Developing countries increasingly face decisions on whether or when to introduce computer technology. With efficiency, capabilities, and adaptability increasing, and costs declining, computers seem to offer tempting, quick solutions to an array of problems. This article examines the potential advantages of computers in one area of government administration: revenue collection. More precisely, it provides an overview of the applications of automated data processing (ADP) systems in customs and tax administrations, examines some of the problems associated with implementation of and adjustment to the new technology, and looks at a number of ways in which these problems can be minimized or avoided.
Over the past decade computer technology has become an integral part of the customs and tax administration operations in many developed countries and has significantly increased their capacity to process forms, streamline tax procedures, compile statistics, and use data to improve forecasting of fiscal revenues. Revenue administrations in developing countries also face expanding workloads: the number of taxpayers has grown rapidly; procedures and regulations have become more complex; international trade has increased; and the need to assemble greater quantities of data for economic and fiscal policy making has intensified. Can computer technology play a role in meeting these needs as well?
The answer seems to be a qualified yes. Experience suggests that ADP can increase the efficiency of well-run operations, but could prove useless, and will probably exacerbate existing problems, if it is superimposed on badly organized or inadequately rationalized revenue administrations.
Customs administration. In customs, ADP systems can be used principally to identify importers, clear goods, manage tariff files, control inventories of warehoused goods, and compile external trade statistics. These functions are usually divided into two categories: central processing and customs office functions.
At the central processing site, maintenance and compilation of the “integrated tariff,” and data centralization and information services are the main functions. Automated clearance requires the creation of a set of files (the integrated tariff) that would contain, for each customs tariff heading, all the data needed to verify that goods meet requirements (quotas, licenses, health regulations, etc.) and to calculate the duties and taxes payable. The data centralization and information services of an ADP system are designed to produce external trade statistics; special summaries and studies, such as analyses of import and export prices; and insurance and freight studies. Useful information, such as general accounting, estimation of cost of duty-free and privileged clearances, fraud analyses, and changes in workloads, can also be generated for customs management.
In customs offices, automated clearance of imported and exported goods is the main application of ADP systems. Principal operations include entering, checking, and storing data; printing out of declarations; application of regulations on external trade (e.g., licenses, quotas, prohibitions, and health controls); calculation of duties and other levies; and identifying where document checks and physical examination of goods might be needed. These are normally processed instantaneously (in “realtime”). Less time-sensitive management tasks are often handled through batch processing; this method allows a computer to collect data and process it at a later date (e.g., overnight or at the end of the month) and can be used to maintain official records, produce daily and periodic accounting statements, and compile official activity reports and tables.
Internal tax administration. Tax collection procedures vary from country to country but ADP systems have commonly been used to process returns and payments, assist in enforcement operations, and compile statistics. In processing tax returns and payments, computers can preaddress forms and payment vouchers, check the accuracy and consistency of data reported, calculate taxes, identify computation errors, maintain taxpayers’ records and general accounting controls and records, and prepare refund, assessment, and penalty notices. In enforcement, computerized systems can identify defaulters, prepare notices, develop mathematical formulas and statistical programs to select returns for audit, and verify data and identify tax evaders through cross-checking with external sources or other computer files. At minimal cost, ADP programs can also produce operating and statistical reports designed to assist tax managers and policy makers in management and planning, formulation of tax policy, and economic analysis and research.
Internal tax ADP systems that perform these operations require the comprehensive design of an integrated master file system. The master file system becomes the heart of the tax department’s ADP program. It maintains a record of all taxpayers and all accounting, auditing, and collection transactions. Most countries use at least two master files: one for individuals (employed and self-employed) and the other for legal entities, such as corporations. Some countries also use a separate file for tax-exempt organizations. The usefulness of these master files depends mainly on the establishment of a reliable and up-to-date tax identification numbering system that can distinguish one taxpayer’s document or record from another’s. As a general rule, the master file system should be flexible so that, after a simple start, the system can accept new data from various sources and perform progressively more complex work.
An important function in tax administration is the selection of returns for audit so that limited resources are focused on particular areas to maximize gains in revenue and elicit compliance. In identifying likely candidates for auditing, ADP programs use selection criteria and classification techniques to assign weights to various characteristics involving the high probability of error, change, and evasion. The formulas used in this process are kept secret not only to avoid manipulation of returns by taxpayers but also to ensure impartiality in the selection of returns.
Introduction of ADP systems
In deciding whether or to what extent ADP systems should be used, an important first step is a feasibility study. This would describe current operations; enumerate possible constraints; and determine the performance criteria by which an ADP system would be evaluated. The study’s conclusions would provide estimates of costs and benefits in terms of manpower, equipment, and time; compare costs of the various systems; define both personnel and training needs; and provide a statement of objectives.
Potential advantages then must be carefully weighed against possible problems. An ADP system can increase administrative efficiency, reduce costs, improve service, and expand statistical capabilities. But its implementation may displace workers doing routine work, elicit negative reactions from officials ill at ease with the new technology, and create a dependence upon foreign suppliers, who are needed to design and develop the system and to maintain the hardware and software. Many of these difficulties, however, can be offset by increases in capacity and efficiency and by giving staff more interesting and rewarding work.
More serious are the problems related to hiring and training officials and technical staff to implement and operate the new systems. In developed countries, training is often provided for current staff through in-house training courses arranged by computer manufacturers, software designers, and other private companies. In developing countries, training and staffing needs must often be met by hiring new personnel who have been trained outside government service or abroad. Nigeria, for example, has drawn planners and programmers from the training facilities offered by local universities and foreign institutions; Ecuador and Honduras have recruited from a training center for tax administrators that emphasizes ADP. Hiring outside people, however, may create conflicts between new technical staff and the present operational staff. For some countries the use of foreign experts for technical work and for training current staff may offer a more acceptable alternative.
Retaining qualified staff may also present problems. A separate salary scale may be one alternative, though experience suggests it may not be a viable solution in every case. Public service contracts may offer another option. Though problems of confidentiality can arise, contracting has been used successfully in a number of countries. The data processing of the Brazilian Federal Tax Department, for example, is contracted to SERPRO (Serviço Federal de Processamento de Dados), a data processing organization that has the status of a public enterprise and can offer salaries more competitive with the private sector.
Design and implementation
Developing countries introducing an ADP system for revenue administration face a number of important decisions regarding design and implementation. One concerns the structure of the computer system: both centralized and decentralized systems can produce satisfactory results. In a centralized approach, the design, development, and operation of the system are provided by an organization that is independent of any of the tax collecting departments and that is responsible for providing all public entities with the information needed for their operations and decisions. In Zaire, the Data Processing Service of the Finance Department performs the data processing activities for the Department’s various directorates (customs, taxation, budget, treasury, and accounting). In a decentralized approach, the finance ministry may require operating departments to be responsible for the supervision and control of their own computer systems. The US Internal Revenue Service, for example, organizes its operations in the latter manner, as do most of the tax departments of the member countries of the Inter-American Center of Tax Administrators.
While the initial choice may depend upon several factors, including the scale of operations to be performed, capital expenditures, and efficient utilization of computer hardware, one major consideration is the availability of adequate numbers of skilled computer technicians. Because computer costs are falling and the number of available technicians is increasing, and because services provided by the central computer organization might prove unresponsive in terms of either seasonal fluctuations of work or unplanned events (tax legislation changes, for instance), a mixed approach may be preferable and is often applied. Under such a scheme, the central computer of the ministry of finance usually provides services for policy activities and for the ministry’s own statistical and national reporting needs, and may, when necessary, provide services on a time-sharing basis for some collection work of the revenue departments. On the other hand, the data processing units of revenue departments operate their own computer systems and perform time-sensitive activities, such as issuing customs clearances, tax refund checks, assessment notices, tax receipts, and answering inquiries.
Data security presents another element in the design of a computer system; control measures must be taken against the unauthorized disclosure of information from customs declarations or tax returns, the fraudulent manipulation of data, and the misuse of terminals by unauthorized persons. A security system is necessary to ensure the integrity of the system, to restrict access to computerized data, and to protect the computer facility against fraudulent intrusion or destruction by natural disasters.
Developing countries will also need to scrutinize foreign-designed ADP projects and related services carefully. Some programs may be inappropriate for local needs or unnecessarily complicated and expensive; excessive enthusiasm by outside experts and hardware salesmen might also encourage administrations to become overambitious. Current ADP systems are sufficiently diversified to allow step-by-step progress. Increasingly, small computers are being used because they use less space, offer better service, and are more flexible than large central computers; and they do so at lower initial and operating costs. The inevitable shift toward more comprehensive and integrated software systems requires the standardization of equipment and, consequently, an appropriate administrative policy to coordinate the needs of the departments that use it. It is important to provide a link between the various computers, both large and small, to enable information to circulate among the different departments of the ministry, to allow users access to more information, or simply to share costly hardware, such as high speed printers and disc drives for storing information. There are internationally accepted standards for much of the coding and other computer-related processes, and it is preferable to ensure that these are adopted whenever possible.
A great deal of information and technical assistance is currently available to developing countries that want to automate their revenue administrations. Technical assistance, which includes both personnel and financial assistance, has traditionally been provided through bilateral cooperation agreements, sometimes in the context of a joint commission established to promote cooperation between the two countries. Agreements often involve the participation of customs or tax authorities and private contractors of each country, and sometimes entail the assistance of independent technical consultants and academic institutes. (The US-Saudi Arabian Customs Program, for instance, involved the participation of Arkansas State University, while the French-Egyptian Customs Project was completed with the participation of Grenoble University.)
International organizations have recently begun to offer advice on the design and installation of ADP systems (see box), while independent consultants and specialized institutions are additional sources of assistance. Courses on customs and tax applications of computers are, for example, regularly presented by the Institute for Tax Administration at the University of Southern California, with the assistance of the US Customs Service and the Internal Revenue Service.
A country seeking technical assistance may wish to consider two types. The first would consist of the short-term assignments of customs or tax advisors to conduct feasibility studies, produce cost/benefit analyses of alternative systems, evaluate new programs designed to extend the capabilities of the existing systems, and identify personnel training needs. The second type would consist of long-term assistance, possibly spread over several years by data processing specialists experienced in the application and implementation of all facets of computer utilization for mass processing techniques and operations and familiar with government operations in customs, tax, and budget administration.
Clearly there are potential advantages to properly applied systems of data processing. In customs work, the growing volume of international trade, new methods of transport, increasingly complex regulations, and expanded information requirements may make automation a necessity if developing countries wish to prevent undue delays at their borders and to increase, or even just maintain, their share of world trade. In tax administration, because of additional budgetary needs for revenue, increased compliance with tax obligations and more efficient collection are becoming priorities for developing countries. Automation may eventually offer the most effective means of meeting these needs.
The note of caution remains, however. For many reasons, both administrative and political, the introduction of ADP systems may not always bring about the intended result. Many of the difficulties associated with automation, however, can be avoided or minimized with appropriate planning and a careful assessment of current needs and specific goals. The experience of many developed and a growing number of developing countries, as well as the availability of technical assistance, can help a country make the transition from manual to computerized systems a successful one.
Sources of international assistance
A number of international agencies now offer technical assistance on data processing needs and equipment. These agencies include:
The International Monetary Fund, which responds to requests for technical assistance regarding electronic data processing in revenue administration. This is provided under the auspices of its Fiscal Affairs Department. The Fund is best able to respond to requests regarding the determination of what application of computer technology is most appropriate to a country’s situation, and to study the feasibility of introducing or expanding computer systems. Advice has been given, for example, on the design and implementation of a taxpayer identification system, as a prelude to the design of a full taxpayer master file;
The Intergovernmental Bureau of Informatics, which promotes research and use of information sciences at the government level;
The Inter-American Center of Tax Administrators, which has developed training in ADP for tax officials from Central America and South America, with the cooperation of France, Germany, Spain, the Inter-American Development Bank, and other international organizations;
The Customs Cooperation Council, which is considering the development of guidelines on specific customs applications of computers. Demonstrations on the use of computers by customs administrations of Australia, Canada, Cameroon, China, the European Community, France, Tunisia, the United Kingdom, and the United States were organized under the auspices of the Customs Cooperation Council in June 1985;
UNCTAD, which has developed a project with the CEAO countries (see ASYCUDA box); and
The Organization of American States which, on a limited basis, provides technical assistance to its member countries on the computerization of their income, sales, and land taxes.
The Automatic System for Customs Data Acquisition, Control, and Management (ASYCUDA) was created and developed by UNCTAD experts to be used in a variety of ways in a customs office and at the customs department headquarters. The system functions on microcomputer equipment that can be expanded, particularly in terms of memory and the number of work and teletransmission stations. It can operate autonomously or under the control of a central plant.
Recently the ASYCUDA software system was adapted by UNCTAD/CEAO experts to implement, on the basis of standardized customs documents and codifications, the collection, acquisition, and control of information required by CEAO member countries for the calculation of compensation and the production of trade statistics. (Customs duties collected on trade within the CEAO feed a common fund; this fund compensates importing countries that have negotiated lower duties on goods for two thirds of the difference between the yield from these lower rates and the full rate.)
Given the mutual obligations of community members, the system is capable of processing all national or international data in accordance with the requirements of each country. The system also provides conformity of information, so that both community and individual member countries can be assured of the accuracy and authenticity of the data collected. Its flexibility also permits the creation of specific procedures in response to the community’s demands.