The OECD’s Forum on Tax Administration (FTA) has put together a report entitled: “Measures of Tax Compliance Outcomes: A Practical Guide”. Tax Administrations are concerned with outcomes such as collecting the right amount of tax, improving taxpayer voluntary compliance and effective administration of the tax system. This may involve for example making it easier for taxpayers to comply with their tax obligations; helping them to send correct returns to the tax authority; or imposing effective penalties for non-compliance. Tax authorities require a method of measuring their progress to allow them to continually improve their performance by measuring it against the desired outcomes.

Outcomes may be categorized into three types: revenue outcomes, involving the collection of the correct amount of tax; voluntary compliance outcomes, in terms of the extent of voluntary compliance by taxpayers; and integrity outcomes, ensuring that the tax system is administered in a fair and way and that the taxpayers have confidence in the revenue body.

The traditional way of measuring tax compliance is the audit of tax returns. Taxpayers have traditionally been encouraged to comply with their obligations by a deterrence approach which seeks to ensure that the costs of non-compliance outweigh its benefits in terms of tax evaded. Using this approach tax compliance would be encouraged by increasing the number of tax audits so that each tax return is more likely to be audited. As audit resources are scarce, a risk assessment approach is increasingly adopted and the highest risk cases are selected for audit. This approach is more cost effective and its success can be measured in terms of additional tax collected. Revenue bodies can however have a more sustained influence on compliance behavior by a differentiated approach, adapting their approach to different types of taxpayer.

The OECD report has developed six guiding principles to help tax administrations to develop principles for measuring performance and outcomes. The measures should be totally aligned with the compliance strategy; comprehensive in their view of performance; attributable to the actions of the tax administration; measurable in practice; meaningful for external stakeholders; and integrated into the existing and future processes used by the tax administration.

The report suggests three approaches for measuring revenue outcomes. These are audit yield, total revenue effects and tax assured. Audit yield actually measures outputs rather than policy outcomes but is widely used in practice as a performance measure. Total revenue effects provide a more focused measure as they look at the extra tax collected as a result of the improved voluntary compliance resulting from the activities of the tax administration. The “tax assured” approach measures the proportion of the revenue base with regard to which the tax administration is confident that the correct amount of tax is being collected.

The report also looks at three methods of measuring voluntary compliance outcomes. The first measures compliance in the four domains of tax obligations, these being registration, filing tax returns, correctly reporting tax liabilities and paying tax on time. The second category relates to measures of systemic compliance behavior. These methods use available technology to measure taxpayer behavior either in real time, over a longer term, or at the point of certain life events such as employing staff or engaging in international transactions for the first time. The third category of measures relates to effectiveness narratives. These might be described as qualitative rather than quantitative measures. These can use narrative to put quantitative measures into context or can expand reporting with additional narrative to provide a more complete picture where the figures on their own are not sufficient.

The report also looks at practical approaches for measuring integrity outcomes. The two measures of tax compliance integrity examined are internal governance measures to ensure that the tax administration is acting with fairness and integrity; and external measures that can show the extent to which the revenue body’s actions are building trust and confidence in the community. Internal governance measures could involve for example measuring a sample of tax audits to ensure that they are procedurally fair, by measuring the extent to which they focus on targeted risks, are technically and procedurally correct and are referenced correctly.

Metrics for measurement of the trust and confidence of the community could include measuring the proportion of taxpayers who believe they are treated fairly by the tax administration; are confident they can resolve a dispute with the tax authorities; believe that tax evaders will be punished; consider that the revenue body is putting enough effort into increasing compliance; or who consider the revenue body are likely to identify and address non-compliance.

The OECD report recommends that revenue bodies should continue to develop measures of outcomes. They can be developed by building on the approaches already used, rather than departing from them. When reviewing the methods in the medium term they can consider if the adoption of some of the approaches mentioned in the report would help to overcome any limitations of their present methods. The measures will need to be developed along with the compliance strategy, as the sources of data and techniques evolve.