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Can semi-autonomous tax agencies play a role in strengthening the effectiveness, efficiency and legitimacy of decentralised tax systems? This article analyses semi-autonomous tax agencies in nine Peruvian cities. It shows that the Servicios de Administración Tributaria (SAT) collect local taxes and non-tax revenues more effectively than conventional tax administrations. Efficiency may improve once the SAT are consolidated. Positive effects on fiscal governance will materialise when reforms cover the whole fiscal cycle, including budget formulation and execution. SAT needs to be embedded in a broader context of fiscal reform promoting transparency and accountability.

Since the 1980s, some developing countries have founded semi-autonomous tax agencies to deal with the problems of revenue generation. These agencies are autonomous in their budget decisions, internal organisational structure and human resources management. Their main source of finance is a commission on the taxes and non-tax revenues they collect.

Financing tax administration through a commission gives strong incentives to collect tax. In Peru, the SAT model incorporates basic New Public Management principles, such as the introduction of results-based management, private-sector management tools and the reform of existing incentive structures.

However, transferring tax authority to outside bodies involves certain political risks. The Peruvian example shows that in the short run the local constituency resents higher tax pressure, since citizens do not imagine that their payments will result in better service delivery.

Nevertheless, SAT have had some success in addressing the challenges of fiscal decentralisation, revenue mobilisation and good financial governance:

• Municipalities with SAT were able to increase local revenue generation more than provincial municipalities with a conventional tax administration.
• They have succeeded in lowering compliance costs, thus improving the allocative efficiency of the local tax system.
• Although there were serious legitimacy problems before 2006, there is growing public acknowledgement that the SAT model offers benefits to both citizens and local government.
• However, weaknesses in the SAT model include a lack of incentives for efficiency improvements and the risk of legitimacy problems arising from robust revenue collection.

The SAT model broadens the tax base, improves tax justice and equity and strengthens ties between tax administrations and taxpayers. National governments need to:

• Stimulate the founding of local semi-autonomous tax agencies, by decentralising the necessary fiscal and administrative competencies and by imposing budget constraints on sub-national governments.
• Be aware that the model will only suit a small number of large, advanced cities.
• Be prepared to face a growing polarisation of local conditions, as SAT cities improve their service delivery and their fiscal situation, while the rest of local government lags behind.
• Promote semi-autonomous revenue agencies within a broader strategy of local revenue generation and the rationalisation of existing transfer mechanisms.
• Be aware that the New Public Management principles incorporated into SAT could lead to a focus on individual institutions that might be unsuitable in a public sector that is weak and diverse. Situations might arise in which the local government is unable to monitor and control its agent (the SAT).