Reforming tax debt administration: international experience

To enhance the current state of public finance administration in Ukraine, there is a need to improve the tax debt administration and collection institution. The analysis of the current Ukrainian legislation clearly shows that the state is in much worse position in debt collection comparing to private contractors.

Paulius Majauskas
Head of the Tax and Customs Duty Administration Division
Ministry of Finance of the Republic of Lithuania

This improvement of this state can be split in two areas:

1. prevention of tax debt accumulation;

2. prevention of tax debt accumulation;

The tools for improvement should be:

1. legislative reform;

2. further effective implementation of the legislation and law enforcement;

3. legislative reform;

4. further effective implementation of the legislation and law enforcement;

Regarding prevention of tax deb accumulation. Nowadays,the world practice and experience of successful countries, given the recommendations of the US Treasury, the Organization for Economic Co-operation and Development (OECD) in tax debt administration shows that it is effective not to focus on “collection” activities by tax authorities, and work “on prejudice”.

The latter should consist of:

  1. development and implementation of a general strategy for preventing the occurrence and administration of tax debt;
  2. analytical activities to identify the causal links of tax debt through IT solutions; application of specific measures to prevent the occurrence of tax debt, taking into account the specifics of the taxpayer;
  3. development of specific warning and support mechanisms;
  4. creation/establishment of a separate autonomous function in this direction and equipping a special unit of the State Tax Service of Ukraine;
  5. proper information, communication with taxpayers, etc.

At the moment, the State Tax Service of Ukraine uses an IT system, which helps to analyze taxpayers and risks. Although, it has been crucial to create a new effective and modern automated system for managing tax debt (inc. preventive measures) that will allow to:

  • worthily group taxpayers on certain basis (e.g. depending on the amount and date of occurrence, etc.);
  • segment approaches applied to taxpayers (personalization);
  • predict tax behaviors of taxpayers and events with a fairly high accuracy;
  • use tax debt management approaches that are based on risk assessment;
  • implement the recommendations of the Organization for Economic Co-operation and Development (OECD) on tax debt management.

The mechanism for deferral/installment of tax liabilities should become a common service phenomena. The latter should be implemented if the taxpayer can adequately prove the existence of temporary financial difficulties, as well as the need to obtain assistance from the state in order to repay the overdue amounts of monetary obligations through such a mechanism. Meanwhile, when providing such a service, the State Tax Service of Ukraine and its territorial divisions should take into account the principle of equality of taxpayers, compliance with economic competition, tax discipline, risks of losses due to other property obligations of the debtor, etc.

Regarding effective tax debt collection. At first, the legislative bodies need to determine the concept based on which the State Tax Service of Ukraine and its territorial divisions will act as the executors of decisions to collect tax debt from individuals, or this function would be given to state executors, and if the heads of such bodies could make decisions on tax debt collection form legal entities by repaying their tax debt on self-declared taxes.

If the legislative bodies select a concept that is generally consistent with world practice (except for local taxes), the tax authorities as the executive service should be endowed with the powers and tools to repay the tax debt of legal entities.

There is a clear and urgent need to simplify the procedure for tax debt collection, considering the interests of the state related to the filling of budgets and the protection of enterprises. Currently, the procedure is quite complicated and inefficient. Besides, each measure of the tax debt repayment procedure is accompanied by the receipt of a court decision (inc. the collection of funds to repay the tax debt on monetary obligations, which the taxpayer declared himself). Such artificial barriers must be removed.

Several other issues that need to be addressed, including:

  1. local tax debt collection;
  2. procedures for the property inventory as a tax lien and seizure;
  3. the status of the tax lien (especially relevant in the taxpayer bankruptcy proceedings);
  4. strengthening the liability of the taxpayer for intentional tax debt accumulation and alienation of property not included in the tax lien;
  5. bad debts write-off;
  6. prompt write-off of funds from debtors’ accounts as for tax debt collection;
  7. lack of mechanisms for securing property as consequence of unfounded appeal by the payer of tax surcharges for withdrawal of assets;
  8. sale of taxpayer’s property that is in tax lien at public auctions, etc.

Summarizing the abovementioned, currently it is important to comprehensively and conceptually address the issues of dealing with tax debt at the legislative level in Ukraine, rather than imposing point changes. Only afterwards, an effective work on creation of the appropriate conditions for change implementation and process upgrade (inc. automation) at the level of the State Tax Service of Ukraine and its territorial divisions would be possible to maintain.

Paulius Majauskas

Head of the Tax and Customs Duty Administration Division

Ministry of Finance of the Republic of Lithuania