM and carefully focused training, especially for managers, whose functions begin to change immediately in parallel with operational changes.

Applying Change Management Concepts 

The recent and successful Hungarian tax administration reform is used as an example to illustrate the application of private sector change management concepts to revenue administrative reforms because of its comprehensiveness and the challenges it faced in overcoming an array of organizational and systems development challenges.

Hungary’s tax administration confronted the need for deep organizational reform, including decentralization, computerization, reorganization along functional lines, human resource upgrading and/or replacement, and the requisite training to implement an increasingly complex reform agenda. The political environment was relatively stable when the reform was initiated, with a social and political consensus about its necessity. The country was in the process of opening its economy and developing a private-sector friendly tax regime. Political changes during the reforms led to turnover at critical project stages among agency presidents and other managers.

The reform took shape in a new organization as an essentially rapid IT deployment project to manage an immense increase in the number of taxpayers. Later it  began to acquire characteristics of a broad and deep institutional reform.  Elements associated with private sector change management were present but applied intermittently.

  • commitment of all organizational levels to a shared vision, values, and objectives constitute the required platform for lasting change. 

There was limited involvement of staff in the development of vision, mission, and goal statements. This may reflect the public sector nature of the agency, as well as its specific mission to collect revenues for use by the State.  It also suggests the “top-down” approach to all initiatives.  As this is a transition country, it might be expected that general statements made on behalf of the agency would initially involve only a small circle of change agents, i.e., top managers.  During comprehensive tax reforms such statements may well incorporate “new” notions, i.e., striving for an equitable and fair tax administration, and occasionally introducing the idea of stewardship of public resources, along with codes of conduct and ethics and exhortations about maintaining high performance standards and the image of the agency before the public. The possibility of internal initiation of change is a vital part of knowledge assimilation that could facilitate meeting the articulated vision, mission, and goals of the agency; hence, in the case of Hungary, the agency will have rely on the interaction between local tax offices and the center, which was effective in the piloting of various reform initiatives.     

  • concentration on changing management styles
In the area of organizational culture and management style, Hungary has the possibility of moving away from a command-and-control management style and thus influencing change in the organizational culture.  Managers, during the reform process, received training intended to open lines of communications between and among management levels, and to facilitate decision-making between headquarters and the increasingly decentralized system. The sustainability of cultural changes may be compromised however when leadership changes at the top.   
  • Inclusive general discussion of how the functional and operational decentralization will take place

In Hungary, the functional organization is in place and the agency is fully decentralized.  APEH eventually had to merge tax and social collection functions.  This caused administrative, managerial, training, and integration challenges that temporarily displaced ongoing reform efforts.  Field office decentralization successfully occurred in Hungary. A change management unit was installed to monitor IT systems rollout. On the other hand, there was no overall change management capacity in the agency itself—though the Human Resources and Training Department was linked closely with top management at one stage of the reform to work on internal communications between and among managers at all levels through specially organized training events involving external consultants/facilitators.      

  • Local operational decision-making is encouraged at all organizational levels and to the level of the individual (i.e., “empowerment”), as a part of better client and business orientation. 

To build a constituency for change the concept of empowerment must be invoked.  Building a constituency for change is one of the most important dimensions of sustaining and perpetuating an environment able to change to meet new circumstances and able to improve performance based on constantly evolving benchmarks to reflect new dimensions of performance that appear as organizations mature. Empowerment of local offices—meaning the full accountability over local operations--occurred in Hungary.  As noted, the organizational culture was based on top-down management and rigid bureaucratic structures. This affected the ways in which the transition was managed and constituencies developed or bypassed.  It also affected the way computers and software development and deployment took place--initially on an emergency basis to handle a massive number of new taxpayers and to address the large taxpayer issue. There was  strong commitment of government, agency executives, and department directors, which eventually encompassed local offices through HR and training and IT rollout.  But the internal constituency began to be affected by turnover of CEOs. Fortunately, at critical junctures executive leadership was provided to maintain the pace and process of change, including and notably in decentralization of HRM and training functions.

At the operational level, internal constituency was built through training provided by external consultants, including participation of the existing IT unit in software development initially based on existing platforms.  There was also a sense of urgency and empowerment instilled by internal participation in software development with external technical assistance.  Later, new auditing software began to be developed by a team of consultants associated with the project but physically housed outside the agency. The rationale was twofold: there was a sense of urgency to develop and pilot the new software, and the existing unit in the agency was judged to lack the capacity to keep up with the rapid pace of technical developments.  In the end, the internal unit developed its own auditing software running on the old platform, while a new platform was purchased by the agency for eventual deployment. Eventually the new platform was installed and new software adapted for use, but at the cost the internal constituency for change.  Generally, continuous involvement of  managers at all levels and in all locations over time will be needed to fully realize the effects of even well-designed and managed organizational change.

  • developing human resources, and continuous training, which is both uniform and adapted to fit the specific needs of the decentralized organizational environment in the interest of better product development and client service.
Human resource management and training played a major role in moving the organizational change process forward.  The HRM and training director oversaw the revision of the HR policy and regulations manual as well as its implementation in all decentralized offices of the tax administration, making site visits and personally delivering training to local HR officers.  Training was both contracted out (basic computer literacy and office software packages) and developed in-house (with the use of external consultants in curricula content development and teaching delivery modalities).  All local offices set up training rooms and equipped them with computers, and sent trainers to headquarters for training-of-trainers instruction including techniques for delivering the training modules (a combination of manuals and on-line instruction). 

Assessing the Adequacy of Change Management Applications

The table below incorporates the variables found to affect the success of organizational change in the private sector and relates them to the Hungarian tax administration to develop benchmarks to assess the comprehensiveness and change management characteristics of the reforms. In the process, areas were identified that could complicate the potential for change in organizational culture and management style--especially the change management attributes needed to implement and ultimately sustain the reforms. 

If an attribute of private sector change was applied (yes or no), then a quality value was assigned ranging from 1 to 5, 5 signifying success, 3 neutral, and 1 not planned or done. The value points are then averaged to rate the quality outcome using private sector change management criteria.


1. Tax Administration Project Factors (Transactional)

(a) Reorganization to meet Functional Goals     4 
(b) Creation of New Units, i.e., Large Taxpayer Unit and/or VAT     5
(c) Merger of customs and taxes  and/or social tax collection during change process 4

(d) New hardware and software     5
(e) Decentralization of Operations to Field Offices     5
(f) Establishment of New
Taxpayer (Client) Service Ethos         4
Average                                            4.5

2. Private Sector Transformational Factors

(a) Vision and Mission Statement Agreed through Management and Staff Interaction     No/1
(b) Strategy Successful in Implementing Changes   Yes/3
(c) Organizational Culture                  Yes/3

Subject to Change
(d) Management Style                         Yes/3
Subject to Change
(e) Empowerment of Local Offices/    Yes/4
Units to take Decisions
Average                                               2.8

3. Private Sector HRM Factors

(a) HRM as Change Agent or in Leadership role with Top Management         Yes/3
(b) Training System Innovations         Yes/4
(c) Wage and Benefits Reforms/Incentive Systems       Yes/3
(d) HR Policy Reform Planned or Implemented            Yes/4
(e) Performance Benchmarks             Yes/4
agreed with Local Offices/Units
Average                                               3.6

Overall average                                    3.7

Implications for Tax Reforms

The Hungarian tax administration undertook a comprehensive modernization effort that undoubtedly will take time to consolidate and sustain. The transactional attributes conform to those commonly found in tax modernization projects.  There is also overlap between the transactional attributes and those labeled transformational and HRM factors. The transformational attributes comprise the tools needed to carry out the reforms with the greatest potential for sustainability and the greatest involvement of staff in the reform itself. 

The value scores suggest that Hungary has succeeded in implementing its tax administration modernization project to improve the efficiency of transactional operations in nearly all respects; indeed the project has now ended and APEH is considered by many to be the exemplary tax agency in Eastern Europe.  On the transformational scale, the analytical categories drawn from principal attributes of successful private sector reforms show less utilization in the reform process.

In essence, the inherent complexity of comprehensive tax reform projects will require a much more systematic approach to change management that has been applied to date.  Knowledge and on-going experience in employing private sector change management approaches in public sector agencies can serve as a guide to developing this change management capacity in tax reforms—especially in establishing more congruence between transactional change in the interest of greater immediate efficiency and transformational change aimed at longer term and deeper organizational impact and building in the capacity to initiate change when circumstances warrant it.  

Managing Change in Revenue Administrations

  1. Comprehensive tax reforms will require the early installation of the capacity to manage change; otherwise the risk of a fragmented and unsustainable reforms is substantial, as the agency will be unable to adapt to the changing internal and external environment sufficiently to build on accrued benefits from any one part of the reform package. For example, infrastructure investments alone will be ineffectual unless there is commensurate development of agency human resources management capacity and ongoing, cost effective and timely staff development--especially at the executive but also at all levels of management and staff.

  2. Changing to a functional organizational structure should not be thought of as an end in itself, i.e., a cure-all for tax agency inefficiencies; instead, revenue administrations will need to become better managers of the knowledge they are continuously acquiring and use that knowledge to improve agency performance and client service. This should be done by employing installed change management processes based on the use of teams whose composition reflects the nature of the intended change, the agency’s leadership drawn from wherever it resides.  Moreover, the ability to manage institutional knowledge innovatively not just at the top but throughout the agency should be a sine qua non to meet constantly changing requirements on agency performance and related administration.

  3. For example, a key area of institutional knowledge management relates to the  interface with market mechanisms when taxpayers compete to pay the least of their tax obligation. For this reason, an integrative change management approach will require attention to regulating this competition through auditing and enforcement practices based on  acquired knowledge of taxpayer accounting and auditing practices.  This will need to be managed, absorbed, and used by the agency through active feedback mechanisms and institutionalized through training to confront this open competition to evade tax obligations and foster corruption.                    
  4. Compensation packages that provide incentives for performance linked to dynamic career paths (i.e., non-linear) are more instrumental in motivating staff than merely raising wages of all categories of staff to be competitive with the private sector. And turnover of key categories of staff may be as much related to the inherent challenge of the work and ability of measure job satisfaction as to automatic structural increases in a rigidly bureaucratic career structure where initiative and performance are constrained both by management practices and limited prospects for professional growth.  In this case, private sector wage models linked to returns on investment from human capital and innovations to retain core staff will be important inputs.   

  5. Continuity of “leadership” will be crucial to sustaining reform momentum.  However, the empowerment of managers to take decisions and the issue of the changing role of corporate headquarters relative to the shifting responsibilities and accountabilities to local offices often needs to be addressed  as a priority not only to improve agency   performance but to develop a more inclusive approach to managing change.   


Selected Bibliography

  • Barbone, Luca, Arindam Das-Gupta, Luc DeWulf, and Anna Hansson. Reforming Tax Systems: The World Bank Record in the 1990s. Policy Research Working Paper 2237. Washington, D.C.: World Bank, 1999.
  • Bass, Bernard. Transformational Leadership: Industrial, Military, and Educational Impact. London and Mahwah, New Jersey: Lawrence Erlbaum Associates, Publishers, 1998.
  • Bennis, Warren G. and Edgar Schein (eds.). Leadership and Motivation: Essays of Douglas McGregor Cambridge, Massachusetts. MIT Press, 1968.  
  • Bird, Richard and Milka Casanegra de Jantscher. Improving Tax Administration in Developing Countries. Washington, D.C.: International Monetary Fund, 1992.
  • Collins, Jim. “Level 5 Leadership: The Triumph of Humility and Fierce Resolve.” Harvard Business Review (January 2001):pp. 66-76.
  • Das-Gupta, Arindam, Michael Engelschalk, and William Mayville. An Anti-Corruption Strategy for Revenue Administration. PREM Notes. No. 33. Washington, D.C: World Bank, October 1999.
  • Deal, Terrence E. and Allan A. Kennedy. The New Corporate Culture: Revitalizing the Workplace after Downsizing, Mergers, and Reengineering. Cambridge, Massachusetts: Perseus Publishing, 2000.
  • DeWulf, Luc, "Reforming Tax Systems: Lessons from the 1990s."  PREM Notes. No. 37. Washington, D.C.: World Bank, April 2000.
  • Drucker, Peter. Management Challenges for the 21st Century. New York: HarperCollins, 2001.
  • Fitz-enz, Jac.  The ROI of Human Capital: Measuring the Economic Value of Employee Performance. New York: American Management Association, 2000.
  • Flannery, Thomas P., David A. Hofrichter, and Paul E. Platten. People, Performance, and Pay: Dynamic Compensation for Changing Organizations. The Hay Group. New York: The Free Press, 1996.
  • Gill, Jit B.S.  A Diagnostic Framework for Revenue Administration. World Bank Technical Paper No. 472. Washington, D.C.: IBRD, 2000.
  • Godard, Alain and Vincent Lenhardt. Transformational Leadership: Shared Dreams to Succeed.  London: Palgrave, 2000. (Originally published in French as Engagements, Espoirs, Reves, Paris: Village Mondial.) 
  • Hargreaves, Pat and Peter Jarvis. The Human Resource Development Handbook. London: Kogan Page Limited, 2000.
  • Heneman,R.E., G.E. Ledford, Jr., M.T. Greshan. "The Changing Nature of Work and Its Effect on Compensation Design and Delivery." In Compensation in Organizations: Current Research and Practice, Chapter 6.   Edited by Sara L. Rymes and Barry Gerhart.  San Francisco: Jossey-Bass, 2000.
  • Ingstrup, Ole and Paul Crookall. The Three Pillars of Public Management. Montreal, Canada: McGill-Queen’s University Press, 1999.
  • Mills, D. Quinn. e-Leadership: Guiding you Business to Succeed in the New Economy. New Jersey: Prentice-Hall, 2001.
  • Peters, Tom. Liberation Management. New York: Alfred A. Knopf, 1993.
  • Sanchez, Luis Alvaro, Jaime Vazquez-Caro, and William V. Mayville. Tax Administration: Toward a Framework for Growth and Development. The World Bank Working Paper, 1993 (unpublished).
  • Teece David J. Managing Intellectual Capital: Organizational, Strategic, and Policy Dimensions. Oxford: Oxford University Press, 2000.
  • Thirsk, Wayne (ed.). Tax Reform in Developing Countries. Regional and Sectoral Studies. Washington, D.C. The World Bank, 1997.
  • Tropman, John E. The Compensation Solution: How to Develop an Employee-Driven Rewards System. University of Michigan Business School Management Series. San Francisco: Jossey-Bass, 2001.
  • Ulrich, Dave. Human Resource Champions: The Agenda for Adding Value and Delivering Results. Boston, Massachusetts: Harvard Business School Press,1997.>  Discusses inter alia the HR professional as change agent.
  • Walker, Alfred J. and Towers Perrin (eds.). Web-based Human Resources: The Technologies and Trends that are Transforming HR. New York: McGraw-Hill, 2001.
  • How initial conditions matter
  • Selected case studies of different approaches and Bank/Fund experience
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8. Special problems of social security administration

Key Issues:
  • Combined or separate administrations with other taxes: Alternative models
  • Cooperation with other tax administrations
  • Special administrative procedures

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9. Bank and Fund advice

Key Issues:

Bank and Fund advice in the area of tax and customs administration has only recently been the subject of evaluation or summary description. The overall evaluations by Datta-Mitra (1997) and by Barbone, Das-Gupta, De Wulf and Hansson (1999) pertain to Bank advice and loan operations. Readings for the Fund while relatively more plentiful, contain less evaluation. Thy are represented by Tax Policy Division (1993), Tanzi and Pellechio (1995), and Silvani and Baer (1997). An earlier but still insightful assessment of Bank and Fund is in Bird (1991). Full citations to the papers on the IMF are available in Section VII of "Research Activities of the International Monetary Fund."

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