How the Law on Administrative Procedure increases trust in the tax system: the experience of Lithuania

Interview with EU4PFM Project Team Leader Jurgita Domeikienė, and International Key Expert on Taxes Paulius Majauskas

– Does LT have a Law on Administrative procedure and when was it adopted? Was it a requirement for accession to the EU?

Jurgita Domeikienė (J. D.) In Lithuania we have in force the Law on Public Administration (LPA), which also covers regulation on the administrative procedures. The law was introduced on June 17, 1999. Afterwards, there has been several amendments of the legal act adopted, while it was vitally to further develop the rules governing the activities of public administration in Lithuania to ensure that all administrative procedures and the protection of personal rights in administrative matters are in line with the principles established by the EU legislation and practice of European Court of Justice.

– To what extent does it apply to tax area?

Paulius Majauskas (P. M.) The LPA encompasses the establishment of fundamental principles governing public administration, delineates the scope of public administration, defines the framework for public administration entities, and outlines the fundamental aspects of organizing administrative procedures.

Meanwhile, the special rules for tax disputes are established in the Tax Administration Law to ensure the special procedure for resolving claims related to the determination of tax base and giving for taxpayer the opportunity to receive qualified, well-justified and exhaustive response on question related to tax duties. First of all, it concerns the tax audit results. The procedures also apply to appeals filed by taxpayers against the tax administrator’s decision to refuse exemption from fines, default interest, or the setting off tax overpayments. Those are the categories of claims that require special attention and professional skills from the tax authorities’ side. Usually, it also takes more time to resolve the dispute, on the other hand, significantly reduces the volume of cases that go to the courts.

Nevertheless, the provisions of the LPA have the same importance in the tax administration area if we are speaking about other categories of claims raised by individuals and companies on potentially unlawful activities of tax officials. As a rule, the investigations of such cases have the same character as in other areas of the public sector and might be more easily and quickly solved by conventional, common procedures established by the LPA. So, the claims that shall not be resolved following the special tax disputes procedure, are investigated according to the LPA.

In any event either during tax disputes or standardized administrative procedures, tax authority shall follow the  general principles of the law such as the rule of law, justification, proportionality, timeliness, and efficiency, what is essential for building client-oriented approach and efficient tax services.

It should be said that Lithuanian LPA establishes not only administrative procedures related to the public services and resolution of claims. It sets up the common administrative rules applicable for public institutions as regards business control procedures. The law, however, explicitly says that those are not applicable for tax administration, as tax audit and other control measures are in detail described in the Tax Administration Law.

– What were the major obstacles in application of LAP to tax in LT? How were those obstacles resolved?

J.D. As previously mentioned, the procedure for tax disputes is specifically established in the Tax Administration Law in Lithuania, while  the LPA does not directly focus on tax matters and legal framework for interactions between individuals, business and public institutions in a broader sense. Thus, the main challenge was maintaining a delicate balance in addressing the specific needs of tax-related procedures while recognizing the principal elements with general administrative procedures established by the LPA.

To address it challenge, Lithuania has implemented supplementary legislation, such as specific regulations, tax law commentaries that offer detailed guidance on tax dispute-related and common administrative procedures.

– What was the practical impact of the LAP in tax area? Is there any long term impact of LAP on quality of services?

P.M. The LPA in tax area has had several practical effects, for example it has contributed to greater transparency in tax procedure by established clear rules and procedures for administrative actions, ensuring that taxpayers have a better understanding of their rights, obligations, and the processes involved.

It also improved the legalsafeguards for taxpayers in their interactions with tax authorities. By ensuring that individuals have the right to be heard, present evidence, and have access to relevant information during administrative proceedings. This enhances legal protections and safeguards against arbitrary actions as well.

The LPA has helped to simplify administration processes, as a whole, and by establishing clear procedures and timeframes for actions contributing to greater efficiency and predictability in the administration of taxes.

In terms of the long-term impact on the quality of services, the LPA has contributed to the overall improvement of administrative services provided by tax authorities. By establishing clear procedures, enhancing transparency, and ensuring legal safeguards, the law has impacted the development of culture of professionalism, accountability, and efficiency within the tax administration. This, in turn, contributes to higher-quality services being provided to taxpayers, and as the quality of tax administration services is a key element of a good business environment.

– Is there any impact of LAP on protection of rights of business?

J.D. The LPA impacts the protection of business rights in several ways by establishing clear, unified rules and procedures for administrative actions, ensuring mechanisms to safeguard business rights in their interactions with public authorities, including tax administration.

One significant aspect is the protection against excessive administrative actions. The LPA sets limits and standards for such actions, safeguarding businesses from the implementation of disproportionate or excessive measures by public authorities. It ensures that administrative actions align with the pursued objectives and that businesses’ rights are not unduly infringed upon.

– Is there potentially any impact of LAP on reduction of corruption in public administration?

J.D. Here are some ways in which the LPA can impact the reduction of corruption. First, it ensures that public officials are accountable for their actions and decisions, as businesses and individuals have the right to challenge any administrative decisions through legal remedies and appeals. This accountability and the availability of oversight mechanisms and the right to challenge the actions of any public administrator act as a deterrent to corrupt behavior.

– How does LAP go together with digitalization of public services, in particular in tax areas? What’s LT experience with that?

J.D Digitalization initiatives in taxation aim to simplify administrative procedures and reduce paperwork. The LPA supports these efforts by establishing a legal framework for the implementation of digital solutions, enabling faster and more efficient processing of administrative actions.

The LPA encompasses the utilization of information and communication technologies within the operations of public administration entities. It encompasses significant regulations pertaining to the utilization of electronic documents, the management of the electronic delivery system, and the prerequisites for the provision of electronic delivery services.

In general, the LPA unifies administrative procedures and aligns with digitalization offers numerous advantages for both taxpayers and tax authorities. The implementation of a unified process leads to simplicity and cost-effectiveness, as automated response control enables swift and consistent replies to complaints, minimizing the chances of delays or oversight.

Additionally, unified procedures along with digital solutions, allow to create the automated response control within the system ensures that every step of the complaint process is recorded and easily traceable, thereby promoting better accountability and transparency. Also, digitalization facilitates the integration and sharing of data between different public authorities, enabling streamlined processes and reducing duplication of efforts. The LPA ensures that data protection and privacy regulations are upheld while promoting efficient data exchange to improve the quality and speed of administrative services.

Overall, the integration of the LPA with the digitalization of tax services in Lithuania has contributed to more efficient, accessible, and user-friendly administrative processes, benefitting both taxpayers and public authorities.

– In your opinion, did LAP introduction complicate the tax and work in any way?

J.D. In the beginning, introduction of the LPA might have challenges in  adjustments for tax administration. Whenever a new legal framework is implemented, it requires adaptation and familiarization by the relevant stakeholders. It was rather temporary obstacles successfully solved years ago in Lithuania.

– What is perception of society and business of LT tax and customs services? How has it evolved since the introduction of LAP?

P.M. Tax administration plays an important role in ensuring the collection of revenues for the state budget while providing services to taxpayers. The quality of tax administration services is a key element in creating a safe business environment and often influences investment decisions.

In past years Lithuania are focusing on developing tax administration as client-oriented service organization, shifting away from a purely enforcement and control-oriented approach. Encouraging voluntary tax compliance is considered the most effective method for increasing tax revenues and reducing the shadow economy.

Lithuania’s tax administration data indicates that the customer satisfaction rate of the Tax Administration has been increasing over the years. In 2021, the satisfaction rate was 8.26 points, and it further rose to 8.41 points in 2022.

Also, in recent years, there has been a significant decrease in the VAT gap in Lithuania, with the highest reduction compared to previous years. According to a study published by the European Commission (EC) in December 2022, the VAT gap in Lithuania was 19.3 percent in 2020. It decreased by 1.6 percentage points compared to 2019, reaching 14.3 percent in 2021, which is 5 percentage points lower than in 2020.

It’s no doubt that positive improvement in taxpayer’s behavior and voluntary tax payment is also influenced by transparent, fair, effective, and unified administration procedures that impact trust in tax administration and its services.