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1998 December Report of the Auditor General of Canada

Main Points

24.1 Revenue Canada's International Tax Directorate was established in November 1991. It is the focal point for all international tax issues (except legislative issues), with a view to enabling Revenue Canada to respond to them in a consistent and timely way.

24.2 A recent report of the Technical Committee on Business Taxation noted the following:

  • In 1993, taxpayers reported to Revenue Canada $248 billion in related-party cross-border transactions, $166 billion of which were between related parties in Canada and the United States.
  • In 1995, foreign direct investment into Canada was approximately $170 billion, or 20 percent of assets held by Canadian businesses; and outbound foreign direct investment by Canadians was about $140 billion, or 18 percent of total assets held by Canadian businesses.
  • Even relatively small shifts in income allocated to Canada from related-party transactions have the potential to cause a significant change in the domestic revenue base.
24.3 In this complex and growing field, the Directorate requires staff who are highly skilled and who understand Canadian tax laws and tax laws in other jurisdictions.

24.4 Weaknesses in human resource management in the Directorate, coupled with the often cumbersome human resource management rules in the public service, have resulted in long delays in the competition process for staffing positions and in finalizing appointments. Skilled candidates for international tax positions at senior levels are rare, and are in demand in the private sector. Good candidates may lose interest if they have to wait long periods before being offered a position.

24.5 Currently, key positions in the Directorate - including positions of leadership - are filled by using secondments, redeployments and acting assignments. We are concerned that this approach to staffing may result in a lack of continuity and stability and may pose a risk to both the quality of work performed and the Directorate's ability to fully realize potential revenues and protect Canada's tax base.

24.6 Despite having recognized since 1994 the urgent need for a human resource plan, the Directorate is still developing a comprehensive human resource plan and strategies linked to its business plan. During September and October 1998 it initiated a number of actions that, upon completion, it expects will address certain identified problems.

24.7 Existing human resource and performance data bases need to be enhanced and better used to provide managers with information needed for human resource planning.

24.8 If Parliament approves the establishment of the proposed new Canada Customs and Revenue Agency, the Department will become a separate employer and assume most of the responsibility for human resource management. In the absence of a comprehensive human resource plan and strategies linked to the Directorate's business plan, the establishment of the new agency will not in itself resolve the problems outlined in this chapter. It is important that the analysis, planning and implementation of needed human resource initiatives be carried out as soon as possible to ensure that the Directorate can appropriately manage the risks to Canada's tax base that are inherent in international transactions.

Introduction

International tax is a complex and growing field
24.9 Revenue Canada's International Tax Directorate was established in November 1991. It is the focal point for all international tax issues (except legislative issues), with a view to enabling Revenue Canada to respond to them in a consistent and timely way.

24.10 The Department realigned its international tax resources in response to changes in the international environment. Those changes included the removal of trade barriers as a result of international agreements (such as free trade agreements and GATT - General Agreement on Tariffs and Trade); economic union of the European Community and social and political changes in various parts of the world; the growing complexity of international financial transactions; the rising use of tax havens; the increasing number of bilateral income tax treaties and agreements; and the aggressive stance of some of Canada's trading partners.

24.11 The Directorate develops and refines tax administration programs and systems to ensure compliance with the legislation that applies to non-residents and international transactions. It also provides policy guidance and technical assistance on international tax issues.

24.12 For 1996-97 Revenue Canada reported that its international tax programs generated total recoveries of $630 million.

24.13 The Directorate includes four divisions: International Audit; Non-Resident Assessing and Withholding; Transfer Pricing and Competent Authority; and International Tax Strategy. Exhibit 24.1 shows how the Directorate's staff are deployed throughout Revenue Canada and summarizes the responsibilities of its four divisions.

24.14 The Directorate is responsible for identifying the resources needed to deliver its programs, and for identifying the staff it needs for its functions at Revenue Canada's headquarters. Tax Services Offices (TSOs) are responsible for staffing their own international tax audit positions, using guidelines prepared by the Directorate at headquarters. The Department's human resource personnel at headquarters and at TSOs carry out the identified staffing actions.

24.15 The International Tax Directorate has taken a number of initiatives to manage risk to the tax base. Some of these initiatives are:

  • introducing measures to enhance the reporting of world income;
  • strengthening, in partnership with the Department of Finance, key legislation in the areas of, for example, transfer pricing, foreign affiliates and disposition of taxable Canadian property;
  • addressing the tax implications of electronic commerce in international forums;
  • working with Canada's treaty partners to enhance specific compliance activities such as the exchange of information, simultaneous audits, advance pricing agreements, and the examination of tax haven issues.
Focus of the audit
24.16 This audit focussed on human resource management in the International Tax Directorate. Our objective was to determine whether human resource management practices are sufficient to enable the Directorate to manage the inherent risk to Canada's tax base caused by international transactions. Subsequent audits will focus on international tax compliance activities.

24.17 The International Tax Directorate is part of the much larger Verification, Enforcement and Compliance Research Branch in the still larger departmental structure. This has certain implications for human resource management, which we took into account in our audit:

  • Most human resource policies are determined by central agencies and implemented by the Department. This affects the Directorate's flexibility to address staffing issues.
  • The Branch influences the Directorate's vision and the scope of its activities, along with its resourcing; the assignment of resources depends on the Branch as well as the Department. The level of resources they allocate to the Directorate will reflect the priority they attach to its activities, as well as the other pressures and challenges being faced by the Department and government.
24.18 Further information on our objectives, scope and criteria can be found at the end of the chapter in the section About the Audit .

Observations

International Transactions Have the Potential to Erode the Tax Base

24.19 International tax is a growing field with significant potential for tax revenues. In this complicated, knowledge-intensive area, the International Tax Directorate requires a stable work force of highly skilled people. The complexity of its work is reflected in the types of transactions, industries, and policy questions that define its scope - transfer pricing; electronic commerce; non-residents doing business in Canada or disposing of taxable Canadian property; global enterprises and their related-party transactions; tax havens and harmful tax competition; international financing arrangements; and international tax treaties.

24.20 A recent report of the Technical Committee on Business Taxation noted that in 1993, taxpayers reported to Revenue Canada $248 billion in related-party cross-border transactions, $166 billion of which were between related parties in Canada and the United States. As the report went on to note, considering that in 1996 Canada raised close to $20 billion in federal and provincial corporate income tax, even relatively small shifts in income allocated to Canada from related-party transactions have the potential to cause a significant change in the domestic revenue base.

24.21 The report also noted that foreign direct investment into Canada is substantial, in 1995 amounting to approximately $170 billion or 20 percent of assets held by Canadian businesses. Outbound foreign direct investment by Canadians is also significant - in 1995 about $140 billion or 18 percent of total assets held by Canadian businesses - and is rising faster than inbound investment.

24.22 Therefore, the complexity and significance of international tax issues demand that Revenue Canada attract, motivate and retain well-qualified and trained staff who can perform effectively and to a high standard. Its international tax employees must be highly skilled and understand Canadian tax laws and tax laws in other jurisdictions.

24.23 Exhibits 24.2 and 24.3 set out the Directorate's staff resources at the Department's headquarters and at Tax Services Offices across the country.

Stable Leadership Is Required

24.24 In September 1996, the Director General of the Directorate was transferred to another branch of the Department. A staffing action was undertaken shortly thereafter and the current Director General was appointed in October 1997 - one year later. In the interim, the four Division Directors reported directly to the Assistant Deputy Minister.

24.25 Other key positions have been filled through the use of secondments, redeployments and acting assignments. As of October 1998, three of the four Divisions have as Directors staff who are acting in the positions at a level higher than their own classification level and who are on loan from another work location. The Director of the fourth Division is also on loan from another work location. The acting Directors had advised their staff in February 1997 that they would continue in an interim capacity to allow a new Director General to decide who would hold the positions on a permanent basis.

24.26 We are concerned that in such a situation of uncertainty about whether they will remain in their positions, people may focus on the routine, day-to-day issues and not pay appropriate attention to important long-term planning or make critical decisions about it.

Frequent Staff Movements Are a Cause for Concern

24.27 All functions at headquarters are important in providing overall direction and technical expertise for the Directorate's activities. Therefore, staffing problems at headquarters could have a negative impact on international tax work done in the TSOs.

24.28 Only 52 percent of the Directorate staff at Revenue Canada headquarters are in their permanent positions, including only 20 of the 32 senior auditors. In the Transfer Pricing and Competent Authority Division, 60 percent of the present staff are in permanent positions. This Division expects to triple its present work force within the next seven months.

24.29 We found that the movement of the Directorate's staff at headquarters was high. At 1 April 1995, there were 58 employees at headquarters, 31 of whom are still there. At various times over the 40 months from April 1995 to September 1998, 66 people left and had to be replaced and 22 more people joined the Directorate's headquarters staff. It currently has 80 employees at headquarters. The Department informed us that 33 percent of the staff who left had been brought in specifically for short-term projects or for developmental assignments.

24.30 In TSOs, 87 percent of the international tax employees are in their positions on a permanent basis. However, only 68 percent of the senior international tax auditors are permanent in the positions. TSO auditors in general have an average of less than three years' experience in international taxation.

24.31 Because of the complexity and the significance of international tax issues, we are concerned that frequent staff movements may prevent the Directorate from maintaining the experience and skill levels required to provide an appropriate level of service to taxpayers and to manage the risks to the tax base that are inherent in international transactions.

The Directorate Could Take Action to Speed Up the Staffing Process

24.32 Information on recent competitions for positions in the Directorate highlights the time it takes to complete a staffing action:

  • A competition for program managers closed in April 1997; in October 1998 the examinations were being marked - 18 months after the competition closed.
  • A competition for senior international officer positions closed in August 1997; the results were issued in September 1998.
  • A competition for international officer positions closed in October 1997; the examinations were being marked in October 1998, one year later.
  • A competition for international tax advisor positions closed in October 1996; the eligibility list was established 18 months later.
  • A competition for audit managers closed in May 1997; the examinations were being marked in October 1998, 18 months later.
24.33 The Directorate could speed up the process by deciding, even before competitions are announced, on the selection strategy, process and techniques it will use. It could then develop position-specific selection tools such as interviews and written examinations. It could also screen and respond to applications as they come in, instead of waiting weeks. Skilled candidates for international tax positions at senior levels are rare, and are in demand in the private sector. Good candidates may lose interest if they have to wait long periods of time before being offered positions.

24.34 Statements of qualifications or selection profiles that provide a clearer indication of the experience, skills and traits sought in candidates could be developed to enable potential candidates to better assess their interest and their chances of success.

24.35 The Directorate is developing new job descriptions and classifying positions for some of the new staff it expects to hire over the next seven months. Job competency profiles will not be developed until after the planned 60 percent increase in current Directorate staff at headquarters has taken place.

24.36 We note that in a competition for senior auditor positions that closed in June 1998, the Department screened the applications and administered the written examinations that same month. The examinations were marked in July 1998; candidates were interviewed and the eligibility lists were completed in September 1998. This shows that it is possible to speed up the process.

Better Information Is Needed

24.37 Revenue Canada estimates that the average age of all the auditors in the Branch is 43.7 years. The Directorate will need to have a robust human resource strategy to ensure that as people at senior levels retire, their positions are filled with competent people. In addition, it will require a human resource information system to support its implementation of the strategy.

24.38 The Department has acknowledged that the need for reliable human resource information systems and data bases is a concern affecting all branches. It advised us that it has undertaken a major project to develop a new human resource information system to provide reliable information on key processes such as staffing, classification and performance reviews, as well as other employee information.

24.39 The Directorate will need to maintain information on the location, occupational group and level, and years of service of staff who leave or retire. It also needs to keep track of the numbers and levels of staff promoted to positions elsewhere in the Department.

24.40 The Directorate can use the information on staff losses to target retention strategies, recruitment activities, and classification and compensation structures. The monitoring of retention statistics is an essential component of human resource planning.

The Directorate Has Not Developed a Comprehensive Staffing Strategy

24.41 The Directorate has been aware since 1994 of its human resource problems. It has held a number of discussions and prepared and circulated papers that outlined various concerns. For example:

  • In 1994, the Directorate recognized in its draft business plan that it would need a human resource plan to identify staffing needs and to recruit, select, train and manage qualified staff.
  • A 1996 draft compliance and enforcement strategy for the Directorate indicated the need to address several human resource issues, including developing competency profiles, revising training programs, and developing new courses designed to fill gaps in knowledge and skills.
  • In late 1996, the Branch started a project to determine the skills and competencies, career paths and training needs of staff to form an integrated approach to its human resource management.
  • In July 1997, the Division Directors in the Directorate prepared a draft paper on staffing issues. It noted that although a large number of staff have applied for positions as managers and advisors, few had extensive experience in international tax. It also noted that TSO staff with experience in international tax generally did not apply for positions at headquarters. It further acknowledged that successful candidates for vacant positions might still require extensive training and development. The paper stated that because of requirements in domestic tax programs, combined with the fact that the Directorate often performs the role of "finishing school" for the best young talent in the Branch, many of the Directorate's best employees were being promoted to positions elsewhere in the Department. It identified the need for technical expertise at headquarters and TSOs and it recommended the continued use of interim staffing measures including secondments, developmental assignments, acting appointments and temporary assignments.
24.42 We were advised that in April 1998, the Branch created a committee to define the "key principles and parameters" for a comprehensive human resource strategy. On 8 October 1998 we were advised that:

  • most, but not all of the key parameters of the strategy had been defined. We asked to see them but, as of 11 October 1998, they had not been provided to us;
  • in September 1998, a contract was issued to a professional firm to develop job competency profiles;
  • the development of an employee skills inventory system had been put on hold;
  • the results of a demographic study of the Branch's work force would be ready in November 1998; and
  • the Branch was developing four new audit training and development programs, which would be the "foundation" required to address recruitment issues and to proactively manage the longer-term human resource needs.
24.43 While these actions address some of the problems outlined in paragraph 24.41, we are concerned that they are only a piecemeal solution rather than part of a comprehensive human resource plan. This is particularly worrisome because the Directorate is planning to increase its staff at headquarters by 60 percent - from 80 people to 129 people - within the next seven months.

Conclusion and Recommendations

24.44 Our review of the International Tax Directorate's management of human resources identified problems that limit its ability to discharge its responsibilities and to manage the inherent risk to Canada's tax base caused by international transactions. Despite having recognized these problems for a number of years, the Directorate is still developing a comprehensive human resource plan and strategies linked to its business plan for the next few years.

24.45 During September and October 1998, the Directorate initiated a number of actions that it expects will address certain identified problems. However, this is only a piecemeal solution and it does not deal with the underlying problem.

24.46 In our view, failure to take urgent action on these matters will severely limit Revenue Canada's ability to manage the risks to Canada's tax base that international transactions represent.

24.47 If Parliament approves the establishment of the proposed new Canada Customs and Revenue Agency, the Department will become a separate employer and assume most of the responsibility for human resource management currently shared with central agencies. In the absence of a comprehensive human resource plan and strategies linked to the Directorate's business plan, the establishment of the new agency will not in itself resolve the problems outlined in this chapter. It is important that the analysis, planning and implementation of needed human resource initiatives be carried out as soon as possible to ensure that the Directorate can act appropriately to protect Canada's tax base.

24.48 Revenue Canada should ensure that the International Tax Directorate:

  • develops a comprehensive human resource management plan that is linked to its business plan;
  • develops and implements a comprehensive staffing strategy to ensure that it has a full complement of staff with the continuity, qualifications, job performance and quality standards that are essential to carrying out its responsibilities; and
  • has a human resource information system that provides reliable information on key processes such as staffing, classification and performance.
Department's response:

1. Development of a comprehensive human resource management plan, linked to its business plan.

We concur with the importance of linking business planning with human resource planning. With the creation of the Canada Customs and Revenue Agency, the link between human resource plans and business plans will be strengthened and will be a more integral feature of the overall departmental planning process. Please refer to the Department's Action Plan, at the end of the chapter, for additional information.

2. Development and implementation of a comprehensive staffing strategy to ensure a full staff complement with the necessary continuity, qualifications, job performance and quality standards.

As noted by the Auditor General, the International Tax Directorate has recognized the need to address the particular human resource challenges that have emerged in the area of international tax and has acted to address a number of these challenges. Key activities to address these challenges are outlined in the Department's Action Plan at the end of the chapter.

In the longer term, as an Agency, the Department will have greater flexibility to tailor human resource strategies to specific business needs. The ability to develop new classification systems and remuneration rates, streamlined staffing processes and the ability to negotiate collective agreements based on the priorities and needs of the Agency and its unions will create an enhanced capacity to attract and retain key personnel.

3. Development of a human resource information system to provide reliable information on key processes such as staffing, classification and performance.

This important requirement will be addressed by the Corporate Administration System (CAS) project, currently under way in the Department. Please refer to the Department's Action Plan, at the end of the chapter, for additional information.


About the Audit

Objectives

The objective of the audit was to determine whether human resource management practices are sufficient to enable Revenue Canada's International Tax Directorate to manage the risks to Canada's tax base that are inherent in international transactions.

Scope

Our audit scope was restricted to the management of the Directorate's human resources. It was conducted at Revenue Canada headquarters and at various Tax Services Offices. We did not examine the International Tax Services Office.

Criteria

Revenue Canada's International Tax Directorate should have in place appropriate policies, systems, processes and practices to attract and retain sufficient people with the right skills and to provide an enabling environment for them to learn and work.

Approach

We interviewed officials in the Department and experts in the private sector, and reviewed appropriate documents, files and statistics.

Audit Team

Assistant Auditor General: Shahid Minto
Principals: Barry Elkin and Jamie Hood
Director: Marial Stirling

For more information, please contact Barry Elkin.


Revenue Canada provided the following action plan with its response to our recommendations (see paragraph 24.48) .

THE DEPARTMENT'S ACTION PLAN

Revenue Canada has an International Tax Program that keeps abreast of change to remain effective and efficient. During the last few years, the International Tax Program has undergone significant restructuring and growth so that it can continue to address the many challenges involved in enhancing Canadian business competitiveness and protecting Canada's tax base.

The Auditor General has examined the human resource management of the International Tax Directorate and made a number of recommendations for addressing the issues he has raised in his report. The Department is taking, or plans to take, the following measures that will respond to the Auditor General's recommendations:

Development of a comprehensive human resource management plan that is linked to its business plan.

As part of its preparation for Agency status, the Department is moving toward an integrated planning process that will more closely link human resource and business planning. It is committed to having a business plan that incorporates a human resource plan. Branch business plans will be submitted in support of this process. The International Tax Directorate will form a component of the Verification, Enforcement and Compliance Research Branch business plan.

The Department will complete a Business Plan, including a Human Resource Management Plan, based on the new integrated departmental planning process by spring 1999.

Development and implementation of a comprehensive staffing strategy to ensure a full staff complement with the necessary continuity, qualifications, job performance and quality standards.

The Verification, Enforcement and Compliance Research Branch has undertaken a number of activities, outlined below, to further improve its capacity to attract and retain competent and professional staff, ensure that staff have the right skills and knowledge to meet future demands, and speed up the staffing process.

  • A demographic study is under way.
  • The development of competency profiles has begun.
  • A Recruitment and Apprenticeship Program has been developed.
  • An Accelerated Development Program for officers will be introduced in early fiscal year 1999-2000.
  • An Assistant Director Verification and Enforcement and Assistant Director Investigations Trainee Program will be introduced in early fiscal year 1999-2000.
  • A Self-directed Career Development Program will be introduced in 2000.
  • Pre-qualified pools of candidates for forecast vacancies will be used to reduce the time required for staffing.
To address the significant growth in resources, actions have already been taken to staff vacant and newly created positions. The Directorate expects to complete staffing of these positions in 1999.

Implementation of a human resource information system that provides reliable information on key processes such as staffing, classification and performance.

The Corporate Administration System (CAS), a department-wide project dealing with financial and human resource information needs for Revenue Canada, is in progress. The human resources component will include enhanced human resource information and data bases on key human resource processes such as staffing, classification, performance reviews and employee information. Implementation will begin on 1 April 1999.

The training on the first phase of the corporate administrative systems will commence in February 1999.