KPIs, or key performance indicators, are an instrument used to measure and monitor how effectively an organisation is achieving its objectives.

The choice of KPIs in a strategic plan is a tricky business. They are seen as the operational milestones by which to carry out the performance evaluations. This explains why management circles have these words of warning: “The organisation will deliver what is being measured.” Here’s an example: if the number of new customers is measured, the people in the organisation will focus on increasing the number of new customers. While many new customers may be brought in, one of the pitfalls is that the metric will not give any information about the intrinsic quality of these customers.

Up until the second half of the 2000s, the minister of Finance would call his services at the end of the year to inquire about the amount of taxes levied. This was done as part of the annual budget and the subsequent budget checks. Characteristically, the requested data indicated that a very large number of taxes were always raised on paper as a result of tax audits, but also that the effective collection of those taxes was by no means certain. Only a small fraction of the taxes levied as a result of tax audits were actually collected. Not only was this ineffectual when estimating the budget, but it also pointed to a large number of unjustified retrospective levies.

Aware that an organisation delivers what is measured, a different direction was eventually taken. In the minister’s proverbial telephone call with his administration, the question asked no longer focused on ‘levied taxes’ as a result of a tax audit, but on ‘the taxes actually collected’.

In order to be able to provide their minister with a positive answer, tax officials adapted – perhaps even unconsciously. Since the quickest way to ‘collected tax’ is to strike an agreement with the taxpayer, in a first audit cycle – which can be estimated at seven years – the officials put a lot of effort into concluding these agreements. Together with those agreements, many principles relating to what could and could not be done with regard to the deductibility of costs were laid down.

We are now in the second audit cycle. In his year-end call, the minister still asks how much has actually been collected, adding that it could be a bit more from a budget point of view. Auditors are now confronted with taxpayers who reached an agreement with the tax authorities several years ago and who have consistently acted according to the principles of that agreement ever since.

The amount of past agreements that the tax administration ignores today is unreasonably large.

Yet, the amount of past agreements that the tax administration ignores today is unreasonably large. These agreements are binding for the tax authorities, and safeguarded by the principle of legal certainty and the principles of legitimate expectations.

In fact, this column could have just as well been about those principles. However, it was more interesting to dig even deeper, to the root of the problem. Surprisingly enough, that root is not legal, but of a management and strategic nature. Be careful when defining the KPIs. The organisation delivers what is measured. But the quality of what is delivered is not necessarily high enough. 

The author is a lawyer-partner at Tuerlinckx Tax Lawyers. E-mail: jan.tuerlinckx@tuerlinckx.eu

The text is a translation of the Dutch column in Trends.