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Manual on Fiscal Transparency |
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I. Clarity of Roles and Responsibilities (continued) |
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The Framework for Fiscal Management 1.2 There should be a clear legal and administrative framework for fiscal management. 39. The Code includes good practices relating to: (1) budgetary and extrabudgetary activities; (2) taxation; and (3) ethical standards of behavior. Budgetary and extrabudgetary activities 1.2.1 Any commitment or expenditure of public funds should be governed by comprehensive budget laws and openly available administrative rules. 40. The effectiveness of the budget depends on the strength of its basis in law and on supporting regulations and administrative practices. The relative importance of codified budget laws, regulations, and administrative practices varies considerably among countries. Box 5 provides a summary of different traditions of budget law. Despite these differences, there are important elements that should be embedded in all legal/administrative frameworks. Public funds can only be spent by law; the budget should be comprehensive, covering all central government transactions (albeit possibly through different funds); budget transactions should be shown in gross terms; a minister responsible for government finance should be given effective power of budget management; individual agencies should be held accountable for funds they collect and/or use; contingency or reserve provisions should specify clear and stringent conditions for use of such funds; and independently audited reports showing clearly how public funds have been used should be prepared for the legislature and the public.
41. It is common for basic principles of budget management to be embodied in a general budget system law (which may have constitutional or near constitutional status). Often, such laws are supported by specific laws governing treasury operations or the management of public debt. This latter practice has become common in economies in transition. Where a comprehensive legal framework is not in place, its development should proceed at a pace that is consistent with policy and administrative capacity.39 42. The existence of a budget law does not guarantee that its provisions will be observed in practice. There are several areas of budget law that are commonly abused, and they need special attention if fiscal transparency is to be fully achieved. These include the excessive use of supplementary budgets, abuse of contingency funds, and accumulation of payment arrears.40 All of these practices tend to reduce transparency, both in terms of aggregate control and strategic priority setting. 43. Supplementary budgets, which are presented to the legislature during a budget year to seek additions or changes in legislative authority, are transparent in the sense that they are formally presented to the legislature. Often, however, their expected impact on fiscal outcomes is not reviewed. Moreover, in some countries supplementary budgets are used to authorize spending after the fact rather than to seek legislative authority prior to spending taking place. 44. Contingency (or reserve) funds are also a common avenue for abuse of the law and a source of a lack of transparency. As noted above, a possible weakness in the budget law is that the conditions for use of contingency funds are not clearly specified. In some countries, this weakness is compounded by provisions in the budget law or the annual appropriation law that allow the use of unanticipated financial receipts to meet unspecified contingencies. In addition to ensuring that laws define the conditions under which contingency funds are used, actual practices should be closely monitored. 1.2.2 Taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and regulations should be easily accessible and understandable, and clear criteria should guide any administrative discretion in their application. Explicit legal basis for all taxes 45. The constitutional framework of almost all countries embodies the principle that no tax may be levied unless it has a clear legal basis (although there are some differences in the application of this principle).41 It is fundamental to fiscal transparency that taxation should be under the authority of law and that the administrative application of tax laws should be subject to procedural safeguards.42 As with budget laws, however, the legal framework for taxation needs to be developed in a way that reflects policy and administrative capacity. Accessibility and understandability 46. Tax laws, regulations, and other documents relating to administrative interpretation of tax law should be accessible to the general public. Explanatory materials (e.g., instructions and pamphlets), usually prepared by the tax agency, should also be kept up-to-date. New budget revenue measures should be given sufficient publicity so that taxpayers understand how they might be affected. To this end, the material the tax agency uses in applying the tax laws (e.g., manuals and legal opinions) should be publicly available and there should be mechanisms in place whereby taxpayers can have their queries answered (e.g., by setting up a dedicated office in the tax agency to do so). 47. In addition to being accessible, tax laws should be understandable to the public and avoid unwarranted complexity. Tax laws should be well organized and include all elements needed to determine tax liabilities and to establish procedures for tax collection. Clear criteria for administrative application 48. A corollary of requiring that taxes be imposed under law is that administrative discretion in applying tax laws must be limited. Case-by-case negotiation of tax liabilities between officials and taxpayers should not be the general rule in any country, both because of the nontransparency of such practices and the potential for corruption. However, appropriate provision should be made for settlement of tax cases, agreement on installment payment schedules, and writing off of uncollectible amounts, all with procedural safeguards. In addition, many countries find it convenient to provide taxpayers, on request, with advance rulings on how particular transactions that they are contemplating would be treated in a subsequent tax assessment. Where this practice is followed, it is important that the rulings are publicized. Tax laws should also clearly establish the powers and limitations of the tax administration to search the premises of taxpayers, demand information from taxpayers and third parties (including banks), apply indirect methods to determine income and sales, and enforce the collection of tax arrears. 49. Clarity and precision of legislation are emphasized as a means of promoting transparency and fighting corruption with respect to customs in the Declaration of the World Customs Organization (Customs Cooperation Council), Arusha 1993,43 which sets out guidelines for a program to achieve integrity in customs administration. To limit the size and complexity of tax laws, however, it is generally preferable that the explanation of a tax administration's powers be detailed in published administrative guidelines, policy statements or rulings, rather than being embodied in detail in the tax laws. 50. Tax administration should be organized in such a way as to minimize opportunities for collusion between taxpayers and tax officials. In this connection, administrative functions should be distributed across the tax administration, to provide a self-checking element whereby the work of staff engaged in one function serves as a control on the work performed by staff in other functions. It is also important that a tax agency does not become so fragmented that its staff cannot avoid becoming closely involved with the population it serves. 51. Internal audit systems should be established to ensure the financial accountability of tax collection staff and systems, and adherence to tax administration policies and procedures in dealings with taxpayers. 52. Information technology can also play an important role in eliminating opportunities for discretionary action as well as providing for effective monitoring of tax arrears, exemptions, appeals, and payments. The computer systems should be designed to provide a full audit trail of the information recorded in the taxpayers' accounts, by cross-referencing this information to original source documents and to the names of the staff who entered it into the system. 53. Computer systems should have the capacity to readily exchange information among revenue departments. But it should be made clear that all taxpayer information is subject to confidentiality provisions and country-specific legal restrictions. In addition to taxes collected by the tax and customs departments, taxes collected under the social security system (if not collected by the tax department) should be accounted for in a clear manner, and audit information should be shared with tax departments. This arrangement would be facilitated by the use of a common taxpayer identification number by all revenue departments. 54. As in other areas of administration, earmarked taxes and netting operations, to the extent they are used, should be clearly shown and accounted for. If, for instance, a tax department is authorized to use a share of the revenue it collects from audits for staff bonuses or certain administrative expenditure, then the rules on the use of these funds should be clearly specified and normal accounting regulations should apply. Taxpayer rights and openness of administrative decisions to independent review 55. An equally important aspect of transparency in tax and customs legislation and its administration is the system's openness to review of administrative decisions and the extent to which government is obliged to make taxpayers aware of their rights. Taxpayers' rights should be clearly stated and include the following: availability of timely, accurate information; fair and expeditious treatment; confidentiality in interactions with the authorities; and a reasonable penalty structure. Taxpayers should have access to a well-functioning system of administrative review of decisions, as well as the opportunity to appeal to an independent judiciary. Adjustments to taxpayers' tax returns (e.g., following an audit) should be accompanied by clear and complete statements to taxpayers as to the reasons for adjustments. In most countries, these rights exist on paper; however, they often function imperfectly. In particular, the appeals system may fail to provide safeguards against arbitrary administrative action and keep the tax administration within the bounds of the law. A number of countries have a taxpayer bill of rights or the equivalent.44 Taxpayer rights can be established in law or incorporated in a taxpayers' charter or equivalent which is used to communicate taxpayer rights and to hold agencies accountable for their performance. 1.2.3 Ethical standards of behavior for public servants should be clear and well publicized. 56. Officials handling or making decisions about the receipt or use of public funds, and otherwise exercising their official powers, should be subject to a code of conduct that precludes unethical behavior.45 Some aspects of such a code could be included in the budget and tax legislation; other aspects may need separate legislation or regulations. The United Nations' International Code of Conduct for Public Officials,46 which is summarized in Box 6, provides a basis for implementing a standard of ethics and for strengthening an existing standard.47 Best practice is that OECD-PUMA principles for managing ethics in the public sector should be observed.48 These principles assume that an adequate statement of core ethical standards is in place, and emphasize the necessary supporting environment, including the legal framework, clear procedures for exposing wrong-doing, political commitment, and the active promotion of ethical conduct.
39 In some transition
economies (e.g., Kyrgyz Republic and Tajikistan), treasury
laws were enacted ahead of more comprehensive budget laws.
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