CAPACITY BUILDING IN TAXATION

1. introduction

Capacity building in tax administration denotes broad processes by which tax administrations
unleash, strengthen, create, adapt and maintain capacity overtime.1 Capacity on the other hand is
defined as the ability of the people, organizations and society to manage their affairs successfully
and effectively. The main purpose of capacity building in tax administration is premised on
ensuring the effective tax systems. Effective tax systems are critical building blocks for increased
resource mobilization, growth and stability, promoting good governance, and sustainable
development. Tax administration thus lies at the heart of capacity building process. In order to
achieve this, tax co-operation has now reached unprecedented levels and most local and
international stakeholders are assisting developing countries in building their tax capacity.

The purpose of this paper is to identify how tax administrators can better address the increasing
demand for capacity building in developing countries, especially Kenya

2. Significance of capacity building for effective taxation

Firstly, tax and non tax revenue are important components of domestic resource mobilization
which in turn helps governments in achieving development agenda, delivering public services,
increasing state capacity, accountability and responsiveness to citizens. This therefore
necessitates developing quality tax systems both at policy and tax administration level which are
central pillar for state building and governance.2

Secondly, owing to various challenges that developing countries face in their revenue
mobilization, capacity building comes in handy in addressing such challenges. These challenges
include, among others:

i. Weak tax administrations. A well functioning tax administration is key to mobilizing

domestic resources in developing countries and the design of the tax system should be
influenced by the ability of tax administrations to administer it. Yet many
administrations continue to be staffed by poorly trained and low paid officials, have

1
OECD, 2016,Tax Administration and Capacity Building: A Collective Challenge p 12
2
OECD, 2013, Tax and Development, Aid Modalities For Strengthening Tax Systems. OECD, Publishing Paris p 26
 structures which do not encourage an integrated approach to different taxes, and are
marked by imbalanced service and enforcement functions

ii. Low taxpayer morale, corruption and poor governance are often deeply entrenched.
Corruption indicators are strongly associated with low revenue (indeed corruption
functions like a tax itself, and is likely to be a particularly regressive and inefficient
form of taxation), as are other governance indicators (weak rule of law, political
instability). Causation can run both ways, but the centrality of tax collection as an
exercise of state power gives addressing governance issues in tax collection wider
importance;

iii. Dealing with sectors that are ‘hard-to-tax’ everywhere, including small businesses,
small farms, and professionals. This is particularly important where administrative
capacity and incentives to comply are weak. ‘Informality’ is extensive in developing
countries—perhaps 40% of GDP on average, up to 60% in many—but is arguably not
in itself the problem: micro traders may be informal, for instance, but are also likely
to have income and sales well below any reasonable tax threshold; and much of the
most egregious evasion is by qualified professionals. The issue is perhaps better
framed as one of non-compliance. Estimates of non-compliance are scarce, but
Value-Added Tax (VAT) ‘gaps’ have been put at 50-60%

As a result of above challenges, capacity building is a precondition for developing countries,

especially Kenya to mobilize own domestic resources so as to avoid perpetual aid dependency
and achieve United Nations Sustainable Development Goals.

Thirdly, due to globalization, opportunities for tax avoidance through BEPS initiatives have
initiated the needs for developing countries to enhance capacity building in tax administration.3
BEPS and automatic Exchange of Information among different countries, with a view to
combating tax evasion has also necessitated the countries to participate in capacity building
initiatives in order to benefit from automatic to exchange of information.

3
Supra note 1 p 23
Fourthly, the Addis Tax Initiatives, launched on July 2015, has established a commitment to
accelerate capacity building in tax administration

3. Institutional actors/Partners in capacity building in tax administration in Kenya

i. OECD through its Tax and Development Programme, Global Relations Programme,
Tax and Crime Programme, Global Forum on Transparency and Exchange of
Information for Tax Purposes
ii. IMF by providing technical/policy advice/assistance in building state agencies
iii. World Bank in supporting Domestic Revenue Mobilization through the Global Tax
Programme.
iv. UNDP by among other engaging stakeholders in capacity development
v. EU through budget support programme
vi. Regional organizations like CIAT, ATAF, CATA etc

4. Recent developments on capacity building in Kenya

a. Tackling BEPS through the OECD and G20 support

b. Tax Inspectors without Borders Programme- this was established in 2013 between OECD
and UNDP with main purpose of helping the developing countries build tax audit
capacity.
c. Tax Administration Diagnostic Assessment Tool (TADAT)- developed by IMF and other
partners in 2015. The main objective was to provide an objective and consistent
assessment of the health of the key components of a country’s systems of taxation
d. Revenue administration Fiscal Information Tool- was developed by IMF in 2012. It is a
web based system which is intended to generate a standardized set of data from all
customs and taxation administrators on a regular basis, thus allowing them to monitor
basic aspects of their performance more effectively and compare themselves with others
while at the same time providing a better technical assistance work by having data in
advance of planned activities.
e. Tax and Development Transfer Pricing Assistance Programme- was developed in 2011
by OECD in partnership with EC and WBG. Main purpose was to support developing
 countries to strengthen their transfer pricing rules. As a result of this initiative, revenue
mobilization in Kenya from transfer pricing audits has doubled from the year 2012-
2014(USD 52-107)(mum, what is the current status?- perhaps you may consider getting
data from the division.)
f. Task force on Tax and Development- developed by OECD. Brings together various
stakeholders to discuss various tax and development issues affecting their countries

5. KRA’s approach to Capacity Building Initiatives

Mum, Does KRA have capacity building Unit:

a. Strategies

Strategy planning simply means setting of goals and resource planning. In international platform,
liitle effort seems to have been invested in strategy formulation in capacity building process. It is
therefore ad hoc in nature punctuated with resources being misaligned with priorities.
Responsibility of articulating capacity building need rests with the host country.

In Kenya, formulation of these capacity development needs still primarily premised on strategic
development plans of the donor agencies. Need to develop a more strategic way to asses capacity
needs. An effective capacity building strategy need to take the following elements in
consideration:4

 Goals and priorities of the donor government

 The capability and expertise of the donor administration
 Resourcing and funding
 Preferred delivery mechanisms
 Evaluation of impact and results

In developing strategy, there is need to develop ‘ whole of government approaches’ meaning that
donor and domestic partners need to discuss with many government departments as possible in
order to align capacity building efforts with government goals.

4
Supra note 1 P 37
 b. Key deliverables

Delivery approach-occurs exclusively through peer to peer exchanges whereby knowledge and
expertise are shared between various tax administration officials. Key deliverables in this
category include:

i. Collaborative approaches- Increased collaboration between tax administrators

eg sharing best practices
ii. Structured learning and training offered through multilateral organizations
iii. Expert deployments- in person missions, whether short or long term
iv. Implementing various proposals from TADAT and various capacity building
initiatives, eg BEPS
v. Driving reform agenda in tax administration using the capacity building initiatives
toolkits.
vi. Sharing practical expertise between countries and maintaining relationships between
various tax administrations.
vii. Expanded double tax treaty network
viii. Identification and mitigation of global risks such as BEPS
ix. Championing international transparency and equitable tax administration
x. Commitment to supporting regional development- The EAC Treaty
xi. Using technology in capacity building. This can be achieved through:
1. E- learning- essentially entails web based interactive self study interactions ,
simulation and collaborative tools and community portals
2. Knowledge sharing- these are variety of website hoisting resources for tax
administrators. KRA have this though used for internal purposes. Need to explore
and use it for wider community

xii. Mum, how in other areas has KRA contributed to capacity building initiatives? Think
of (Regulatory provisions, data security and protection , IT, information exchange,
training of other revenue administrators etc)
 c. Resourcing- occur on a case by case basis, meaning they are drawn from
programme areas needed.

d. Tracking and evaluation of impact and results- this enables both the donor and
host tax administrators to asses effectiveness of their efforts while ensuring
commitment to meaningful change. Can be done using different approaches eg
written monthly reports prepared by the advisors detailing progress against work
plan objectives, annual on-site programme reviews, where advisors and
counterparts meet to review the projects, progress and support the programmes,
end of tour report which covers the feedback and assessment of advisors
concluding particular assessment and end of project report which evaluate the
long term impact of an engagement

6. Key challenges facing effective capacity building initiatives in Kenya

i. Poor coordination, including difficulties in ensuring cohesive and structured method of

working with other stakeholders
ii. Limited resources to implement key reform initiatives arising out of the capacity building
process(mum, this I believe is a key challenge)
iii. Limited or underutilized structures and tools necessary to make informed decisions on
how and where to invest to ensure optimum impact
iv. Absence of core or long standing funding which has resource implications, thus
diminishing donor tax administrator’s ability to respond to demand for capacity building
assistance.

7. Lessons learnt/observations
i. International cooperation is vital in capacity building initiatives
ii. How donor and host countries/ tax administrators organize the capacity building
initiatives in terms of strategy and implementation matrix influences the achievement
of meaningful outcomes and efficiencies. To achieve optimum results, it should be
 considered a strategic issue, should take the whole of government approach, should
follow a programme based approach, should align to the recipient needs(not the donor
needs), there is need to be a core/long terms funding as well as adequate support and
evaluation tools.
iii. Because of value addition in capacity building, there is need to explore further and
wider approaches
iv. Key institutions like FTA, IMF and TADAT etc play key role in capacity building
initiatives

8. Recommendations
i. Tax administrators need to apply a common tax administration capacity building
framework
ii. Strengthen domestic efforts to capacity building by applying innovative and ‘whole
of government approach’ in order to ensure maximum buy-in and efficiency.
iii. Tax administrator’s need to participate and advance knowledge sharing platform
iv. Members to invest in building capacity building network in order to reap maximum
benefits from one another.