For many governments, enhancing tax compliance and collecting sufficient revenue have been a matter of necessity to finance public goods and services.
That is why tax administrations are undertaking the digital transformation and automation of their systems. The adoption of technology can enable successful and sustainable tax reforms, ensure the proper taxation of the digital economy, and reduce the obstacles to compliance. The COVID-19 pandemic, which led to a boom in the use of digital commerce, made this change especially urgent for tax administrations.
The transformation has progressed increasingly rapidly over the past decade, as the cost of digital technologies has plunged and powerful tools to develop applications have become more user-friendly. One example of the falling cost: Cloud storage is now over 50% cheaper than it was a few years ago.
The rise of big data is an important factor in the shift because it can allow easy cross-checking of information, which enhances compliance by taxpayers. Overall,
Digital transformation is also being driven by the rapid growth of e-commerce, which is projected to expand 24% from 2020 to 2025, making it an increasingly important part of the tax base.
The increasing use of cashless payments, through mobile phones and other devices, is also powering the change. Such payments can be easily reviewed by tax administrations and often leave a digital trail that can be audited.
But it also allows authorities to simplify procedures and reduce the compliance burden on taxpayers. Research shows that in South Korea, for example, digitalization has reduced compliance costs by as much as 19% in the 2011-2016 period.
A real-time, more user-friendly future
With these changes underway, taxation is likely to look a lot different in the future:
- Instead of storing huge amounts of taxpayer data, administrations will have access to encrypted, distributed ledgers that allow them to capture tax information seamlessly and in real time. This has the added benefit of making tax administrations “less visible” to the public.
- The decisions of the tax administrations will increasingly be supported and strengthened by artificial intelligence. But the system will need to be closely monitored for errors.
- Tax administrations could become warehouses for more and more government data. That will give them a central role in the formulation of economic policy, enabling policymakers to review transactions in the economy and allowing better forecasting.
- The tax system could become much more user-friendly. Services could include prefilled tax returns, taxpayers’ access to their own filing information, the sharing of data with banks to expedite credit approval, along with privacy preserving queries on the tax file by researchers and local communities.
- Tax administrations will streamline the interface between taxpayers and tax officials, for instance by connecting corporate accounting systems with the tax administrations’ e-filing and e-payment platforms.
Making change work
Despite all the benefits, this transformation is up against major challenges. Research shows that most digital transformation initiatives don’t succeed. Of the $1.3 trillion spent in 2018, an estimated $900 billion was wasted.
To have the desired result,
The shift should also focus on providing value by simplifying procedures and permanently bringing taxpayers into the e-filing, e-payment, and e-document ecosystem. The value could be provided by reduced compliance costs, increased tax certainty, and higher compliance.
In addition, reform should aim to change the culture from managing processes to managing data, and administrations should focus on getting the right data. One high-income jurisdiction told us that there were errors in 15% of their taxpayer files and that 98% of returns could be prefilled with data from just banks.
The process can be cumbersome, but by providing finance and technical assistance, the World Bank has already supported administrators’ efforts on automation and digitalization in dozens of countries—benefiting governments and citizens alike.