Enhancing compliance rates among taxpayers and reducing the compliance burdens experienced by both taxpayers and tax administrations are key goals of digitalising tax administration processes. To achieve these goals, tax administrations need to employ a comprehensive strategy that focuses on taking advantage of the potential benefits of the digital transformation, while minimising its potential challenges and disadvantages.
To aid the digitalisation efforts and strategies of tax administrations globally, the 2nd NTO Technical Conference will touch upon selected issues regarding the digital transformation of tax authorities. It will take place in Cape Town, South Africa, from 5 to 7 September 2023.
The digitalisation of economies has been moving at an ever-increasing pace bringing fundamental changes to all aspects of society. As a core government business, tax administration is not immune from the shadows of such transformation. Technological innovation and advancement have indeed been causing dynamic and drastic changes in the tax ecosystem across the globe. With this development, the digitalisation of tax administrations is no longer a choice, but a necessity – tax authorities cannot stay behind in the leveraging of digital technologies to optimise their operations.
Opportunities and Challenges
Digitalisation and technology have the potential to positively shape the way tax administrations collect, process, and act on information which helps to improve the efficiency, transparency, and equitability of the systems. On the part of taxpayers, digitalisation can make tax compliance a more seamless and frictionless experience by integrating it into daily life and business activities.
Alongside these positive attributes, however, the journey towards digitalisation of tax administrations has been facing various challenges. Amongst others, the lack of basic technological infrastructure has been one notable challenge in developing countries. On the other hand, challenges faced by transitional economies and developed countries relate to the use of data to improve tax compliance and simplifying tax compliance processes. To enjoy the full potential of digitalisation, many pieces need to fit together. The revolution does not only require the adoption of new technologies, but it also comes with changing work patterns and other management challenges. This requires resilience and persistence when passing through the different stages of digitalisation.
Evolution of Tax Administration Processes: From Manual to Digital Enterprise
No tax authority is immune to the need to modernise its operations. Across countries, tax administrations are currently at different stages on the journey towards a full digital transformation. The three stages of progression from a traditional paper-based tax administration to a fully-fledged digital enterprise are known as Tax Administration 1.0, Tax Administration 2.0, and Tax Administration 3.0:
Tax administration 1.0: The Era of Manual and Paper-based Processes
Tax Administration 1.0 represents the traditional approach to tax administration, characterised by manual and paper-based processes. During this era, taxpayers were required to submit their tax-related information in hard copy format and tax authorities manually processed and reviewed these documents. However, this manual approach often resulted in delays, errors, and inefficiencies. Furthermore, paper-based systems made it challenging to handle large volumes of data.
Tax administration 2.0: Leveraging Digital Tools and Data-driven Approaches
In response to the limitations of Tax Administration 1.0, Tax Administration 2.0 – also known as "e-administration" – emerged. This phase aimed at leveraging digital tools and data-driven approaches to optimise tax administration processes. Tax authorities started adopting electronic filing systems, allowing taxpayers to submit their returns digitally. Online portals for tax payments and transactions were established, enabling taxpayers to conveniently fulfil their tax obligations online.
Under Tax Administration 2.0, tax authorities began utilising analytical tools and algorithms to identify high-risk taxpayers and process data. Collaborations between tax administrations and other government agencies were set up to facilitate the exchange of data and information to improve compliance efforts. While Tax Administration 2.0 brought significant improvements to tax administrations, it did not yet harness the full potential of digital technologies.
Tax Administration 3.0: Integrating Tax Processes into Taxpayers' Digital Ecosystems
The limitations of Tax Administration 2.0, hence, inspired the emergence of Tax Administration 3.0. Tax Administration 3.0 envisions a future where taxation becomes an intrinsic part of taxpayers' digital ecosystems. By connecting with the systems that businesses use for their operations, transactions, and communication, tax administrations can significantly reduce compliance burdens and enhance accuracy.
Tax Administration 3.0 further emphasises the importance of secure and efficient channels of communication between taxpayers and tax authorities to enable timely exchange of information, inquiries, and dispute resolutions. These added features and improvements, however, also come with challenging implications.
The Further Digitalisation of Tax Administrations
The digital transformation of tax administrations entails a range of benefits and challenges. On the benefits side, digital transformation can streamline tax processes, improve compliance, enhance data management and analysis, and foster collaboration between tax administrations and other government agencies. These have the aggerated effect of improving the efficiency, transparency, and equitability of the systems. Transparency – which also comes with the digitalisation of taxpayer information – could further improve taxpayers’ trust, develop the state-citizen relationship, and lead to an efficient domestic revenue mobilisation (DRM). Moreover, with the aid of technology, tax authorities can increase compliance and reduce tax evasion, and decrease administrative and enforcement cost. The introduction of electronic filing systems with automated tax calculations, online portals for tax payments, and digital identity frameworks can significantly reduce compliance burdens and enhance accuracy.
On the other hand, the challenges to overcome in the digital transformation journey of countries are closely connected to the overall digital advancement of the country concerned. While countries at the early stages of digitalisation struggle to put the required infrastructure in place, countries at an advanced stage face challenges linked to data security, privacy, and confidentiality – addressing ethical and legal considerations, ensuring equitable access to digital services and resources as well as training the workforce to adapt to the digital era. Hence, each tax administration needs to develop a solution that is tailormade and addresses its own challenges. A successful and sustainable implementation of a digitalisation strategy requires tax administrations to be proactive and demand-driven.
Implementing Digitalisation Strategies: Country Experiences
In recent years, various tax administrations across the globe have successfully undertaken digitalisation projects. In Argentina, the tax administration (AFIP) established the “Comprehensive System for Monitoring Payments Abroad for Services” (SIMPES) system in 2022. The SIMPES system requires individuals and entities that pay foreign service providers to have their tax compliance and financial capacity analysed before making payments abroad. The SIMPES is designed to help the AFIP track down tax evasion and relies heavily on data matching processes. Recently, the new system has also proven its worth in the tracing of undeclared crypto-asset income – a class of income that is notoriously difficult to monitor for tax enforcement purposes. The Argentinian experience shows how technical advancement on the taxpayers’ side requires tax authorities to adapt to and embrace such advancements.
In Nigeria, the tax administration (FIRS) launched the “TaxPro-Max platform” in 2021. The platform is an online tax administration solution that allows taxpayers to register, file, and pay taxes electronically. TaxPro-Max also provides a single-view to taxpayers for all transactions with the tax administration. The platform plays a significant role in promoting tax compliance over time. The FIRS has been reporting a consistent increase in revenue collection each year since the adoption of the platform.
In the 2nd NTO Technical Conference, best practices and the digitalisation journey of tax administrations will be discussed with the view to encourage peer-learning and exchange.
The 2nd NTO Technical Conference
Although tax administrations are at different stages of digitalisation, experience sharing and peer-exchange have been accelerating the digitalisation journey of tax authorities joining the club at a later time. With this in mind, the opening plenary session (1) of the 2nd NTO Technical Conference will discuss the experience of countries and best practices.
As new tax technology can only bring rewards if it is sufficiently embraced by the tax administration staff, the required soft skills will also be covered – such as organisational change management (plenary session 2) and leadership in period of change (breakout session 2), which are crucial components of a successful digital transformation project. The closing plenary session will focus on aspects of the digital transformation which alter the profile of the tax administrators of the future, as they will need to be more tech-savvy than their predecessors (plenary session 6).
Another subject of the 2nd NTO Technical Conference will be the challenges of these digital transformation processes. The increased reliance on private service contracting for the development of digital solutions underscores the importance of well-designed public procurement procedures (breakout session 1). Data analytics (breakout session 3), artificial intelligence, and machine learning (plenary session 5) are powerful tools to increase the effectiveness of enforcement. On the flipside, reliance on data also necessitates the development of a cyber security strategy by tax administrations (breakout session 4).
These and other contemporary issues regarding the digital transformation of tax administrations will be presented and discussed at the 2nd NTO Technical Conference which will take place in Cape Town, South Africa, from 5 to 7 September 2023.
For more information on the NTO Conference, please click here.