Tax Administration Reform in Iraq

The current tax administration in Iraq is ineffective, with weak management, inappropriate use of technology, and poor coordination between tax administration and other agencies involved in tax administration. The tax administration in Iraq is organized around substantive taxes, rather than functional categories, which makes it difficult to understand and apply. The current tax laws authorizing the activities of the tax administration do not clearly and sufficiently describe compliance requirements, permitting too much discretion to tax administration officials and inconsistent application. The tax administration provisions in Law #113 are confusing, inadequate, and arbitrary. To design a tax administration reform strategy, it is essential to identify the problems that disrupt tax administration operations, including taxpayer registration, returns and payment processing, computer operations, arrears collection, delinquent taxpayers, audit, sanctions and penalties, taxpayer services and publicity, and management and organization. The reform should aim at simplifying the tax system to facilitate its administration and enhance the effectiveness and efficiency of the tax administration. A tax administration with limited resources cannot effectively monitor a tax system with various deductions and exemptions. Therefore, the tax administration reform strategy should take into account the environment in which it has to function, the laws it is supposed to administer, and the institutional infrastructure with which it has been equipped. The reform should focus on reducing the complexity of the tax system, encouraging taxpayers' voluntary compliance, differentiating the treatment of taxpayers by their revenue potential, and ensuring the effective management of the reform. One goal of tax administration reform should be to place more responsibility on the taxpayer, moving from a system of official assessment of all taxpayers by the tax authorities to a system of self-assessment. However, a tax administration with limited resources cannot effectively monitor a tax system with various deductions and exemptions. The costs of assessing, collecting, and controlling taxes should be kept to the lowest level consistent with other goals of taxation. The tax administration reform strategy should take into account the different functions necessary for the tax administration, including registration, record keeping, returns, audits, appeal, and taxpayer services. The tax administration legislation should be primarily organized around these functional categories, making the law easier to understand for the taxpayer as well as for the tax administration. Decisions must be made regarding which payment methods will be adopted for both legal entities and physical persons, including withholding, advance payments, and payment at the time of filing. Tax withholding significantly increases the efficiency of tax collection, and it is generally recognized that withholding may be either final or preliminary. Many countries do not require an employee to file a return if he or she has no other income other than the wages on which tax is withheld, while other countries require these employees to file a return and reconcile the final tax assessment with the withheld tax. A similar difference in treatment among countries exists with respect to withholding and reporting of interest and dividends. Withholding tax schemes for interest and dividend income are commonly used, and withholding on this type of income should expand the tax base and increase tax collections. Typically, withholding rates on this income are flat, applying a uniform tax rate to gross payments.