Supporting Institutional Reforms in Tax and Customs: Integrating Tax and Customs

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Pre-merger status

Until 1991, Latvia was part of the USSR. The USSR Customs Code and the respective customs legal systems were in force, the main task of which was to ensure external trade monopoly. The main responsibility of local offices was to control licenses for import-export operations issued by the Chief Customs Department (part of the USSR External Trade People’s Commissariat - later the Ministry), and to collect fines and custom service charges.

The formation of the administrative structure for Latvian Customs began after regaining independence, August 21, 1991. In 1993, Latvian Customs was legally and structurally empowered by the sovereign state of Latvia. Late in 1993, consideration was given to merging the Customs Department and the Finance Inspection Department into a unified revenue administration, now known as the State Revenue Service (SRS).
Even after the SRS was created, the agencies maintained separate functions for strategic and development planning, informatics, legal services, collection of arrears, and international affairs. In 1996, amendments to the State Revenue Service Law legislated the integration of functions common to both tax and customs administrations.
The SRS was organized into a two-tier structure: 26 local offices handled tax and customs administration in the provinces, seven offices in Riga dealt with tax matters only; and Riga Customs operated 30 border control posts. The organizational structure of local offices varied, including the integration of the local tax and customs administration. In addition, local office size differed, as did workload and the number of employees in any given local office.
The merger

The restructuring of the Latvian tax and customs operations has been an ongoing process since 1991. Today, the Latvian tax and customs administrations are integrated at headquarters but remain separate at regional and local levels.

A major factor in promoting continuous change has been the need to accommodate and modernize SRS to meet EU accession criteria.
SRS implements fiscal and customs policies, protects the state economic borders, and collects revenue to meet State budget estimates. It operates under the supervision of the Ministry of Finance.
It comprises three organizational levels: central, regional, and local. At the central level the National Customs Board (NCB) and the National Tax Board (NTB) are responsible for the functions of strategic planning, operational management, and methodology. Reporting to the Director of SRS are the Deputy Directors for the National Customs Board and the National Tax Board, plus the Deputy Director General, who is responsible for central departments covering support functions.

The SRS regional offices carry out the functions of tax or customs administration, i.e. planning, analysis, control and supervision. The Directors of the Regional offices are responsible for all activities and performance to the SRS Director General, and functionally responsible to NCB and NTB. The Deputy Directors for Customs and Tax, respectively, are responsible for regional performance. Support functions such as financial planning, personnel are decentralized to the regional level.

The establishment of a regional structure began in 1998,. The modernization project aims at changing the organization into a three-tier structure to be fully implemented in 2002. All local offices are not yet included in the regional structure.

The goal is to provide faster and more effective services for taxpayers and increase the level of taxpayer compliance through establishment of one institution responsible for all taxes, including those administered by customs. Also, the merger is expected to reduce administrative costs, especially for support functions, which can be shared at the regional as well as the central level. Thus, employees engaged in central support functions--corruption prevention, appeals, financial police and operational support--in headquarters will support the regional offices as well, while support functions at local level will be eliminated.
Local offices included in the regional structure only have tax administration functions. The Directors of local offices are accountable to the Deputy Director for Taxes at the Regional Office. There are also Custom Control Offices operating at this level. Directors of these offices are directly responsible to the Deputy Director for Customs in regional offices.
With the formation of SRS regions, the taxpayers service idea changed. Service functions are now separated from control and audit, with special taxpayers service areas in tax offices, not in separate offices for different taxes, as before.
Effects of the merger

The Latvian merger can be considered a success in that a few years after the merger, the unified State Revenue Service met its main challenge of ensuring revenues for the state budget at decreasing costs per Lat collected. The merger, however, was only the first step in a series of organizational adjustments both centrally and regionally. Among these was a slight rollback of the integration between the National Tax Board and The National Customs Board. For instance budgets were separated for cost transparency and to enable separate measurements of efficiency. The idea behind further development has not been closer integration but increased cooperation and improved communication, combined with decentralization and clarification of competencies.

The merger did encounter difficulties, especially in personnel issues. The SRS was organized with a strongly centralized top management, with accountabilities concentrated in very few persons. This design became an obstacle for the development of an overall organizational strategy. Latvia’s desire to join the European Union brought about strong focus and assistance from abroad to Customs, while the organizational design of Tax has not enjoyed the same attention. Recently an overall modernization effort has begun and included both tax and customs.

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